HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED

SECTION A
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 prepare the original journal entry that should have been made. (No
narrations are required.)
a. Furniture with a market value of $80000 was acquired on credit at a cost of $75000. The
following entry was made:
Debit Credit

$ $
Furniture 80000

Creditor 75000
Gain on purchase of furniture 5000
b. The owner withdrew $7000 in cash for his vacation trip to Taiwan. The book-keeper recorded
the entry as follows:
Debit Credit

$ $
Travel expense 7000

Cash 7000
c. A pocket-sized calculator was purchased for $20 cash. The book-keeper made the following
entry:
Debit Credit

$ $
Office equipment 20

Cash 20
d. An insurance premium for the coming financial year was adjusted at year end as follow:
Debit Credit

$ $
Profit and loss 1000

Insurance premium 1000

e. Goods costing $21000 and with a selling price of $25000 were sent on consignment. The
following entry was made:
Debit Credit

$ $
Consignee 25000

Consignment sales 25000

(10 marks)

2. Allen and Davis have been partners sharing profits and losses in the ratio of 3:2 respectively.
Their balance sheet as at 31 December 1997 was as follows:
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HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED
$ $ $
Goodwill 98000 Capital accounts:

Plant and machinery (net) 50400 Allen 95000

Stock 20000 Davis 85000 180000
Debtors 26000 Creditors 16680
Cash at bank 2280
196680 196680
They decided to admit Charles as a partner on 1 January 1998. Charles was to contribute
$60000 cash as capital and the new profit and loss sharing ratio for Allen, Davis and Charles was
5:3:2 respectively. Plant and machinery was to be revalued at $76300 and stock of $2000 was
to be written off as obsolete. Provision was to be made for doubtful debts at 5% of the debtors.
Goodwill was revaluated at $120000, but would not be shown in the books of the new
partnership.
Required:
Draw up the revaluation account and the partners’ capital accounts (in columnar form) to reflect
the admission of Charles. (Show the workings for goodwill adjustments.) (10 marks)

3. The treasurer of the Leisure Club has prepared the following receipts and payments account for
the year ended 31 December 1997.
Receipts and payments account
$ $
Balance b/d 15330 Bar purchases 61250
Subscriptions
Bank interest
Bar sales 49000 Bar wages 7420
92 Administration expenses 42270
97500 Repairs 1898
Sundry expenses 4352
Balance c/d 4732
161922 161922
Additional information:
i. The following balances were extracted from the club’s books at 31 December 1996:
$
Accrued bar wages 455

Club premises 300000

Creditors for bar supplies 8190
Bar stock 9425
Subscriptions in arrears 2405
Subscriptions in advance 1120
ii. Depreciation is to be charged on the cost of club premises at 5% per annum.
iii. Bar stock at 31 December 1997 amounted to $9620.
iv. At 31 December 1997, accrued bar wages and creditors for bar supplies amounted to
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HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED

$390 and $7215 respectively.

v. At 31 December 1997, subscriptions in advance and in arrears amounted to $2600 and
$1360 respectively.
Required:
Prepare for the Leisure Club the following accounts for the year ended 31 December 1997:
a. a bar trading account. (4 marks)
b. an income and expenditure account. (6 marks)

4. Maggie Limited had an authorised and issued share capital of 500000 ordinary shares of $1 each,
fully paid. On 1 January 1998, the authorised share capital was increased by $400000 divided
into ordinary shares of $1 each. On the same date, the company made an issue of the 400000
ordinary shares at $1.5 per share.
Under the terms of the issue, payments were due as follows:
1998 Per share
1 January On application ( including premium) $0.70

1 February On allotment $0.60

1 May First and final call $0.20
The response to the issue is summarised below:
Number of shares
Applied for by Allotted to each
each applicant applicant
Number of applicants
i. 40 7000 5000

ii. 20 25000 10000

iii. 10 5000 --
The amounts overpaid on application were to be retained by the company to set off sums due on
allotment. All refunds were made on 15 February 1998.
All monies were received on their due dates.
Required:
Prepare journal entries for Maggie Limited to record the above transactions. (No narrations are
required.) (10 marks)

5. a. Define the going concern concept and give an example to illustrate its application. (3
marks)
b. Desmond Company generates income by letting its flats to tenants.
During 1996, the company had received in advance $5200 in respect of rent for January
1997; and at 31 December 1996, arrears of rents amounted to $18000.
In 1997, the company received from the tenants cheques amounting to $248300 which
included rent in advance for 1998 amounting to $13200. Arrears of rent at 31 December
1997 was $14500.
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HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED

