Tutorial Answers A1

Section A: Evaluate the following statements and state TRUE or FALSE. Discuss the
validity of your answers.

1. The main disadvantage of sole traders is that they have unlimited liabilities for the
debts of the business.

2. Profit from sole traders can be withdrawn as drawings.

3. Drawing from sole trader’s business is also possible if the business suffered losses
and this will result in deduction from the balance of capital.

4. Businesses in Singapore have to be registered with registry of Companies &

businesses (MOF).

5. Private Companies do not restrict the right of its members to transfer their shares in
the company; and do not limit the number of members that the company can have.

6. “Listed companies” are public companies which are listed on a stock exchange.

7. The maximum amount of capital that that a company envisages it will require is
paid-up capital

8. Issued capital cannot exceed the authorised capital.

9. All issued capital must be paid on issue.

10. Sole traders can issue ordinary shares to shareholders

11. Partnership may be made up of two or more people. These people may receive
salaries and/or interest on the capital provided by them.

12. The profits made by company may be used in payments of dividends or transfer to
reserves.

13. One of the reasons for declaring a bonus issue is to increase the amount of issued
and paid-up capital.

14. Preference share is a form of long-term debt and share holders will receive
dividends which are usually fixed for the entire life span of the preference shares.

15. There are various ways in the redemption of special debt such as preference share.
One of which is the conversion of the preference shares into ordinary shares.

16. Accrual accounting recognizes revenue at the point of sale and recognizes
expenses when it is incurred regardless of whether they are paid or not.

17. Accrual accounting does not fully describe the circumstances of the company.
Section B:

1. Why a business needs a statement of cash flow when a balance sheet statement
and profit and loss statement are available?

A balance sheet statement shows the cash position at a moment of time and does
not show the movement of cash from one period to another.
Profits are affected by non-cash transactions such as depreciation, goodwills, gain
or losses on disposal of assets.
Cash movements involve more than income and expenses – purchase and sale of
non-current assets, loan finance and repayments, dividends.
Statement of cash flows discloses the flows of cash into and out of the business
during the financial period. This is an important report for a manager or investor as
it provides information about the ability of the business to meet its future financial
commitment as it falls due

2. Classify the following between “Capital” and “Revenue” expenditure.

2.1 The purchase of equipment for use in business

2.2 Carriage paid to bring the above equipment to the company
2.3 Redecoration of premises at a cost of $2,000
2.4 The purchase of soft drinks vending machine for the canteen with a stock of soft
drinks
2.5 Cost of repairs to accounting machines
2.6 Legal fees paid in connection with factory extension
2.7 Purchase of an extra motor car for company’s use
2.8 Cost of rebuilding warehouse wall which had fallen down
2.9 Building extension to the warehouse
2.10 Painting costs for the extension to the warehouse when it was first built
2.11 Costs of repainting the warehouse extension 5 years later
2.12 Carriage costs on purchases
2.13 Legal fees for the collection of debts
2.14 Legal fees for the acquisition of new premises
2.15 Fire insurance premium
2.16 Costs of erecting new machine
3. The authorised share capital of Sea Star Ship Repair & Supplies PLC is 800,000
ordinary shares of $1 each. The following balances and associated adjustments were
extracted from the books of the company at the end of the financial year 31 st
December, 2008.

Sea Star Ship Repair & Supplies PLC

For the Year Ended December 31, 2008

Trial Balance Adjustments Adjusted Trial

Balance
Account Title Dr Cr Dr Cr Dr Cr
Issued & paid-up ord. shares 400,000 400,000
Machinery 370,000 370,000
Equipment 130,000 130,000
Purchases 654,000 654,000
Sales 1,018000 1,018000
Debtors 159,000 159,000
Creditors 64,000 64,000
Provision for depreciation, 37,000 37,000 74,000
Boats
Prov for depreciation, 13,000 13,000 26,000
Equipment
Wages and salaries 143,000 4,700 147,700
Return inwards 17,000 17,000
Office expenses 75,000 75,000
Debenture interest 6,000 6,000
Rent 10,000 2,000 8,000
Bad debts 4,000 4,000
Provision for doubtful debts 4,000 3,000 7,000
Stocks, 1st January 2008 55,000 55,000
Cash at bank 47,000 47,000
Retained earnings, 1st 34,000 34,000
January 2008
Debentures 100,000 100,000
Prepaid rent 2,000 2,000
Doubtful debt expense 3,000 3,000
Depreciation, Equipment 37,000 37,000
Depreciation, Machinery 13,000 13,000
Accrued salary 4,700 4,700

1,727,700 1,727,700
Additional information as at 31st December, 2008:

a. Stock as at 31st December, 2008 was valued at $57,000

b. Provision for taxation at 25% of profit.
c. A dividend of 10¢ per share is proposed

3.1 Prepare a Profit & Loss statement for the year ended 31 st December, 2008
3.2 Prepare a Balance Sheet as at 31st December, 2008
 Sea Star Ship Repair & Supplies PLC
Income Statement for Year Ending 31 December, 2008
Sales 1,018,000
Less Return inwards 17,000
Net sales 1,001,000

Stocks, 1 Jan, 2008 55,000

Purchases 654,000
Goods available for sale 709,000
Stocks, 31 Dec, 2008 57,000
Costs of goods sold 652,000
Gross profit 349,000

Less Expenses
Rent (operation and admin) 8,000
Wages and salaries (operation and admin) 147,700
Office expenses (operation and admin) 75,000
Bad debts (finance) 4,000
Doubtful debts expense (finance) 3000
Operating costs except depreciation 237,700
Earnings before interest, taxes and 111,300
depreciation (EBITDA)
Depreciation, Machinery 37,000
Depreciation, Equipment 13,000
Total depreciation 50,000
Earnings before interest and taxes (EBIT) 61,300
Less Debenture interest 6,000
Earning before taxes (EBT) 55,300
Less 25% Corporate tax 13,825
Net earnings 41,475
Common dividends, 10¢ per share 40,000
Addition to retained earnings 1,475
 Sea Star Ship Repair & Supplies PLC
Balance Sheet Statement as at 31 December, 2008
Assets
Cash and equivalents 47,000
Prepaid Rent 2,000
Inventories 57,000
Debtors 159,000
Less Provision for doubtful debts 7,000 152,000
Total current assets 258,000
Machinery 370,000
Less Provision for depreciation 74,000 296,000
Equipment 130,000
Less Provision for depreciation 26,000 104,000
Total assets 658,000

Liabilities and Equity

Creditors 64,000
Accrued salary 4,700
Common dividend payable 40,000
Tax payable 13,825
Total current liabilities 122,525
Long-term debentures 100,000
Total liabilities 222,525
Common stock (400,000 issued and paid-up shares) 400,000
Retained earnings 35,475
Total common equity 435,475
Total liabilities and equity 658,000