2021 HKDSE Business, Accounting and Financial Studies Answers & Marking Scheme

1) Goodwill adjustment:
- Write up goodwill in old ratio (3:2): Alan's share = \$80,000 \times 3/5 = \$48,000 (Cr)
- Write off goodwill in new ratio (2:2:1): Alan's share = \$80,000 \times 2/5 = \$32,000 (Dr)
- Net goodwill adjustment to Alan = \$48,000 (Cr) - \$32,000 (Dr) = \$16,000 (Cr).
2) Revaluation surplus adjustment:
- Distributed in old ratio (3:2): Alan's share = \$40,000 \times 3/5 = \$24,000 (Cr).
3) Total net adjustment to Alan's capital account = \$16,000 (Cr) + \$24,000 (Cr) = \$40,000 increase.

2 marks for the correct option C. No fractional marks.

1) Calculate divisible profit:
- Net Profit: \$120,000
- Add: Interest on drawings (X: \$1,000 + Y: \$750) = \$1,750
- Less: Interest on capital (X: \$200,000 \times 5% = \$10,000; Y: \$150,000 \times 5% = \$7,500) = (\$17,500)
- Less: Salary to X = (\$30,000)
- Residual Profit = \$120,000 + \$1,750 - \$17,500 - \$30,000 = \$74,250
- X's share of profit = \$74,250 \times 2/3 = \$49,500
2) X's Current Account:
- Opening Balance: \$12,000 (Cr)
- Add: Interest on Capital: \$10,000 (Cr)
- Add: Salary: \$30,000 (Cr)
- Add: Share of Profit: \$49,500 (Cr)
- Less: Drawings: \$20,000 (Dr)
- Less: Interest on Drawings: \$1,000 (Dr)
- Closing Balance = \$12,000 + \$10,000 + \$30,000 + \$49,500 - \$20,000 - \$1,000 = \$80,500 (Cr).

2 marks for the correct option B. No fractional marks.

1) Relevant cost of making 10,000 units:
- Variable cost: (\$8 + \$6 + \$3) \times 10,000 = \$170,000
- Avoidable fixed overheads: \$5 \times 10,000 \times 60% = \$30,000
- Opportunity cost (rental income forgone if making): \$15,000
- Total relevant cost of making = \$170,000 + \$30,000 + \$15,000 = \$215,000.
2) Relevant cost of buying 10,000 units:
- Purchase cost: \$19 \times 10,000 = \$190,000.
3) Comparison:
- Cost of buying (\$190,000) is less than cost of making (\$215,000) by \$25,000.
- Therefore, the company should Buy, saving \$25,000.

2 marks for the correct option A. No fractional marks.

1) Identify new parameters:
- New variable cost per unit = \$40 \times (1 + 10%) = \$44
- New selling price = \$80
- New contribution margin per unit = \$80 - \$44 = \$36
- New fixed costs = \$150,000 + \$30,000 = \$180,000
- Target net profit = \$72,000
2) Apply formula:
- Required Sales (units) = (New Fixed Costs + Target Profit) / New Contribution Margin per unit
- Required Sales (units) = (\$180,000 + \$72,000) / \$36 = \$252,000 / \$36 = 7,000 units.

2 marks for the correct option C. No fractional marks.

1) Calculate application money retained:
- Total application cash received = 1,400,000 \times \$0.50 = \$700,000
- Refunded cash = 200,000 \times \$0.50 = \$100,000
- Application money retained (from 1,200,000 applicants) = \$600,000
- Actual application money needed for 1,000,000 shares = 1,000,000 \times \$0.50 = \$500,000
- Excess application money carried forward to offset allotment = \$600,000 - \$500,000 = \$100,000
2) Calculate cash collected on allotment:
- Total amount due on allotment = 1,000,000 \times \$1.00 = \$1,000,000
- Cash collected on allotment = Total amount due - Excess application money = \$1,000,000 - \$100,000 = \$900,000.

2 marks for the correct option B. No fractional marks.

1) Treatment of proposed final dividend:
- Under Hong Kong Financial Reporting Standards, proposed final dividends are not recognized as a liability or deducted from retained profits at the reporting date as they have not yet been approved.
2) Treatment of revaluation surplus:
- Credited directly to the revaluation reserve, not retained profits.
3) Calculation of Retained Profits:
- Opening balance: \$350,000
- Add: Net profit for the year: +\$220,000
- Less: Interim dividend paid: -\$40,000
- Less: Transfer to general reserve: -\$50,000
- Closing balance = \$350,000 + \$220,000 - \$40,000 - \$50,000 = \$480,000.

2 marks for the correct option B. No fractional marks.

1) Calculate Purchases using Trade Payables account:
- Purchases = Closing Payables + Payments + Discount Received - Opening Payables
- Purchases = \$35,000 + \$180,000 + \$3,000 - \$30,000 = \$188,000
2) Calculate Cost of Goods Sold (COGS):
- COGS = Opening Inventory + Purchases - Closing Inventory
- COGS = \$40,000 + \$188,000 - \$48,000 = \$180,000
3) Calculate Sales:
- Margin = 25% on sales, so COGS is 75% of sales.
- Sales = COGS / 0.75 = \$180,000 / 0.75 = \$240,000.

