ACCA F3 Financial Accounting INT Solved Past Papers 0107 Copy

Financial Accounting (International)

Time allowed: 2 hours

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Fundamentals Pilot Paper – Knowledge module

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The Association of Chartered Certified Accountants

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ALL 50 questions are compulsory and MUST be attemptedPlease use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.

1 Should details of material adjusting or material non-adjusting events after the balance sheet date be disclosed in the notes to financial statements according to IAS 10 Events After the Balance Sheet Date?

A Adjusting events

B Non-Adjusting events (1 mark)

2 At 30 June 2005 a company’s allowance for receivables was $39,000. At 30 June 2006 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the equivalent of 5 per cent of the trade receivables based on past events.

What figure should appear in the income statement for the year ended 30 June 2006 for these items?

A $61,000 B $22,000

C $24,000

D $23,850 (2 marks)

3 In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset values and profit?

A Asset values and profit both understated

B Asset values and profit both overstated

C Asset values understated and profit overstated

D Asset values overstated and profit understated. (2 marks)

4 The IASB’s Framework for the preparation and presentation of financial statements gives qualitative characteristics that make financial information reliable.

Which of the following are examples of those qualitative characteristics?

A Faithful Representation, neutrality and prudence

B Neutrality, comparability and true and fair view

C Prudence, comparability and accruals

D Neutrality, accruals and going concern (2 marks)



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5 The following bank reconciliation statement has been prepared by a trainee accountant:

$ Overdraft per bank statement 3,860 less: Outstanding cheques 9,160 5,300 add: Deposits credited after date 16,690 Cash at bank as calculated above 21,990

What should be the correct balance per the cash book?

A $21,990 balance at bank as stated

B $3,670 balance at bank

C $11,390 balance at bank

D $3,670 overdrawn. (2 marks)

6 Which of the following calculates a trader’s net profit for a period?

A Closing net assets + drawings – capital introduced – opening net assets

B Closing net assets – drawings + capital introduced – opening net assets

C Closing net assets – drawings – capital introduced – opening net assets

D Closing net assets + drawings + capital introduced – opening net assets. (2 marks)

7 A sole trader took some goods costing $800 from inventory for his own use. The normal selling price of the goods is $1,600.

Which of the following journal entries would correctly record this? Dr Cr $ $ A Drawings account 800 Inventory account 800

B Drawings account 800 Purchases account 800

C Sales account 1,600 Drawings account 1,600 (1 mark)

8 The debit side of a company’s trial balance totals $800 more than the credit side.

Which one of the following errors would fully account for the difference?

A $400 paid for plant maintenance has been correctly entered in the cash book and credited to the plant asset account.

B Discount received $400 has been debited to discount allowed account

C A receipt of $800 for commission receivable has been omitted from the records

D The petty cash balance of $800 has been omitted from the trial balance. (2 marks)



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9 A company’s income statement for the year ended 31 December 2005 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the company’s policy to depreciate motor vans at 25 per cent per year on the straight line basis, with a full year’s charge in the year of acquisition.

What would the net profit be after adjusting for this error?

A $106,100

B $70,100

C $97,100

D $101,600 (2 marks)

10 Should dividends paid appear on the face of a company’s income statement?

A Yes

B No (1 mark)

11 The following control account has been prepared by a trainee accountant:

Receivables ledger control account $ $ Opening balance 308,600 Cash received from credit customers 147,200 Credit sales 154,200 Discounts allowed to credit customers 1,400 Cash sales 88,100 Interest charged on overdue accounts 2,400 Contras against credit balances in payables ledger 4,600 Bad debts written off 4,900 Allowance for receivables 2,800 Closing balance 396,800 555,500 555,500

What should the closing balance be when all the errors made in preparing the receivables ledger control account have been corrected?

A $395,200

B $304,300

C $309,500

D $307,100 (2 marks)



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12 At 31 December 2004 Q, a limited liability company, owned a building that cost $800,000 on 1 January 1995. It was being depreciated at two per cent per year.

On 1 January 2005 a revaluation to $1,000,000 was recognised. At this date the building had a remaining useful life of 40 years.

What is the depreciation charge for the year ended 31 December 2005 and the revaluation reserve balance as at 1 January 2005?

Depreciation charge Revaluation reserve for year ended 31 December 2005 as at 1 January 2005 $ $ A 25,000 200,000

B 25,000 360,000

C 20,000 200,000

D 20,000 360,000 (2 marks)

13 P and Q are in partnership, sharing profits equally.

On 30 June 2005, R joined the partnership and it was agreed that from that date all three partners should share equally in the profit.

In the year ended 31 December 2005 the profit amounted to $300,000, accruing evenly over the year, after charging a bad debt of $30,000 which it was agreed should be borne equally by P and Q only.

What should P’s total profit share be for the year ended 31 December 2005? A $ 95,000

B $122,500 C $125,000

D $110,000 (2 marks)

14 A company has made a material change to an accounting policy in preparing its current financial statements.

Which of the following disclosures are required by IAS 8 Accounting policies, changes in accounting estimates and errors in the financial statements?

1 The reasons for the change. 2 The amount of the adjustment in the current period and in comparative information for prior periods. 3 An estimate of the effect of the change on the next five accounting periods.

A 1 and 2 only

B 1 and 3 only

C 2 and 3 only

D 1, 2 and 3 (2 marks)



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15 According to IAS 2 Inventories, which of the following costs should be included in valuing the inventories of a manufacturing company?

(1) Carriage inwards

(2) Carriage outwards

(3) Depreciation of factory plant

(4) General administrative overheads

A All four items

B 1, 2 and 4 only

C 2 and 3 only

D 1 and 3 only (2 marks)

16 Part of a company’s cash flow statement is shown below:

$’000 Operating profit 8,640 Depreciation charges (2,160) Increase in inventory (330) Increase in accounts payable 440

The following criticisms of the extract have been made:

(1) Depreciation charges should have been added, not deducted.

(2) Increase in inventory should have been added, not deducted.

(3) Increase in accounts payable should have been deducted, not added.

Which of the criticisms are valid?

A 2 and 3 only

B 1 only

C 1 and 3 only

D 2 only (2 marks)

17 Which of the following explains the imprest system of operating petty cash?

A Weekly expenditure cannot exceed a set amount.

B The exact amount of expenditure is reimbursed at intervals to maintain a fixed float.

C All expenditure out of the petty cash must be properly authorised.

D Regular equal amounts of cash are transferred into petty cash at intervals. (2 marks)



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18 Which of the following are differences between sole traders and limited liability companies?

(1) A sole traders’ financial statements are private; a company’s financial statements are sent to shareholders and may be publicly filed

(2) Only companies have capital invested into the business

(3) A sole trader is fully and personally liable for any losses that the business might make; a company’s shareholders are not personally liable for any losses that the company might make.

A 1 and 2 only

B 2 and 3 only

C 1 and 3 only


19 Which of the following documents should accompany a payment made to a supplier?

A Supplier statement

B Remittance advice

C Purchase invoice (1 mark)

20 Goodwill should never be shown on the balance sheet of a partnership.

Is this statement true or false?

A False

B True (1 mark)

21 Which of the following journal entries are correct, according to their narratives? Dr CR $ $ 1 Suspense account 18,000 Rent received account 18,000 Correction of error in posting $24,000 cash received for rent to the rent received account as $42,000

2 Share premium account 400,000 Share capital account 400,000 1 for 3 bonus issue on share capital of 1,200,000 50c shares

3 Trade investment in X 750,000 Share capital account 250,000 Share premium account 500,000 500,000 50c shares issued at $1.50 per share in exchange for shares in X

A 1 and 2

B 2 and 3

C 1 only

D 3 only (2 marks)



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22 The plant and machinery account (at cost) of a business for the year ended 31 December 2005 was as follows:

Plant and machinery – cost 2005 2005 $ $ 1 Jan Balance 240,000 31 March Transfer disposal account 60,000 30 June Cash – purchase of plant 160,000 31 Dec Balance 340,000 400,000 400,000

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal.

What should be the depreciation charge for the year ended 31 December 2005?

A $68,000 B $64,000

C $61,000

D $55,000 (2 marks)

23 Which of the following should appear in a company’s statement of changes in equity?

1 Profit for the financial year 2 Amortisation of capitalised development costs 3 Surplus on revaluation of non-current assets

A All three items

B 2 and 3 only

C 1 and 3 only


24 Which of the following statements are correct?

(1) Capitalised development expenditure must be amortised over a period not exceeding five years.

(2) Capitalised development costs are shown in the balance sheet under the heading of Non-current Assets

(3) If certain criteria are met, research expenditure must be recognised as an intangible asset.

A 2 only

B 2 and 3

C 1 only

D 1 and 3 (2 marks)



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25 A fire on 30 September destroyed some of a company’s inventory and its inventory records.

The following information is available: $ Inventory 1 September 318,000 Sales for September 612,000 Purchases for September 412,000 Inventory in good condition at 30 September 214,000

Standard gross profit percentage on sales is 25%

Based on this information, what is the value of the inventory lost?

A $96,000 B $271,000

C $26,400

D $57,000 (2 marks)

26 At 31 December 2004 a company’s capital structure was as follows:

$ Ordinary share capital (500,000 shares of 25c each) 125,000 Share premium account 100,000

In the year ended 31 December 2005 the company made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the share premium account for the purpose.

What was the company’s capital structure at 31 December 2005?

Ordinary share capital Share premium account $ $ A 450,000 125,000

B 225,000 250,000

C 225,000 325,000

D 212,500 262,500 (2 marks)

27 The inventory value for the financial statements of Q for the year ended 31 May 2006 was based on an inventory count on 4 June 2006, which gave a total inventory value of $836,200.

Between 31 May and 4 June 2006, the following transactions took place:

$ Purchases of goods 8,600 Sales of goods (profit margin 30% on sales) 14,000 Goods returned by Q to supplier 700

What adjusted figure should be included in the financial statements for inventories at 31 May 2006?

A $838,100

B $853,900

C $818,500

D $834,300 (2 marks)



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28 In preparing a company’s bank reconciliation statement at March 2006, the following items are causing the difference between the cash book balance and the bank statement balance:

(1) Bank charges $380

(2) Error by bank $1,000 (cheque incorrectly debited to the account)

(3) Lodgements not credited $4,580

(4) Outstanding cheques $1,475

(5) Direct debit $350

(6) Cheque paid in by the company and dishonoured $400.

Which of these items will require an entry in the cash book?

A 2, 4 and 6

B 1, 5 and 6

C 3, 4 and 5


29 At 31 December 2005 the following require inclusion in a company’s financial statements:

(1) On 1 January 2005 the company made a loan of $12,000 to an employee, repayable on 1 January 2006, charging interest at 2 per cent per year. On the due date she repaid the loan and paid the whole of the interest due on the loan to that date.

(2) The company has paid insurance $9,000 in 2005, covering the year ending 31 August 2006.

(3) In January 2006 the company received rent from a tenant $4,000 covering the six months to 31 December 2005.

For these items, what total figures should be included in the company’s balance sheet at 31 December 2005?

Current assets Current liabilities $ $ A 10,000 12,240

B 22,240 nil

C 10,240 nil

D 16,240 6,000 (2 marks)

30 How should a contingent liability be included in a company’s financial statements if the likelihood of a transfer of economic benefits to settle it is remote?

A Disclosed by note with no provision being made

B No disclosure or provision is required (1 mark)



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31 Which of the following material events after the balance sheet date and before the financial statements are approved are adjusting events?

(1) A valuation of property providing evidence of impairment in value at the balance sheet date.

(2) Sale of inventory held at the balance sheet date for less than cost.

(3) Discovery of fraud or error affecting the financial statements.

(4) The insolvency of a customer with a debt owing at the balance sheet date which is still outstanding.

A 1, 2, 3 and 4

B 1, 2 and 4 only

C 3 and 4 only

D 1, 2 and 3 only. (2 marks)

32 Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alpha’s payables ledger account for Beta shows a balance due to Beta of $4,140.

Investigation reveals the following:

(1) Cash paid to Beta $4,080 has not been allowed for by Beta (2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta.

What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?

A $690

B $770

C $9,850

D $9,930 (2 marks)

33 The business entity concept requires that a business is treated as being separate from its owners.


A True

B False (1 mark)

34 Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premises quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year until 30 June 2005. It was increased from that date to $96,000 per year.

What rent expense and end of year prepayment should be included in the financial statements for the year ended 30 April 2006?

Expense Prepayment A $93,000 $8,000

B $93,000 $16,000

C $94,000 $8,000

D $94,000 $16,000 (2 marks)



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35 Which of the following items could appear in a company’s cash flow statement?

(1) Surplus on revaluation of non-current assets

(2) Proceeds of issue of shares

(3) Proposed dividend

(4) Dividends received

A 1 and 2

B 3 and 4

C 1 and 3

D 2 and 4 (2 marks)

36 What is the role of the International Financial Reporting Interpretations Committee?

A To create a set of global accounting standards

B To issue guidance on the application of International Financial Reporting Standards (1 mark)

37 Q’s trial balance failed to agree and a suspense account was opened for the difference. Q does not keep receivables and payables control accounts. The following errors were found in Q’s accounting records:

(1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capital account as $330,000

(2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant asset account

(3) The petty cash book balance $500 had been omitted from the trial balance

(4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as $87,400.

Which of the errors will require an entry to the suspense account to correct them?

A 1, 2 and 4 only

B 1, 2, 3 and 4

C 1 and 4 only


38 Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain and a further 5% settlement discount if goods are paid for within 14 days. Hill bought goods with a list price of $200,000 from Mountain. Sales tax is at 17.5%.

What amount should be included in Mountain’s receivables ledger for this transaction?

A $235,000

B $211,500

C $200,925

D $209,925 (2 marks)



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39 A computerised accounting system operates using the principle of double entry accounting.


A False

B True (1 mark)

40 A company receives rent from a large number of properties. The total received in the year ended 30 April 2006 was $481,200.

The following were the amounts of rent in advance and in arrears at 30 April 2005 and 2006: 30 April 2005 30 April 2006 $ $ Rent received in advance 28,700 31,200 Rent in arrears (all subsequently received) 21,200 18,400

What amount of rental income should appear in the company’s income statement for the year ended 30 April 2006?

A $486,500 B $460,900

C $501,500

D $475,900 (2 marks)

41 Annie is a sole trader who does not keep full accounting records. The following details relate to her transactions with credit customers and suppliers for the year ended 30 June 2006:

$ Trade receivables, 1 July 2005 130,000 Trade payables, 1 July 2005 60,000 Cash received from customers 686,400 Cash paid to suppliers 302,800 Discounts allowed 1,400 Discounts received 2,960 Contra between payables and receivables ledgers 2,000 Trade receivables, 30 June 2006 181,000 Trade payables, 30 June 2006 84,000

What figure should appear in Annie’s income statement for the year ended 30 June 2006 for purchases?