Rates were paid by cheques in two half-yearly instalments on 1 January 1997 and 1 July
1997 as follows:
$
6 months to 31 March 1997 972

6 months to 30 September 1997 1048

2020
The rates amounting to $1048 for the 6 months to 31 March 1998 had not been paid by the
company on 31 December 1997.
Required:
In the books of Desmond Company, show the entries for the year ended 31 December 1997 in
the following accounts:
i. the rental income account. (3 marks)
ii. the rates account. (4 marks)

6. Tang consigned 400 cartons of video cassette tapes costing $500 each to Chow who was entitled
to a 5% selling commission on all sales and an additional 2% as del credere commission. The
video cassette tapes were to be sold by Chow at $600 per carton.
Tang paid transportation charges and insurance of $8 and $2 respectively for each carton of
video cassette tapes.
Unfortunately, the contents of 10 cartons were damaged in transit and were sold immediately on
arrival by Chow for $1000 cash. The insurance company agreed to pay $3400 as compensation.
By the end of March 1998, Chow had sold 110 cartons for cash and 200 cartons on credit at the
normal selling price. Chow had paid storage expenses of $1170 and selling expenses of $690.
He incurred a bad debts expense of $4510. He then sent a cheque for the amount due to Tang.
You are required to prepare for Tang:
a. the consignment account (showing the profit or ,loss on consignment). (8 marks)
b. the consignee account. (2 marks)

SECTION B
Answer any THREE questions from this section. Each question carries 20 marks.

7. Clara is a wholesaler for children’s clothing. For several years, she has obtained a gross profit
margin of 40% on all sales.
In a burglary in February 1998, she lost stock costing $60000 as well as many of her
accounting records. However, after a careful investigation, the following information for the
year ended 31 March 1998 was made available:
i. Account balances at 31 March 1997 were as follows:
$
Capital 227500

Stock, at cost 28000

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HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED

Trade debtors 94500

Trade creditors 63000
Office premises, at cost 150000
Delivery van, at cost 75000
Provision for depreciation
Office premises 90000
Delivery van 30000
Prepaid administration expenses 1800
Bank 64650
Accrued rent and rates 3450
ii. All receipts and payments were made through the bank account. The following bank
payments were made during the year:
$
Trade creditors 591000

Rent and rates 100800

Drawings 64500
Administration expenses 110400
iii. Stock at cost amounted to $88000 at 31 March 1998.
iv. Discounts received and discounts allowed amounted to $18000 and $24300 respectively.
v. Administration expenses prepaid at 31 March 1998 totalled $1200.
vi. Trade debtors at 31 March 1998 were $100500.
vii. Rent and rates for the year amounted to $105300.
viii. Trade creditors at 31 March 1998 amounted to $114000.
ix. Depreciation is provided at the following rates:
Office premises - 5% on cost
Delivery van - 20% on a reducing balance basis
Required to prepare:
a. the bank account showing the balance as at 31 March 1998. (4 marks)
b. the trading and profit and loss account for the year ended 31 March 1998. (9 marks)
c. the balance sheet as at 31 March 1998. (7 marks)

8. Ng and Lo entered into a joint venture to buy and sell electronic toys. It was agreed that Lo
would be entitled to a commission of 5% on all gross sales made by him, and that the joint
venture profits and losses be shared equally.
The following transactions took place in 1998:
January 1. Lo purchased toys at a cost of $38920, paying $18920 in cash and accepting
a bill of exchange for two months for the balance.
2 Lo sent to Ng toys which had cost $11680 and paid delivery charges of
$1168.
15 Lo returned toys costing $700 to the supplier and full allowance on the
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HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED

returned goods was given.

16 Ng purchased toys at a cost of $17630.
17 Ng paid $22000 for rent for the four months ending 30 April 1998.
25 Sales proceeds of $19670 were kept by Ng.
February 4 Credit sales of $39200 were made by Lo. A bill of $6000 was accepted by a
debtor and was then discounted at $5560.
6 Ng sent a cheque for $10000 to Lo to provide him with funds.
10 Goods costing $6000 were stolen in the shop. Half of this loss was to be borne
by Ng.
26 Cash sales of $18000 were made by Lo and half of the sales proceeds were
collected by Ng.
March 1 The bill payable was honoured by Lo.
4 The bill receivable was dishonoured and was renewed with an extended
maturity of one month. Interest at 12% per annum was charged on the
renewed bill.
16 Ng paid wages of $8900.
30 Ng sold the remaining stock for $33400 on credit.
April 1 Some of the goods sold on 30 March were returned and a credit note of $1400
was sent to the customer.
4 The bill receivable was honoured on maturity.
20 Ng agreed to take over the returned goods at a value of $1126.
30 $1600 of the unsettled debts in Lo’s books was written off.
30 Ng and Lo decided to terminate the joint venture and settle their accounts.
Required to prepare:
a. the joint venture with Lo account in Ng’s book. (6 marks)
b. the joint venture with Ng account in Lo’s book. (7 marks)
c. a memorandum joint venture account. (7marks)

