King’s College

S.7 Mock Examination 2008-2009

Principles of Accounts
Marker’s Report
Paper 1

Question
Performance in General
Number
1. (A) Satisfactory. Most students answered this part well. However, some failed to classify the following
items properly in the cash flow statement: (1) interest element on finance lease (investing activities);
(2) dividend paid (financing activities); and (3) interest received (investing activities). It should also
be noted that the items in the profit and loss account are adjusted prior to items in working capital
under the indirect method.
(B) Many students failed to show workings and specify the calculation methods of accounting ratios. It
should be noted that some ratios have more than one way of computation. For instance, to compute
the return on capital employed, unless otherwise specified, the denominator can be defined either as
shareholders’ fund or capital employed. Some students forgot to round off their answers to 2 decimal
places as required. A few incorrectly presented the current ratio as 1:4.13, instead of 4.13:1.
2. Well answered, except those who incorrectly recorded the accounting treatment of abnormal loss.
The correct double entries are:
Dr. Profit and loss – stock loss
Cr. Trading/Cost of goods sold/Purchases
For item (vii)(1), most students incorrectly recorded the credit entry through the Bank account; the
correct credit entry is made through Cash account/Cash Book instead. As the discrepancy had been
included in the Sundry Expenses account, no error concerned should be corrected through the
Suspense account. For item (iv) of part (B), students were advised to separate the items of bad debt
and bad debt recovered and show corresponding workings.
3. Well answered, although some failed to present the consolidated financial statements in the updated
format. Most students failed to work out proper treatment of goodwill. The goodwill upon
consolidation was $960,000; after impairment review, it was written down to $800,000 which should
be recorded in the balance sheet, while the difference of $160,000 was impairment loss which should
be recorded in the income statement.
4. Fair. Many students failed to compute the super profit with the use of the value of return on revalued
net assets, which should be ($1,200,000 + $2,000) × 20% = $240,400. Student should have
presented the statement of final profit separately for two periods, i.e. before and after the admission
and withdrawal of partners. They were expected to show workings, especially when doing
calculations associated with profit-sharing ratios.
5. Fair. Students were advised to show workings, especially when computing the amounts of takings,
purchases and closing stock. Some students failed to take into consideration the twenty litres of
premium per month when computing the salary of John Yip.

1
Paper 2

Question
Performance in General
Number
1. Satisfactory. For part (C), some students failed to indicate what costing systems they were using
when preparing income statements. When computing the aggregate cost of production, they were
expected to show workings with the amount of each category of cost such as direct materials and
direct manufacturing labour clearly shown. Clear presentation of workings helped students to gain
step marks. Besides, they should have indicated which amount to which contribution refers when
preparing an income statement under marginal costing.
2. Fair. For part (A), when computing the efficiency variance for each of the four operations, students
were expected to show workings as to the four types of unit currently produced, i.e. EMC1 – EMC4.
For part (B)(a), many students had difficulty computing the selling volume profit variance, which
should be 1,200 × ($50 – $36). Many did not show clearly whether the variances were favourable or
unfavourable in the statement of reconciliation.
3. (A) Poor. Most students managed to use the prudence concept to explain the accounting treatment in the
financial statement. Nonetheless, it should be noted that the question focused on HKAS 2
“Inventories” and HKAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”;
students should have provided specific explanations for the prior period errors and relevant
accounting treatments.
(B) Unsatisfactory. Many students failed to mention the factor of time value of money when explaining
the rationale behind discounting cash flows in the appraisal of capital investment project. Besides,
most students failed to compute the present value of a cash flow in perpetuity, which should be
$13,500 ÷ 0.1 = $135,000. Most also had difficulty computing the annual cash flow of item (c).
4. (A) Well-answered, although students were expected to present the cash budget properly by grouping
relevant items under the sections of Receipts and Payments respectively.
(B) Poor. For part (b)(i), most students failed to point out that the disposal of the plant took place after
the balance sheet date. Despite a loss of $107,000 from such non-current asset disposal, no
adjustment should be made to the plant’s value as reported in the balance sheet as at 31 March 2008
and no disclosure is necessary. For part (b)(ii), most students failed to state and explain, in view of
HKAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, whether the compensation of
$180,000 and potential increase of $40,000 in value of the insurance claim should be recognised or
not. While the former was certain and hence could be recognised, the latter was a contingent asset
(an uncertain future event not within the control of the entity) and hence should not be recognised.
In addition, most students did not realise that the contingent asset should be disclosed.
5. Satisfactory. Many students did not understand the meaning of replacement cost and hence
incorrectly ascertained the cost of Material X. For (a), many students either overlooked the second
part of the question, or failed to provide sound explanations in relation to the concept of relevant
costs. They were expected to provide a brief explanation for whether each of the given items,
including fixed overheads and profit, should be considered a relevant cost.