A $331,760

B $740,800

C $283,760

D $330,200 (2 marks)



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42 The bookkeeper of Field made the following mistakes:

Discounts allowed $3,840 was credited to the discounts received account

Discounts received $2,960 was debited to the discounts allowed account

Which journal entry will correct the errors?

DR CR A Discounts allowed $7,680 Discounts received $5,920 Suspense account $1,760

B Discounts allowed $880 Discounts received $880 Suspense account $1,760

C Discounts allowed $6,800 Discounts received $6,800

D Discounts allowed $3,840 Discounts received $2,960 Suspense account $880 (2 marks)


(1) Materiality means that only items having a physical existence may be recognised as assets.

(2) The substance over form convention means that the legal form of a transaction must always be shown in financial statements even if this differs from the commercial effect.

(3) The money measurement concept is that only items capable of being measured in monetary terms can be recognised in financial statements.

A 2 only

B 1, 2 and 3

C 1 only

D 3 only (2 marks)

44 The total of the list of balances in Valley’s payables ledger was $438,900 at 30 June 2006. This balance did not agree with Valley’s payables ledger control account balance. The following errors were discovered:

1 A contra entry of $980 was recorded in the payables ledger control account, but not in the payables ledger. 2 The total of the purchase returns daybook was undercast by $1,000. 3 An invoice for $4,344 was posted to the supplier’s account as $4,434.

What amount should Valley report in its balance sheet as accounts payable at 30 June 2006?

A $436,830 B $438,010

C $439,790

D $437,830 (2 marks)



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(1) A cash flow statement prepared using the direct method produces a different figure for operating cash flow from that produced if the indirect method is used.

(2) Rights issues of shares do not feature in cash flow statements.

(3) A surplus on revaluation of a non-current asset will not appear as an item in a cash flow statement

(4) A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing Activities in a cash flow statement.

A 1 and 4 B 2 and 3

C 3 only

D 2 and 4 (2 marks)

46 Gareth, a sales tax registered trader purchased a computer for use in his business. The invoice for the computer showed the following costs related to the purchase:

$ Computer 890 Additional memory 95 Delivery 10 Installation 20 Maintenance (1 year) 25 1,040 Sales tax (17.5%) 182 Total 1,222

How much should Gareth capitalise as a non-current asset in relation to the purchase?

A $1,222

B $1,040

C $890

D $1,015 (2 marks)

47 A and B are in partnership sharing profits and losses in the ratio 3:2 respectively. Profit for the year was $86,500. The partners’ capital and current account balances at the beginning of the year were as follows:

A B $ $ Current accounts 5,750CR 1,200CR Capital accounts 10,000CR 8,000CR

A’s drawings during the year were $4,300, and B’s were $2,430.

What should A’s current account balance be at the end of the year?

A $57,650

B $51,900

C $61,950

D $53,350 (2 marks)



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48 What is the correct double entry to record the depreciation charge for a period?

A DR Depreciation expense CR Accumulated depreciation

B DR Accumulated depreciation CR Depreciation expense (1 mark)

49 A company values its inventory using the first in, first out (FIFO) method. At 1 May 2005 the company had 700 engines in inventory, valued at $190 each.

During the year ended 30 April 2006 the following transactions took place:

2005 1 July Purchased 500 engines at $220 each 1 November Sold 400 engines for $160,000

2006 1 February Purchased 300 engines at $230 each 15 April Sold 250 engines for $125,000

What is the value of the company’s closing inventory of engines at 30 April 2006?

A $188,500

B $195,500

C $166,000

D $106,000 (2 marks)

50 A company’s motor vehicles at cost account at 30 June 2006 is as follows:

Motor vehicles – cost $ $ Balance b/f 35,800 Disposal 12,000 Additions 12,950 Balance c/f 36,750 48,750 48,750

What opening balance should be included in the following period’s trial balance for motor vehicles – cost at 1 July 2006?

A $36,750 DR

B $48,750 DR

C $36,750 CR

D $48,750 CR (2 marks)



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Answers



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Pilot Paper F3 (INT) AnswersFinancial Accounting (International)

1 B 2 B 37,000 + ((517,000 – 37,000)*5%) – 39,000) = 22,0003 C 4 A 5 B -3,860 – 9,160 + 16,690 = 3,670 6 A 7 B 8 B 9 C 83,600 +18,000 – (18,000*25%) = 97,10010 B 11 D Receivables ledger control account $ $ Opening balance 308,600 Contras 4,600 Credit sales 154,200 Cash received 147,200 Interest charged 2,400 Discounts allowed 1,400 Bad debts 4,900 Closing balance 307,100 465,200 465,200

12 B 1,000,000/40years = 25,000; 1,000,000 – (800,000 – (800,000*2%*10years)) = 360,00013 B ((300,000 + 30,000) / 2 * ½ ) + (300,000 + 30,000) / 2 * 1/3) – (30,000 * ½ ) = 122,50014 A 15 D 16 B 17 B 18 C 19 B 20 A 21 D 22 D (240,000*20%) + (6/12*160,000*20%) – (9/12*60,000*20%) = 55,00023 C 24 A 25 D (318,000 + 412,000 – 214,000) – (612,000*75%) = 57,00026 B 125,000 + (500,000*1/2*25c) + (750,000*1/5*25c) = 225,000; 100,000 + (500,000*1/2*75c) –

(750,000*1/5*25c) = 250,00027 A 836,200 – 8,600 + (14,000*70%) + 700 = 838,10028 B 29 B 12,000 + (12,000*2%) + (9,000*8/12) + 4,000 = 22,24030 B 31 A 32 A (8,950 – 4,080) – (4,140 + 40) = 69033 A 34 D (84,000*2/12) + (96,000*10/12) = 94,000; 96,000*2/12 = 16,00035 D 36 B 37 B 38 D List Price 200,000 Trade discount (20,000) 180,000 Sales tax (17.5%*95%*180,000) 29,925 209,92539 B 40 D Rent receivable $ $ O/Balance 21,200 O/Balance 28,700 Income statement 475,900 Disposal 481,200 C/Balance 31,200 C/Balance 18,400 528,300 528,300



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41 A Payables ledger $ $ Cash paid 302,800 O/balance 60,000 Discounts received 2,960 Purchases 331,760 Contra 2,000 C/balance 84,000 391,760 391,760 42 B 43 D 44 D 438,900 – 980-90 = 437,83045 C 46 D 890 + 95 + 10 + 20 = 1,01547 D 5,750 + (86,500*3/5) – 4,300 = 53,35048 A 49 A (300@230) + (500@220) + (50@190) = 188,50050 A



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PreparingFinancialStatements(International Stream)

QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A ALL 25 questions are compulsory and MUST beanswered

Section B ALL FIVE questions are compulsory and MUST beanswered

PART 1

THURSDAY 6 DECEMBER 2001



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Section A � ALL TWENTY-FIVE questions are compulsory and MUST be attemptedPlease use the answer sheet provided to indicate your choice in each questionEach question within this section is worth 2 marks

1 The trial balance totals of Gamma at 30 September 2001 are:

Debit $992,640Credit $1,026,480

Which TWO of the following possible errors could, when corrected, cause the trial balance to agree?

1. An item in the cash book $6,160 for payment of rent has not been entered in the rent payable account.2. The balance on the motor expenses account $27,680 has incorrectly been listed in the trial balance as a credit.3. $6,160 proceeds of sale of a motor vehicle has been posted to the debit of motor vehicles asset account.4. The balance of $21,520 on the rent receivable account has been omitted from the trial balance.

A 1 and 2B 2 and 3C 2 and 4D 3 and 4

2 The trial balance of Delta, a limited liability company, did not agree and a suspense account was opened for thedifference. The following errors were subsequently found:

1. A cash refund due to customer A was correctly treated in the cash book and then credited to the accounts receivableledger account of customer B.

2. The sale of goods to a director for $300 was recorded by debiting sales revenue account and crediting the director�scurrent account.

3. The total of the discount received column in the cash book had been credited in error to the discount allowedaccount.

4. Some of the cash received from customers had been used to pay sundry expenses before banking the money.5. $5,800 paid for plant repairs was correctly treated in the cash book and then credited to plant and equipment asset

account.

Which of the above errors would require an entry to the suspense account as part of the process of correcting them?

A 1, 3 and 5B 1, 2 and 5C 1 and 5D 3 and 4

3 Beta purchased some plant and equipment on 1 July 2001 for $40,000. The estimated scrap value of the plant in tenyears� time is estimated to be $4,000. Beta�s policy is to charge depreciation on the straight line basis, with aproportionate charge in the period of acquisition.

What should the depreciation charge for the plant be in Beta�s accounting period of twelve months to30 September 2001?

A $720B $600C $900D $675



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4 Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premisesquarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year until30 June 2000. It was increased from that date to $96,000 per year.

What rent expense and end of year prepayment should be included in the financial statements for the year ended 30April 2001?

Expense PrepaymentA $93,000 $8,000B $93,000 $16,000C $94,000 $8,000D $94,000 $16,000

5 At 30 September 2000, the following balances existed in the records of Lambda:

$Plant and equipment: Cost 860,000

Accumulated depreciation 397,000

During the year ended 30 September 2001, plant with a written down value of $37,000 was sold for $49,000. Theplant had originally cost $80,000. Plant purchased during the year cost $180,000. It is the company�s policy to chargea full year�s depreciation in the year of acquisition of an asset and none in the year of sale, using a rate of 10% on thestraight line basis.

What net amount should appear in Lambda�s balance sheet at 30 September 2001 for plant and equipment?

A $563,000B $467,000C $510,000D $606,000

6 At 30 September 2000, Z Ltd had a provision for doubtful debts of $37,000. During the year ended 30 September2001 the company wrote off debts totalling $18,000, and at the end of the year it is decided that the provision fordoubtful debts should be $20,000.

What should be included in the income statement for bad and doubtful debts?

A $35,000 debitB $1,000 debitC $38,000 debitD $1,000 credit

7 Which of the following best explains the imprest system of petty cash control?

A Weekly expenditure cannot exceed a set amount.B The exact amount of expenditure is reimbursed at intervals to maintain a fixed float.C All expenditure out of the petty cash must be properly authorised.D Regular equal amounts of cash are transferred into petty cash at intervals.

1D

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8 In reconciling a business cash book with the bank statement, which of the following items could require asubsequent entry in the cash book?

1. Cheques presented after date.2. A cheque from a customer which was dishonoured.3. An error by the bank.4. Bank charges.5. Deposits credited after date.6. Standing order entered in bank statement.

A 2, 3, 4 and 6B 1, 2, 5 and 6C 2, 4 and 6D 1, 3 and 5

9 The following bank reconciliation statement has been prepared for Omega by a junior clerk:

$Overdraft per bank statement 68,100Add: Deposits not credited 141,200

209,300Less outstanding cheques 41,800

Overdraft per cash book 167,500

Which of the following should be the correct balance per the cash book?

A $167,500 overdrawn as stated.B $31,300 overdrawnC $31,300 cash at bankD $114,900 overdrawn

10 X and Y are in partnership, sharing profits equally and preparing their accounts to 31 December each year. On 1 July2000, Z joined the partnership, and from that date profits are shared X 40%, Y 40% and Z 20%.

In the year ended 31 December 2000, profits were:$

6 months to 31 June 2000 200,0006 months to 31 December 2000 300,000

It was agreed that X and Y only should bear equally the expense for a bad debt of $40,000 written off in the six monthsto 31 December 2000 in arriving at the $300,000 profit.

Which of the following correctly states X�s profit share for the year?

Profit shareX$

A 216,000B 200,000C 220,000D 224,000

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11 S and T are in partnership and prepare their accounts to 31 December each year. On 1 July 2000, U joined thepartnership.

Profit sharing arrangements are:

6 months to 30 June 2000 6 months to 31December 2000Salary S $15,000 $25,000

Share of balance of profit S 60% 40%T 40% 40%U 20%

The partnership profit for the year ended 31 December 2000 was $350,000 accruing evenly over the year.

What are the partners� total profit shares for the year ended 31 December 2000?

S T U$000 $000 $000

A 196 124 30B 217 108 25C 155 130 65D 175 145 35

12 Which of the following four statements about accounting concepts or principles are correct?

1. The money measurement concept is that items in accounts are initially measured at their historical cost.2. In order to achieve comparability it may sometimes be necessary to override the prudence concept.3. To facilitate comparisons between different entities it is helpful if accounting policies and changes in them are

disclosed.4. To comply with the law, the legal form of a transaction must always be reflected in financial statements.

A 1 and 3B 1 and 4C 3 onlyD 2 and 3

13 The closing inventory of Epsilon amounted to $284,000 at 30 September 2001, the balance sheet date. This totalincludes two inventory lines about which the inventory taker is uncertain.

1. 500 items which had cost $15 each and which were included at $7,500. These items were found to have beendefective at the balance sheet date. Remedial work after the balance sheet date cost $1,800 and they were thensold for $20 each. Selling expenses were $400.

2. 100 items which had cost $10 each. After the balance sheet date they were sold for $8 each, with sellingexpenses of $150.

What figure should appear in Epsilon�s balance sheet for inventory?

A $283,650B $283,800C $292,150D $283,950



6

14 Which of these statements about research and development expenditure are correct?

1. If certain conditions are satisfied, research and development expenditure must be capitalised.2. One of the conditions to be satisfied if development expenditure is to be capitalised is that the technical feasibility

of the project is reasonably assured.3. If capitalised, development expenditure must be amortised over a period not exceeding five years.4. The amount of capitalised development expenditure for each project should be reviewed each year. If

circumstances no longer justify the capitalisation, the balance should be written off over a period not exceeding fiveyears.

5. Development expenditure may only be capitalised if it can be shown that adequate resources will be available tofinance the completion of the project.

A 2 and 5B 3, 4 and 5C 2, 3 and 5D 1, 2 and 3

15 On 30 September 2001 part of the inventory of a company was completely destroyed by fire.

The following information is available:

� Inventory at 1 September 2001 at cost $49,800� Purchases for September 2001 $88,600� Sales for September 2001 $130,000� Inventory at 30 September 2001 � undamaged items $32,000� Standard gross profit percentage on sales 30%

Based on this information, what is the cost of the inventory destroyed?