2 marks for the correct option C. No fractional marks.

1) Calculate Cost of Goods Sold (COGS):
- Markup = 25% on cost, so Sales = 125% of COGS.
- COGS = \$450,000 / 1.25 = \$360,000.
2) Calculate estimated inventory before fire:
- Estimated closing inventory = Opening Inventory + Purchases - Drawings at cost - COGS
- Estimated closing inventory = \$65,000 + \$380,000 - \$5,000 - \$360,000 = \$80,000.
3) Calculate inventory destroyed:
- Inventory destroyed = Estimated closing inventory - Salvaged inventory = \$80,000 - \$12,000 = \$68,000.

2 marks for the correct option B. No fractional marks.

1) Returns of goods bought on credit to suppliers are first recorded in the Return Outwards Journal (or Purchases Returns Journal).
- 2) The individual personal accounts of trade suppliers (creditors) are kept in the Purchases Ledger (or Creditors Ledger). Return outwards account itself is kept in the General Ledger.

2 marks for the correct option A. No fractional marks.

1) Calculate net invoice price after trade discount:
- Invoice price = \$20,000 \times (1 - 10%) = \$18,000
2) First payment on 12 May (within the 10-day discount window):
- Half of outstanding = \$9,000
- Cash discount entitled = \$9,000 \times 2% = \$180
- Cash received = \$9,000 - \$180 = \$8,820
3) Second payment on 28 May (outside the 10-day discount window):
- Remaining balance = \$9,000
- Cash received = \$9,000 (no cash discount)
4) Total cash received = \$8,820 + \$9,000 = \$17,820.

2 marks for the correct option C. No fractional marks.

1. Net book value of premises = \$500,000 - \$100,000 = \$400,000.
2. Total revaluation surplus = Revalued amount - Net book value = \$650,000 - \$400,000 = \$250,000.
3. Alice's share of the revaluation surplus = \$250,000 \times \frac{3}{5} = \$150,000.

Award 2 marks for the correct answer C. No fractional marks.

1. Realization loss = Book value of assets - Disposal proceeds = \$80,000 - \$65,000 = \$15,000.
2. Q's share of realization loss = \$15,000 \times \frac{2}{5} = \$6,000.
3. Q's final Capital balance (cash received) = Initial capital - share of loss = \$20,000 - \$6,000 = \$14,000.

Award 2 marks for the correct answer B. No fractional marks.

1. Relevant cost to make = Direct materials (\$12) + Direct labour (\$8) + Variable overheads (\$5) + Avoidable fixed overheads (\$4) = \$29 per unit.
2. Cost to buy = \$28 per unit.
3. Financial impact = \$29 (make) - \$28 (buy) = \$1 saving per unit if buying.

Award 2 marks for the correct answer A. No fractional marks.

1. Available excess capacity = 50,000 - 40,000 = 10,000 units, which is enough to fulfill the 8,000 units order without affecting current sales.
2. Selling price of special order = \$55.
3. Relevant cost per unit = Variable manufacturing cost = \$45 (Variable selling expenses are \$0, and fixed costs are irrelevant as they are already incurred).
4. Contribution per unit of special order = \$55 - \$45 = \$10.
5. Total profit increase = 8,000 units \times \$10 = \$80,000.

Award 2 marks for the correct answer A. No fractional marks.

1. Initial shares = 1,000,000
2. Shares issued via bonus issue = 1,000,000 / 5 = 200,000 shares
3. New issue on 1 October = 200,000 shares
4. Total shares in issue on 31 December 2023 = 1,000,000 + 200,000 + 200,000 = 1,400,000 shares
5. Total dividend declared = 1,400,000 shares \times \$0.15 = \$210,000.

Award 2 marks for the correct answer C. No fractional marks.

Retained profits balance on 31 Dec 2023 = Opening balance + Net profit - Transfer to reserves - Interim dividend paid - Final dividend declared = \$180,000 + \$320,000 - \$50,000 - (1,000,000 \times \$0.10) - (1,000,000 \times \$0.20) = \$180,000 + \$320,000 - \$50,000 - \$100,000 - \$200,000 = \$150,000.

Award 2 marks for the correct answer A. No fractional marks.

1. Cost of goods sold (COGS) = Opening inventory + Purchases - Closing inventory = \$35,000 + \$210,000 - \$45,000 = \$200,000.
2. Total Sales (at 25% mark-up on cost) = COGS \times 1.25 = \$200,000 \times 1.25 = \$250,000.
3. Total Cash sales made = Total Sales - Credit Sales = \$250,000 - \$240,000 = \$10,000.
4. Cash sales recorded = Total Cash sales - Stolen cash = \$10,000 - \$8,000 = \$2,000.

Award 2 marks for the correct answer A. No fractional marks.

1. Net purchases on 5 May = \$10,000 \times (1 - 10\%) = \$9,000.
2. Net return on 8 May = \$1,000 \times (1 - 10\%) = \$900.
3. Balance before payment = \$9,000 - \$900 = \$8,100.
4. Payment was made within 10 days (on 12 May), so Sunny is entitled to the 2% cash discount.
5. Discount received = \$8,100 \times 2\% = \$162.
6. The payment transaction is recorded in the Cash book.

