2025 HKDSE Business, Accounting and Financial Studies Answers & Marking Scheme

Statements (1) and (2) are correct. CEPA provides zero-tariff treatment and eliminates non-tariff barriers specifically for goods of Hong Kong origin that satisfy the rules of origin. Statement (3) is incorrect because foreign goods re-exported from Hong Kong do not qualify as goods of Hong Kong origin, hence they do not enjoy zero tariff.

Award 2 marks for the correct answer (B). No marks are awarded for incorrect choices.

(1) is correct because transfer of shares in a company is generally easier than transferring partnership interests which requires consent from all other partners. (2) is correct because a limited company has perpetual succession as a separate legal entity. (3) is incorrect because partnerships are not required to publish or file financial statements, making partnerships more confidential than companies.

Award 2 marks for the correct answer (B). No marks are awarded for incorrect choices.

Option C is correct because corporate bonds bear higher credit/default risk than government bonds, so they must offer higher interest yields to attract investors. Option A is incorrect as corporate bonds always carry higher default risk than government bonds. Option B is incorrect because iBond interest rates are floating and tied to inflation. Option D is incorrect because Silver Bonds cannot be traded in the secondary market.

Award 2 marks for the correct answer (C). No marks are awarded for incorrect choices.

Statement (1) is correct as the APR represents the true annual cost of credit, which includes both interest and non-refundable fees. Statement (2) is incorrect because paying only the minimum payment results in heavy interest charges on the remaining unpaid balance. Statement (3) is incorrect because a poorer credit score signifies higher default risk, leading financial institutions to charge a higher APR to offset the risk.

Award 2 marks for the correct answer (A). No marks are awarded for incorrect choices.

This is an ordinary annuity. The Future Value of Ordinary Annuity (FVOA) formula is: \( FV = PMT \times \frac{(1+r)^n - 1}{r} \). Inserting the values: \( FV = 10,000 \times \frac{(1.04)^3 - 1}{0.04} = 10,000 \times 3.1216 = 31,216 \). Alternatively, calculating year-by-year: Year 1 deposit earns 2 years of interest: \( 10,000 \times (1.04)^2 = 10,816 \). Year 2 deposit earns 1 year of interest: \( 10,000 \times 1.04 = 10,400 \). Year 3 deposit earns no interest: \( 10,000 \). Total = \( 10,816 + 10,400 + 10,000 = 31,216 \).

Award 2 marks for the correct answer (B). No marks are awarded for incorrect choices.

The manager is performing the controlling function. Controlling involves setting performance standards, measuring actual performance, comparing actual results against the standards, and taking corrective actions when deviations occur.

Award 2 marks for the correct answer (D). No marks are awarded for incorrect choices.

All statements are correct. (1) SMEs have simple structures and flat hierarchies, enabling quick adaptation. (2) Due to lack of collateral and credit history, they face higher borrowing costs. (3) This corresponds exactly to the official definition of SMEs in Hong Kong.

Award 2 marks for the correct answer (D). No marks are awarded for incorrect choices.

The computer is a non-current asset acquired for business operations, so the 'Computer' account should be debited (increasing assets). Since it was bought on credit, a liability is created, so the creditor's account 'Mega Office Equipment Ltd' should be credited (increasing liabilities).

Award 2 marks for the correct answer (A). No marks are awarded for incorrect choices.

Under the accrual concept, revenue and expenses should be recognized when they are earned or incurred, regardless of the cash transaction timing. The \$24,000 insurance expense belongs to the financial year 2023. Charging it to 2022 violates the accrual concept.

Award 2 marks for the correct answer (C). No marks are awarded for incorrect choices.

Let Sales be \( S \). Since gross profit margin is 20%, Gross Profit = \( 0.20 \times S \). Cost of goods sold (COGS) is Sales - Gross Profit = \( S - 0.20S = 0.80S \). We are given COGS = \$160,000. Therefore, \( 0.80S = 160,000 \), which gives \( S = 160,000 / 0.80 = 200,000 \). Sales revenue is \$200,000.

Award 2 marks for the correct answer (A). No marks are awarded for incorrect choices.

Statement (1) is correct because under CEPA, all goods of Hong Kong origin can enjoy zero tariff, provided they meet the agreed rules of origin. Statement (2) is correct because CEPA offers preferential access to Hong Kong service suppliers. Statement (3) is incorrect because foreign-owned companies incorporated in Hong Kong can also qualify as 'Hong Kong service suppliers' and benefit from CEPA as long as they meet the relevant criteria (e.g., operating in Hong Kong for a certain number of years, paying profits tax, etc.). Therefore, nationality of owners is not the sole criterion.

Award 2 marks for the correct answer A. No fractional marks will be given.

A limited partnership must have at least one general partner who is liable for all the debts and obligations of the firm (unlimited liability). Therefore, option C is correct. Option A is incorrect because not all partners have limited liability. Option B is incorrect because limited partners cannot manage the business; if they do, they lose their limited liability status. Option D is incorrect because the death or bankruptcy of a limited partner does not dissolve the partnership.