A $17,800B $47,400C $15,400D $6,400

16 At 1 July 2000 the share capital and share premium account of a company were as follows:

$Share capital � 300,000 ordinary shares of 25c each 75,000Share premium account 200,000

During the year ended 30 June 2001 the following events took place:

1. On 1 January 2001 the company made a rights issue of one share for every five held, at $1·20 per share.2. On 1 April 2001 the company made a bonus (capitalisation) issue of one share for every three in issue at that time,

using the share premium account to do so.

What are the correct balances on the company�s share capital and share premium accounts at 30 June 2001?

Share capital Share premium accountA $460,000 $287,000B $480,000 $137,000C $120,000 $137,000D $120,000 $227,000



7 [P.T.O.

17 In relation to cash flow statements, which, if any, of the following are correct?

1. The direct method of calculating net cash from operating activities leads to a different figure from that produced bythe indirect method, but this is balanced elsewhere in the cash flow statement.

2. A company making high profits must necessarily have a net cash inflow from operating activities.3. Profits and losses on disposals of non-current assets appear as items under cash flows from investing activities in

the cash flow statement or a note to it.

A Item 1 onlyB Item 2 onlyC Item 3 onlyD None of the items.

18 A cash flow statement prepared in accordance with IAS7 Cash Flow Statements opens with the calculation of cash flowsfrom operating activities from the net profit before taxation.

Which of the following lists of items consists only of items that would be ADDED to net profit before taxation in thatcalculation?

A Decrease in inventories, depreciation, profit on sale of non-current assets.B Increase in trade payables, decrease in trade receivables, profit on sale of non-current assets.C Loss on sale of non-current assets, depreciation, increase in trade receivables.D Decrease in trade receivables, increase in trade payables, loss on sale of non-current assets.

19 IAS 10 Events after the Balance Sheet Date defines the extent to which events after the balance sheet date should bereflected in financial statements. Five such events are listed below.

1 Merger with another company.2 Insolvency of a customer.3 Destruction of a major non-current asset.4 Sale of inventory held at the balance sheet date for less than cost.5 Discovery of fraud.

Which three of the listed items are, according to IAS 10, normally to be classified as adjusting?

A 1, 2 and 3B 2, 4 and 5C 1, 2 and 5D 1, 4 and 5

20 In preparing the financial statements of a company, the following items have to be considered:

1. The company offers a one year warranty to purchasers, undertaking to replace an item if a defect occurs. Pastexperience suggests that claims under the warranty will probably arise.

2. The company has an action pending against it for damages for wrongful dismissal of a director. The company�s legaladvisor considers it improbable that the action will be successful.

3. The company has guaranteed the overdraft of a subsidiary. The subsidiary is trading profitably and the probabilityof a liability arising is remote.

How should these items be reflected in the financial statements, if at all?

A All three should be disclosed by note.B A provision should be created for the best estimate of the liability in 1, and items 2 and 3 should be disclosed

by note.C A provision should be created for the best estimate of the liability in 1, item 2 should be disclosed by note and

item 3 not disclosed at all.D A provision should be created for the best estimate of the liabilities in 1 and 2 and item 3 should be disclosed

by note.



8

21 The analysis of a company�s financial statements revealed that the number of days� sales in inventory was 80 days. Theaverage for companies in the same industry was 35 days.

Which one of the following is LEAST likely to account for the high level of 80 days?

A The company�s trade is seasonalB Poor inventory controlC A large purchase was made just before the balance sheet dateD An increase in the company�s sales in the three months before the balance sheet date.

The following data relates to Questions 22 and 23.

Extracts from a company�s financial statements for the year ended 30 September 2001 are given below.

Balance sheet Income statement

$000 $000Issued share capital 500 Operating profit 300Reserves 200 Finance cost 100

Accumulated profit 800 Profit before tax 200Non-current liabilities:10% loan notes 1,000

22 What is the return on shareholders� equity as a percentage, based on these figures?

A 40%B 20%C 13·3%D 12%

23 What is the return on total capital employed as a percentage, based on these figures?

A 12%B 8%C 13·3%D 20%

24 Which of the following correctly states items which should be disclosed in the statement of changes in equityrequired by IAS 1 Presentation of Financial Statements?

A Net profit for the period, surplus on revaluation of non-current assets, dividends paid, proceeds of issue ofshares.

B Proceeds of issue of shares, loan notes issued or repaid, retained profit for the period, surplus on revaluation ofnon-current assets.

C Profit on ordinary activities, income tax expense, extraordinary items.D Accumulated profits, reserves, issued share capital.

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25 Which of the following statements about financial statements are in accordance with IAS 1?

1. Extraordinary items must be disclosed on the face of the income statement as additions to or deductions from profitbefore tax.

2. The authorised share capital of the company must be disclosed by note or on the face of the balance sheet.3. The total of staff costs for the period must be disclosed by note or on the face of the income statement.4. The accounting policies adopted by the company must be disclosed but only if they do not comply with accounting

standards.5. Proposed ordinary dividends should not be recognised as liabilities unless they have been proposed or declared

before the balance sheet date.

A 1, 2, 3 and 4B 1, 2, 3 and 5C 2, 3 and 5D 1, 4 and 5

(50 marks)



10

Section B � ALL FIVE questions are compulsory and MUST be attempted

1 The following is an extract from the trial balance of Tafford, a limited liability company, at 30 September 2001:

$000 $000Warehouse machinery:

Cost: 3,000Accumulated depreciation at 1 October 2000 1,700

Motor vehicles:Cost 1,180Accumulated depreciation at 1 October 2000 500

Inventory at 1 October 2000 13,000Sales revenue 41,600Purchases 22,600Distribution costs 6,000Administrative expenses 5,000Allowance for doubtful debts, 1 October 2000 1,300Bad debts written off 60010% loan notes (issued 1999) 10,000Interest paid on loan notes 500Suspense account 100

Notes:(1) Closing inventory at 30 September 2001 was $15,600,000.

(2) Bad debts written off and the movement on the allowance for doubtful debts are to be included in administrativecosts. The allowance for doubtful debts is to be reduced to $500,000.

(3) The balance on the suspense account is the proceeds of sale of motor vehicles, entered to the suspense accountpending correct treatment in the records.

The vehicles sold had cost $180,000 and had a written down value at 1 October 2000 of $60,000. It is thecompany�s policy to provide for a full year�s depreciation in the year of purchase of vehicles and none in the year ofsale. The vehicles sold were all used in the distribution of the company�s sales.

(4) Depreciation is to be provided for on the straight line basis as follows:Warehouse machinery 10 per centMotor vehicles 25 per cent

Depreciation of motor vehicles is to be divided equally between distribution costs and administrative expenses, anddepreciation of warehouse machinery charged wholly to distribution costs.

(5) Prepayments and accruals at 30 September 2001 were:

Prepayments Accruals$000 $000

Distribution costs 200 100Administrative expenses 100 60

(6) The estimated income tax expense for the year is $3,000,000.

Required:

Prepare Tafford�s income statement, complying as far as possible with the requirements of IAS 1 Presentation ofFinancial Statements.

(10 marks)



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2 You are preparing an income statement and balance sheet for Lamorgan, a sole trader who does not keep adequateaccounting records.

The following information is available to you to compute the figures for inclusion in the accounts for sales revenue,purchases and closing inventory for the year ended 30 June 2001:

(a) Sales revenue$

Cash received from credit customers 218,500Cash sales receipts paid into bank 114,700Expenses paid out of cash sales before banking 9,600Trade receivables: 30 June 2000 41,600

30 June 2001 44,200Refunds to customers 800Discounts allowed 2,600Bad debts written off 1,500Amount due from credit customer deducted by Lamorgan in payingsupplier�s account 700

Required:

Compute the sales revenue figure from this information. (5 marks)

(b) Purchases$

Payments to suppliers 114,400Trade payables: 30 June 2000 22,900

30 June 2001 24,800Cost of items taken from inventory by Lamorgan for personal use 400Amount due from credit customer deducted by Lamorgan in settlingsupplier�s account 700

Required:

Compute the purchases figure from this information. (3 marks)

(c) Closing inventory$

Cost of inventory obtained from physical count on 30 June 2001 77,700This figure does NOT include any amounts for the two items below.

(i) An inventory line which had cost $1,800 was found to be damaged. Remedial work costing $300 is neededto enable the items to be sold for $1,700. Selling expenses of $100 would also be incurred in selling theseitems.

(ii) Goods sent to a customer on approval in May 2001 were not included in the inventory. The sale price of thegoods was $4,000 and the cost $3,000. The customer notified his acceptance of the goods in July 2001.Note: No adjustment to the sales figure in (a) above is required for this item.

Required:

Compute the adjusted closing inventory figure from this information. (2 marks)

(10 marks)



12

3 On 1 April 1998, Evon Limited acquired 75% of the ordinary share capital of Orset Limited for $180,000. At that datethe balance sheet of Orset Limited was as follows:

$Sundry net assets 160,000

Share capital100,000 Ordinary shares of $1 each 100,000

Accumulated profit 60,000

160,000

At 31 March 2001, the balance sheets of the two companies were as follows:

Evon Ltd Orset Ltd$ $

Sundry net assets 560,000 230,000Investment in Orset 180,000

740,000 230,000

Share capitalShares of $1 each 500,000 100,000

Accumulated profit 240,000 130,000

740,000 230,000

Goodwill arising on consolidation is to be amortised over five years.

Required:

Prepare the consolidated balance sheet of Evon Limited and its subsidiary as at 31 March 2001.

(10 marks)

4 The IASC�s Framework for the Preparation and Presentation of Financial Statements, and IAS 1 Presentation of FinancialStatements, together present concepts important in the preparation of financial statements, including materiality,prudence and comparability among others.

Required:

(a) Explain the meaning of the following terms, giving one example of the application of each of them:

(i) Materiality;(ii) Prudence. (6 marks)

(b) Explain how international accounting standards and the Framework promote comparability. (4 marks)(10 marks)



13

5 The term �overtrading� is used to describe the condition of an enterprise which is increasing its sales revenue withinsufficient working capital to support the increase.

Required:

(a) State FOUR movements in items in financial statements or in accounting ratios that could indicate overtrading.(4 marks)

(b) State THREE actions a company suffering from overtrading could take to rectify its position, and explain thelikely effect of the actions you propose. (6 marks)

(10 marks)

End of Question Paper



Answers



17

Part 1 Examination � Paper 1.1(INT)Preparing Financial Statements (International Stream) AnswersSection A

1 C Effect of errors: 2 increased debit 55,3604 increased credit 21,520

33,840

2 C Items 2, 3 and 4 do not affect balancing, items 1 and 5 do.

3 C 3/12 x 10% x $36,000 = $900

4 D Charge 2/12 x $84,000 + 10/12 x $96,000 = $94,000Prepayment 2/12 x $96,000 = $16,000

5 C Cost: $860,000 � $80,000 + $180,000 = $960,000Depreciation: $397,000 � $43,000 + £96,000 = $450,000

$510,000

6 B $37,000 = $18,000 + $20,000 = $1,000 debit

7 B

8 C Items 1, 3 and 5 would appear in the bank reconciliation statement,items 2, 4 and 6 in the cash book.

9 C $68,100 + $41,800 � $141,200 = $31,300 cash at bank

10 A X$000

6 months to 30 June 2000 1006 months to 31 December 2000 136

236Less: for bad debt 20

216

11 A S T U$000 $000 $000

6 months to 30 June 2000:Salaries 15Profit share 60:40 96 64

6 months to 31 December 2000Salaries 25Profit share 40:40:20 60 60 30

196 124 30

12 C

13 A $284,000

Item 1 � No changeItem 2 (350) Reduce to net realisable value

283,650

14 A

15 C $Theoretical gross profit 30% x $130,000 39,000Actual gross profit$130,000 � $49,800 � $88,600 + $32,000 23,600

Shortfall � missing inventory 15,400



18

16 D Share capital $75,000 + $15,000 + $30,000 = $120,000Share premium $200,000 + $57,000 � $30,000 = $227,000

17 D 1, 2 and 3 are all incorrect.

18 D

19 B

20 C

21 D

22 C 200/1,500 is correct

23 A 300/2,500 is correct

24 A

25 C



19

Section B

1Tafford Limited

Income statement for the year ended 30 September 2001$000

Revenue 41,600Cost of sales (20,000)

Gross profit 21,600Distribution costs (6,285)Administrative expenses (4,885)

Profit from operations 10,430Finance cost 1,000

Profit before tax 9,430Income tax expense 3,000

Net profit for the period 6,430

Working 1Cost of sales Distribution Administrative

costs expenses$000 $000 $000

Opening inventory 13,000Purchases 22,600Distribution costs 6,000Administrative expenses 5,000Bad debts 600Reduction in allowance for doubtful debts (800)Depreciation: warehouse machinery 300

motor vehicles 125 125Profit on sale of vehicles (40)Prepayments (200) (100)Accruals 100 60Closing inventory (15,600)

20,000 6,285 4,885

2 (a) Sales revenueSales revenue total account

$ $Opening receivables 41,600 Cash received from customers 218,500Refunds to customers 800 Discounts allowed 2,600

Bad debts written off 1,500Sales 225,100 Contra purchases 700

Closing receivables 44,200

267,500 267,500

$Credit sales as above 225,100Cash sales $114,700 + $9,600 124,300

349,400

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(b) PurchasesPurchases total account

$ $Payments to suppliers 114,400 Opening payables 22,900Contra sales 700 Lamorgan � goods taken 400Closing payables 24,800 Purchases 116,600

139,900 139,900

(c) Inventory$

Per inventory count 77,700Damaged item: $1,700 � $300 � $100 1,300Goods on approval 3,000

82,000

3 Cost of control

$ $Shares in Orset 180,000 75% share capital 75,000

75% pre-acquisition profits 45,000Accumulated profitGoodwill written off3/5 x $60,000 36,000Balance to CBS 24,000

180,000 180,000

Minority Interest

$ $Balance to CBS 57,500 25% share capital 25,000

25% accumulated profit 32,500

57,500 57,500

Accumulated profit

$ $Minority interest 25% x 130,000 32,500 Evon 240,000Cost of control: 75% x 60,000 45,000 Orset 130,000Cost of control: Goodwill written off 36,000Balance to CBS 256,500

370,000 370,000

Evon Limited GroupBalance sheet as at 31 March 2001

$ $Goodwill 60,000

Less: Amortisation 36,000 24,000Sundry net assets 790,000

814,000Share capital

500,000 shares of $1 each 500,000Accumulated profit 256,500

756,500Minority interest 57,500

814,000

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4 (a)(i) Materiality

Information is material to the financial statements if its misstatement or omission might reasonably be expected toinfluence the economic decisions of users taken on the basis of financial statements.

Example: the amount of an inventory write-down through obsolescence will only be disclosed in financial statements ifmaterial.

