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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

General Certificate of Education Ordinary Level
*0176013196*

PRINCIPLES OF ACCOUNTS 7110/02

Paper 2 October/November 2009
2 hours
Candidates answer on the Question Paper.

READ THESE INSTRUCTIONS FIRST

Write your Centre number, candidate number and name on all the work you hand in.
Write in dark blue or black pen.
You may use a soft pencil for any diagrams or graphs.
Do not use staples, paper clips, highlighters, glue or correction fluid.
DO NOT WRITE IN ANY BARCODES.

Answer all questions.

You may use a
calculator.

Where layouts are to be completed, you may not need all the lines for your answer.
The businesses mentioned in this Question Paper are fictitious.

At the end of the examination, fasten all your work securely together.
The number of marks is given in brackets [ ] at the end of each question or part For Examiner's Use
question.
1

Total

This document consists of 22 printed pages and 2 blank pages.

IB09 11_7110_02/RP
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1 The following balances were taken from the books of Salim Electrical Supplies on
15 September 2009. For
Examiner's
Use
$
Sales 14 950 Cr
Stock 1 800 Dr
Eastern Retailers 1 200 Dr
Khan Ltd 2 150 Dr

The following transactions took place:

September 16 Sold goods, list price $500 less 20 % discount, on credit to Khan Ltd
18 Received a cheque from Eastern Retailers in full settlement of their
account less 5 % cash discount
24 Khan Ltd returned goods, list price $50, purchased on 16 September
25 Sold goods, $250, on credit to Eastern Retailers
26 Sold goods, $500, to Khan Ltd for cash
30 Khan Ltd ceased trading. Salim Electrical Supplies decided to write off the
balance of Khan Ltd as a bad debt.

Additional information

1 The stock was valued at $1470 on 30 September 2009.

2 The financial year of Salim Electrical Supplies ends on 30 September 2009.

REQUIRED

(a) Name the type of discount that was deducted on 16 September 2009.

[1]

(b) (i) Name the document issued to Khan Ltd on 24 September 2009.

[1]

(ii) Name the document issued to Eastern Retailers on 25 September 2009.

[1]

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(c) Prepare the following ledger accounts.

For
Examiner's
Close the accounts at 30 September 2009 either by balancing the account or by Use
transfer to the trading account, as appropriate.

Sales account

[4]

Stock account

[3]

Eastern Retailers account

[4]

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Khan account
For
Examiner's
Use

[3]

[Total: 17]

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BLANK PAGE

Question 2 is on the next page.

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2 Universal Industries provided the following information:

For
Examiner's
1 Purchased a machine for $8 000 on 1 October 2007. Use

2 Sold the machine for cash, $7000, on 31 March 2009.

3 The policy of Universal Industries is to charge depreciation at the rate of 10 % per

annum on cost using the straight line method. Depreciation on machinery is charged
from the date of purchase and up to the date of sale.

4 All sales of fixed assets are recorded in a disposal account.

5 Universal Industries prepares final accounts on 31 March each year.

REQUIRED

(a) Explain the term depreciation.

[2]

(b) State two reasons why fixed assets depreciate.

2 [2]

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(c) Prepare the journal entries to record the sale of the machine. Show the transfer of any
profit or loss on the sale to the final accounts on 31 March 2009. Narratives are not For
Examiner's
required. Use

Dr Cr

$ $

[8]

(d) Explain why depreciation is an application of the accruals concept.

[2]

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(e) Complete the table below for items (i) to (iii). State in each case the most appropriate
method of depreciation and give one reason for your answer. For
Examiner's
Use

Asset

Method of depreciation
(i) Buildings

Reason

Method of depreciation
(ii) Computers

Reason

Method of depreciation
(iii) Loose tools

Reason

[6]

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Universal Industries has one employee who worked a total of 170 hours in March 2009
For
of which Examiner's
Use
160 hours were paid at $6 per hour
10 hours were paid at time and a half

Tax and social security of $150 was deducted from the employee’s gross pay.

The net payment has been made to the employee in cash.

REQUIRED

(f) Calculate the employee’s net pay for March 2009.

[4]

Universal Industries must also pay an additional 10 % of the employee’s gross pay for
their share of tax and social security contributions.

The total tax and social security is due to be paid to the tax authorities on
31 March 2009.

REQUIRED

(g) Calculate the total tax and social security payment to be made to the tax authorities on
31 March 2009.

[3]

[Total: 27]

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3 Loxton Ltd had the following capital structure on 1 September 2008.

For
Examiner's
Authorised and issued share capital $ Use
50 000 ordinary shares of $0.50 each 25 000
100 000 10 % preference shares of $1 each 100 000

Reserves
General reserve 80 000
Profit and loss 25 000

Debentures
5 % Debenture repayable 31 December 2015 80 000

REQUIRED

(a) State one similarity and one difference between preference shares and debentures.