Award 2 marks for the correct answer C. No fractional marks will be given.

Mr. Chan is risk-averse and near retirement, meaning preservation of capital and steady income are his main objectives. iBonds issued by the HKSAR government carry extremely low default risk (backed by the government) and offer stable interest payments linked to local inflation, making them the most suitable. Options A, B, and C involve significantly higher market and default risks.

Award 2 marks for the correct answer D. No fractional marks will be given.

Using the compound interest formula: \(FV = P \times (1 + r/n)^{nt}\), where \(P = 10,000\), \(r = 0.04\), \(n = 4\) (compounded quarterly), and \(t = 2\) years. \(FV = 10,000 \times (1 + 0.04/4)^{4 \times 2} = 10,000 \times (1.01)^8 = 10,000 \times 1.082856 = \$10,828.56\). Total interest = \(FV - P = 10,828.56 - 10,000 = \$828.56 \approx \$829\).

Award 2 marks for the correct answer C. No fractional marks will be given.

For credit card cash advances, banks usually charge a one-off transaction or handling fee (option C is correct). Option A and D are incorrect because cash advances do not have an interest-free repayment period; interest starts accumulating immediately from the day the cash is withdrawn. Option B is incorrect because the interest rate for cash advances is typically higher than that for regular retail purchases.

Award 2 marks for the correct answer C. No fractional marks will be given.

Unity of Direction states that there should be 'one head and one plan' for a group of activities having the same objective, directing them towards a common goal. This is shown by coordinating the departments towards the singular goal of expanding market share. Unity of Command states that an employee should receive orders from one supervisor only.

Award 2 marks for the correct answer B. No fractional marks will be given.

All statements are correct. Statement (1) reflects their small size allowing quick decision making. Statement (2) describes their major financing constraint. Statement (3) is the official definition of SMEs used by the Hong Kong Trade and Industry Department.

Award 2 marks for the correct answer D. No fractional marks will be given.

When returning goods to Mr. Cheung (a creditor), the liability decreases, so Mr. Cheung's account is debited. At the same time, purchases return (returns outwards) increases, so Returns Outwards account is credited.

Award 2 marks for the correct answer A. No fractional marks will be given.

Under the going concern assumption, it is assumed that the business will continue in operational existence for the foreseeable future. Therefore, assets do not need to be valued at their current market/liquidation values, but can be recorded at historical cost less accumulated depreciation.

Award 2 marks for the correct answer B. No fractional marks will be given.

All matches are correct. (1) Trade creditors provide short-term credit and look at current ratio/liquidity. (2) Inland Revenue Department requires net profit figures to verify tax computations. (3) Bank lenders offer long-term loans and are concerned with solvency and long-term interest coverage.

Award 2 marks for the correct answer D. No fractional marks will be given.

Statement (1) is correct: Under CEPA, goods of Hong Kong origin enjoy zero tariff when imported into the Mainland, subject to meeting the agreed CEPA rules of origin.
Statement (2) is correct: CEPA provides Hong Kong service providers with early or preferential access to the Mainland market, which goes beyond the commitments made by China under the WTO.
Statement (3) is incorrect: Foreign companies established in Hong Kong do not automatically enjoy CEPA benefits. They must satisfy the definition and criteria of a 'Hong Kong Service Supplier' (such as having substantive business operations in Hong Kong for a specified period) to qualify for CEPA benefits.

Award 2 marks for selecting the correct option A. No marks are awarded for incorrect options.

1. Calculate the accumulated amount for Option X:
Interest rate per quarter = 6% / 4 = 1.5% = 0.015
Number of compounding periods in 5 years = 5 x 4 = 20
Accumulated Amount Ax = $100,000 x (1 + 0.015)^20 ≈ $134,686

2. Calculate the accumulated amount for Option Y:
Annual interest rate = 6.1% = 0.061
Number of compounding periods in 5 years = 5
Accumulated Amount Ay = $100,000 x (1 + 0.061)^5 ≈ $134,455

3. Compare the two options:
Since Ax > Ay, Mr. Chan should choose Option X.
Difference in accumulated amount (and hence interest earned) = $134,686 - $134,455 = $231.

Award 2 marks for selecting the correct option A. No marks are awarded for incorrect options.

Statement (1) is correct: A flat organizational structure has fewer hierarchy levels and is characterized by a wider span of control where each manager supervises more subordinates.
Statement (2) is correct: With fewer layers of management, information travels faster from bottom to top, facilitating quicker decision-making and better upward/downward communication.
Statement (3) is incorrect: In a tall organizational structure, the span of control is narrow, meaning managers supervise very few subordinates. Supervision is close, and decision-making tends to be centralized, resulting in less delegation of authority. In contrast, managers in flat organizational structures with wide spans of control must delegate more authority to their subordinates to manage the larger workload.

