Accounting (9-1) 0985 | Paper 2 Mock 01 | Structured Written Paper

(a) Definition of goodwill

Goodwill is an intangible non-current asset. [1] It represents the value of a business above the net value of its identifiable tangible and intangible assets, arising from factors such as the firm's reputation, established customer base, and earning potential. [1]

(b) Goodwill Account

Goodwill is first credited to the existing partners' capital accounts in the old profit-sharing ratio (Henry:Isa = 1:1), then debited to all partners' capital accounts in the new ratio (Henry:Isa:Jia = 2:2:1). Since goodwill is not to be retained in the books, the account opens and closes in the same set of entries.

The debit side credits the old partners for the goodwill they built. The credit side charges all partners (including Jia) in the new ratio, effectively making Jia pay for her share of the existing goodwill.

(c) Partners' Capital Accounts (columnar format)

Henry: $60 000 + $15 000 - $12 000 = $63 000

Isa: $50 000 + $15 000 - $12 000 = $53 000

Jia: $40 000 - $6 000 = $34 000

Total capital = $63 000 + $53 000 + $34 000 = $150 000 [1]

Correct columnar format with old and new ratios correctly applied. [1][1]

(d) Factors contributing to goodwill

Good reputation / brand name [1] - a well-known and respected business attracts customers more easily and can generate above-average profits. [1]

Loyal customer base [1] - regular repeat customers provide reliable income and reduce the cost and uncertainty of finding new business. [1]

(a) Peters Account in the books of Kwame

Peters is both a trade receivable (customer) and a trade payable (supplier) of Kwame's business. On 3 March, Kwame sold goods to Peters on credit, making Peters a debtor. On 7 March, Kwame purchased goods from Peters on credit, making Peters a creditor.

After the contra entry on 10 March, the debit balance on Peters' account is:

$5 200 - $1 800 (purchases) - $1 800 (contra, but the contra cancels the $1 800 payable by transferring it from the credit side)

More precisely: the $1 800 owed to Peters as a supplier is set off against the $5 200 owed by Peters as a customer. The net amount Peters owes is $5 200 - $1 800 = $3 400. [1]

The account closes to nil [1] after Peters pays the remaining $3 400 by cheque on 15 March. [1]

(b) Journal entry for the contra entry on 10 March

(c) Contra entry explained

A contra entry is used when the same person is both a debtor (trade receivable) and a creditor (trade payable) of the business. [1] The smaller balance is set off against the larger balance. [1] This avoids the unnecessary exchange of cash between the two parties for amounts that cancel each other out. [1] Only the net amount remaining needs to be settled in cash. [1]

(d) ABC Motors Account in the books of Kwame

The account closes to nil. [1] The credit entry records the liability to ABC Motors for the vehicle. The debit entries record the two forms of payment: $8 000 by cheque and $10 000 by promissory note. Correct format and balancing. [1]

(a) FIFO inventory record card

Under the FIFO (First In, First Out) method, the oldest inventory is assumed to be issued (sold) first. The record card tracks receipts, issues, and running balances by cost layer.

On 10 January, the 350-unit sale draws first from the oldest layer (200 units at $8.00), then from the next layer (150 of the 300 units at $8.50). On 22 January, the 200-unit sale uses the remaining 150 units at $8.50, then 50 units from the $9.00 layer.

(b) Value of closing inventory at 31 January 2025

Closing inventory = 200 x $9.00 + 100 x $9.50 [1]

= $1 800 + $950 [1] = $2 750 [1]

The closing inventory consists of the most recently purchased units, which is characteristic of FIFO.

(c) Cost of goods sold for January 2025

Cost of goods sold = Total issues = $2 875 + $1 725 [1] = $4 600 [1]

Alternatively: Opening inventory ($1 600) + Total purchases ($2 550 + $2 250 + $950 = $5 750) - Closing inventory ($2 750) = $4 600 [1]

(d) Explanation of the FIFO method

Under FIFO, the first (oldest) inventory purchased is assumed to be the first sold or issued. [1] The remaining inventory is therefore valued at the most recent purchase prices. [1]

(e) Advantage of the FIFO method

The closing inventory valuation is close to current market prices or replacement cost, giving a realistic balance sheet figure. [1] It is also a logical method that matches the physical flow of most goods, particularly perishable items. [1]

(a) Purchases Ledger Control Account - Year ended 31 December 2025

The purchases ledger control account (PLCA) is a summary account with a credit balance, since trade payables represent amounts the business owes. Items that reduce the amount owed are debited; items that increase what is owed are credited.

Closing balance: $14 200 + $42 800 - $39 600 - $1 280 - $1 950 - $630 = $13 540 [1]

The set-off (contra) entry arises when a customer is also a supplier: the amounts owed to and by the same person are offset rather than settled in cash.

(b) Sources of the totals

(c) Double entry for discount received of $1 280

Discount received reduces the amount owed to suppliers (debit PLCA) and is recognised as income (credit discount received).

(d) One reason the balance might not agree

An error in posting to an individual creditor's account in the purchases ledger that does not affect the control account - for example, a payment posted to the wrong supplier's account. [1] The individual balances would be incorrect (one too high, another too low) even though the control account total is correct. [1]

(e) Why payments appear on the debit side

The PLCA normally carries a credit balance representing total amounts owed to suppliers. [1] When the business makes a payment, it reduces the amount owed, so the payment is debited to decrease the credit balance. This follows the rule that to reduce a credit balance, you debit the account. [1]

(a) Four reasons for maintaining proper accounting records

1. To calculate the profit or loss made by the business over a given period, enabling the owner to assess business performance. [1]
2. To show the financial position of the business (its assets, liabilities, and capital) at any given date through a statement of financial position. [1]
3. To provide the information required for tax purposes and to comply with legal requirements, so the correct amount of tax can be calculated and paid. [1]
4. To help make informed business decisions, such as whether to expand, borrow, invest, or reduce costs, based on accurate financial data rather than guesswork. [1]

(b) Users of accounting information

(c) Difference between a sole trader and a partnership

A sole trader is a business owned and run by one person. The owner makes all business decisions independently and receives all the profits. [1]

The sole trader has unlimited liability, meaning personal assets (such as a home or savings) may be used to pay business debts if the business cannot. [1]

A partnership is a business owned by two or more people (typically up to 20) who share responsibilities, decision-making, profits, and losses according to the partnership agreement. [1]

A partnership is governed by a partnership agreement (or the Partnership Act in the absence of one), which sets out each partner's capital contribution, profit-sharing ratio, roles, and other terms. [1]

(d) Advantages and disadvantages of operating as a sole trader compared to a partnership

Advantages:

1. The owner keeps all the profits and does not have to share them with anyone. [1]
2. The owner has complete control over all business decisions without needing to consult or agree with partners. [1]

Disadvantages:

1. The owner has unlimited liability and bears all business risks alone; if the business fails, all debts fall on one person. [1]
2. It may be more difficult to raise capital compared to a partnership, where multiple partners can each contribute funds. The sole trader is limited to personal savings and borrowing. [1]