Award 2 marks for the correct answer A. No fractional marks.

According to the materiality principle, small items of low value (such as a stapler) do not significantly affect the decisions of financial statement users. Thus, they can be treated as expenses immediately instead of being capitalized as non-current assets and depreciated over their useful lives.

Award 2 marks for the correct answer A. No fractional marks.

1. Adjusted cash book balance = Unadjusted Cash Book balance - Bank charges - Dishonoured cheque = -\$1,200 - \$150 - \$900 = -\$2,250 (Credit balance/Overdraft).
2. Bank Reconciliation formula:
Adjusted Cash Book balance = Bank Statement Balance + Deposits in transit - Unpresented cheques
-\$2,250 = Bank Statement Balance + \$1,700 - \$2,300
-\$2,250 = Bank Statement Balance - \$600
Bank Statement Balance = -\$2,250 + \$600 = -\$1,650 (i.e., a debit balance / overdraft of \$1,650).

Award 2 marks for the correct answer A. No fractional marks.

1. Credit old partners with goodwill in their old ratio:
Alan: \$100,000 \times \frac{3}{5} = +\$60,000 (Credit)
Billy: \$100,000 \times \frac{2}{5} = +\$40,000 (Credit)

2. Debit all partners with goodwill in their new ratio:
Alan: \$100,000 \times \frac{5}{10} = -\$50,000 (Debit)
Billy: \$100,000 \times \frac{3}{10} = -\$30,000 (Debit)
Charles: \$100,000 \times \frac{2}{10} = -\$20,000 (Debit)

3. Net adjustment to Alan's Capital Account:
+\$60,000 (Credit) - \$50,000 (Debit) = +\$10,000 (Credit).

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

Relevant cost of making per unit = Direct materials (\$15) + Direct labour (\$10) + Variable overheads (\$5) = \$30.
Total relevant cost of making 3,000 units = 3,000 \times \$30 = \$90,000.
Total cost of buying 3,000 units = 3,000 \times \$32 = \$96,000.
Less: Rental income gained if buying = \$12,000.
Net cost of buying = \$96,000 - \$12,000 = \$84,000.
Financial impact: Saving by buying = \$90,000 (making) - \$84,000 (buying) = \$6,000. Therefore, the company should buy product X.

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

Total cash received on application = 600,000 \times \$3 = \$1,800,000.
Cash refunded = 100,000 \times \$3 = \$300,000.
Net cash remaining in Bank = \$1,800,000 - \$300,000 = \$1,500,000.
Under the Hong Kong Companies Ordinance (no-par value regime), share capital is credited with the total issue price of the shares allotted = 500,000 \times \$3 = \$1,500,000.
Thus, Bank balance is \$1,500,000 and Ordinary Share Capital is \$1,500,000.

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

1. Find credit purchases from Trade Creditors account:
Purchases = Cash Paid + Closing Creditors - Opening Creditors = \$115,000 + \$15,000 - \$12,000 = \$118,000.

2. Find Cost of Goods Sold (COGS):
COGS = Opening Inventory + Purchases - Closing Inventory = \$24,000 + \$118,000 - \$28,000 = \$114,000.

3. Calculate Sales with 25% markup on cost:
Sales = COGS \times (1 + 0.25) = \$114,000 \times 1.25 = \$142,500.

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

Invoice price of goods = List price - Trade discount = \$20,000 \times (1 - 0.10) = \$18,000.
Since payment was made on 12 April (within 10 days of the sale on 5 April), Yahoo Ltd is entitled to a 2% cash discount.
Cash discount allowed = \$18,000 \times 2\% = \$360.
Amount received = \$18,000 - \$360 = \$17,640.
Journal entry to record settlement:
Debit Bank \$17,640; Debit Discount Allowed \$360; Credit Yahoo Ltd \$18,000.

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

1. Find Fixed Manufacturing Overhead rate per unit = \$100,000 / 10,000 units = \$10 per unit.
2. Find the change in inventory = Production - Sales = 10,000 units - 8,000 units = 2,000 units (increase).
3. Difference in profits = Change in inventory \times Fixed Manufacturing Overhead rate per unit = 2,000 units \times \$10 = \$20,000.
4. Since inventory increased, profit under Absorption Costing is higher than Marginal Costing by \$20,000.
5. Net profit under Marginal Costing = Net profit under Absorption Costing - \$20,000 = \$120,000 - \$20,000 = \$100,000.

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

- Statement (1) is incorrect because a sole proprietorship is not a separate legal entity. Only a limited company has a separate legal entity.
- Statement (2) is correct because company shareholders have limited liability (limited to the amount unpaid on their shares, if any), whereas sole proprietors are personally liable for all business debts.
- Statement (3) is incorrect because neither a private limited company nor a sole proprietorship is required to publish their annual financial statements to the general public (only public listed companies must do so).