(ii) PrudencePrudence in accounting means that a degree of caution is necessary when making estimates required under conditions ofuncertainty, so that assets or income are not overstated and liabilities or expenses are not understated.

Example: In deciding whether to make an allowance for a debt, an allowance should be made whenever there is doubt asto the eventual receipt of the cash.

(b) Comparability is promoted by two main means:

(i) The requirement to treat similar items in the same way within each accounting period and from one period to the next,subject to the need to change treatments if, for example, a new accounting standard requires a change. There is also arequirement when there is a change to disclose full details of its effect.

(ii) The requirement to disclose accounting policies and changes in them. This makes comparisons with other entities easier.

5 (a) Four from:

(i) Longer payment period for suppliers(ii) Increasing overdraft(iii) Increasing inventories(iv) Deterioration in quick ratio (acid test)(v) Rapid increase in sales revenues and trade receivables.

(b) Three from:

(i) Raise additional long-term capital (equity or loan) � this would introduce more cash into the current assets withoutincreasing the current liabilities, thus improving the working capital position.

(ii) Negotiate an increased overdraft facility.

(iii) Attempt to clear inventories by sales at reduced prices � this would generate more cash to pay suppliers and speed up theworking capital cycle.

(iv) Offer cash discounts to customers to encourage prompt payment � this too would generate more cash to pay suppliers andspeed up the working capital cycle.

(v) Negotiate longer payment periods from suppliers � this would ease the pressure on the enterprise and allow it to paysuppliers from the proceeds of profitable sales in due course.

(vi) Sell non-essential assets � this would realise cash to increase working capital.

Other items marked on their merits.

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23

Part 1 Examination � Paper 1.1(INT)Preparing Financial Statements (International Stream) Marking SchemeSection B

Available Maximum1 Cost of sales 1½

Distribution costs 3Administrative expenses 3Interest 1Income tax expense 1Layout 2

11½ 10

2 (a) ½ mark per item 9 x ½ + ½ layout 5(b) ½ mark per item 5 x ½ + ½ layout 3(c) (i) 2

(ii) ½ 2½

10½ 10

3 Goodwill � calculation 3� amortisation 1 4 3

Minority interest � calculation 3 2Accumulated profit:

Initial profit figures 1Minority interest 1Cost of control 1Goodwill written off 1 4 3

Consolidated balance sheet � format 2 2

13 10

4 (a) (i) Explanation 2Example 1

3(ii) Explanation 2

Example 1

3 6 6

(b) Consistency of treatment of items 2Disclosure of policies 2

4 4

10 10

5 (a) 1 mark per item 4 x 1 4

(b) 1 mark per item 3 x 1 31 mark per explanation of effect 3 6

10 10

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PART 1

THURSDAY 13 JUNE 2002

QUESTION PAPER





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Section B – ALL FIVE questions are compulsory and MUST be attempted

1 The following information is available about the transactions of Marmot, a limited liability company, for the year ended31 December 2001.

$000Depreciation 880Cash paid for expenses 2,270Increase in inventories 370Cash paid to employees 2,820Decrease in receivables 280Cash paid to suppliers 4,940Decrease in payables 390Cash received from customers 12,800Net profit before taxation* 2,370

*Marmot has no interest payable or investment income.

Required:

Compute Marmot’s net cash flow from operating activities for the company’s cash flow statement for the yearended 31 December 2001 using:

(a) the direct method;

(b) the indirect method.

(10 marks)

2 The following balances appeared in the balance sheet of Addax, a limited liability company, at 31 March 2001.

$Plant and equipment – cost 840,000Accumulated depreciation 370,000

In the year ended 31 March 2002 the following transactions took place:

(1) Plant which had cost $100,000 with a written down value of $40,000 was sold for $45,000 on 10 December.

(2) New plant was purchased for $180,000 on 1 October 2001.

It is the policy of the company to charge depreciation at 10% per year on the straight line basis with a proportionatecharge in the year of acquisition and no charge in the year of sale. None of the plant was over ten years old at 31 March 2001.

Required:

(a) Prepare ledger accounts recording the above transactions. A cash account is NOT required. (5 marks)

(b) List the items which should appear in Addax’s cash flow statement for the year ended 31 March 2002 basedon these transactions and using the indirect method, including the headings under which they should appear.

Note. The headings from IAS 7 are to be used. (4 marks)

(9 marks)



3 [P.T.O.

3 The following information is available about the balances and transactions of Alpaca, a limited liability company.

Balances at 30 April 2001 $Non-current assets – cost 1,000,000Non-current assets – accumulated depreciation 230,000Inventories 410,000Receivables 380,000Cash at bank 87,000Payables 219,000Issued share capital – ordinary shares of $1 each 400,000Accumulated profits 818,00010% Loan notes 200,000Loan note interest owing 10,000

Transactions during year ended 30 April 2002: $Sales revenue 4,006,000Purchases 2,120,000Expenses 1,640,000Interest on loan notes paid during year 20,000Issue of 100,000 $1 ordinary shares at a premium of 50c per share

There were no purchases or sales of non-current assets during the year.

Adjustments at 30 April 2002(1) Depreciation of $100,000 is to be allowed for.(2) Receivables totalling $20,000 are to be written off.

Balances at 30 April 2002$

(1) Inventory 450,000(2) Receivables (before writing off debts shown above) 690,000(3) Cash at bank 114,000(4) Trade payables 180,000

Required:

Prepare the balance sheet of Alpaca as at 30 April 2002 using the format in IAS 1 Presentation of FinancialStatements as far as the information available allows.

Note: No formal income statement is required, but your answer should include a working showing yourcomputation of the accumulated profit figure in the balance sheet. This working carries 4 of the 11 marksavailable in all.

(11 marks)



4

4 Financial statements must be prepared according to established accounting concepts, many of which may be foundin the IASB’s Framework for the Preparation and Presentation of Financial Statements.

Define and explain the relevance of the following accounting concepts:

(a) Going concern (3 marks)

(b) Accruals (2 marks)

(c) Substance over form (3 marks)

(d) Historical cost (2 marks)

(10 marks)

5 The summarised financial statements of Weden, a limited liability company engaged in manufacturing, are shownbelow:

Income statementYear ended

31 March 2001 31 March 2002$000 $000 $000 $000

Sales revenue 3,200 4,000Cost of sales

Opening inventory 800 300Purchases 1,800 3,200

2,600 3,500less: Closing inventory 300 500

(2,300) (3,000)

Gross profit 900 1,000Expenses (400) (450)Interest paid (100) (200)

Net profit 400 350

Balance sheets31 March 2001 31 March 2002

$000 $000 $000 $000Non-current assets 1,970 4,000Current assets

Inventory 300 500Receivables – trade 600 800Prepayments 60 70Cash 50 10

1,010 1,380

2,980 5,380

Issued share capital 600 600Share premium account 200 200Accumulated profits 750 1,100

1,550 1,900Non-current liabilities

10% loan notes 1,000 2,000Current liabilities

Payables – trade 380 1,400Accruals 50 430 80 1,480

2,980 5,380



Required:

(a) Compute the following five ratios for each of the two years:

(i) return on capital employed

(ii) return on owners’ equity

(iii) current ratio

(iv) inventory turnover (use closing figures)

(v) number of days’ purchases in trade payables (5 marks)

(b) Comment briefly on the changes in the company’s results and position between the two years, mentioningpossible causes for the changes. (5 marks)

(10 marks)


5



Answers



Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) Answers

Section B

1 (a) Net cash flow from operating activities – direct method$000 $000

Cash receipts from customers 12,800Cash paid to suppliers 4,940Cash paid to employees 2,820Cash paid for expenses 2,270

10,030

Net cash flow from operating activities 2,770

(b) Net cash flow from operating activities – indirect methodNet profit before taxation 2,370Adjustment for: Depreciation 880

Operating profit before working capital changes 3,250Increase in inventories (370)Decrease in receivables 280Decrease in payables (390)

Net cash from operating activities 2,770

9



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2 (a) Plant and equipment – cost2001 $ 2001 $1 April Balance 840,000 10 Dec Transfer disposal 100,000

20021 Oct Cash 180,000 31 Mar Balance 920,000

1,020,000 1,020,000

Plant and equipment – depreciation

2001 $ 2001 $10 Dec Transfer – disposal 60,000 1 April Balance 370,0002002 200231 Mar Balance 393,000 31 March Income statement 83,000

(74,000 + 9,000)

453,000 453,000

Plant and equipment – disposal

2001 $ 2001 $10 Dec Transfer – cost 100,000 10 Dec Transfer

– depreciation 60,0002002 Cash 45,00031 Mar Income statement 5,000

105,000 105,000

(b) AddaxCash flow statement for the year ended 31 March 2002 (extracts)

$Cash flow from operating activitiesNet profit before taxationAdjustments for:Depreciation 83,000Profit on sale of plant (5,000)

Cash flows from investing activitiesPurchase of plant (180,000)Proceeds of sale of plant 45,000

3 AlpacaBalance Sheet as at 30 April 2002

$ $ASSETSNon-current assets: cost 1,000,000accumulated depreciation 330,000 670,000

Current assets:Stocks 450,000Receivables 670,000Cash at bank 114,000

1,234,000

1,904,000

EQUITY AND LIABILITIESCapital and reserves

Issued capital 500,000Share premium 50,000Accumulated profits (working) 964,000

1,514,000Non-current liabilities

10% Loan notes 200,000

Current liabilitiesPayables 180,000Interest accrued 10,000 190,000

1,904,000



11

Working for accumulated profits$ $

Balance at 30 April 2001 818,000Sales revenue 4,006,000Purchases 2,120,000Expenses 1,640,000Opening inventories 410,000Closing inventories 450,000Interest payable 20,000Depreciation 100,000Bad debts written off 20,000

4,310,000 5,274,0004,310,000

Balance at 30 April 2002 964,000

4 (a) Going concernThe going concern assumption means that financial statements are prepared on the basis that the business will continue forthe foreseeable future.

The application of the concept is relevant to many items in the financial statements.

(i) Inventory is valued on the basis that it will be disposed of in sales in the normal course of business rather than in aforced bulk sale.

(ii) Non-current assets are valued at cost less depreciation rather than their immediate sale value.

(iii) Non-current liabilities are distinguished from current liabilities in assessing a company’s liquidity position.

(b) AccrualsThe accruals concept is that income and expenses are recognised in the period to which they relate and not in the period inwhich they are paid.

The relevance of the concept is that profit or loss figures would be meaningless if the inclusion of items of income or expensedepended on whether they had been received or paid.

(c) Substance over formSubstance over form means that if the real nature and effect of a transaction differ from its legal form, the real nature andeffect should be recognised instead of the legal form, unless legislation prohibits this.

The relevance of the concept is that its application improves the usefulness of the financial statements by preventing certaincreative accounting practices.

(d) Historical costThe historical cost convention is that assets are recorded at their initial cost and are not subsequently revalued upwards, andliabilities valued at the amount initially received in exchange for the obligation.

The relevance of the convention is that figures remain objectively based on verifiable figures, but in times of high inflationhistorical cost can become a dubious convention to follow.



12

5 (a)Year ended

31 March 2001 31 March 2002(i) Return on capital employed

500/2,550 19·6%550/3,900 14·1%

(ii) Return on owners’ equity400/1,550 25·8%350/1,900 18·4%

(iii) Current ratio1,010/430 2·35:11,380/1,480 0·93:1

(iv) Inventory turnover2,300/300 7·67 times3,000/500 6·0 times

(full credit given for correct answer in days)

(v) Payables’ days1,380/1,800 x 365 77 days1,400/3,200 x 365 160 days

(b) CommentAll ratios show a marked deterioration in 2002 compared with 2001.

Return on capital employed (ROCE) and return on owners’ equity (ROOE) are at reasonable levels in 2002, but areconsiderably below the levels in 2001. A possible cause is the decline in the gross profit percentage caused by reducing pricesto increase sales.

ROOE shows a return in excess of ROCE in both years, and well in excess of the interest payable on the loan, showing thatthe shareholders are continuing to benefit from the gearing effect of the loan.

The current ratio is seriously reduced to a potentially dangerous level. The consequence is the slowness in paying suppliers,which must be eroding suppliers’ goodwill, evidenced by the increase in creditors’ days from 77 days to 160.

In effect, suppliers’ money is being used to finance the very heavy purchasing of non-current assets.

The inventory turnover ratio has declined, indicating a possible slowing of activity. The decline could be caused simply by alarge purchase of goods just before the balance sheet date.



Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) Marking scheme

Available and Maximum1 (a) 1 mark per item 4

(b) 1 mark per item 5Agreement of totals 1

10

Available Maximum2 (a) 1/2 mark per entry 12 x 1/2 6 5

(b) 1 mark per item 4 x 1 4 4

10 9

3 Accumulated depreciation 1 1Receivables 1 1Issued capital 1 1Share premium 1 1Interest accrued 1 1

5 5

Layout and style 2 2

7 7

Accumulated profits working1/2 mark per item 41/2 4

111/2 11

4 1(a) Definition 2Relevance 1 3

1(b) Definition 1Relevance 1 2

1(c) Definition 2Relevance 1 3

1(d) Historical Definition 1Relevance 1 2

10

5 (a) 1 mark per ratio 5 x 1 5

(b) 1 mark per comment 5 x 1 5

10

13




PART 1


QUESTION PAPER





Pape

r 1.1

(IN

T)



Section A – ALL 25 questions are compulsory and MUST be attemptedPlease use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.Each question within this section is worth 2 marks.

1 The debit side of a trial balance totals $800 more than the credit side.

Which one of the following errors would fully account for the difference?

A $400 paid for plant maintenance has been correctly entered in the cash book and credited to the plant assetaccount.

B Discount received $400 has been debited to discount allowed account.

C A receipt of $800 for commission receivable has been omitted from the records.

D The petty cash balance of $800 has been omitted from the trial balance.

2 A company receives rent from a large number of properties. The total received in the year ended 31 October 2002was $481,200.

The following were the amounts of rent in advance and in arrears at 31 October 2001 and 2002:

31 October 2001 31 October 2002$ $

Rent received in advance 28,700 31,200Rent in arrears (all subsequently received) 21,200 18,400

What amount of rental income should appear in the company’s income statement for the year ended 31 October2002?

A $486,500

B $460,900

C $501,500

D $475,900

2



3 A company receives rent for subletting part of its office block.

Rent, receivable quarterly in advance, is received as follows:

Date of receipt Period covered $

1 October 2001 3 months to 31 December 2001 7,500-30 December 2001 31 March 2002 7,500 4 April 2002 30 June 2002 9,000 1 July 2002 30 September 2002 9,000 1 October 2002 31 December 2002 9,000

What figures, based on these receipts, should appear in the company’s financial statements for the year ended30 November 2002?