Award 2 marks for selecting the correct option A. No marks are awarded for incorrect options.

1. Under the historical cost principle and matching concept, capital expenditure includes all expenditures incurred to acquire a non-current asset and bring it to its working condition for its intended use.
- Machine purchase price ($200,000), delivery & installation charges ($12,000), and pre-use testing costs ($4,000) are capital expenditures and should be capitalized.
- Total capitalized cost of Machine = $200,000 + $12,000 + $4,000 = $216,000. Debit Machine account with $216,000.

2. The insurance premium for the first year ($6,000) is a revenue expenditure (operating expense) and should be expensed. Debit Insurance account with $6,000.

3. The liability to Apex Limited for the credit purchase is $200,000. Credit Apex Limited account with $200,000.

4. Total cash paid in cash = $12,000 + $4,000 + $6,000 = $22,000. Credit Cash account with $22,000.

Award 2 marks for selecting the correct option A. No marks are awarded for incorrect options.

(a) Characteristics of the HK economy (Any two, 2 marks each, max 4 marks):\n1. Free port / Free trade policy: Hong Kong does not levy tariffs on general import and export goods, reducing trading costs and facilitating international commerce.\n2. Simple and low tax system: Hong Kong has low profits tax and salaries tax rates, and does not charge VAT, GST, or capital gains tax, maximizing business returns.\n3. Free flow of capital: There are no foreign exchange controls, allowing international businesses to move funds into and out of Hong Kong freely.\n\n(b) Benefits of CEPA to HK service industries (Any two, 2 marks each, max 4 marks):\n1. Preferential market access: Hong Kong service providers can enter the Mainland market ahead of other foreign competitors, enjoying early-mover advantages.\n2. Lower entry thresholds: CEPA relaxes the minimum registered capital, business turnover, or years of operation required for Hong Kong companies entering the Mainland.\n3. Wholly-owned operations: It permits Hong Kong enterprises to set up wholly-owned operations in many service sectors rather than relying on joint ventures.

(a) Characteristics of the HK economy (Max 4 marks, 2 marks for each point):\n- Free port / Free trade policy (1 mark): No tariffs on general imports and exports (1 mark), lowering trading costs.\n- Low and simple tax system (1 mark): Profits and salaries tax rates are low, and there is no VAT/GST (1 mark).\n- Free flow of capital (1 mark): No foreign exchange controls, allowing free fund transfers (1 mark).\n(b) Benefits of CEPA (Max 4 marks, 2 marks for each point):\n- Preferential market access (1 mark): Enter Mainland market ahead of foreign rivals (1 mark).\n- Lower entry thresholds (1 mark): Reduces requirements on capital/turnover/operation years (1 mark).\n- Wholly-owned operations (1 mark): Permits wholly-owned subsidiaries in many service sectors instead of joint ventures (1 mark).

(a) First three steps of the control process:\n1. Establishing standards: The manager needs to set a clear, measurable performance target for food wastage, such as keeping food wastage below 2% of total ingredient cost.\n2. Measuring actual performance: The manager must collect data and record the actual food wastage, for example, by weighing and calculating the cost of discarded food daily.\n3. Comparing actual performance against standards: The manager compares the actual wastage rate against the pre-set 2% target to identify any deviations and determine if the wastage is significantly higher than expected.\n\n(b) Corrective action if caused by improper storage:\n- Provide training to kitchen staff on proper food storage procedures (such as the First-In-First-Out (FIFO) method).\n- Repair or upgrade food storage facilities (e.g., commercial refrigerators) to maintain the optimal temperature and conditions for preserving ingredients.

(a) Steps of control process (Max 6 marks, 2 marks for each step):\n- Step 1: Establishing standards (1 mark) + relevant application (setting wastage target) (1 mark).\n- Step 2: Measuring actual performance (1 mark) + relevant application (recording daily wastage) (1 mark).\n- Step 3: Comparing performance against standards (1 mark) + relevant application (identifying deviations/gap) (1 mark).\n(b) Corrective action (Max 2 marks):\n- Relevant corrective action linked to storage, such as staff training on FIFO or upgrading storage equipment (2 marks). (Reject: non-storage related actions, e.g., changing recipes)

(a) Advantages of credit card over personal bank loan (Any two, 2 marks each, max 4 marks):\n1. Interest-free repayment period: Credit cards offer a grace period (usually 30-40 days). If Chris repays the balance in full by the due date, he pays zero interest. Personal loans charge interest from the disbursement date.\n2. Convenience and speed: Credit card transactions are completed instantly at checkout without application, documentation, or approval wait times.\n3. Rewards and consumer benefits: Paying by credit card can earn Chris cash rebates, reward points, or purchase protection, which are typically not provided by personal loans.\n\n(b) Factors in assessing creditworthiness (Any two, 2 marks each, max 4 marks):\n1. Credit history / Credit score: The bank will check Chris's past repayment records from credit reference agencies to see if he has a history of late payments or defaults.\n2. Income and repayment capacity: The bank will evaluate Chris's monthly income and debt-to-income ratio to ensure he has a stable cash flow and sufficient capability to afford the monthly loan repayments.\n3. Employment stability: Having a permanent or long-term job reduces the risk of income loss, which makes the bank more confident in his repayment stability.