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

Using the present value of an ordinary annuity formula:
\(PV = C \times \left[ \frac{1 - (1 + r)^{-n}}{r} \right]\)
Where \(C = 5,000\), \(r = 0.06\), and \(n = 3\).
\(PV = 5,000 \times \left[ \frac{1 - (1.06)^{-3}}{0.06} \right]\)
\(PV = 5,000 \times 2.673012 = \$13,365.06 \approx \$13,365\).

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

The unadjusted cash book balance is \$45,000 (Debit).
Items that require correction in the cash book:
- Bank service charges: Deduct \$150.
- Dishonoured cheque (returned cheque): Deduct \$800.
(Note: Unpresented cheques are reconciling items in the bank reconciliation statement and do not affect the corrected cash book balance.)
Corrected cash book balance = \$45,000 - \$150 - \$800 = \$44,050 (Debit).

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

- Error (i) is an error of principle. It affects two debit-balance accounts (Equipment and Purchases). The correction entry is: Debit Equipment \$5,000 and Credit Purchases \$5,000. It does not affect the agreement of the trial balance, so no suspense account is required.
- Error (ii) is an error of omission. The correction entry is: Debit Cash \$800 and Credit Sales \$800. No suspense account is required.
- Error (iii) is a single-sided recording error where the debit and credit entries are of unequal amounts, causing the trial balance to disagree. The correction entry is: Credit Ken's account \$180 (to reduce the debit from \$530 to \$350) and Debit Suspense account \$180. Thus, this error requires an entry in the suspense account.

Award 2 marks for the correct answer A. Award 0 marks for incorrect answers.

(a) (1) Sales Journal, (2) Purchases Returns/Returns Outwards Journal, (3) General Journal/Journal. (b) (1) Sales Ledger/Debtors Ledger, (2) Purchases Ledger/Creditors Ledger, (3) General Ledger. (c) Credit note (received from Betty).

(a) 1 mark for each correct book of original entry (Total: 3 marks). (b) 1 mark for each correct ledger (Total: 3 marks). Note: Tech Ltd is a non-trade creditor, so its account is kept in the General Ledger. (c) 0.67 mark for credit note.

(a) Raising goodwill in old ratio (3:2): Amy = \$120,000 * 3/5 = \$72,000 (Cr.); Billy = \$120,000 * 2/5 = \$48,000 (Cr.). Writing off goodwill in new ratio (5:3:2): Amy = \$120,000 * 5/10 = \$60,000 (Dr.); Billy = \$120,000 * 3/10 = \$36,000 (Dr.); Cathy = \$120,000 * 2/10 = \$24,000 (Dr.). Net adjustments: Amy: \$72,000 (Cr.) - \$60,000 (Dr.) = \$12,000 (Cr.); Billy: \$48,000 (Cr.) - \$36,000 (Dr.) = \$12,000 (Cr.); Cathy: \$24,000 (Dr.). (b) Cathy's Capital account balance = Cash contribution - Goodwill adjustment = \$100,000 - \$24,000 = \$76,000.

(a) 1 mark for raising calculations, 1.5 marks for writing off calculations, and 1.5 marks for final net adjustments (Total: 4 marks). (b) 1 mark for cash contribution, 1 mark for deducting goodwill debit, 0.67 mark for the final correct balance of \$76,000 (Total: 2.67 marks).

(a) Product X: Contribution per unit = \$60 - \$30 = \$30; Contribution per labor hour = \$30 / 3 hours = \$10 per hour. Product Y: Contribution per unit = \$80 - \$40 = \$40; Contribution per labor hour = \$40 / 2 hours = \$20 per hour. (b) Since Product Y has a higher contribution per direct labor hour (\$20 > \$10), we produce Product Y first to meet its maximum demand. Hours for Product Y: 400 units * 2 hours = 800 hours. Remaining hours for Product X: 1,250 hours - 800 hours = 450 hours. Units of Product X produced: 450 hours / 3 hours per unit = 150 units. Optimal production plan: Product Y: 400 units; Product X: 150 units. (c) Maximum total contribution = (400 units * \$40) + (150 units * \$30) = \$16,000 + \$4,500 = \$20,500.

(a) 0.5 mark for each contribution per unit and 1 mark for each contribution per hour (Total: 3 marks). (b) 0.5 mark for identifying ranking/priority, 0.5 mark for Product Y units, 0.5 mark for remaining hours, and 0.5 mark for Product X units (Total: 2 marks). (c) 0.5 mark for Y contribution, 0.5 mark for X contribution, and 0.67 mark for the final total of \$20,500 (Total: 1.67 marks).

(a) Disadvantages of partnership:
1. Unlimited liability: Partners are personally liable for all the debts of the partnership. If the business fails, Alan and Ben's personal assets (e.g., houses, savings) can be seized to pay off creditors. In contrast, shareholders of a private limited company enjoy limited liability.
2. Lack of perpetual succession: A partnership does not have a separate legal identity. The partnership is legally dissolved upon the death, bankruptcy, or mental illness of any partner. A private limited company has perpetual succession and continues to exist regardless of changes in shareholders.
3. Mutual agency: Every partner is an agent of the firm. The actions of either Alan or Ben in the course of business bind the entire partnership, meaning one partner can be held liable for the business mistakes or debts created by the other.