Similarity

Difference

[4]

For the year ended 31 August 2009 Loxton Ltd made a net profit of $60 000 before
calculating the debenture interest. The directors made the following decisions:

1 On 1 March 2009 to make an interim dividend payment of

$0.10 on each ordinary share

$0.05 on each preference share

2 On 31 August 2009 to

make a final dividend payment of $0.20 on each ordinary share

pay the remainder of the preference dividend

transfer $20 000 to the general reserve

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REQUIRED
For
Examiner's
(b) Prepare the profit and loss appropriation account of Loxton Ltd for the year ended Use
31 August 2009.

Loxton Ltd
Profit and Loss Appropriation Account for the year ended 31 August 2009

[9]

(c) Suggest two reasons why a company might use a general reserve.

[4]

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Elodie has the following investments in Loxton Ltd:

For
Examiner's
1500 ordinary shares of $0.50 Use
$2000 5 % debenture

REQUIRED

(d) Calculate Elodie’s total income from Loxton Ltd for the year ended 31 August 2009.

[4]

[Total: 21]

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BLANK PAGE

Question 4 is on the next page.

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4 Jamal Mohsin has been provided with some information about a general trading business,
For
Easisell, which buys and sells goods on credit. The following information relates to the year Examiner's
ended 30 September 2009. Use

$
Sales 120 000
Stock at 1 October 2008 12 000
Purchases 91 000
Stock at 30 September 2009 28 000
Expenses 15 000
Debtors 30 000
Creditors 43 000
Bank overdraft 15 000
Capital 150 000

REQUIRED

(a) Calculate, to two decimal places, the following ratios. Show your workings.

(i) Gross profit to sales percentage

[3]

(ii) Rate of stock turnover

[3]

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(iii) Net profit to capital percentage

For
Examiner's
Use

[3]

(iv) Working capital ratio (current ratio)

[3]

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Jamal Mohsin obtained the following ratios for a similar business:

For
Examiner's
1 Gross profit to sales percentage 40 % Use

2 Rate of stock turnover 6 times

3 Net profit to capital percentage 12 %

4 Working capital ratio (current ratio) 1.8 : 1

REQUIRED

(b) Using the information above and your answer to (a) compare and comment upon the
performance of Easisell under the following headings.

(i) Controlling stock

[4]

(ii) Net profit to capital percentage

[4]

(iii) Ability to pay creditors

[4]

[Total: 24]

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Answer Question 5 on the following pages.

For
Examiner's
5 Paul and Judi are partners in a retail business. The partnership agreement states that they Use
share profits and losses in the ratio 3 : 2, after allowing interest on capital at the rate of 4 %
per annum. The following balances were extracted from the books on 30 September 2009.

$
Capital accounts
Paul 30 000
Judi 20 000
Current accounts
Paul 2 300 Cr
Judi 650 Dr
Drawings
Paul 11 000
Judi 10 000
Purchases 139 750
Sales 210 000
Returns inward 4 500
Stock at 1 October 2008 12 650
Staff wages 18 000
General expenses 9 650
Rent receivable 6 000
Advertising expenses 10 000
Rent 17 500
Fixtures and fittings (cost) 24 000
Provision for depreciation of fixtures and fittings 12 600
Creditors 8 900
Debtors 16 000
Provision for doubtful debts 550
Bank 16 650 Dr

Additional information

1 Stock at 30 September 2009 was valued at $15 400.

2 Paul withdrew goods costing $4000 from the partnership business during the year. This
had not been recorded in the books.

3 At 30 September 2009:

Advertising expenses, $2850, were prepaid.

Rent receivable, $2000, was due.

4 Depreciation is charged on fixtures and fittings at 15 % per annum on cost using the
straight line method.

5 Additional fixtures and fittings, $4000, were purchased on 31 January 2009. These are
included in the balance at 30 September 2009. No other changes in fixed assets
occurred during the year. Depreciation is calculated from the date of purchase.

6 The provision for doubtful debts is to be maintained at 5 % of debtors.

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REQUIRED
For
Examiner's
(a) Prepare the trading and profit and loss and appropriation accounts of Paul and Judi for Use
the year ended 30 September 2009. [19]

(b) Prepare the balance sheet of Paul and Judi at 30 September 2009. [12]

The current accounts details may be included within the balance sheet or in account
format outside the balance sheet.

[Total: 31]

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Examiner's
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Examiner's
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For
Examiner's
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For
Examiner's
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For
Examiner's
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For
Examiner's
Use

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© UCLES 2009 7110/02/O/N/09