(a) Advantages of credit card (Max 4 marks, 2 marks for each point):\n- Interest-free repayment period (1 mark): Explanation that full payment by due date incurs no interest vs interest on personal loan (1 mark).\n- Convenience/Speed (1 mark): Instant purchase vs waiting for loan approval/documentation (1 mark).\n- Rewards (1 mark): Earn points/cashback/purchase protection (1 mark).\n(b) Factors for assessing creditworthiness (Max 4 marks, 2 marks for each point):\n- Credit history / Credit score (1 mark): Checks repayment records/defaults history from credit bureau (1 mark).\n- Income / Capacity (1 mark): Evaluates monthly income/debt-to-income ratio to ensure repayment ability (1 mark).\n- Employment stability (1 mark): Permanent/stable job lowers risk of income loss (1 mark).

(a)
To record adjustments for goodwill without maintaining a goodwill account:
1. Goodwill write-up in the old ratio (3:2):
- Alan's share: \( \$120,000 \times 3/5 = \$72,000 \)
- Bill's share: \( \$120,000 \times 2/5 = \$48,000 \)

2. Goodwill write-off in the new ratio (3:2:1):
- Alan's share: \( \$120,000 \times 3/6 = \$60,000 \)
- Bill's share: \( \$120,000 \times 2/6 = \$40,000 \)
- Chris's share: \( \$120,000 \times 1/6 = \$20,000 \)

Net adjustments:
- Alan: Credit \( \$12,000 \) (\( \$72,000 - \$60,000 \))
- Bill: Credit \( \$8,000 \) (\( \$48,000 - \$40,000 \))
- Chris: Debit \( \$20,000 \)

Journal Entry:
Debit: Chris - Capital \( \$20,000 \)
Credit: Alan - Capital \( \$12,000 \)
Credit: Bill - Capital \( \$8,000 \)

(b)
Capital balances immediately after Chris's admission:
- Alan: Opening \( \$200,000 \) + Goodwill adjustment \( \$12,000 \) = \( \$212,000 \)
- Bill: Opening \( \$150,000 \) + Goodwill adjustment \( \$8,000 \) = \( \$158,000 \)
- Chris: Cash capital \( \$80,000 \) + Equipment capital \( \$40,000 \) - Goodwill adjustment \( \$20,000 \) = \( \$100,000 \)

(a) Journal entry:
- Dr Chris - Capital \( \$20,000 \) (1.2 marks)
- Cr Alan - Capital \( \$12,000 \) (1.2 marks)
- Cr Bill - Capital \( \$8,000 \) (1.2 marks)
(Alternatively, accept separate journal entries for Goodwill write-up and write-off: Dr Goodwill \( \$120,000 \), Cr Alan Capital \( \$72,000 \), Cr Bill Capital \( \$48,000 \) [1.8 marks] AND Dr Alan Capital \( \$60,000 \), Dr Bill Capital \( \$40,000 \), Dr Chris Capital \( \$20,000 \), Cr Goodwill \( \$120,000 \) [1.8 marks])

(b) Capital balances calculation:
- Alan: \( \$212,000 \) (1.2 marks)
- Bill: \( \$158,000 \) (1.2 marks)
- Chris: \( \$100,000 \) (1.6 marks)

(a) Journal Entries:
(1)
Debit: Suspense \( \$900 \)
Credit: Insurance \( \$900 \)
(To correct the over-entry in insurance account)

(2)
Debit: Suspense \( \$5,400 \)
Credit: Sales \( \$5,400 \)
(To correct credit sales under-recorded in sales account)

(3)
Debit: Ms. Lee (or Trade Payables) \( \$1,200 \)
Credit: Returns Outwards \( \$1,200 \)
(To record return of goods omitted from books)

(4)
Debit: Motor Van \( \$45,000 \)
Credit: Purchases \( \$45,000 \)
(To correct capital expenditure wrongly recorded as revenue expenditure)

(b) Errors (3) and (4) would not affect the agreement of the trial balance because:
- Error (3) is an error of omission, where both debit and credit entries are completely omitted from the books.
- Error (4) is an error of principle, where the correct debit amount was entered into the wrong class of account (Purchases instead of Motor Van), so total debits still equal total credits.

