“A” LEVEL ACCOUNTING

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HOMEWORK
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FRIDAY 21 JULY 2017

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QUESTIONS

DUE DATE 24 JULY 2017

 QUESTION 1

Adbel received a legacy from his Father so he was able to fulfil a long standing desire to open
a spare parts shop. On 1 January 1992 he opened a business bank account with the full
amount of the legacy. However he paid little attention about keeping proper accounting
records.
Also on 1 January 1992 he rented premises at a rental of $750 per month payable quarterly in
advance. The first payment was made on 3 January 1992. At 31 December 1992 a summary
of Adbel’s bank transactions revealed the following:

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Receipts $ Payments $

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Legacy 50 000 Rent 6 750

Cash banked 269 000 Fixtures/equipment 21 670

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Business rates 2 400

NO Electricity

Telephone
4 670

690
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Purchases 265 770
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Holiday in Vumba 3 400

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All Adbel’s takings were banked after the following cash expenses were paid and personal
drawings taken. These were:
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Wages $410 per week (50 weeks);

Sundry expenses $15 per week (50 weeks);
Cash purchases $2 980 for the year.
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Adbel always retained a cash float of $250 in the till.

Additional information:
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i. Due to an oversight the last quarter’s rent due on 1 October 1992 was not paid until
January 1993.
ii. Selling prices were fixed by marking up the goods by 40% on cost price.
iii. Business rates of $1000 had been paid on 5 October 1992 to cover the period 1
October 1992 until 31 March 1993.
iv. It was estimated that Adbel owed $1 800 for electricity and an accountant’s fee of
$220 at 31 December 1992.
v. It was decided to depreciate the fixtures and equipment by $6 670.
vi. Creditors for purchases were $6 250 at 31 December 1992.
vii. Trade debtors amounted to $38 000 at the year ended 31 December 1992 and a
provision for doubtful debts of 5% was to be established at that date.
viii. Closing stock was valued at cost at $15 000.
After preparing Adbel’s final accounts for the year ended 31 December 1992 the accountant
suggested he should consider converting his business into a private limited company.
Required
a) A lncome statement for the year ended 31 December 1992 {14}
b) A statement showing the calculation of Adbel’s drawings {4}
c) A Statement of financial position as at 31 December 1992. {14}

QUESTION 2

Two years ago Sandstone Ltd conducted market research at a cost of $16 000 to investigate

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the potential market for new products. They are now considering two new products
developments, only one of which will be undertaken. The anticipated profitabilities of these

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two separate projects are given below.
Project A Project B

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$ $ $ $
Annual sales
Cost of sales
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Administration costs
40 000
15 000
80 000
50 000
10 000
100 000
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Depreciation 5 000 10 000
60 000 70 000
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20 000 30 000
It is expected that the above will continue for each year of each project’s forecast life. The
capital cost for project A is $45 000 and for project B is $53 000.
The expected economic lives are
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Project A 8 years
Project B 5 years
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Depreciation has been calculated on a straight line basis, and assumes estimated scrap values
of $5 000 for Project A at the end of year 8, and $3 000 for Project B at the end of year 5.
All costs and revenue take place at the end of each year
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The cost of capital is 12%

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Extract from present value tables $1 @ 12%

Year 1 0,893 Year 5 0,567
Year 2 0,797 Year 6 0,507
Year 3 0,712 Year 7 0,452
Year 4 0,636 Year 8 0,404
REQUIRED
(a) Calculate the payback period and net present value of each project (14 marks)
(b) State, with reasoning, which of the two projects you would recommend (3 marks)
(c) Briefly explain why net present value is considered a more meaningful technique
compared to payback when making capital expenditure decisions (4 marks)
(d) Explain how you have treated the original market research costs in relation to the
evaluation of the projects. (2 marks)
 ( Total 23 marks)

QUESTION 3

Knowledge and Munashe are concerned at the cost of manufacture. Consequently at the
beginning of 2017 they decided to introduce a standard costing system.

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The standard cost card for a reading desk included the following:
Direct materials ­ 2m3 of timber at 150/m3 = $300
1

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Direct labour ­ 4 hours at $80 per hour = $360
2

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During the year ended 31 March 2017, 2 500 reading desks were manufactured.
Actual expenditure was as follows:
5 750m3 timber at $851 000
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10 500 direct labour hours at $892 500
Required
a. i. Total direct material cost variance {2}
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ii. Direct material price variance {2}

iii. Direct material usage variance {2}
iv. Total direct labour cost variance {2}
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v. Direct labour rate variance {2}

vi. Direct labour efficiency variance {2}
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 QUESTION 4

Larry Ltd’s summarised Statement of financial position (Balance Sheet) at 30 June 2010 was

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as follows:

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$000
Ordinary shares of $2 each 2 400
10% Preference shares of $2 each 600

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Share premium 400
Profit and loss account 680

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Non­current(Fixed) assets
Net current assets
4 080
2 600
1 480
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4 080

On 1 July 2010, fixed assets were revalued to $2 850 000 and the company decided to redeem
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all the preference shares at a premium of $0,60 per share. These shares have been issued at
$2,40 each. In order to provide funds for the redemption, the company issued a further 100
000 ordinary shares at a premium of $0,50 per share.
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Required
Larry Ltd’s Statement of financial position (Balance sheet) immediately after the capital
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reconstruction.
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QUESTION 5
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The following are results of the last two months trading at Townsend Limited.
Sales Total Profit
Revenue Costs
Month 1 $220 000 $200 000 $20 000
Month 2 $280 000 $245 000 $35 000
Total costs consists of fixed costs which do not vary from month to month and variable costs
which vary directly with sales revenue.
Required
i. Monthly fixed costs
ii. Contribution to sales ratio
iii. Break even level of sales
 The end
Tinofamba nevanofamba/
Thank you….GOD BLESS
SOLUTIONS 25 JULY 2017

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