Income statement Balance sheet

A $34,000 Debit Prepayment (Dr) $3,000

B $34,500 Credit Accrual (Cr) $6,000

C $34,000 Credit Accrual (Cr) $3,000

D $34,000 Credit Prepayment (Dr) $3,000

4 A company’s plant and machinery ledger account for the year ended 30 September 2002 was as follows:

Plant and machinery – cost

2001 $ 2002 $1 October Balance 381,200 1 June Disposal account – cost of asset sold 36,0001 December Cash – addition 18,000 30 September Balance 363,200

399,200 399,200

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionatedepreciation in years of purchase and sale.

What is the depreciation charge for the year ended 30 September 2002?

A $74,440

B $84,040

C $72,640

D $76,840

3 [P.T.O.



5 The following bank reconciliation statement has been prepared by a trainee accountant:

Bank reconciliation 30 September 2002$

Balance per bank statement (overdrawn) 36,840add: Lodgements credited after date 51,240

88,080less: Outstanding cheques 43,620

Balance per cash book (credit) 44,460

Assuming the amounts stated for items other than the cash book balance are correct, what should the cash bookbalance be?

A $44,460 credit as stated

B $60,020 credit

C $29,220 debit

D $29,220 credit

6 Listed below are some possible causes of difference between the cash book balance and the bank statement balancewhen preparing a bank reconciliation:

(1) Cheque paid in, subsequently dishonoured.

(2) Error by bank

(3) Bank charges

(4) Lodgements credited after date

(5) Outstanding cheques not yet presented.

Which of these items require an entry in the cash book?

A (1) and (3) only

B (1), (2), (3), (4) and (5)

C (2), (4), and (5) only

D (1), (2) and (3) only

4



7 Which of the following items could appear on the credit side of a receivables ledger control account?

(1) Cash received from customers

(2) Bad debts written off

(3) Increase in allowance for doubtful debts

(4) Discounts allowed

(5) Sales

(6) Credits for goods returned by customers

(7) Cash refunds to customers

A (1), (2), (4) and (6)

B (1), (2), (4) and (7)

C (3), (4), (5) and (6)

D (5) and (7)

8 A business has compiled the following information for the year ended 31 October 2002:

$Opening inventory 386,200Purchases 989,000Closing inventory 422,700

The gross profit as a percentage of sales is always 40%

Based on these figures, what is the sales revenue for the year?

A $1,333,500

B $1,587,500

C $2,381,250

D The sales revenue figure cannot be calculated from this information

5 [P.T.O.



9 A fire on 30 September 2002 destroyed some of a company’s inventory and its inventory records.

The following information is available:

$Inventory 1 September 2002 318,000Sales for September 2002 612,000Purchases for September 2002 412,000Inventory in good condition at 30 September 2002 214,000

Standard gross profit percentage on sales is 25%

Based on this information, what is the value of the inventory lost?

A $96,000

B $271,000

C $26,400

D $57,000

10 Which of the following inventory valuation methods is likely to lead to the lowest figure for closing inventory at atime when prices are rising?

A Average cost

B First in, first out (FIFO)

C Last in, first out (LIFO)

D Replacement cost

11 Which of the following costs may be included when arriving at the cost of finished goods inventory for inclusionin the financial statements of a manufacturing company?




(4) Finished goods storage costs

(5) Factory supervisors’ wages

A (1) and (5) only

B (2), (4) and (5) only

C (1), (3) and (5) only

D (1), (2), (3) and (4) only

6



12 Listed below are some characteristics of financial information.

(1) Neutrality

(2) Prudence

(3) Completeness

(4) Timeliness

Which of these characteristics contribute to reliability, according to the IASC’s Framework for the Preparation andPresentation of Financial Statements?

A (1), (2) and (3) only

B (1), (2) and (4) only

C (1), (3) and (4) only

D (2), (3) and (4) only

13 Which of the following statements about accounting concepts are correct?

(1) The money measurement concept is that only items capable of being measured in monetary terms can berecognised in financial statements.

(2) The prudence concept means that understating of assets and overstating of liabilities is desirable in preparingfinancial statements.

(3) The historical cost concept is that assets are initially recognised at their transaction cost.

(4) The substance over form convention is that, whenever legally possible, the economic substance of a transactionshould be reflected in financial statements rather than simply its legal form.

A (1), (2) and (3)

B (1), (2) and (4)

C (1), (3) and (4)

D (2), (3) and (4)

14 P and Q are in partnership, sharing profits in the ratio 3:2 and compiling their accounts to 30 June each year.

On 1 January 2002 R joined the partnership, and from that date the profit-sharing ratio became P 50%, Q 25% andR 25%, after providing for salaries for Q and R as follows:

Q $20,000 per year

R $12,000 per year

The partnership profit for the year ended 30 June 2002 was $480,000, accruing evenly over the year.

What are the partners’ total profit shares for the year ended 30 June 2002?

P Q R$ $ $

A 256,000 162,000 62,000

B 248,000 168,000 64,000

C 264,000 166,000 66,000

D 264,000 156,000 60,000

7 [P.T.O.



15 The issued share capital of Alpha, a limited liability company, is as follows:

$Ordinary shares of 10c each 1,000,0008% Preference shares of 50c each 500,000

In the year ended 31 October 2002, the company has paid the preference dividend for the year and an interimdividend of 2c per share on the ordinary shares. A final ordinary dividend of 3c per share is proposed.

What is the total amount of dividends relating to the year ended 31 October 2002?

A $580,000

B $90,000

C $130,000

D $540,000

16 When a company makes a rights issue of equity shares which of the following effects will the issue have?

(1) Working capital is increased

(2) Gearing ratio is increased

(3) Share premium account is reduced

(4) Investments are increased

A (1) only

B (1) and (2)

C (3) only

D (1) and (4)

17 Which of the following items may appear as current liabilities in a company’s balance sheet?

(1) Minority interests in subsidiaries.

(2) Loan due for repayment within one year.

(3) Taxation.

(4) Preference dividend payable

A (1), (2) and (3)

B (1), (2) and (4)

C (1), (3) and (4)

D (2), (3) and (4)

8



18 What is the correct treatment of extraordinary items in a company’s income statement, according to IAS8 NetProfit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies?

A Add to or subtract from profit after tax.

B Include in calculating profit from operations with an explanatory note.

C Show separately in the income statement as part of profit from operations with an explanatory note.

D Exclude from income statement and disclose by note.

19 A company made an issue for cash of 1,000,000 50c shares at a premium of 30c per share.

Which of the following journal entries correctly records the issue?

Debit Credit$ $

A Share capital 500,000Share premium 300,000

Bank 800,000

B Bank 800,000Share capital 500,000Share premium 300,000

C Bank 1,300,000Share capital 1,000,000Share premium 300,000

D Share capital 1,000,000Share premium 300,000

Bank 1,300,000


(1) Surplus on revaluation of non-current assets.

(2) Proceeds of issue of shares.

(3) Proposed dividend.

(4) Bad debts written off.

(5) Dividends received.

A (1), (2) and (5) only

B (2), (3), (4), (5) only

C (2) and (5) only

D (3) and (4) only

9 [P.T.O.



21 Part of the process of preparing a company’s cash flow statement is the calculation of cash inflow from operatingactivities.

Which of the following statements about that calculation (using the indirect method) are correct?

(1) Loss on sale of operating non-current assets should be deducted from net profit before taxation.

(2) Increase in inventory should be deducted from operating profits.

(3) Increase in payables should be added to operating profits.

(4) Depreciation charges should be added to net profit before taxation.

A (1), (2) and (3)

B (1), (2) and (4)

C (1), (3) and (4)

D (2), (3) and (4)

22 Which of the following might appear as an item in a company’s statement of changes in equity?

(1) Profit on disposal of properties.

(2) Surplus on revaluation of properties

(3) Equity dividends proposed after the balance sheet date.

(4) Issue of share capital.

A (1), (3) and (4) only

B (2) and (4) only

C (1) and (2) only

D (3) and (4) only

23 Which of the following statements about research and development expenditure are correct?

(1) Research expenditure, other than capital expenditure on research facilities, should be recognised as an expenseas incurred.

(2) In deciding whether development expenditure qualifies to be recognised as an asset, it is necessary to considerwhether there will be adequate finance available to complete the project.

(3) Development expenditure recognised as an asset must be amortised over a period not exceeding five years.

A (1), (2) and (3)

B (1) and (2) only

C (1) and (3) only

D (2) and (3) only

10



24 Which one of the following would help a company with high gearing to reduce its gearing ratio?

A Making a rights issue of equity shares.

B Issuing further long-term loan notes.

C Making a bonus issue of shares.

D Paying dividends on its equity shares.

25 Which one of the following would cause a company’s gross profit percentage on sales to fall?

A Sales volume has declined.

B Closing inventory is lower than opening inventory.

C Some closing inventory items were included at less than cost.

D Selling and distribution costs have risen.

(50 marks)

11 [P.T.O.




1 The following items have been extracted from the trial balance of Cronos, a limited liability company, as at30 September 2002:

Referenceto notes

$ $Opening inventory 186,400Purchases 1,748,200 Carriage inwards 38,100Carriage outwards 2 47,250Sales 3,210,000Trade receivables 318,000Wages and salaries 2 and 3 694,200Sundry administrative expenses 2 381,000Allowance for doubtful debts, as at

1 October 2001 4 18,200Bad debts written off during the year 4 14,680Office equipment as at 1 October 2001:

Cost 5 214,000Accumulated depreciation 5 88,700

Office equipment: additions during year 5 48,000Office equipment: proceeds of sale of items during year 5 12,600Interest paid 2 30,000

Notes1 Closing inventory amounted to $219,600

2 Prepayments and accrualsPrepayments Accruals

$ $Carriage outwards 1,250Wages and salaries 5,800Sundry administrative expenses 4,900 13,600Interest payable 30,000

3 Wages and salaries cost is to be allocated:

– cost of sales 10%

– distribution costs 20%

– administrative expenses 70%

4 Further bad debts totalling $8,000 are to be written off, and the closing allowance for doubtful debts is to beequal to 5% of the final trade receivables figure. The bad and doubtful debt expense is to be included inadministrative expenses.

5 Office equipment:Depreciation is to be provided at 20% per annum on the straight line basis, with a full year’s charge in theyear of purchase and none in the year of sale.

During the year equipment which had cost $40,000, with accumulated depreciation of $26,800, was soldfor $12,600.

Required:

Prepare the company’s income statement in accordance with IAS 1.Notes to the income statement are not required.

(12 marks)

12



2 The trial balance of Rhea, a limited liability company, at 30 June 2002 failed to agree and a suspense account wasopened with a debit balance of $386,400 pending further action to find the difference.

Subsequent checking revealed the following errors:

(1) The balance of $48,900 on the carriage outwards account was omitted from the trial balance.

(2) Discount columns in the cash book had been misposted:

– Discount allowed $38,880 had been credited to discount received account.

– Discount received $68,200 had been debited to discount allowed account.

(3) An issue of 100,000 $1 ordinary shares in exchange for an asset with an agreed value of $400,000 had beenrecorded by crediting ordinary share capital account with $400,000 and debiting the non-current asset accountwith $400,000.

Required:

(a) Prepare journal entries with narratives to correct these errors.

(b) Write up the suspense account and bring down the balance of difference not yet found.

(9 marks)

3 Helios acquired 80% of the ordinary share capital of Luna for $700,000 on 1 July 1999, when the retained profitsof Luna amounted to $60,000. There have been no movements on Luna’s share capital or share premium accountsince that date.

At 30 June 2002 the balance sheets of the two companies were as follows:

Helios Luna$ $

Tangible non-current assets 280,000 490,000Investment in Luna 700,000Net current assets 130,000 260,000

1,110,000 750,000

Share capital 600,000 400,000Share premium account 350,000 200,000Accumulated profit 160,000 150,000

1,110,000 750,000

The policy of Helios is to amortise goodwill arising on consolidation over five years on the straight line basis.

Required:

Prepare the consolidated balance sheet of Helios and its subsidiary as at 30 June 2002.(11 marks)

13 [P.T.O.FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com


4 Required:

Explain the extent, if any, to which the following assets should be depreciated/amortised.

(a) Land and buildings that have been revalued upwards since acquisition. (3 marks)

(b) Capitalised development expenditure on a project expected to begin commercial production in two years’time. (3 marks)

(c) A holding of quoted equity shares. (2 marks)

(8 marks)

5 The directors of a company are considering the company’s draft financial statements for the year ended 30 September2002.

The following material points are unresolved:

(a) One of the company’s buildings was destroyed in a flood in October 2002. The estimated value of the buildingwas $4m, but it was insured for only $3m. The company’s going concern status is not jeopardised. The directorsare unsure what adjustment or disclosure, if any, should be made. (2 marks)

(b) The company gives warranties on its products at the time of sale, undertaking to repair or replace any defectiveitem free of charge. Some directors believe that an allowance should be made for estimated warranty liabilitiesat 30 September 2002 based on sales to that date, and other directors argue that the expense of warranty workshould be borne in the period in which it is incurred. (2 marks)

(c) Some goods which had cost $120,000, and which were included in closing inventory at 30 September 2002at that figure, were subsequently sold for $80,000 after they were found to have deteriorated while held ininventory. The directors are unsure whether to adjust the inventory figure downwards by $40,000 or allow theloss to fall in the period when the deterioration was discovered. (2 marks)

(d) The company had supplied $100,000 worth of goods to a customer on a sale or return basis in September2002. The transaction was included as a credit sale in the accounting records, and as a result a profit of$20,000 was taken. In October 2002 the customer returned all of the items in good condition. (4 marks)

Required:

Advise the board of directors as to the correct treatment of each of these items, quoting the authority for youradvice in each case and stating the effect, if any, on the income statement and balance sheet.

(10 marks)


14



Answers



Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) December 2002 Answers

Section A1 B $400 debit which should have been credited – correction will bring trial balance into agreement.

2 DRent Receivable

$ $O/Balance 21,200 O/Balance 28,700Income Statement 475,900 Cash 481,200C/Balance 31,200 C/Balance 18,400

528,300 528,300

3. C $2,500 + $7,500 + $9,000 + $9,000 + $6,000

One month in advance = $3,000 Cr.