(a) Journal Entries:
- Entry (1): Dr Suspense \( \$900 \) / Cr Insurance \( \$900 \) (1.4 marks)
- Entry (2): Dr Suspense \( \$5,400 \) / Cr Sales \( \$5,400 \) (1.4 marks)
- Entry (3): Dr Ms. Lee \( \$1,200 \) / Cr Returns Outwards \( \$1,200 \) (1.4 marks)
- Entry (4): Dr Motor Van \( \$45,000 \) / Cr Purchases \( \$45,000 \) (1.4 marks)

(b) Errors identification:
- Error (3) (1 mark)
- Error (4) (1 mark)

(a) (i)
Unit product cost under marginal costing = Direct materials + Direct labour + Variable manufacturing overheads
= \( \$40 + \$30 + \$10 = \$80 \)

(ii)
Unit product cost under absorption costing = Marginal unit cost + (Fixed manufacturing overheads / Budgeted production units)
= \( \$80 + (\$200,000 / 10,000) = \$80 + \$20 = \$100 \)

(b)
Zenith Ltd
Income Statement for the year ended 31 December 2022 (Marginal Costing)
Sales (\( 8,500 \times \$150 \)) = \( \$1,275,000 \)

Less Variable Cost of Goods Sold:
Opening inventory = \( \$0 \)
Add Variable cost of goods manufactured (\( 10,000 \times \$80 \)) = \( \$800,000 \)
Less Closing inventory (\( 1,500 \times \$80 \)) = \( (\$120,000) \)
Variable Cost of Goods Sold = \( \$680,000 \)
Add Variable selling & admin overheads (\( 8,500 \times \$5 \)) = \( \$42,500 \)
Total Variable Costs = \( (\$722,500) \)

Contribution = \( \$552,500 \)

Less Fixed Costs:
Fixed manufacturing overheads = \( \$200,000 \)
Fixed selling & admin overheads = \( \$80,000 \)
Total Fixed Costs = \( (\$280,000) \)

Net Profit = \( \$272,500 \)

(a)(i) \( \$80 \) (1 mark)
(a)(ii) Show formula/calculation of fixed overhead per unit (0.8 mark) and final answer \( \$100 \) (0.8 mark).
(b) Income Statement:
- Sales: \( \$1,275,000 \) (0.5 mark)
- Variable cost of goods manufactured: \( \$800,000 \) (0.5 mark)
- Closing inventory: \( \$120,000 \) (1 mark)
- Variable selling & admin: \( \$42,500 \) (1 mark)
- Contribution: \( \$552,500 \) (1 mark)
- Fixed costs (both manufacturing & admin) and Net Profit \( \$272,500 \) (1 mark)

(a)
Gary
Statement of Affairs as at 1 January 2022

Assets:
Equipment: \( \$85,000 \)
Inventory: \( \$24,000 \)
Trade receivables: \( \$18,000 \)
Bank: \( \$12,500 \)
Total Assets = \( \$139,500 \)

Less Liabilities:
Trade payables: \( \$15,000 \)

Capital as at 1 January 2022 = \( \$139,500 - \$15,000 = \$124,500 \)

(b)
Calculation of Capital as at 31 December 2022:
Total Assets = \( \text{Equipment} (\$76,500) + \text{Inventory} (\$29,500) + \text{Trade Receivables} (\$21,500) + \text{Bank} (\$19,800) = \$147,300 \)
Less Trade Payables = \( \$13,200 \)
Capital as at 31 December 2022 = \( \$147,300 - \$13,200 = \$134,100 \)

Capital Comparison Method:
Closing Capital (31 December 2022): \( \$134,100 \)
Add Drawings (goods): \( \$4,000 \)
Less Capital introduced: \( (\$20,000) \)
Less Opening Capital (1 January 2022): \( (\$124,500) \)

Net Loss for the year = \( \$134,100 + \$4,000 - \$20,000 - \$124,500 = -\$6,400 \) (Net Loss of \( \$6,400 \))

(a) Statement of Affairs:
- Correct list of assets (0.5 mark for each: Equipment, Inventory, Trade Receivables, Bank) (2 marks)
- Correct trade payables (0.5 mark)
- Correct Capital balance: \( \$124,500 \) (0.1 mark)

(b) Capital Comparison:
- Calculate Closing Capital: \( \$134,100 \) (1.5 marks)
- Add Drawings: \( \$4,000 \) (1 mark)
- Less Capital introduced: \( \$20,000 \) (1 mark)
- Less Opening Capital: \( \$124,500 \) (1 mark)
- Correct Net Loss: \( \$6,400 \) (0.5 mark)

(a)
Sunny Ltd
Statement of Retained Profits for the year ended 31 December 2022:
Opening balance (1 January 2022): \( \$450,000 \)
Less: Dividend paid (\( 500,000 \text{ shares} \times \$0.15 \)): \( (\$75,000) \)
Less: Bonus issue of shares: \( (\$200,000) \)
Add: Net profit for the year: \( \$180,000 \)
Retained profits as at 31 December 2022: \( \$355,000 \)

*Note: The share issue on 1 October 2022 increases Share Capital by \( \$250,000 \) (\( 100,000 \times \$2.5 \)) and does not affect the retained profits.

