Answer any FOUR questions from this section. Each question carries 10 marks.
1. For each of the independent situations described below, list the accounting principle or concept that has been violated and give your explanation. (10 marks) i. Raymond Company has been adopting different methods to calculate depreciation on its motor vehicles for the past 4 years. ii. In estimating the provision for doubtful debts, the accountant of Peter Limited prefers to have a provision that is slightly too small rather than slightly too large. iii. The current liabilities of Reliable Store are much bigger than its current assets. In order to present a better liquidity position, the owner decides to include his personal bank account in the Store’s balance sheet. iv. Luxury Hotel recognises hotel room rental income on the date that a reservation is received. For the year 2001, many overseas visitors make reservations one year in advance.
2. “Although the totals of debit and credit balances agree in a trial balance, it does not mean that the books are correct as there are various situations that give rise to errors.” Elaborate on the above statement with examples. (10 marks)
3. Mandy Limited has an authorised share capital consisting of 500000 ordinary shares of $2.50 each and 50000 8% preference shares of $10 each. An extract of the share capital and reserves section of its balance sheet at 31 December 1999 is shown below: | |$ |$ | |Issued and fully paid share capital | | | |19000 8% preference shares | |? | |? Ordinary shares | |1000000 | | | |? | |Reserves | | | |Share premium |600000 | | |Retained profits |720800 |1320800 | | | |? |
i. The shares were all issued on 1 January 1997 and the preference shares were issued at par. ii. There were no other transactions affecting the share capital and share premium accounts after the first issue. iii. The balance in retained profits at 1 January 1999 was $590000 and there were no dividends in arrears. Net profit for the year was $250000. Required to calculate:
a. the amount of authorised share capital. (1.5 marks)
b. the amount of paid-up preference share capital. (1 mark) c. the amount of issued share capital. (1 mark)
d. the number of ordinary shares issued. (1.5 marks)
e. the amount of dividend that should be paid annually to preference shareholders. (1 mark) f. the average issue price of an ordinary share. (2 marks) g. the amount of ordinary dividend declared during the year 1999. (2 marks)
4. On 1 July 1999, Queen Limited, which prepares its accounts annually to 31 December, paid a deposit of $2400 to Prince Limited to acquire a piece of equipment on hire purchase terms. The cash price of the equipment was $31200. Queen Limited was required to pay, in addition to the deposit, eight equal quarterly instalments of $4464 each, payable on the last days of March, June, September and December....