(b) Short-term financing sources and limitations:
1. Trade credit:
- Source: Purchasing inventory/materials on credit from suppliers.
- Limitation: The business may lose cash discounts offered for prompt cash payment, and delaying payment too long can damage the firm's relationship with suppliers.
2. Bank overdraft:
- Source: Withdrawing more money from the bank account than is currently deposited, up to a pre-approved limit.
- Limitation: The interest rate charged on the overdrawn amount is typically higher than that of regular loans, and the bank has the right to demand immediate repayment at any time.
3. Short-term bank loan:
- Source: Borrowing a fixed amount of money from a commercial bank with a repayment period of one year or less.
- Limitation: Interest must be paid regularly regardless of whether the business is making a profit, and the bank may require collateral or personal guarantees from the partners.

(c) Differences between private and public limited companies:
(i) Ownership transferability: Shares of a private limited company cannot be transferred freely and require the approval of other directors/shareholders, whereas shares of a public limited company can be freely transferred and traded on the stock exchange.
(ii) Disclosure of financial information: A private limited company is not required to publish its annual financial statements to the general public, whereas a public limited company must publish its financial accounts and make them available for public inspection.

(a) 2 marks for each explained disadvantage (max 4 marks):
- Unlimited liability: Award 1 mark for identifying unlimited liability and 1 mark for explaining that personal assets can be seized to pay business debts, or contrasting with company's limited liability.
- Lack of perpetual succession: Award 1 mark for identifying the lack of separate legal entity/continuity and 1 mark for explaining that death/bankruptcy dissolves the partnership.
- Mutual agency: Award 1 mark for identifying mutual agency and 1 mark for explaining that one partner's actions bind the other.

(b) 2 marks for each short-term financing source and its limitation (max 4 marks):
- Trade credit (1 mark) + Limitation (e.g., loss of cash discount / damage to supplier relationships) (1 mark).
- Bank overdraft (1 mark) + Limitation (e.g., higher interest rate / repayable on demand) (1 mark).
- Short-term bank loan (1 mark) + Limitation (e.g., fixed interest obligation / require collateral) (1 mark).
(Reject long-term financing sources like issuing debentures, long-term bank loans, or lease financing)

(c) 1 mark for each difference (max 2 marks):
- (i) Ownership transferability (1 mark): Award 0.5 mark for stating private company shares cannot be freely transferred, and 0.5 mark for stating public company shares can be traded on the stock exchange.
- (ii) Disclosure of financial information (1 mark): Award 0.5 mark for stating private company does not disclose to the public, and 0.5 mark for stating public company must publish accounts for public inspection.

(a)
**Partners' Capital Accounts**
$$
\begin{array}{lrrr|lrrr}
\hline
\text{Details} & \text{Alan ($)} & \text{Ben ($)} & \text{Carl ($)} & \text{Details} & \text{Alan ($)} & \text{Ben ($)} & \text{Carl ($)} \\
\hline
\text{Goodwill (new ratio)} & 20,000 & 12,000 & 8,000 & \text{Balance b/f} & 120,000 & 80,000 & - \\
\text{Balance c/f} & 133,000 & 90,000 & 52,000 & \text{Bank} & - & - & 60,000 \\
& & & & \text{Revaluation} & 9,000 & 6,000 & - \\
& & & & \text{Goodwill (old ratio)} & 24,000 & 16,000 & - \\
\hline
& 153,000 & 102,000 & 60,000 & & 153,000 & 102,000 & 60,000 \\
\hline
\end{array}
$$
*Working on Revaluation surplus:* \((\$65,000 - \$50,000) = \$15,000\)
- Alan's share: \(\$15,000 \times 3/5 = \$9,000\)
- Ben's share: \(\$15,000 \times 2/5 = \$6,000\)

*Working on Goodwill:* \((\$40,000)\)
- Raised in old ratio (3:2): Alan \(\$24,000\); Ben \(\$16,000\)
- Written off in new ratio (5:3:2): Alan \(\$20,000\); Ben \(\$12,000\); Carl \(\$8,000\)

(b)
When no goodwill account is maintained in the books:
1. Debit the partners' Capital Accounts in the new profit-sharing ratio (to write off the goodwill).
2. Credit the old partners' Capital Accounts in the old profit-sharing ratio (to raise the goodwill).

Part (a) (Total 6 marks):
- Balances b/f & Cash introduced (0.5 mark each for Alan & Ben b/f, 0.5 mark for Carl's cash) [Total 1.5 marks]
- Revaluation surplus shared to Alan and Ben in old ratio [Total 1.5 marks]
- Goodwill raised in old ratio (Alan: $24,000; Ben: $16,000) [Total 1.5 marks]
- Goodwill written off in new ratio (Alan: $20,000; Ben: $12,000; Carl: $8,000) [Total 1 mark]
- Correct balances c/f [Total 0.5 mark]

Part (b) (Total 2 marks):
- State debiting partners' capital accounts in the new ratio (1 mark)
- State crediting old partners' capital accounts in the old ratio (1 mark)