$4 D 20% × $345,200 69,040

10/12 × 20% × $18,000 3,0008/12 × 20% × $36,000 4,800

76,840

5 D –$36,840 + $51,240 – $43,620 = $29,220 overdrawn

6 A

7 A

8 B $952,500 × 100/60 = $1,587,500

$ $9 D Sales 612,000

Opening inventory 318,000Purchases 412,000

730,000less: Inventory held 214,000

516,000Shortfall 57,000 459,000

Gross profit 25% 153,000

10 C

11 C

12 A

13 C

14 A

15 D 5c × 10,000,000 + 8% × $500,000

16 A

17 D

18 A

19 B

20 C

17



21 D

22 B

23 B

24 A

25 C

Section B1 Cronos Limited

Income statement for the year ended 30 September 2002$ $

Sales 3,210,000Cost of sales (W1) (1,823,100)

Gross profit 1,386,900Distribution costs (W1) (188,500)Administrative expenses (W1) (944,680) (1,133,180)

Profit from operations 253,720Interest payable (30,000 + 30,000) (60,000)

Net profit for the year 193,720

Working 1

Cost of Distribution AdministrativeSales Costs Expenses

$ $ $Opening inventory 186,400Purchases 1,748,200Carriage inwards 38,100Carriage outwards (47,250 + 1,250) 48,500Wages and salaries 694,200

5,800

700,000 70,000 140,000 490,000

Sundry administrative expenses(381,000 + 13,600 – 4,900) 389,700

Bad and doubtful debts(14,680 + 8,000 – 2,700) 19,980

Depreciation of office equipment20% × (214,000 – 40,000 + 48,000) 44,400Loss on sale 600

Closing inventory (219,600)

1,823,100 188,500 944,680

18



2 (a) Journal entries

(1) Trial balance (no ledger entry) 48,900Suspense account 48,900Correction for carriage outwards balance omitted from trial balance

(2) Discount received 38,880Discount allowed 38,880

Suspense account 77,760Suspense account 136,400

Discount received 68,200Discount allowed 68,200

Correction of discount totalsWrong discount amount posted to the wrong side

(3) Ordinary share capital account 300,000Share premium account 300,000

Correction of error in recording issue of shares – $300,000 wrongly credited to ordinary share capital account.

Suspense Account(b)$ $

Difference 386,400 Trial balance (carriage outwards) 48,900Discount accounts 136,400 Discount accounts 77,760

Balance 396,140

522,800 522,800

3 Helios Consolidated balance sheet as at 30 June 2002

Non-current assets $Goodwill 68,800Tangible assets 770,000

838,800Net current assets 390,000

1,228,800

Share capital 600,000Share premium account 350,000Accumulated profit 128,800

1,078,800Minority interest 150,000

1,228,800

19



Cost of control

$ $Investment in Luna 700,000 Share Capital 80% 320,000

Share Premium 80% 160,000Accumulated profits 80% pre-acq 48,000Balance – goodwill 172,000

700,000 700,000

Balance 172,000 Amortisation 20% × 3 years 103,200Balance 68,800

172,000 172,000

Minority interest

$ $Balance for CBS 150,000 Share Capital 20% 80,000

Share Premium 20% 40,000Accumulated profits 20% 30,000

150,000 150,000

Accumulated profits

$ $Cost of control Helios 160,000

80% × $60,000 48,000 Luna 150,000Minority interest

20% × $150,000 30,000Cost of control

Goodwill amortisation 103,200Balance for CBS 128,800

310,000 310,000

4 (a) The values of the land and the buildings need to be separated, because the land would not normally require depreciation.

The revalued amount of the buildings should be depreciated over the estimated remaining useful economic life at the time ofthe revaluation. The straight-line method is usually adopted, but other methods such as the reducing balance method maybe used.

(b) Development costs should be amortised, using a method that reflects the pattern in which the economic benefits of the costsare consumed by the enterprise. If this pattern cannot be determined reliably, the straight-line method should be used.

If the circumstances justifying the deferral of the expenditure cease to apply at any time, the expenditure should be writtenoff to the extent that it is no longer recoverable.

(c) Investments of this kind do not depreciate, though they may fluctuate in value. Accordingly no depreciation is provided forthem.

5 (a) IAS 10 Events after the Balance Sheet Date classifies this type of event as non-adjusting – no change to the figures in thefinancial statements is required but there should be a note to ensure that the financial statements are not misleading. Thenote should state the amount of the loss and the extent of the insurance cover.

(b) A provision should be made for the estimated amount of the liabilities under warranties, as required by IAS 37 Provisions,Contingent Liabilities and Contingent Assets. The provision will appear as a liability in the balance sheet and the operatingprofit will be reduced by the amount of the allowance.

(c) This is an adjusting event according to IAS 10 Events after the Balance Sheet Date. The closing inventory should be reducedby $40,000 in the balance sheet and in cost of sales, thus reducing operating profit by this amount, unless it could be shownthat the deterioration had taken place after the balance sheet date

(d) The goods have to be treated as trading inventory at September 2002, applying generally accepted accounting principles.The effect on the income statement and balance sheet will be:

(i) Sales and trade receivables both reduced by $100,000.

(ii) Closing inventory increased by $80,000.

The combined effect of the two adjustments is to reduce current assets and profit by $20,000.20



Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) December 2002 Marking scheme

Available Maximum1 Sales revenue 1/2

Cost of sales 5 × 1/2 21/2Distribution costs 2 × 1/2 1Administrative expenses:

Wages and salaries 1Sundry admin. expenses 1Bad and doubtful debts 11/2Depreciation 11/2Loss on sale 1 6

91/2Interest payable 1Format 2

13 12

2 (1) Journal entry 1Narrative 1/2 11/2

(2) Journal entry 2Narrative 1/2 21/2

(3) Journal entry 1Narrative 1/2 11/2

Suspense accountPer entry 3 × 1 3Final balance 1/2 31/2

9

3 Calculation of goodwill 4 × 1/2 2Goodwill amortisation 1 3Calculation of minority interest 3 × 1/2 11/2Calculation of accumulated profits

Initial profits 2 × 1/2 1Adjustments 3 × 1 3 4

Consolidated balance sheet – formatAssets 1Capital and reserves 1Minority interest 1/2 21/2

11

21



Available Maximum4 (a) Land and buildings separated 1

Land not normally depreciated 1Revalued amount for buildings depreciated over the remaining useful economic life 1 3 3

(b) Amortised 1Basis of amortisation 1Written off if no longer recoverable 1 3 3

(c) Value fluctuating but does not depreciate 1No depreciation required 1 2 2

8 8

5 (a) Non-adjusting event 1/2Disclose by note 1/2IAS 10 mentioned 1/2Contents of note 1/2 2

(b) Allowance required 1/2IAS 37 mentioned 1/2Effect on accounts 1 2

(c) Adjusting event 1/2IAS 10 mentioned 1/2Effect on accounts 1 2

(d) Description of adjustment 1Generally accepted accounting principles 1Adjustments to:

Sales 1/2Receivables 1/2Closing inventory 1/2

Effect on profit 1/2 4

10

22




PART 1


QUESTION PAPER




Section B ALL FIVE questions are compulsory and MUST beanswered Pa

per

1.1

(IN

T)



Section A – ALL 25 questions are compulsory and MUST be attempted

Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.Each question within this section is worth 2 marks.

1 A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent wasincreased from $90,000 per year to $120,000 per year as from 1 October 2002.

What rent expense and accrual should be included in the company’s financial statements for the year ended31 January 2003?

Rent expense Accrual$ $

A 100,000 20,000

B 100,000 10,000

C 97,500 10,000

D 97,500 20,000

2 Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alpha’spayables ledger account for Beta shows a balance due to Beta of $4,140.

Investigation reveals the following:

(1) Cash paid to Beta $4,080 has not been allowed for by Beta.

(2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta.

(3) Goods returned by Alpha $380 have not been recorded by Beta.

What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?

A $9,310

B $390

C $310

D $1,070

2



3 An inexperienced bookkeeper has drawn up the following receivables ledger control account:

Receivables Ledger Control Account

$ $Opening balance 180,000 Credit sales 190,000Cash from credit customers 228,000 Bad debts written off 1,500Sales returns 8,000 Contras against payables 2,400Cash refunds to credit customers 3,300 Closing balance (balancing figure) 229,600Discount allowed 4,200

———— ————423,500 423,500———— ————

What should the closing balance be after correcting the errors made in preparing the account?

A $130,600

B $129,200

C $142,400

D $214,600

4 At 31 March 2002 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil billfor $3,600.

At 31 March 2003 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of $3,200.

Payments made for heating oil during the year ended 31 March 2003 totalled $34,600.

Based on these figures, what amount should appear in the company’s income statement for heating oil for theyear?

A $23,900

B $36,100

C $45,300

D $33,100

5 At 31 December 2002 a company’s receivables totalled $400,000 and an allowance for doubtful debts of $50,000had been brought forward from the year ended 31 December 2001.

It was decided to write off debts totalling $38,000 and to adjust the allowance for doubtful debts to 10% of thereceivables.

What charge for bad and doubtful debts should appear in the company’s income statement for the year ended31 December 2002?

A $74,200

B $51,800

C $28,000

D $24,200

3 [P.T.O.



6 The plant account of a company is shown below:

Plant – Cost

2002 $ 2002 $1 January Balance (plant purchased 1999) 380,000 1 October Transfer disposal1 April Cash – plant purchased 51,000 account – cost of plant sold 30,000

31 December Balance 401,000———— ————431,000 431,000———— ————

The company’s policy is to charge depreciation on plant at 20% per year on the straight line basis, with proportionatedepreciation in years of purchase and sale.

What should the company’s plant depreciation charge be for the year ended 31 December 2002?

A $82,150

B $79,150

C $77,050

D $74,050

7 In preparing a company’s bank reconciliation statement at March 2003, the following items are causing the differencebetween the cash book balance and the bank statement balance:

(1) Bank charges $380

(2) Error by bank $1,000 (cheque incorrectly debited to the account)

(3) Lodgements not credited $4,580

(4) Outstanding cheques $1,475

(5) Direct debit $350

(6) Cheque paid in by the company and dishonoured $400

Which of these items will require an entry in the cash book?

A 2, 4 and 6

B 1, 5 and 6

C 3 and 4

D 3 and 5

4



8 The closing inventory at cost of a company at 31 January 2003 amounted to $284,700.

The following items were included at cost in the total:

(1) 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in manufacture, theywere all sold after the balance sheet date at 50% of their normal price. Selling expenses amounted to 5% of theproceeds.

(2) 800 skirts, which had cost $20 each. These too were found to be defective. Remedial work in February 2003cost $5 per skirt, and selling expenses for the batch totalled $800. They were sold for $28 each.

What should the inventory value be according to IAS 2 Inventories after considering the above items?

A $281,200

B $282,800

C $329,200

D None of these.

9 A company values its inventory using the first in, first out (FIFO) method. At 1 May 2002 the company had 700engines in inventory, valued at $190 each.

During the year ended 30 April 2003 the following transactions took place:

2002

1 July Purchased 500 engines at $220 each

1 November Sold 400 engines for $160,000

2003

1 February Purchased 300 engines at $230 each

15 April Sold 250 engines for $125,000

What is the value of the company’s closing inventory of engines at 30 April 2003?

A $188,500

B $195,500

C $166,000

D None of these figures.

5 [P.T.O.



10 Which of the following statements about the valuation of inventory are correct, according to IAS2 Inventories?

(1) Inventory items are normally to be valued at the higher of cost and net realisable value.

(2) The cost of goods manufactured by an enterprise will include materials and labour only. Overhead costs cannotbe included.

(3) If LIFO (last in, first out) is used to value inventory, additional disclosures must be made in the financialstatements.

(4) Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable approximationto actual cost.

A 1, 3 and 4 only

B 1 and 2 only

C 3 only

D 3 and 4 only.

The following information is relevant for questions 11 and 12.

When Q’s trial balance failed to agree, a suspense account was opened for the difference. The trial balance totals were:Debit $864,390Credit $860,930

The company does not have control accounts for its receivables and payables ledgers.

The following errors were found:

(1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capitalaccount as $330,000.

(2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plantasset account.

(3) The petty cash book balance $500 had been omitted from the trial balance.

(4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as$87,400.

(5) A contra between the receivables ledger and the payables ledger for $1,200 which should have been credited inthe receivables ledger and debited in the payables ledger was actually debited in the receivables ledger andcredited in the payables ledger.

11 Which of these errors will require an entry to the suspense account to correct them?

A All five items

B 3 and 5 only

C 2, 4 and 5 only

D 1, 2, 3 and 4 only.

6



12 What will the balance on the suspense account be after making the necessary entries to correct the errorsaffecting the suspense account?

A $2,440 Debit

B $15,560 Credit

C $13,640 Debit

D $3,440 Debit.

13 Which of the following statements about research and development expenditure are correct according to IAS38Intangible Assets?

(1) If certain conditions are met, an enterprise may decide to capitalise development expenditure.

(2) Research expenditure, other than capital expenditure on research facilities, must be written off as incurred.

(3) Capitalised development expenditure must be amortised over a period not exceeding 5 years.

(4) Capitalised development expenditure must be disclosed in the balance sheet under intangible non-current assets.

A 1, 2 and 4 only

B 1 and 3 only

C 2 and 4 only

D 3 and 4 only.

14 Listed below are some comments on accounting concepts.

(1) In achieving a balance between relevance and reliability, the most important consideration is satisfying as far aspossible the economic decision-making needs of users.

(2) Materiality means that only items having a physical existence may be recognised as assets.

(3) The substance over form convention means that the legal form of a transaction must always be shown in financialstatements, even if this differs from the commercial effect.

Which, if any, of these comments is correct, according to the IASB’s Framework for the Preparation andPresentation of Financial Statements?

A 1 only

B 2 only

C 3 only

D None of them.

7 [P.T.O.



15 Which of the following explanations of the prudence concept most closely follows that in the IASB’s Frameworkfor the Preparation and Presentation of Financial Statements?

A The application of a degree of caution in exercising judgement under conditions of uncertainty

B Revenue and profits are not recognised until realised, and provision is made for all known liabilities

C All legislation and accounting standards have been complied with

D Understatement of assets or gains and overstatement of liabilities or losses.

16 In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset valuesand profit?

A Asset values and profit both understated

B Asset values and profit both overstated

C Asset values understated and profit overstated

D Asset values overstated and profit understated.

17 At 31 December 2002 the following matters require inclusion in a company’s financial statements:

(1) On 1 January 2002 the company made a loan of $12,000 to an employee, repayable on 30 April 2003,charging interest at 2 per cent per year. On the due date she repaid the loan and paid the whole of the interestdue on the loan to that date.

(2) The company has paid insurance $9,000 in 2002, covering the year ending 31 August 2003.

(3) In January 2003 the company received rent from a tenant $4,000 covering the six months to 31 December2002.

