O-LevelAccountingPreparation of financial statements7707/22 · Oct/Nov 2020 · Q320 Marks

JP Limited's financial year ended on 30 September 2020. The following balances were available at that date. | $ --- | --- 7% debentures (2026) | 20000 Administrative expenses | 44000 Carriage inwards | 1500 Distribution costs | 38000 Debenture interest paid | 700 Inventory at 1 October 2019 | 66000 Non-current assets at book value at 1 October 2019 | 610000 Provision for doubtful debts | 1000 Purchases | 263000 Revenue | 529500 Trade receivables | 80500 Additional information 1 Inventory at 30 September 2020 was valued at $59 000. 2 Interest on the 7% debentures (2026) had been paid up to 31 March 2020. 3 Administrative expenses included rates of $1200 for the six months ending 31 March 2021. 4 Distribution costs of $800 were outstanding at 30 September 2020. 5 Non-current assets should be depreciated by 10% per annum using the reducing balance method. 6 Irrecoverable debts of $500 are to be written off. 7 The directors wish to maintain the provision for doubtful debts at 2% of trade receivables. REQUIRED

(a)Calculate the cost of sales for the year ended 30 September 2020.[2]
(b)Calculate the increase or decrease in the provision for doubtful debts at 30 September 2020.[2]
(c)Prepare the income statement for the year ended 30 September 2020. JP Limited Income Statement for the year ended 30 September 2020 $ | $[12]
(d)Complete the table by placing a tick (✔) in the correct column to indicate the effect on the equity of JP Limited of each of the following. The first one has been completed as an example. | Increase | Decrease | No effect --- | --- | --- | --- Issue additional debentures | | | ✔ Issue additional ordinary shares | | | Payment of ordinary share dividend | | | Proposal of ordinary share dividend | | | Transfer from retained earnings to general reserve | | | [4]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2020). The mark or mark type is shown in brackets.

[1] (a) Opening inventory 66000 + Purchases 263000 + Carriage inwards 1500 = 330500
[1] (a) Cost of sales: 330500 - Less Closing inventory 59000 = 271500 OF
[1] (b) Provision at 30 September 2020 ((80500 – 500) x 2%) $1600
[1] (b) Increase in provision for doubtful debts: $1600 - Less Provision at 1 October 2019 $1000 = $600 OF
[1] (c) Revenue $529500
[1] (c) Less Cost of sales $271500 (1) OF
[1] (c) Gross profit $258000 (1) OF
[1] (c) Administrative expenses (44000 - 1200) $42800 (1)
[1] (c) Distribution costs (38000 + 800) $38800 (1)
[1] (c) Irrecoverable debts $500 (1)
[1] (c) Provision for doubtful debts $600 (1) OF
[1] (c) Depreciation – non-current assets $61000 (1)
[1] (c) Profit from operations $114300
[1] (c) Debenture interest (700 + 700) $1400 (1)
[1] (c) Profit for the year $112900 (1) OF
[1] (d) Issue additional ordinary shares ✓ (1)
[1] (d) Payment of ordinary share dividend ✓ (1)
[1] (d) Proposal of ordinary share dividend ✓ (1)
[1] (d) Transfer from retained earnings to general reserve ✓ (1)

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