(b)
Reasons why a company issues bonus shares instead of cash dividends (any one):
- Conserve cash: Paying dividends in cash leads to an outflow of cash. A bonus issue allows the company to reward shareholders without reducing its liquid funds, which can be retained for future business growth and investment.
- Improve liquidity of shares: It increases the number of shares in the market, which can lower the price per share, making it more accessible and liquid for investors.

(a) Retained Profits:
- Opening balance: \( \$450,000 \) (0.6 mark)
- Dividend paid: \( \$75,000 \) (1.5 marks)
- Bonus issue: \( \$200,000 \) (1.5 marks)
- Net profit: \( \$180,000 \) (1 mark)
- Closing balance: \( \$355,000 \) (1 mark)

(b) Reason (any one, 2 marks):
- To conserve cash / retain liquid funds for business expansion or investment. (2 marks)
- To lower the market price per share to improve share trading liquidity. (2 marks)

(a) Contribution margin per unit:\n- Matcha Delight = \( \$120 - \$40 = \$80 \)\n- Choco Dream = \( \$150 - \$60 = \$90 \)\n\nContribution margin per machine hour:\n- Matcha Delight = \( \$80 / 0.5 \text{ hours} = \$160 \text{ per hour} \)\n- Choco Dream = \( \$90 / 1.5 \text{ hours} = \$60 \text{ per hour} \)\n\n(b) Priority ranking:\nSince Matcha Delight has a higher contribution margin per machine hour (\$160 > \$60), it has priority 1, and Choco Dream has priority 2.\n\nAllocation of machine hours:\n1. Produce Matcha Delight to meet maximum demand of 1,200 units:\n - Machine hours required = \( 1,200 \text{ units} \times 0.5 \text{ hours/unit} = 600 \text{ hours} \)\n2. Remaining hours for Choco Dream = \( 1,200 - 600 = 600 \text{ hours} \)\n3. Units of Choco Dream to produce = \( 600 \text{ hours} / 1.5 \text{ hours/unit} = 400 \text{ units} \) (which is within the maximum demand of 800 units)\n\nOptimal Product Mix:\n- Matcha Delight: 1,200 units\n- Choco Dream: 400 units\n\nTotal Contribution Margin:\n- Matcha Delight: \( 1,200 \text{ units} \times \$80 = \$96,000 \)\n- Choco Dream: \( 400 \text{ units} \times \$90 = \$36,000 \)\n- Total Contribution Margin = \( \$96,000 + \$36,000 = \$132,000 \)\n\n(c) Additional machine hours = 300 hours.\nSince the demand for Choco Dream (800 units) is not fully satisfied (currently producing 400 units), the additional 300 hours will be used to produce Choco Dream.\n- Additional units of Choco Dream to produce = \( 300 \text{ hours} / 1.5 \text{ hours/unit} = 200 \text{ units} \)\n- Additional contribution margin = \( 200 \text{ units} \times \$90 = \$18,000 \) (or \( 300 \text{ hours} \times \$60/\text{hour} = \$18,000 \))\n- Less: Additional leasing cost = \$4,000\n- Net financial benefit = \( \$18,000 - \$4,000 = \$14,000 \)\n\nDecision: Yummy Bakery should accept the lease offer because it will increase the company's net profit by \$14,000.

(a) 1 mark for each correct calculation of contribution margin per machine hour (total 2 marks).\n- Matcha Delight: $160 (1 mark)\n- Choco Dream: $60 (1 mark)\n\n(b) \n- Identification of ranking (Matcha Delight 1st, Choco Dream 2nd): (1 mark)\n- Calculation of optimal quantity for Matcha Delight (1,200 units) and Choco Dream (400 units): (2 marks; 1 mark each)\n- Calculation of total contribution margin ($132,000): (2 marks; 1 method mark, 1 accuracy mark)\n\n(c) \n- Calculation of additional production (200 units of Choco Dream) or additional contribution margin ($18,000): (1.6 marks)\n- Deduction of lease cost to find net financial benefit ($14,000): (1 mark)\n- Correct conclusion to accept the offer based on financial analysis: (1 mark)

(a)\nRevaluation Account\n---------------------------------------------------------------\nDr Cr\n---------------------------------------------------------------\nInventory $5,000 | Equipment $30,000\nCapital - Alan (3/5) $15,000 | \nCapital - Ben (2/5) $10,000 | \n---------------------------------------------------------------\n $30,000 | $30,000\n===============================================================\n\n(b)\nCapital Accounts\n------------------------------------------------------------------------------------\nDr Alan Ben Chris | Cr Alan Ben Chris\n------------------------------------------------------------------------------------\nGoodwill (write-off) $24,000 $16,000 $10,000 | Balance b/f $180,000 $120,000 -\nBalance c/f $201,000 $134,000 $90,000 | Cash/Bank - - $100,000\n | Revaluation profit $15,000 $10,000 -\n | Goodwill (raise) $30,000 $20,000 -\n------------------------------------------------------------------------------------\n $225,000 $150,000 $100,000 | $225,000 $150,000 $100,000\n====================================================================================\n\n(c) Two reasons why a partnership might decide not to maintain a goodwill account:\n1. Prudence concept: Non-purchased / internally generated goodwill should not be recognized in the financial statements because its value is highly subjective and lacks reliable measurement.\n2. To present a more realistic picture of the tangible net assets of the firm and avoid overstating assets.