For these items, what total figures should be included in the company’s balance sheet at 31 December 2002?

Currents assets Current liabilities$ $

A 22,000 240

B 22,240 nil

C 10,240 nil

D 16,240 6,000

8



18 At 31 December 2001 the capital structure of a company was as follows:

$

Ordinary share capital100,000 shares of 50c each 50,000

Share premium account 180,000

During 2002 the company made a bonus issue of 1 share for every 2 held, using the share premium account for thepurpose, and later issued for cash another 60,000 shares at 80c per share.

What is the company’s capital structure at 31 December 2002?

Ordinary share capital Share premium account$ $

A 130,000 173,000

B 105,000 173,000

C 130,000 137,000

D 105,000 137,000

19 Listed below are some items that may appear in a company’s income statement, either separately disclosed orincluded in another figure.

(1) Profit or loss on discontinuing operations

(2) Profit or loss on the sale of part of the enterprise

(3) Extraordinary items

According to International Accounting Standards, which of these items must always be shown separately ifmaterial to avoid misleading users?

A All three items

B 1 and 2 only

C 1 and 3 only

D 2 and 3 only.

9 [P.T.O.



20 In the course of preparing a company’s cash flow statement, the following figures are to be included in the calculationof net cash from operating activities.

$

Depreciation charges 980,000

Profit on sale of non-current assets 40,000

Increase in inventories 130,000

Decrease in receivables 100,000

Increase in payables 80,000

What will the net effect of these items be in the cash flow statement?

$

A Addition to operating profit 890,000

B Subtraction from operating profit 890,000

C Addition to operating profit 1,070,000

D Addition to operating profit 990,000

The following information is relevant for questions 21 to 23

On 1 January 2000 Alpha purchased 80,000 ordinary $1 shares in Beta for $180,000. At that date Beta’s retained profitsamounted to $90,000 and the fair values of Beta’s assets at acquisition were equal to their book values.

Three years later, on 31 December 2002, the balance sheets of the two companies were:

Alpha Beta$ $

Sundry net assets 230,000 260,000Shares in Beta 180,000 –

———— ————410,000 260,000———— ————

Share capitalOrdinary shares of $1 each 200,000 100,000

Accumulated profits 210,000 160,000 ———— ————410,000 260,000———— ————

The share capital of Beta has remained unchanged since 1 January 2000.Goodwill on consolidation is being amortised over four years.

21 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for goodwill?

A $25,000

B $28,000

C $7,000

D $14,000

10



22 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for minorityinterest?

A $52,000

B $20,000

C $34,000

D $32,000

23 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for accumulatedprofits?

A $266,000

B $338,000

C $370,000

D $245,000

24 A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December 2001 to 27%in the year ended 31 December 2002.

Which of the following events is most likely to have caused the increase?

A An increase in sales volume

B A purchase in December 2001 mistakenly being recorded as happening in January 2002

C Overstatement of the closing inventory at 31 December 2001

D Understatement of the closing inventory at 31 December 2001.

11 [P.T.O.



25 A company’s capital structure at December 2002 is as follows:

$m

Ordinary share capital 380Accumulated profits 120

——500

8% Loan notes 100——600——

The company’s income statement shows the following for the year ended 31 December 2002:

$m

Operating profit 40Interest paid 8

——32

Taxation 10——

22Dividends paid 10

——Retained profit for year 12

——

What is the return on equity shareholders’ capital employed, using closing capital figures?

A 4·4%

B 2·4%

C 3·7%

D 5·8%

(50 marks)

12




1 Alamute and Brador have been in partnership for several years, compiling their financial statements for the yearending 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5%per year.

Extracts from their trial balance at 31 March 2003 are given below:

Reference $to notes

Capital accounts: Alamute 50,000Brador 50,000

Current accounts: Alamute 3,800 CreditBrador 2,600 Debit

Drawings: Alamute 48,400Brador 36,900

Office equipment: cost 1 48,300accumulated depreciation, 1 April 2002 12,800

Inventory, 1 April 2002 2 15,600Trade receivables 3 68,400Allowance for doubtful debts, 1 April 2002 3 3,800Sales revenue 448,700Purchases 184,600Rent paid 4 30,000Salaries 88,000Insurance 5 4,000Sundry expenses 39,400

Notes:

(1) Office equipment should be depreciated at 20% per year on the reducing balance basis.

(2) Closing inventory amounted to $21,400.

(3) Debts of $2,400 are to be written off, and the allowance for doubtful debts is to be adjusted to 5% of tradereceivables.

(4) Rent paid $30,000 is the amount for the nine months to 31 December 2002. From that date the rent wasincreased by 10%.

(5) Insurance paid in advance amounted to $1,500.

Required

(a) Prepare the partnership’s income statement and a statement showing the division of profit among thepartners for the year ended 31 March 2003. (9 marks)

(b) Write up the partners’ current accounts for the year ended 31 March 2003. (3 marks)

(12 marks)



2 The balance sheets of Paniel at 31 March 2002 and 2003 were as follows:

31 MarchReference 2002 2003to notes $ $

Non-current assets 2 2,140,000 3,060,000Less: accumulated depreciation (580,000) (840,000)

————— —————1,560,000 2,220,000

Net current assets 3 1,520,000 1,570,000————— —————3,080,000 3,790,000————— —————

Ordinary share capital 1,000,000 1,100,000Share premium account 800,000 900,000Accumulated profits 480,000 590,000

————— —————2,280,000 2,590,000

6% Loan notes 4 800,000 1,200,000————— —————3,080,000 3,790,000————— —————

Notes

1 The net cash generated from operating activities for the year is $746,000, before deducting interest paid on theloan notes.

2 During the year the company sold non-current assets which had cost $480,000 for $280,000.

3 The net current asset figures include cash at bank:

31 March 2002 $14,00031 March 2003 $18,000

All other movements in net current assets have already been allowed for in computing the net cash inflow fromoperating activities given in Note 1 above. Dividends paid, when computed, should be included in financingactivities.

4 The loan note issue during the year took place on 1 April 2002, and all interest for the year ended 31 March2003 was paid in the year.

5 The profit for the year ended 31 March 2003 before allowing for dividends paid was $260,000.

6 Ignore taxation.

Required:

Prepare the company’s cash flow statement for the year ended 31 March 2003, beginning with the net cashinflow from operating activities given in Note 1 above.

(9 marks)

14



3 (a) The net assets of Altese, a trader, at 1 January 2002 amounted to $128,000.

During the year to 31 December 2002 Altese introduced a further $50,000 of capital and made drawings of$48,000.

At 31 December 2002 Altese’s net assets totalled $184,000.

Required:

Using this information compute Altese’s total profit for the year ended 31 December 2002. (3 marks)

(b) Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for the yearended 31 January 2003 from the following information:

$Trade payables 31 January 2002 130,400

31 January 2003 171,250Payment to suppliers 888,400Cost of goods taken from inventory by

Senji for her personal use 1,000Refunds received from suppliers 2,400Discounts received 11,200

Required:

Compute the figure for purchases for inclusion in Senji’s financial statements. (3 marks)

(c) Aluki fixes prices to make a standard gross profit percentage on sales of 331/3%.The following information for the year ended 31 January 2003 is available to compute her sales total for the year.

$Inventory: 1 February 2002 243,000

31 January 2003 261,700Purchases 595,400Purchases returns 41,200

Required:

Calculate the sales figure for the year ended 31 January 2003. (3 marks)

(9 marks)

15 [P.T.O.



4 Extracts from the financial statements of Apillon for the years ended 31 March 2002 and 2003 are given below:

Year ended 31 MarchIncome statement 2002 2003

$ $ $ $Sales revenue (including cash sales

$300,000 in 2002 and $100,000 in 2003) 3,100,000 3,800,000

Cost of salesOpening inventory 360,000 540,000Purchases (all on credit) 2,080,000 2,580,000

————— —————2,440,000 3,120,000

Less: closing inventory 540,000 (1,900,000) 720,000 (2,400,000)————— ————— ————— —————

Gross profit 1,200,000 1,400,000Expenses (900,000) (1,100,000)

————— —————Net profit 300,000 300,000

————— —————Balance SheetCurrent assets

Inventory 540,000 720,000Trade receivables 450,000 700,000

———— 990,000 ———— 1,420,000Current liabilities

Trade payables 410,000 690,000Bank overdraft 20,000 430,000 170,000 860,000

———— ————

Required:

(a) Calculate the following for each of the two years:

(i) Current ratio;(ii) Quick ratio (acid test);(iii) Inventory turnover period (use closing inventory);(iv) Average period of credit allowed to customers;(v) Average period of credit taken from suppliers.

Calculate items (iii), (iv) and (v) in days. (5 marks)

(b) Make four brief comments on the changes in the position of the company as revealed by the changes in theseratios and/or in the given figures from the financial statements. (4 marks)

(9 marks)

16



5 (a) The term ‘reserves’ is frequently found in company balance sheets.

Required:

(i) Explain the meaning of ‘reserves’ in this context;

(ii) Give two examples of reserves and explain how each of your examples comes into existence.(6 marks)

(b) A company’s issued share capital may be increased by a bonus (capitalisation) issue or by a rights issue.

Required:

Define ‘bonus issue’ and ‘rights issue’ and explain the fundamental difference between these two types ofshare issue. (5 marks)

(11 marks)


17



Answers



Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) June 2003 Answers

Section A

1 B 8 months at 90,000 per year, 4 months at 120,000 per year; accrual 1 month

2 C (8,950 – 4,080 – 380) – (4,140 + 40) = 310

3 B 180 + 190 + 3·3 – 228 – 8 – 4·2 – 1·5 – 2·4 = 129·2

4 D 8,200 + 34,600 + 3,200 – 3,600 – 9,300 = 33,100

5 D 38,000 – (50,000 – 36,200) = 24,200

6 A (350,000 + 9/12 x 30,000 + 9/12 x 51,000) x 20% = 82,150

7 B

8 A 284,700 – (32,000 – 28,500) = 281,200

9 A 300 @ 230 + 500 @ 220 + 50 @ 190 = 188,500

10 D

11 D

12 A 3,000 + 9,000 – 3,460 – 5,600 – 500 = 2,440

13 C

14 A

15 A

16 C

17 B 12,000 + 240 + 6,000 + 4,000 = 22,240

18 B Share capital 50 + 25 + 30Share premium 180 – 25 + 18

19 A

20 D 980 – 40 – 130 + 100 + 80 = 990

21 C 180 – 152 – 21 = 7

22 A 20% x 260 = 52

23 D 210 + 160 – 72 – 32 – 21 = 245

24 D

25 A 22/500 = 4·4%

21



22

Section B

1 (a) Alamute and Brador

Income statement for the year ended 31 March 2003

$ $Sales Revenue 448,700Cost of sales: Opening inventory 15,600

Purchases 184,600————200,200

Less: Closing inventory 21,400———— (178,800)

————Gross profit 269,900Less: Expenses: Salaries 88,000

Rent (30,000 + 11,000) 41,000Insurance (4,000 – 1,500) 2,500Sundry expenses 39,400Depreciation (35,500 × 20%) 7,100Bad and doubtful debts

(2,400 – 500) 1,900———— (179,900)

————Net profit 90,000

————

Division of profit Alamute Brador Total$ $ $

Net profit 90,000Interest on capital 2,500 2,500 (5,000)

————85,000

Balance of profit 60:40 51,000 34,000 (85,000)———— ———— ————

53,500 36,500 –———— ———— ————

(b) Current AccountsAlamute Brador Alamute Brador

$ $ $ $Balance 2,600 Balance 3,800Drawings 48,400 36,900 Share of profit 53,500 36,500Balance 8,900 Balance 3,000

––––––– ––––––– ––––––– –––––––57,300 39,500 57,300 39,500––––––– ––––––– ––––––– –––––––



23

2 PanielCash flow statement for the year ended 31 March 2003

$ $Net cash inflow from operating activities 746,000Interest paid (72,000)

———— 674,000

Cash flows from investing activitiesPurchase of non-current assets (W1) (1,400,000)Proceeds from sale of non-current assets 280,000

—————Net cash used in investing activities (1,120,000)

Cash flows from financing activitiesProceeds from issuance of share capital 200,000Proceeds from long-term borrowings 400,000Dividends paid (260,000 – 110,000) (150,000)

—————Net cash from financing activities 450,000

————Increase in cash 4,000Cash at 31 March 2002 14,000

————Cash at 31 March 2003 18,000

————

Workings1 Fixed assets – cost

$ $Opening balance 2,140,000 Transfer – disposal 480,000Purchases 1,400,000 Closing balance 3,060,000

————— —————3,540,000 3,540,000————— —————

3 (a) $Opening capital 128,000Capital introduced 50,000

————178,000

Less: Drawings 48,000————130,000

Closing capital 184,000————

Profit is therefore 54,000————

(b) Purchases Total Account$ $

Balance brought forward 130,400Payments to suppliers 888,400 Goods taken by Senji 1,000Discounts received 11,200 Refunds from suppliers 2,400

Purchases 937,050Balance carried forward 171,250

————— —————1,070,850 1,070,850————— —————



24

(c) $ $Cost of sales:

Opening inventory 243,000Purchases 595,400Less: Returns 41,200 554,200

———— ————797,200

Less: Closing inventory 261,700————535,500————

Sales figure is therefore $535,500 × 3/2 = $803,250

4 (a) Year ended 31 March2002 2003

(i) Current ratio 990,000/430,000 2.3:11,420,000/860,000 1·65:1

(ii) Quick ratio 450,000/430,000 1·05:1700,000/860,000 0·81:1

(iii) Inventory turnover540,000/1,900,000 × 365 104 days720,000/2,400,000 × 365 109 days

(iv) Average period of credit allowed to customers450,000/2,800,000 × 365 59 days700,000/3,700,000 × 365 69 days

(v) Average period of credit allowed by suppliers410,000/2,080,000 × 365 72 days690,000/2,580,000 × 365 98 days

(b) Comments

(i) The current ratio and quick ratio are both down by over 20%. The drop in the quick ratio to below 1:1 could indicate liquidity problems.

(ii) The increase in sales, and hence in receivables, purchases and payables, is placing strain on the working capital,evidenced by the increase in the receivables and payables payment periods.

(iii) The business is one requiring large holdings of inventory, but inventory control appears to have deteriorated slightlybetween the two years

(iv) Cash sales have decreased considerably in 2003. Making more sales for cash could contribute to an improvement inthe current and quick ratios because this would reduce the overdraft.

Other comments considered on their merits.

5 (a) (i) Reserves are balances in a company’s balance sheet forming part of the equity interest and representing surpluses orgains, whether realised or not.

