The following balances were extracted from the books of Paul Lee, a manufacturer, on 31 May 2013. Capital $220000 Drawings $10800 Factory machinery (cost) $210000 Office equipment (cost) $60000 Provision for depreciation: Factory machinery $75600 Office equipment $21600 Inventory at 1 June 2012: Raw materials $33000 Work in progress $36000 Finished goods $66444 Purchases of raw materials $133687 Revenue $426088 Transport costs $29400 Wages and salaries $140600 Rent and rates $28000 Indirect factory expenses $18423 Lighting and heating $23140 Selling and administration expenses $10742 Bad debts $1000 Loan interest paid $2000 Trade payables $43690 Trade receivables $34400 Bank $658 Cr 6% Loan (repayable on 23 June 2018) $50000 Additional information: 1 Inventory values at 31 May 2013: Raw materials $38000 Work in progress $42600 Finished goods $71200 2 Transport costs are allocated 65% to raw materials and 35% to delivery of finished goods. 3 Wages and salaries include $56000 for production managers' salaries. The remaining balance is split 40% direct labour, 35% indirect labour and 25% office salaries. 4 Rent and rates are apportioned factory 80% and office 20%. 5 Lighting and heating are apportioned factory 70% and office 30%. On 31 May 2013 these were in arrears by $860. 6 On 31 May 2013 selling and administration expenses had been prepaid by $230. 7 A provision for doubtful debts, representing 4% of trade receivables, is to be created. 8 Factory machinery is depreciated at 20% per annum using the diminishing (reducing) balance method. Office equipment is depreciated at 12% per annum on cost. REQUIRED

Mark scheme

Marking points from the official mark scheme (May/June 2013). The mark or mark type is shown in brackets.

1. [1] (a) Inventory of raw materials 1 June 2012 $33 000
2. [1] (a) Purchases of raw materials $133 687
3. [1] (a) Transport cost ($29 400 × 65%) $19 110
4. [1] (a) Inventory of raw materials 31 May 2013 ($38 000)
5. [1] (a) Cost of raw materials consumed $147 797
6. [1] (a) Direct labour ($140 600 – $56 000 × 40%) $33 840
7. [1] (a) Prime cost $181 637 of
8. [1] (a) Factory overheads: Production managers' salaries $56 000
9. [1] (a) Indirect labour $29 610
10. [1] (a) Indirect factory expenses $18 423
11. [1] (a) Factory rent and rates ($28 000 × 80%) $22 400
12. [1] (a) Factory heat and light ($23 140 + $860 × 70%) $16 800
13. [1] (a) Depreciation of factory machinery $26 880
14. [1] (a) Work in progress 1 September 2012 $36 000
15. [1] (a) Work in progress 31 August 2013 ($42 600)
16. [1] (a) Cost of production $345 150 of
17. [1] (b) Revenue $426 088
18. [1] (b) Inventory of finished goods 1 June 2012 $66 444
19. [1] (b) Cost of production $345 150
20. [1] (b) Inventory 31 May 2013 ($71 200)
21. [1] (b) Bad debts $1 000
22. [1] (b) Loan interest ($2000 + $1000) $3 000
23. [1] (b) Selling and administration expenses ($10 742 – $230) $10 512
24. [1] (b) Wages ($140 600 – $56 000 × 25%) $21 150
25. [1] (b) Lighting and heating ($23 140 + $860 × 30%) $7 200
26. [1] (b) Rent and rates ($28 000 × 20%) $5 600
27. [1] (b) Transport ($29 400 × 35%) $10 290
28. [1] (b) Provision for doubtful debts $1 376
29. [1] (b) Provision for depreciation of office equipment $7 200
30. [1] (c) Non-current assets total (Net Book Value) $138 720 of
31. [1] (c) Current assets: Inventory total $151 800
32. [1] (c) Current assets: Trade receivables (net of PDD) $33 024 of
33. [1] (c) Current assets: Other receivables $230
34. [1] (c) Current liabilities: Trade payables $43 690
35. [1] (c) Current liabilities: Other payables $860
36. [1] (c) Current liabilities: Loan interest $1 000 of
37. [1] (c) Current liabilities: Bank overdraft $658
38. [1] (c) Non-current liabilities: 6% Loan $50 000
39. [1] (c) Financed by: Capital $220 000
40. [1] (c) Financed by: Net profit $18 366 of
41. [1] (c) Financed by: Drawings ($10 800)