(a)
**Relevant Cost Analysis for Making vs Buying 10,000 units of Gadget X**

$$
\begin{array}{lrr}
\hline
\text{Relevant Costs} & \text{Make ($)} & \text{Buy ($)} \\
\hline
\text{Direct materials } (10,000 \times \$15) & 150,000 & - \\
\text{Direct labour } (10,000 \times \$10) & 100,000 & - \\
\text{Variable manufacturing overheads } (10,000 \times \$6) & 60,000 & - \\
\text{Avoidable fixed overheads } (10,000 \times \$12 \times 60\%) & 72,000 & - \\
\text{Opportunity cost (Rental income foregone)} & 18,000 & - \\
\text{Purchase cost } (10,000 \times \$33) & - & 330,000 \\
\hline
\text{Total Relevant Cost} & 400,000 & 330,000 \\
\hline
\end{array}
$$

*Decision:*
Zenith Limited should accept the supplier's offer (i.e., buy from the supplier). Purchasing the product results in a cost saving of \(\$70,000\) (\(\$400,000 - \$330,000\)).

(b)
Qualitative factors to consider (Any two):
1. Quality of the supplied products: The supplier's products may not meet Zenith's quality standards.
2. Reliability of the supplier: The supplier might fail to deliver on time, interrupting sales.
3. Impact on employees: Laying off production workers may lower remaining employee morale.
4. Confidentiality: Risk of technology or design leakage to competitors through the external supplier.

Part (a) (Total 6 marks):
- Direct materials, direct labour and variable overheads costs [1.5 marks]
- Avoidable fixed overheads ($72,000) [1.5 marks]
- Opportunity cost ($18,000) [1 mark]
- Purchase cost ($330,000) [1 mark]
- Conclusion to Buy with correct financial difference ($70,000 saving) [1 mark]

Part (b) (Total 2 marks):
- 1 mark for each relevant qualitative factor (maximum 2 marks)

**Ledger Accounts of Novelty Limited**

(a)
$$
\begin{array}{llc|llc}
\text{Dr.} & & \text{Bank Account} & & & \text{Cr.} \\
\hline
\text{Date} & \text{Details} & \text{Amount ($)} & \text{Date} & \text{Details} & \text{Amount ($)} \\
\hline
2023 & & & 2023 & & \\
\text{May 25} & \text{Ord. Share Application} & 960,000 & \text{May 31} & \text{Ord. Share Application (refund)} & 160,000 \\
\text{June 15} & \text{Ord. Share Allotment} & 1,200,000 & \text{June 30} & \text{Balance c/d} & 2,000,000 \\
\hline
& & 2,160,000 & & & 2,160,000 \\
\hline
& & & \text{July 1} & \text{Balance b/d} & 2,000,000 \\
\end{array}
$$

(b)
$$
\begin{array}{llc|llc}
\text{Dr.} & & \text{Ordinary Share Application Account} & & & \text{Cr.} \\
\hline
\text{Date} & \text{Details} & \text{Amount ($)} & \text{Date} & \text{Details} & \text{Amount ($)} \\
\hline
2023 & & & 2023 & & \\
\text{May 31} & \text{Bank (refund)} & 160,000 & \text{May 25} & \text{Bank} & 960,000 \\
\text{May 31} & \text{Ordinary Share Capital} & 800,000 & & & \\
\hline
& & 960,000 & & & 960,000 \\
\hline
\end{array}
$$

(c)
$$
\begin{array}{llc|llc}
\text{Dr.} & & \text{Ordinary Share Allotment Account} & & & \text{Cr.} \\
\hline
\text{Date} & \text{Details} & \text{Amount ($)} & \text{Date} & \text{Details} & \text{Amount ($)} \\
\hline
2023 & & & 2023 & & \\
\text{May 31} & \text{Ordinary Share Capital} & 1,200,000 & \text{June 15} & \text{Bank} & 1,200,000 \\
\hline
& & 1,200,000 & & & 1,200,000 \\
\hline
\end{array}
$$

Part (a) Bank Account (3 marks):
- Receipt on application: $960,000 [1 mark]
- Refund of application: $160,000 [1 mark]
- Receipt on allotment: $1,200,000 [1 mark]

Part (b) Ordinary Share Application Account (2.5 marks):
- Receipt from Bank: $960,000 [1 mark]
- Refund to Bank: $160,000 [0.5 mark]
- Transfer to Ordinary Share Capital: $800,000 [1 mark]

Part (c) Ordinary Share Allotment Account (2.5 marks):
- Allotment due transferred to Ordinary Share Capital: $1,200,000 [1.5 marks]
- Receipt from Bank: $1,200,000 [1 mark]

(Deduct 0.5 marks for missing dates/improper formats, max 1 mark deduction overall)

(a)
**Revaluation Account**

* **Debit:**
* Equipment (\(\\$150,000 \times 10\\% = \\$15,000\))
* Provision for doubtful debts (\(\\$60,000 \times 5\\% = \\$3,000\))
* Capital Accounts (Share of profit):
* Alan (\(\\$102,000 \times 3/5 = \\$61,200\))
* Billy (\(\\$102,000 \times 2/5 = \\$40,800\))
* **Credit:**
* Premises (\(\\$520,000 - \\$400,000 = \\$120,000\))

