Accounting English Paper 2 2015 Questions and Answers Part 3

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Information

1. Issued share capital comprised 850 000 ordinary shares on 1 July 2013.

2. The following was extracted from the books on 30 June 2014

The Following Was Extracted from the Books on 30 June 2014
Fixed/Tangible assets (carrying value)?
Fixed deposit: Swan Bank120 000
Ordinary share capital (850 000 shares)5 737 500
Retained income (1 July 2013)181 900
Bank351 200
Loan: Drake Bank295 000
Trading stock355 700
Net trade debtors (after deducting provision for bad debts)118 370
Creditors՚ control197 000
SARS: Income tax (provisional payments)320 900
Dividends on ordinary shares (interim dividends)315 000

3. No entries have been made for the repurchase of shares. On 1 October 2013, the business bought back 150 000 ordinary shares from certain shareholders. Although the market price of the shares was R9,25, they accepted R7,40 for each share. These shareholders were not entitled to interim dividends.

4. The following adjustments have not yet been taken into account:

  • Insurance included an annual policy of R29 832 paid for on 1 December 2013.
  • The provision for bad debts must be increased by R6 100.
  • Unused packing material amounted to R9 500.
  • A debtor with a credit balance of R11 700 is to be transferred to the Creditors՚ Ledger.
  • The bank reconciliation reflected a post-dated cheque for R33 000 dated 31 August 2014.
  • The statement received from Drake Bank in respect of the loan reflected interest capitalized of R31 200. Monthly repayments are R10 800 including interest. These repayments will end in 2017.
  • On 30 June 2014, a final dividend of 40 cents per share was declared.

5. Net profit after tax, after taking into account the adjustments above, was calculated as R813 600. The income tax rate is 28 % of net profit before tax.

Question 4

Fixed Assets, Cash Flow Statement, Analysis and Interpretation

(75 marks; 45 minutes)

You are provided with information relating to Classic Limited. The financial year-end is on 31 October 2014. New shares were issued on the first day of the financial year.

Required

  • What is the main purpose of a Cash Flow Statement?
  • Refer to the fixed asset note under Information C.
  • Calculate the missing amounts (indicated by a, b, c and d) in the Fixed/Tangible Asset Note for the year ended 31 October 2014.
  • Complete the Cash Flow Statement for the year ended 31 October 2014. Show ALL workings in brackets.
  • The directors issued more shares and sold fixed assets in order to improve the cash flow. A shareholder, John Meanwell, has criticized them for these decisions.

In each case:

  • Provide a reason to support John՚s opinion.
  • Other than improving the cash flow, provide a reason to support the directors՚ decision.

Calculate the following financial indicators on 31 October 2014:

  • Acid-test ratio
  • Earnings per share
  • Return on average shareholders՚ equity
  • Debt-equity ratio

The directors are proposing that the business operations be expanded in the new financial year. One of the directors suggested that they finance the expansions by taking a loan of R1 000 000, instead of issuing new shares to the public. Quote and explain TWO financial indicators to support his opinion.

  • Bongani is a shareholder in Classic Limited. He owns 32 000 shares which he purchased two years ago at R4,75 each.
  • Calculate the amount of dividends Bongani would earn for the financial year ending 31 October 2014.
  • Should Bongani be satisfied with the dividend policy of Classic Limited? Quote and explain relevant financial indicators to support your answer.
  • Bongani wants to sell his shares in Classic Ltd and invest his funds in an alternative investment. You disagree with him. Quote and explain ONE relevant financial indicator, other than dividends, to discourage him from selling his shares. Your answer must include the actual figure/ratio/percentage.

Information

The Following Information Was Extracted from the Income Statement for the Year Ended 31 October 2014

The Following Information Was Extracted from the Income Statement for the Year Ended 31 October 2014
Interest on loan (all capitalized)175 500
Income tax375 000
Net profit after tax975 000

Information Extracted from the Balance Sheet

Information Extracted from the Balance Sheet
31 October 201431 October 2013
Current assets4 804 0002 820 000
Inventories1 437 5001 656 250
Trade and other receivables (see D)1 075 000956 250
Cash and cash equivalents2 291 500207 500
Ordinary shareholders՚ equity4 450 0004 000 000
Ordinary share capital (see F)3 450 0003 150 000
Retained income1 000 000850 000
Loan: Freeport Bank (12 % p. a.)2 000 0001 375 000
Current liabilities1 450 0001 262 500
Trade and other payables (see E)1 450 0001 262 500

Fixed/Tangible Assets

Fixed/Tangible Assets
Land and buildingsVehiclesEquipment
Carrying value at beginning of financial year3 000 000660 000?
Cost3 000 000900 000?
Accumulated depreciation0(240 000)(52 500)
Movements
Additions at cost0048 000
Disposals at carrying value(a)(c)0
Depreciation0(b)(55 500)
Carrying value at end of financial year2 500 000446 000(d)
Cost2 500 000750 000258 000
Accumulated depreciation0(304 000)?