(a) \n- Debit entries for Inventory write-down ($5,000): (0.5 marks)\n- Credit entry for Equipment revaluation ($30,000): (0.5 marks)\n- Transfer of revaluation profits to partners' Capital accounts in 3:2 ratio ($15,000 to Alan, $10,000 to Ben): (2 marks; 1 mark each)\n\n(b) \n- Balance b/f & Cash from Chris: (0.6 marks)\n- Revaluation profits correctly credited: (1 mark)\n- Goodwill raised in old ratio (Alan $30,000, Ben $20,000): (1 mark)\n- Goodwill written off in new ratio (Alan $24,000, Ben $16,000, Chris $10,000): (1.5 marks; 0.5 marks each)\n- Correct ending balances (Alan $201,000, Ben $134,000, Chris $90,000): (1.5 marks; 0.5 marks each)\n\n(c) \n- Mentioning the Prudence concept / non-recognition of internally generated goodwill due to subjective nature: (1 mark)\n- Explaining that it avoids overstating non-current/intangible assets: (1 mark)

(a) Journal Entries:\n1(i) \nDr Office equipment repairs $3,200\n Cr Office equipment $3,200\n1(ii) \nDr Accumulated depreciation - Office equipment $640\n Cr Depreciation expense $640\n\n2. \nDr Trade receivables - Mr. Lee $900\n Cr Sales $900\n\n3. \nDr Suspense $1,600\n Cr Discount received $1,600\n\n4. \nDr Suspense $1,200\n Cr Returns outwards $1,200\n\n5. \nDr Purchases $2,000\n Cr Suspense $2,000\n\n(b)\nSuspense Account\n---------------------------------------------------------------\nDr Cr\n---------------------------------------------------------------\nDiscount received $1,600 | Balance b/f (Difference) $800\nReturns outwards $1,200 | Purchases $2,000\n---------------------------------------------------------------\n $2,800 | $2,800\n===============================================================\n*Therefore, the opening balance was $800 on the Credit side.\n\n(c)\nStatement to Calculate Corrected Net Profit for the year ended 31 December 2023\n-----------------------------------------------------------------------\nDraft net profit $142,800\nAdjustments:\n(1) Increase in repairs expense (Error 1) ($3,200)\n Decrease in depreciation expense (Error 1) $640\n(2) Understated sales (Error 2) $900\n(3) Error in discount received (Error 3) $1,600\n(4) Omitted returns outwards (Error 4) $1,200\n(5) Undercast of purchases (Error 5) ($2,000) ($860)\n-----------------------------------------------------------------------\nCorrected net profit $141,940\n=======================================================

(a) 1 mark for each correct journal correction entry (total 5 marks):\n- Entry 1(i) and 1(ii): (1 mark total; 0.5 marks each)\n- Entry 2: (1 mark)\n- Entry 3: (1 mark)\n- Entry 4: (1 mark)\n- Entry 5: (1 mark)\n\n(b) \n- Debit entries for Discount Received and Returns Outwards: (1 mark; 0.5 marks each)\n- Credit entry for Purchases: (0.6 marks)\n- Calculation of correct opening balance ($800 Cr): (1 mark)\n\n(c) 0.5 marks for each adjusted item with the correct sign (total 3 marks):\n- Repairs: -$3,200 (0.5 marks)\n- Depreciation: +$640 (0.5 marks)\n- Sales: +$900 (0.5 marks)\n- Discount Received: +$1,600 (0.5 marks)\n- Returns Outwards: +$1,200 (0.5 marks)\n- Purchases: -$2,000 (0.5 marks)\n- Correct final net profit ($141,940) receives no extra marks but requires all individual correct calculations.