(b)
**Partners' Capital Accounts**

* **Alan:**
* Debit: Goodwill write-off \(\\$60,000\); Balance c/d \(\\$461,200\).
* Credit: Balance b/f \(\\$350,000\); Revaluation profit \(\\$61,200\); Goodwill write-up \(\\$90,000\); Current A/c \(\\$20,000\).
* **Billy:**
* Debit: Goodwill write-off \(\\$45,000\); Current A/c \(\\$10,000\); Balance c/d \(\\$295,800\).
* Credit: Balance b/f \(\\$250,000\); Revaluation profit \(\\$40,800\); Goodwill write-up \(\\$60,000\).
* **Charlie:**
* Debit: Goodwill write-off \(\\$45,000\); Balance c/d \(\\$135,000\).
* Credit: Bank \(\\$180,000\).

*(Note: Net goodwill adjustment is also acceptable: Alan Cr \(\\$30,000\), Billy Cr \(\\$15,000\), Charlie Dr \(\\$45,000\))*

(c)
**Historical Cost Concept** / **Money Measurement Concept**:
Internally generated goodwill does not have a purchase price or transaction cost. It cannot be objectively measured in terms of money based on historical transactions, so it should not be recognized as an asset in the books.

(a) Revaluation Account:
* Cr: Premises $120,000 [1 mark]
* Dr: Equipment $15,000 [0.5 mark]
* Dr: Provision for doubtful debts $3,000 [0.5 mark]
* Dr: Share of profit: Alan $61,200 [1 mark]; Billy $40,800 [1 mark]
(Total: 4 marks)

(b) Partners' Capital Accounts:
* Balance b/f (Alan $350,000, Billy $250,000) [0.5 mark]
* Bank (Charlie $180,000) [0.5 mark]
* Revaluation profit (Alan $61,200, Billy $40,800) [1 mark]
* Current accounts transfer (Alan Cr $20,000, Billy Dr $10,000) [1 mark]
* Goodwill adjustments (write-up and write-off) OR Net adjustment (Alan Cr $30,000, Billy Cr $15,000, Charlie Dr $45,000) [2 marks]
* Balance c/d (Alan $461,200, Billy $295,800, Charlie $135,000) [1 mark]
(Total: 6 marks)

(c) Accounting Principle/Convention:
* Correct identification: Historical Cost Concept OR Money Measurement Concept [1 mark]
* Explanation: Internally generated goodwill has no purchase price/cost and cannot be measured objectively/reliably in monetary terms. [1 mark]
(Total: 2 marks)

(a)
* **Direct labour hours per unit:**
* Elite: \(\\$100 / \\$20 = 5\) hours
* Prime: \(\\$50 / \\$20 = 2.5\) hours
* **Contribution margin per unit:**
* Elite: \(\\$450 - (\\$120 + \\$100 + \\$50) = \\$180\)
* Prime: \(\\$300 - (\\$90 + \\$50 + \\$30) = \\$130\)
* **Contribution margin per direct labour hour:**
* Elite: \(\\$180 / 5\text{ hours} = \\$36\) per hour
* Prime: \(\\$130 / 2.5\text{ hours} = \\$52\) per hour

(b)
* **Ranking based on contribution per direct labour hour:**
1. Prime (\(\\$52\)/hour)
2. Elite (\(\\$36\)/hour)
* **Allocation of available direct labour hours (total 22,000 hours):**
* First produce Prime to its maximum demand:
\(6,000\text{ units} \times 2.5\text{ hours/unit} = 15,000\) hours
* Remaining hours for Elite:
\(22,000 - 15,000 = 7,000\) hours
* Units of Elite to be produced:
\(7,000\text{ hours} / 5\text{ hours/unit} = 1,400\) units
* **Optimal Production Mix:**
* Prime: 6,000 units
* Elite: 1,400 units

(c)
* **Total contribution:**
* Prime: \(6,000\text{ units} \times \\$130 = \\$780,000\)
* Elite: \(1,400\text{ units} \times \\$180 = \\$252,000\)
* Total Contribution: \(\\$780,000 + \\$252,000 = \\$1,032,000\)
* Less: Fixed overheads: \(\\$150,000\)
* **Maximum Net Profit:** \(\\$1,032,000 - \\$150,000 = \\$882,000\)

(a)
* Direct labour hours per unit (Elite: 5 hours, Prime: 2.5 hours) [1 mark]
* Contribution margin per unit (Elite: $180, Prime: $130) [1 mark]
* Contribution margin per hour (Elite: $36, Prime: $52) [2 marks]
(Total: 4 marks)

(b)
* Ranking (Prime: 1st, Elite: 2nd) [1 mark]
* Direct labour hours allocated to Prime (15,000 hours) [1 mark]
* Direct labour hours allocated to Elite (7,000 hours) [1 mark]
* Optimal production units (Prime: 6,000 units, Elite: 1,400 units) [1 mark]
(Total: 4 marks)

