Candidates’ Performance in the 2009 Examination – Paper 1

1. Candidates’ Performancein the 2009 Examination – Paper 1 Mr. WAN Shiu-kee

2. Overall Performance • Satisfactory • Possess broad understanding of the topics • Able to give appropriate answers based on the scenarios given

3. Overall Performance • Should read the questions carefully • Should present their answers in a logical and systematic manner • Abbreviations are not acceptable • Proper heading / title should be provided for each account / statement • Journal narratives should not be omitted • Should show workings in their answers

4. Overall Performance

5. Question 1 – Consolidated financial statements • Satisfactorily answered • Well prepared for a question on consolidated financial statements

6. Question 1 – Consolidated financial statements • Poor • Not able to explain the accounting definition of goodwill in the context of consolidation • Wrongly focused on elaborating the difference between purchased goodwill and inherent goodwill • Did not understand the meaning of “attributing factors”

7. Question 1 – Consolidated financial statements • Well answered • Computation of goodwill should include holding company’s share of ordinary share capital, share premium, pre-acquisition profits and fair value adjustments on office premises • Did not net off the pre-acquisition dividend from the cost of investment

8. Question 1 – Consolidated financial statements • Not familiar with the adjustments relating to intra-group transactions • Mistakenly treated the mark-up as gross profit margin overstatement of cost of goods sold and understatement of gross profit • Could not identify the adjustments to be made to depreciation expenses  depreciation on profit of the transferred machinery should be excluded, additional depreciation should be computed basing on the fair value adjustment of the office premises

9. Question 1 – Consolidated financial statements • Failed to exclude intra-group management fees from administrative expenses • No difficulty in calculating goodwill arising from consolidation, but not familiar with the treatment of impairment loss on goodwill • Profit attributable to the equity holders of the parent and minority interest were to be shown separately

10. Question 1 – Consolidated financial statements • Amounts of unrealised profit adjustment arising from upstream sale of machinery and additional depreciation on revaluation of office premises were to be apportioned to minority interest

11. Question 1 – Consolidated financial statements • Should present the consolidated balance sheet in vertical form and classify various items under the appropriate headings • Did not adjust the net book value of PPE with the amounts of unrealised profits on machinery, fair value adjustments on office premises and the related depreciation

12. Question 1 – Consolidated financial statements • Cash in transit should be shown neither as a separate item nor as a reduction of bank overdraft • Failed to deduct 2 years’ additional depreciation on fair value adjustment from retained profits • Ignored the depreciation adjustment on the transferred machinery from retained profits

13. Question 2 – Partnership accounts • Good • Quite familiar with the preparation of various accounts for a partnership

14. Question 2 – Partnership accounts • Confused the treatments of debit notes and credit notes • Rule of the lower of cost or net realisable value (LCN rule) should be applied to the valuation of closing inventories • Not aware that insurance expenses had been included in selling and administrative expenses • Wrongly calculated the allowance for doubtful debts basing on “confirmations received from trade debtors” • Returned cheques should be added to the balance of trade debtors

15. Question 2 – Partnership accounts • Remember that no goodwill account was to be maintained in the books  GW should be written off through partners’ capital accounts • No difficulty in recording the drawings of the partners but the full amount of the partners’ salaries had been credited to the capital accounts • Share of profits should be calculated after taking away the partners’ salaries from the net profit before appropriation

16. Question 2 – Partnership accounts • Should transfer the book values of various assets to the realisation account  failed to show the net amount of trade debtors and forgot to include the prepaid portion of the insurance expenses • Could not record the correct payment to trade creditors in the bank account • Ignored the share of realisation profits in recording the final settlement to the partners

17. Question 2 – Partnership accounts • No difficulty in preparing the required journal entries • Mistakenly recorded the assets in the books of A&B Ltd at book values

18. Question 3 – Cash flow statement • Well answered • Demonstrated an acceptable level of understanding in preparing a cash flow statement

19. Question 3 – Cash flow statement • Not able to calculate the correct amounts of the depreciation of machinery and equipment as well as profit before taxation • Not aware that short-term investment was listed at fair value wrongly computed the profit on sale of investment • Had difficulties in calculating the valuation surplus on short-term investments for adjustment to net cash flows from operating activities

20. Question 3 – Cash flow statement • Should classify interest paid as an operating activity and dividend income as an investing activity • Wrongly disclosed increase in fixed deposit as a cash flow from investing activities • Should not divide the proceeds from issuance of ordinary shares into par value and share premium and disclosed separately

21. Question 3 – Cash flow statement • Did not notice the repayment in 2008 and the re-classification of bank loan at the end of 2007 and 2008 • Fixed deposit with a maturity of 6-months was not to be treated as cash equivalents

22. Question 3 – Cash flow statement • Fair • Could not manage to explain 2 advantages of a cash flow statement to investors focused on stating the uses and classifications of a cash flow statement

23. Question 4 – Ratios and Errors • Poor • Could not apply conceptual understanding in solving various accounting problems • Did not posses sufficient knowledge of some specific issues related to lease, provisions and intangible assets, etc

24. Question 4 – Ratios and Errors • Could not calculate the return on equity and return on capital employed correctly  wrongly used average profit figure instead of averages for equity and capital employed • Failed to include issued debenture in calculating opening figure for equity • Did not adjust debenture interest to net profit in computing return on capital employed

25. Question 4 – Ratios and Errors • Gave comments only on the gearing ratio without giving proper reference to their answers in (a) • Failed to explain the implications of return on equity and return on capital employed to the shareholders of a highly geared company

26. Question 4 – Ratios and Errors • Did not understand how to apply the concept of “substance over form” in the question  tended to list the criteria of a lease as their answers

27. Question 4 – Ratios and Errors • Not aware that the books had been closedrecorded omissions and corrections directly to various expenses instead of profit and loss account • Had difficulty in calculating the amounts of lease creditors and finance charge for the year • Not able to prepare the necessary journal entries to recorded the lease

28. Question 4 – Ratios and Errors • Should not record the construction cost of the fire exits as a liability • Failed to apply the matching principle to deal with the non-refundable rental premium and the accrued rent at the end of year 2008

29. Question 5 – Non-profit making organisation • Well-answered • Could identify the items to be shown in the income and expenditure account and balance sheet

30. Question 5 – Non-profit making organisation • Did not know how to work out the cost of goods sold from sales to star plan members  mistakenly treated the margin as the mark-up in arriving at total amount of cost of goods sold • Did not account for stock loss when calculating operating expenses

31. Question 5 – Non-profit making organisation • Had difficulty in calculating income from subscription fees  forgot to allocate the star plan members’ subscription fees over a period of 3 years • Failed to apply the realisation principle in calculating revenue from wine tasting courses • Did not include the deposits for the function room as an expense in computing profit from annual dinner

32. Question 5 – Non-profit making organisation • Could not manage to split deferred subscription fees into current and non-current portions and show them correctly in the balance sheet • Deferred course fees for January and February 2009 should be disclosed as a current liability

33. Thank you !