TEST CODE 02101020

FORM TP 2019131 MAY/JUNE 2019

CARIBBEAN E XAM I NAT I O N S COUNCIL

CARIBBEAN ADVANCED PROFICIENCY EXAMINATION®

ACCOUNTING

UNIT 1 – Paper 02

2 hours 45 minutes

24 MAY 2019 (a.m.)

READ THE FOLLOWING INSTRUCTIONS CAREFULLY.

1. This paper comprises THREE questions. Answer ALL questions.

2. Write your answers in the booklet provided.

3. You may use a silent, non-programmable calculator to answer questions.

4. ALL working must be clearly shown.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.

Copyright © 2018 Caribbean Examinations Council

All rights reserved.

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MODULE 1

ACCOUNTING THEORY, RECORDING AND CONTROL SYSTEMS

1. (a) Jack Sparrow Inc. (JSI) reported the following amounts in the shareholders’ equity section
of the statement of financial position at 01 January 2017, the beginning of the current fiscal
year.
$

10% preferred share, no par value 375 000

(40 000 shares authorized, 5000 shares issued)

Common shares, $20 par value 200 000

(500 000 shares authorized, 10 000 shares issued)

Contributed capital in excess of par 30 000

Retained earnings 1 130 000

During the year, JSI completed the following transactions concerning shareholders’ equity:

– Issued 1000 shares of 10% preferred shares at $110 on 01 July 2017

– Issued 2000 common shares at $25 on 01 October 2017

– Declared cash dividend on the preferred shares and $0.25 per share on the common
stock on 01 December 2017

– Paid the cash dividend on 31 December 2017

Prepare the journal entries to record the transaction. [10 marks]

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(b) Outline FOUR basic rights that are associated with the ownership of a share of common
stock. [8 marks]

(c) On 01 January 2017, Crabtree Corporation pays cash of $450 000 for 45% of the common
stock and net assets of Passion Ltd. For the year ended 31 December 2017, Passion Ltd
reported net income of $126 000 and declared and paid $50 000 in dividends to its common
shareholders.

In the books of Crabtree Corporation,

(i) prepare the journal entries to account for this investment [6 marks]

(ii) calculate the closing balance of the investment in Passion Ltd on the books of
Crabtree Corporation. [2 marks]

(d) (i) List THREE reasonable assurances that should be provided by internal accounting
controls. [3 marks]

(ii) Explain how revenues are reported on the income statements under BOTH the cash
basis of accounting and the accrual basis of accounting and give ONE example of
EACH. [6 marks]

Total 35 marks

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MODULE 2

PREPARATION OF FINANCIAL STATEMENTS

2. (a) The following selected accounts and their current balances appear in the ledger of Cutting
Ltd for the financial year ended 30 September 2018.

$ 000
Sales 720 000
Inventory (01 October 2017) 145 600
Sales returns and allowances 17 300
Sales discounts 13 200
Purchases 560 000
Sales salaries expense 62 400
Office salaries expense 21 800
Advertising expense 11 760
Rent expense 8 400
Depreciation expense — store equipment 3 500
Depreciation expense — office equipment 2 800
Office supplies expense 720
Interest revenue 4 000
Interest expense 2 800
Insurance expense 1 860
Rent revenue 1 000
Miscellaneous selling expense 790
Miscellaneous admin expense 650

Additional information

– The physical count of inventory on hand at 30 September 2018 was $149 000.

– The corporate tax rate is 25%.

Required

Prepare a multi-step statement of comprehensive income for Cutting Ltd in accordance

with IAS1 and IFRS for SMEs. [16 marks]

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(b) Distinguish between ‘corporations’ and ‘cooperatives’. [8 marks]

(c) Davis, Grant and Rachel are partners in an auto repair shop, Southside Auto Repairs.
The three partners share profits in the following ratios Davis ¼, Grant ¼ and Rachel ½.
At 31 December 2018, the following capital and drawing balances were reflected on the
partners’ account.

Capital Drawings
$ $
Davis 60 000 13 000
Grant 70 000 14 000
Rachel 100 000 23 000

The net income for the partnership for the year ended 31 December 2018 was $80 000.

(i) Prepare a statement of partners’ equity for the current year. [9 marks]

(ii) On 01 January 2019, following the closing of the 2018 accounts for Southside
Auto Repairs, Davis retired from the partnership and sold his interest to his fellow
partners for $80 000. Rachel and Grant agreed to make the payment to Davis
from their personal funds.

Prepare the journal entry to record the sale of partner’s interest. [2 marks]

Total 35 marks

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MODULE 3

FINANCIAL REPORTING AND INTERPRETATION

3. (a) The comparative financial statements for Rainbow Corp for the years ended 31 December
2017 and 2016 are as follows.

Rainbow Corp
Statement of Financial Position
2017 2016
$ 000 $ 000
Assets
Non-current assets
Property, plant and equipment (net) 2093 1948
Long-term investments 250 225
2343 2173
Current assets
Other current assets 180 170
Inventory 750 630
Accounts receivable (net) 425 390
Cash 175 140
1530 1330
Total assets 3873 3503
Equity and liability
Equity
Ordinary share, $10 par 500 500
Retained earnings 880 730
Total equity 1380 1230
Non-current liabilities
Bonds 8% 1710 1710
Current liability
Trade payables 516 389
Accruals 267 174
783 863
Total equity and liability 3873 3503

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Statement of Comprehensive Income

2017 2016
$ 000 $ 000
Sales (net) 5000 4200
Cost of sales (3300) (2500)
Gross profit 1700 1600
Operating expenses (975) (680)
725 920
Other income 25 17
Profit before tax 750 937
Tax (180) (253)
Profit for the period 570 684

Additional information:

– All sales are made on credit.

Calculate the following ratios for 2017:

(i) Acid-test ratio [2 marks]

(ii) Gross profit margin [2 marks]

(iii) Net income margin [2 marks]

(b) Assess the performance of Rainbow Corp for 2017 in terms of

(i) inventory turnover [6 marks]

(ii) average collection period. [6 marks]

(c) Distinguish between ‘solvency analysis’ and ‘profitability analysis’, giving TWO examples
of a ratio used in EACH analysis. [4 marks]

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(d) Use the following information to indicate

• how EACH item should be classified and reported, on the statement of cash flows

• the amount of cash flows associated with the activity.

(i)
Office equipment which had a cost of $200 000, and on which there was accumulated
depreciation of $90 000 on the day of the sale, was sold for $120 000.
[4 marks]

(ii) Land with an acquisition price of $460 000 was purchased with a cash payment
of $210 000 and a long-term mortgage for the remainder. [4 marks]

(iii)
The board of directors declared cash dividends totalling $120 000 during
the current year. The comparative balance sheet indicates dividends payable of
$40 000 at the beginning of the year and $55 000 at the end of the year.
[3 marks]

(iv) The issue of a total of 9000 common stock, $10 par with 7000 for cash and 2000
via a stock dividend at a price of $17 per share. [2 marks]

Total 35 marks

END OF TEST

IF YOU FINISH BEFORE TIME IS CALLED, CHECK YOUR WORK ON THIS TEST.

02101020/MJ/CAPE 2019