Accounting English Paper 2 2015 Questions and Answers Part 3
Doorsteptutor material for CTET/Paper-2 is prepared by world's top subject experts: get questions, notes, tests, video lectures and more- for all subjects of CTET/Paper-2.
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
Fixed/Tangible assets (carrying value) | ? |
Fixed deposit: Swan Bank | 120 000 |
Ordinary share capital (850 000 shares) | 5 737 500 |
Retained income (1 July 2013) | 181 900 |
Bank | 351 200 |
Loan: Drake Bank | 295 000 |
Trading stock | 355 700 |
Net trade debtors (after deducting provision for bad debts) | 118 370 |
Creditors՚ control | 197 000 |
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
Interest on loan (all capitalized) | 175 500 |
Income tax | 375 000 |
Net profit after tax | 975 000 |
Information Extracted from the Balance Sheet
31 October 2014 | 31 October 2013 | |
Current assets | 4 804 000 | 2 820 000 |
Inventories | 1 437 500 | 1 656 250 |
Trade and other receivables (see D) | 1 075 000 | 956 250 |
Cash and cash equivalents | 2 291 500 | 207 500 |
Ordinary shareholders՚ equity | 4 450 000 | 4 000 000 |
Ordinary share capital (see F) | 3 450 000 | 3 150 000 |
Retained income | 1 000 000 | 850 000 |
Loan: Freeport Bank (12 % p. a.) | 2 000 000 | 1 375 000 |
Current liabilities | 1 450 000 | 1 262 500 |
Trade and other payables (see E) | 1 450 000 | 1 262 500 |
Fixed/Tangible Assets
Land and buildings | Vehicles | Equipment | |
Carrying value at beginning of financial year | 3 000 000 | 660 000 | ? |
Cost | 3 000 000 | 900 000 | ? |
Accumulated depreciation | 0 | (240 000) | (52 500) |
Movements | |||
Additions at cost | 0 | 0 | 48 000 |
Disposals at carrying value | (a) | (c) | 0 |
Depreciation | 0 | (b) | (55 500) |
Carrying value at end of financial year | 2 500 000 | 446 000 | (d) |
Cost | 2 500 000 | 750 000 | 258 000 |
Accumulated depreciation | 0 | (304 000) | ? |