(c)
* Prime total contribution ($780,000) [1 mark]
* Elite total contribution ($252,000) [1 mark]
* Less: Fixed overheads ($150,000) [1 mark]
* Maximum Net Profit ($882,000) [1 mark]
(Total: 4 marks)

(a)
**Revaluation Account**

| Dr | | $ | Cr | | $ |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2023 | | | 2023 | | |
| Jan 1 | Equipment | 30,000 | Jan 1 | Capital Accounts (Share of Loss): | |
| | Inventory | 8,000 | | - Alan (3/5) | 24,150 |
| | Allowance for doubtful debts | 2,250 | | - Ben (2/5) | 16,100 |
| | | **40,250** | | | **40,250** |

*(Workings for Allowance for doubtful debts: \( \$45,000 \times 5\% = \$2,250 \))*

(b)
**Partners' Capital Accounts**

| Dr | Alan | Ben | Carl | Cr | Alan | Ben | Carl |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| | $ | $ | $ | | $ | $ | $ |
| Revaluation | 24,150 | 16,100 | - | Bal b/f | 180,000 | 120,000 | - |
| Goodwill (Write-off) | 40,000 | 24,000 | 16,000 | Current a/c | 24,000 | 16,000 | - |
| Current a/c (Surplus) | 7,850 | 19,900 | 62,000 | Goodwill (Raise) | 48,000 | 32,000 | - |
| | | | | Bank | - | - | 100,000 |
| | | | | Motor Vehicle | - | - | 50,000 |
| Bal c/d | 180,000 | 108,000 | 72,000 | | | | |
| | **252,000** | **168,000** | **150,000** | | **252,000** | **168,000** | **150,000** |
| | | | | Bal b/f | 180,000 | 108,000 | 72,000 |

*Workings for Capital realignment:*
- Total capital = \( \$360,000 \)
- Alan's required capital = \( \$360,000 \times \frac{5}{10} = \$180,000 \)
- Ben's required capital = \( \$360,000 \times \frac{3}{10} = \$108,000 \)
- Carl's required capital = \( \$360,000 \times \frac{2}{10} = \$72,000 \)
- Surplus / deficit is transferred to partners' current accounts.

(c)
**Alan, Ben and Carl**
**Statement of Financial Position as at 1 January 2023**

| | $ | $ |
| :--- | :--- | :--- |
| **Non-current assets** | | |
| Equipment (\( \$240,000 - \$30,000 \)) | | 210,000 |
| Motor vehicles | | 50,000 |
| | | 260,000 |
| **Current assets** | | |
| Inventory (\( \$68,000 - \$8,000 \)) | 60,000 | |
| Trade receivables (\( \$45,000 - \$2,250 \)) | 42,750 | |
| Bank (\( \$17,000 + \$100,000 \)) | 117,000 | 219,750 |
| **Total assets** | | **479,750** |
| | | |
| **Capital accounts** | | |
| Alan | 180,000 | |
| Ben | 108,000 | |
| Carl | 72,000 | 360,000 |
| **Current accounts** | | |
| Alan | 7,850 | |
| Ben | 19,900 | |
| Carl | 62,000 | 89,750 |
| **Current liabilities** | | |
| Trade payables | | 30,000 |
| **Total equity and liabilities** | | **479,750** |

(d)
- **Meaning of Goodwill**: Goodwill represents the future economic benefits arising from assets that are not capable of being individually identified and separately recognized. In partnership, it is the value of the firm's reputation, client base, and prime location that enables it to earn super-profits above the normal rate of return.
- **Reason for not maintaining a Goodwill account**: According to standard accounting principles (such as HKAS 38), internally generated goodwill should not be recognized as an asset because it has no reliable cost and is not a separable resource. Writing off goodwill avoids overstating the firm's total assets and adheres to the prudence concept.

(a) Revaluation Account:
- Debit: Equipment ($30,000) (1 mark)
- Debit: Inventory ($8,000) (1 mark)
- Debit: Allowance for doubtful debts ($2,250) (1 mark)
- Credit: Shared loss to Capital Accounts - Alan $24,150 and Ben $16,100 (1 mark)

(b) Capital Accounts:
- Balances b/f & Current account transfer of old balances (1 mark)
- Revaluation loss sharing (1 mark)
- Goodwill adjustments (Raise in old ratio: Alan $48,000, Ben $32,000; Write-off in new ratio: Alan $40,000, Ben $24,000, Carl $16,000) (2 marks)
- Carl's contribution: Bank $100,000 and Motor vehicle $50,000 (1 mark)
- Balance c/d (Required Capital in 5:3:2) (1 mark)
- Current account surplus transfers (Alan $7,850, Ben $19,900, Carl $62,000) (1 mark)

(c) Statement of Financial Position:
- Equipment & Motor Vehicle (1.5 marks)
- Inventory & Net Trade Receivables (1.5 marks)
- Bank balance (1 mark)
- Capital Accounts balances (1 mark)
- Current Accounts balances (1 mark)

(d) Theory:
- Definition of Goodwill: Mentioning "future economic benefits / super-profits" or "reputation, client base" (1.5 marks)
- Why write-off: Mentioning "internally generated goodwill cannot be recognized / prudence concept" (1.5 marks)