9. Lee and Wong have been partners sharing profits and losses in the ratio of 3:2 respectively.
Interest of 6% per annum was allowed on the credit balances in the capital accounts.
The trial balance at 31 March 1998 was as follows:
$ $
Capital accounts – Lee 550000
- Wong 380000
Drawings – Lee 49850
- Wong 38370
Current accounts – Lee 9275
- Wong 1350
Equipment – at cost 470800
- accumulated depreciation as at 1 April 1997 164270
Furniture and fittings
- at cost 267500
- accumulated depreciation as at 1 April 1997 129500
Motor vehicles – at cost 280000
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HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED
Purchases 469276
Sales 1261550
Salaries 240070
Rent and rates 110285
Provision for doubtful debts, 1 April 1997 1160
Trade debtors 57250
Trade creditors 218720
Cash at bank 516895
Sundry expenses 7241
Discounts 2220 1384
Salary to Lee 84000
Electricity 26444
Stock as at 1 April 1997 78458
2707934 2707934

The following information was also given:

i. Depreciation is to be charged as follows:
Equipment – 10% per annum on a straight-line basis
Furniture and fittings – 10% per annum on a reducing balance basis
Motor vehicles – 25% per annum on a straight-line basis
ii. Stock as at 31 March 1998 amounted to $92621.
iii. The following adjustments were to be made on 31 March 1998:
$
Accrued salaries 2330
Prepaid electricity 444

Provision for doubtful debts was to be maintained at 2% of trade debtors.

iv. The sale of furniture for $3000 had been recorded as cash sales.
No other entry has yet been made. The furniture had cost $4200 and $1800 had been
provided for depreciation.
v. The motor vehicle was acquired on 1 April 1997 on hire purchase terms. The cash price of
the motor vehicle was $280000. The partnership was required to pay a deposit of $60000
and four annual instalments of $78000 each, payable on 31 March. Each instalment
already included an amount of $23000 for interest. The first instalment was paid on 31
March 1998. The partnership had wrongly recorded the above transactions through the
trade creditors account.
Required to prepare:
a. the trading, profit and loss and appropriation account for the partnership for the year
ended 31 March 1998. (10 marks)
b. the balance sheet as at 31 March 1998. (10 marks)

10. The trial balance of Debbie Limited at 31 March 1998 did not agree. A suspense account was
opened to record the net credit difference of $3996. The draft net profit for the year amounted
to $14290.
Subsequent checking of the records revealed the following errors:
i. Bank charges of $270 appeared in the cash book but had not been posted to the
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HKCEE-PRINCIPLES OF ACCOUNTS-1998 ALL RIGHTS RESERVED

general ledger.
ii. Cheques totalling $3450 were sent to creditors on 31 March 1998 but had not been
recorded in the books.
iii. A credit note from Smith Limited for $880 had been entered correctly in the returns
outwards journal but had been posted to Smith Limited ‘s account as $1080.
iv. The sales proceeds of a fully depreciated motor vehicle had been credited to the sales
account as $8600. The cost of the motor vehicle was $12000.
v. A stock loss of $20000 had been shown in the draft profit and loss account as ‘Loss due
to burglary’. Although the insurance company agreed that $14000 would be paid in
settlement, no record in respect of this had been made by the company as at 31 March
1998.
vi. Office equipment costing $7500, with a list price of $9000, was taken from the
showroom for the use of the company, but no entries in respect of this had been made.
It was included in the trading stock at cost at 31 March 1998. The company provides
for trading stock at cost at 31 March 1998. The company provides for depreciation at
the rate of 25% on the cost of office equipment held at the end of each financial year.
vii. Discounts received of $210 had been credited to purchases as $120.
viii. Credit sales of $1997 had been correctly recorded in the customer’s account, but had
been debited to the selling expenses account as $1979.
You are required to prepare in the books of Debbie Limited:
a. the journal entries necessary to correct the above errors (No narrations are required.)
(11 marks)
b. the suspense account. (4 marks)
c. a statement correcting the draft net profit for the year ended 31 March 1998. (5 marks)
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