### (a) Revaluation Account
$$
\begin{array}{lr|lr}
\hline
\text{Debit (\$)} && \text{Credit (\$)} & \\
\hline
\text{Inventory (\$64,000 - \$58,000)} & 6,000 & \text{Equipment (\$145,500 - \$120,000)} & 25,500 \\
\text{Allowance for doubtful debts (10\% } \times \$45,000) & 4,500 & & \\
\text{Share of profit on revaluation:} & & & \\
\quad \text{Alex (3/5)} & 9,000 & & \\
\quad \text{Billy (2/5)} & 6,000 & & \\
\hline
& 25,500 & & 25,500 \\
\hline
\end{array}
$$

### (b) Partners' Capital Accounts
$$
\begin{array}{lccc|lccc}
\hline
\text{Particulars} & \text{Alex (\$)} & \text{Billy (\$)} & \text{Charles (\$)} & \text{Particulars} & \text{Alex (\$)} & \text{Billy (\$)} & \text{Charles (\$)} \\
\hline
\text{Goodwill (written off)} & 50,000 & 30,000 & 20,000 & \text{Balance b/d} & 120,000 & 80,000 & - \\
& & & & \text{Revaluation profit} & 9,000 & 6,000 & - \\
& & & & \text{Bank (Capital)} & - & - & 120,000 \\
& & & & \text{Goodwill (written on)} & 60,000 & 40,000 & - \\
\text{Balance c/d (adjusted)} & 250,000 & 150,000 & 100,000 & \text{Bank (Cash contribution)} & 111,000 & 54,000 & - \\
\hline
& 300,000 & 180,000 & 120,000 & & 300,000 & 180,000 & 120,000 \\
\hline
\end{array}
$$
*Working for Capital Adjustments:*
1. Charles's final capital balance after goodwill write-off = \$120,000 - \$20,000 = \$100,000.
2. Since Charles's profit share is \(2/10\) (or 20%), the total capital of the partnership should be:
$$\text{Total Capital} = \frac{\$100,000}{2/10} = \$500,000$$
3. The adjusted capital balances should be:
- Alex (5/10): \$\$500,000 \times \frac{5}{10} = \$250,000\$\$
- Billy (3/10): \$\$500,000 \times \frac{3}{10} = \$150,000\$\$
- Charles (2/10): \$\$500,000 \times \frac{2}{10} = \$100,000\$\$
4. Cash contributions needed:
- Alex: \$250,000 - (\$120,000 + \$9,000 + \$60,000 - \$50,000) = \$250,000 - \$139,000 = \$111,000 cash contribution.
- Billy: \$150,000 - (\$80,000 + \$6,000 + \$40,000 - \$30,000) = \$150,000 - \$96,000 = \$54,000 cash contribution.

### (c) Goodwill
- **Definition**: Goodwill is an intangible asset that represents the excess of the business's overall purchase value over the fair value of its identifiable net assets. It reflects future economic benefits arising from factors such as brand reputation, customer loyalty, and prime business location.
- **Explanation**: The partners chose not to maintain a Goodwill account because the goodwill in this case is internally generated (non-purchased) goodwill. According to HKAS 38 (Intangible Assets) and the prudence concept, internally generated goodwill cannot be objectively valued and must not be recognised as an asset in the books of accounts. Writing it off immediately prevents the overstatement of the partnership's assets.

### (d) Accounting Principle
- **Principle**: Prudence Concept (or lower of cost and net realisable value rule).
- **Application**: Under the prudence concept, profits and assets should not be overstated, while losses and liabilities should be recognised immediately. Since the net realisable value of inventory (\$58,000) is lower than its historical cost (\$64,000), a write-down of \$6,000 must be made to ensure that the asset is not overstated in the financial statements.

**(a) Revaluation Account [Total: 4 marks]**
- Debit side: Inventory write-down of \$6,000 (0.5 mark)
- Debit side: Allowance for doubtful debts of \$4,500 (0.5 mark)
- Credit side: Equipment revaluation surplus of \$25,500 (1 mark)
- Revaluation profit distribution: Alex \$9,000 (1 mark), Billy \$6,000 (1 mark)

**(b) Partners' Capital Accounts [Total: 8 marks]**
- Correct opening balances for Alex and Billy (0.5 mark)
- Revaluation profit correctly credited (0.5 mark)
- Bank contribution of \$120,000 credited to Charles (1 mark)
- Goodwill adjustment:
- Goodwill write-on credited in old ratio: Alex \$60,000, Billy \$40,000 (1 mark)
- Goodwill write-off debited in new ratio: Alex \$50,000, Billy \$30,000, Charles \$20,000 (1.5 marks)
- *Note: Net entry (Dr Charles \$20,000, Cr Alex \$10,000, Cr Billy \$10,000) is also acceptable.*
- Cash adjustments to bring capital to the profit-sharing ratio:
- Alex's cash contribution of \$111,000 (1.5 marks)
- Billy's cash contribution of \$54,000 (1.5 marks)
- Correct closing balances c/d (showing proportionate amounts of \$250,000, \$150,000, \$100,000) (0.5 mark)

**(c) Goodwill definition and treatment [Total: 4 marks]**
- Definition of Goodwill (2 marks)
- Reason for not maintaining Goodwill account (internally generated, HKAS 38, prudence) (2 marks)

**(d) Accounting Principle [Total: 2 marks]**
- Identify Prudence Concept (1 mark)
- Explanation in relation to inventory cost vs. net realisable value (1 mark)