(ii) Share premium accountThe surplus arising when shares are issued at a price in excess of their par value.

Revaluation reserve

The unrealised gain when the amount at which non-current assets are carried is increased above cost.(Other examples given credit on their merits)

(b) A bonus issue is the conversion of reserves into share capital, with shares being issued to existing members in proportion totheir shareholdings, without any consideration being given by the shareholders.

A rights issue is again an issue of shares to existing members in proportion to their shareholdings, but with payment beingmade by the shareholders for the shares allotted to them.

The fundamental difference between them is that the rights issue raises funds for the company whereas the bonus issue doesnot.



25

Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) June 2003 Marking Scheme

Marks1 Gross profit (4 × 1/2) 2

Rent 1Insurance 1Depreciation 1Bad and doubtful debts 1

Division of profit 2——

8

Layout and style 1—— 9

Current accountsShare of profit 1Drawings 1Balances 2 × 1/2 1

—— 3——12

——

2 Interest paid 1

Capital expenditurePurchases of non-current assets 2Proceeds of sale of non-current assets 1

Financing Issue of shares 1Issue of loan notes 1Dividends paid 2

Increase in cash and cash movement 11/2

Format and style 1—— 101/2 max 9

3 (a) Opening capital 1/2Capital introduced 1Drawings 1Closing capital 1/2

—— 3

(Marks awarded for having figures the correct way round)

(b) 1/2 mark per item 6 × 1/2 3

(c) Opening inventory 1/2Purchases 1/2Purchases returns 1/2Closing inventory 1/2

Sale figure correct 1—— 3

—— 9

4 (a) 1 mark per pair of ratios 5 × 1 5

(b) 1 mark per valid comment 4 × 1 4—— 9



Marks5 (a) (i) Definition 2

Examples 2 × 1 2Origins 2 × 1 2

—— 6

(b) Bonus issue 2Rights issue 2Difference 1

—— 5—— 11

26




PART 1


QUESTION PAPER





Pape

r 1.1

(IN

T)





1 At 1 July 2002 the doubtful debt allowance of Q was $18,000.

During the year ended 30 June 2003 debts totalling $14,600 were written off. It was decided that the doubtful debtallowance should be $16,000 as at 30 June 2003.

What amount should appear in Q’s income statement for bad and doubtful debts for the year ended 30 June2003?

A $12,600

B $16,600

C $48,600

D $30,600.

2 A company’s trial balance totals were:

Debit $387,642

Credit $379,511

A suspense account was opened for the difference.

Which ONE of the following errors would have the effect of reducing the difference when corrected?

A The petty cash balance of $500 has been omitted from the trial balance

B $4,000 received for rent of part of the office has been correctly recorded in the cash book and debited to Rentaccount

C No entry has been made in the records for a cash sale of $2,500

D $3,000 paid for repairs to plant has been debited to the plant asset account.

3 The bookkeeper of Peri made the following mistakes:

Discount allowed $3,840 was credited to Discounts Received account.

Discount received $2,960 was debited to Discounts Allowed account.

Discounts were otherwise correctly recorded.

Which of the following journal entries will correct the errors?Dr Cr$ $

A Discount allowed 7,680Discount received 5,920Suspense account 1,760

B Discount allowed 880Discount received 880

Suspense account 1,760

C Discount allowed 6,800Discount received 6,800

D Discount allowed 3,840Discount received 2,960Suspense account 880

2



3 [P.T.O.

4 The following bank reconciliation statement has been prepared by a trainee accountant:$

Overdraft per bank statement 3,860less: Outstanding cheques 9,160

–––––––5,300

add: Deposits credited after date 16,690–––––––

Cash at bank as calculated above 21,990–––––––

What should be the correct balance per the cash book?

A $21,990 balance at bank as stated

B $3,670 balance at bank

C $11,390 balance at bank

D $3,670 overdrawn.

5 The following receivables ledger control account has been prepared by a trainee accountant

2003 $ 2003 $31 Dec

1 Jan Balance 284,680 Cash received from credit customers 179,79031 Dec Credit sales 189,120 Contras against amounts owing

by company in payables ledger 800Discounts allowed 3,660Bad debts written off 1,800Sales returns 4,920 Balance 303,590

–––––––– ––––––––484,180 484,180–––––––– ––––––––

What should the closing balance on the account be when the errors in it are corrected?

A $290,150

B $286,430

C $282,830

D $284,430.

6 Which of the following calculations could produce an acceptable figure for a trader’s net profit for a period if noaccounting records had been kept?

A Closing net assets plus drawings minus capital introduced minus opening net assets

B Closing net assets minus drawings plus capital introduced minus opening net assets

C Closing net assets minus drawings minus capital introduced minus opening net assets

D Closing net assets plus drawings plus capital introduced minus opening net assets.



7 A company with an accounting date of 31 October carried out a physical check of inventory on 4 November 2003,leading to an inventory value at cost at this date of $483,700.

Between 1 November 2003 and 4 November 2003 the following transactions took place:

(1) Goods costing $38,400 were received from suppliers.

(2) Goods that had cost $14,800 were sold for $20,000.

(3) A customer returned, in good condition, some goods which had been sold to him in October for $600 and whichhad cost $400.

(4) The company returned goods that had cost $1,800 in October to the supplier, and received a credit note for them.

What figure should appear in the company’s financial statements at 31 October 2003 for closing inventory, basedon this information?

A $458,700

B $505,900

C $508,700

D $461,500.

8 In preparing its financial statements for the current year, a company’s closing inventory was understated by$300,000.

What will be the effect of this error if it remains uncorrected?

A The current year’s profit will be overstated and next year’s profit will be understated

B The current year’s profit will be understated but there will be no effect on next year’s profit

C The current year’s profit will be understated and next year’s profit will be overstated

D The current year’s profit will be overstated but there will be no effect on next year’s profit.

9 A sole trader took some goods costing $800 from inventory for his own use. The normal selling price of the goods is$1,600.

Which of the following journal entries would correctly record this?

Dr Cr$ $

A Inventory account 1,800Purchases account 1,800

B Drawings account 1,800Purchases account 1,800

C Sales account 1,600Drawings account 1,600

D Drawings account 1,800Sales account 1,800

4



10 A company’s gross profit percentage on sales has decreased by 5% in 2002 compared with 2001.

Which one of the following matters could have caused the decrease?

A The level of sales in 2002 is lower than that in 2001

B There have been more bad debts in 2002 than in 2001

C Inventory at the end of 2002 is lower than that at the end of 2001

D Theft of inventory by staff and customers has increased.

11 A sole trader fixes his prices to achieve a gross profit percentage on sales revenue of 40%. All his sales are for cash.He suspects that one of his sales assistants is stealing cash from sales revenue.

His trading account for the month of June 2003 is as follows:$

Recorded sales revenue 181,600Cost of sales 114,000

––––––––Gross profit 167,600

––––––––

Assuming that the cost of sales figure is correct, how much cash could the sales assistant have taken?

A $5,040

B $8,400

C $22,000

D It is not possible to calculate a figure from this information.

12 P, after having been a sole trader for some years, entered into partnership with Q on 1 July 2002, sharing profitsequally.

The business profit for the year ended 31 December 2002 was $340,000, accruing evenly over the year, apart froma charge of $20,000 for a bad debt relating to trading before 1 July 2002 which it was agreed that P should bearentirely.

How is the profit for the year to be divided between P and Q?P Q

$000 $000

A 245 95

B 250 90

C 270 90

D 255 85

5 [P.T.O.



13 Part of a company’s draft cash flow statement is shown below:$000

Operating profit 8,640Depreciation charges (2,160)Proceeds of sale of non-current assets 360Increase in inventory (330)Increase in accounts payable 440

The following criticisms of the above extract have been made:

(1) Depreciation charges should have been added, not deducted.

(2) Increase in inventory should have been added, not deducted.

(3) Increase in accounts payable should have been deducted, not added.

(4) Proceeds of sale of non-current assets should not appear in this part of the cash flow statement.

Which of these criticisms are valid?

A 2 and 3 only

B 1 and 4 only

C 1 and 3 only

D 2 and 4 only.

14 In preparing a company’s cash flow statement complying with IAS 7 Cash Flow Statements, which, if any, of thefollowing items could form part of the calculation of cash flow from financing activities?

(1) Proceeds of sale of premises

(2) Dividends received

(3) Bonus issue of shares

A 1 only

B 2 only

C 3 only

D None of them.

15 Which of the following assertions about cash flow statements is/are correct?

(1) A cash flow statement prepared using the direct method produces a different figure for operating cash flowfrom that produced if the indirect method is used.

(2) Rights issues of shares do not feature in cash flow statements.

(3) A surplus on revaluation of a non-current asset will not appear as an item in a cash flow statement.

(4) A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing Activitiesin a cash flow statement.

A 1 and 4

B 2 and 3

C 3 only

D 2 and 4.

6



16 Which of the following statements concerning the accounting treatment of research and development expenditureare true, according to IAS 38 Intangible Assets?

(1) Development costs recognised as an asset must be amortised over a period not exceeding five years.

(2) Research expenditure, other than capital expenditure on research facilities, should be recognised as anexpense as incurred.

(3) In deciding whether development expenditure qualifies to be recognised as an asset, it is necessary toconsider whether there will be adequate finance available to complete the project.

(4) Development projects must be reviewed at each balance sheet date, and expenditure on any project nolonger qualifying for capitalisation must be amortised through the income statement over a period notexceeding five years.

A 1 and 4

B 2 and 4

C 2 and 3

D 1 and 3.

17 Which of the following statements about accounting concepts and policies is/are correct?

(1) The effect of a change to an accounting policy should be disclosed as an extraordinary item if material.

(2) Information in financial statements should be presented so as to be understood by users with a reasonableknowledge of business and accounting.

(3) Companies should create hidden reserves to strengthen their financial position.

(4) Consistency of treatment of items from one period to the next is essential to enhance comparability betweencompanies, and must therefore take precedence over other accounting concepts such as prudence.

A 1 and 4

B 2 and 3

C 3 and 4

D 2 only.

18 Which, if any, of the following statements are correct according to IAS 8 Net Profit or Loss for the Period,Fundamental Errors and Changes in Accounting Policies?

(1) The correction of a fundamental error relating to a past period should be made in the current period. It isnot acceptable to make the correction by adjusting the opening balance of retained earnings.

(2) A change in an accounting estimate constitutes a fundamental error and should be accounted for as such.

(3) The benchmark treatment for a change of accounting policy is normally to apply it retrospectively, withadjustment to the opening balance of retained earnings.

A 1 only

B 2 only

C 3 only

D None of the statements are correct.

7 [P.T.O.



19 Which of the following statements about company financial statements is/are correct, according to Internationalaccounting standards?

(1) A material profit or loss on the sale of part of the entity must appear in the income statement as anextraordinary item.

(2) Dividends paid and proposed should be included in the income statement.

(3) The income statement must show separately any material profit or loss from operations discontinuing duringthe year.

(4) The statement of changes in equity must not include unrealised gains or losses.

A 1, 2 and 3

B 2 and 4

C 3 only

D 1 and 4.

20 Which of the following items are required to be disclosed in a limited liability company’s financial statementsaccording to IAS 1 Presentation of Financial Statements?

(1) Authorised share capital

(2) Finance costs

(3) Staff costs

(4) Depreciation and amortisation

A 1, 2 and 3 only

B 1, 2 and 4 only

C 2, 3 and 4 only

D All four items.

21 At 30 June 2002 a company’s capital structure was as follows:$

Ordinary share capital500,000 shares of 25c each 125,000

Share premium account 100,000

In the year ended 30 June 2003 the company made a rights issue of 1 share for every 2 held at $1 per share andthis was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using theshare premium account for the purpose.

What was the company’s capital structure at 30 June 2003?

Ordinary share capital Share premium account$ $

A 450,000 125,000

B 225,000 250,000

C 225,000 325,000

D 212,500 262,500

8



22 At 30 June 2002 a company had $1m 8% loan notes in issue, interest being paid half-yearly on 30 June and 31 December.

On 30 September 2002 the company redeemed $250,000 of these loan notes at par, paying interest due to thatdate.

On 1 April 2003 the company issued $500,000 7% loan notes, interest payable half-yearly on 31 March and 30 September.

What figure should appear in the company’s income statement for interest payable in the year ended 30 June2003?

A $88,750

B $82,500

C $65,000

D $73,750.

23 Which of the following material events after the balance sheet date and before the financial statements areapproved by the directors should be adjusted for in those financial statements?

(1) A valuation of property providing evidence of impairment in value at the balance sheet date.

(2) Sale of inventory held at the balance sheet date for less than cost.

(3) Discovery of fraud or error affecting the financial statements.

(4) The insolvency of a customer with a debt owing at the balance sheet date which is still outstanding.

A All of them

B 1, 2 and 4 only

C 3 and 4 only

D 1, 2 and 3 only.

9 [P.T.O.



24 A company’s summarised financial statements, ignoring tax, are shown below:

Income statement Balance sheet$m $m

Non-current assets 1,000Profit before interest 200Interest paid (80) Net current assets 1,600

–––– ––––––Profit after interest 120 2,600

––––––Ordinary share capital 1,000

Dividends paid (40) Reserves 800––––––1,800

Loan capital 800–––– ––––––

Retained profit 80 2,600–––– ––––––

What is the correct calculation of return on shareholders’ capital employed?

A 120/1,800 = 16·7%

B 200/2,600 = 17·7%

C 40/1,800 1= 12·2%

D 120/1,000 = 12·0%

25 The capital of a limited liability company is made up as follows:$m

Issued ordinary share capital 1,000Share premium account 1,500Accumulated profits 3,0008% loan notes 1,500

Which of the following calculations of the company’s gearing ratio, based on these figures, is correct?

A 1,500/6,000 = 1 25%

B 4,500/1,500 = 300%

C 4,500/6,000 = 1 75%

D 1,500/1,000 = 150%

(50 marks)

10



This is a blank page.Section B begins on page 12.



12

Section B – ALL FIVE questions are compulsory and must be attempted

1 (a) At 31 December 2002 the following balances existed in the accounting records of Abrador, a limited liabilitycompany

Reference $to notes

Issued share capital –2,000,000 ordinary shares of 50c each 1 1,000,000

Share premium account 1 400,000Suspense account 1 800,000Accumulated profits 2 7,170,000Deferred development costs 570,000Property, plant and equipment – cost 5,000,000

depreciation at 31 December 2001 3 1,000,000Inventory at 31 December 2002 3,900,000Trade receivables 4 3,400,000Overdraft at bank 100,000Trade payables 1,900,000Allowance for doubtful debts at 31 December 2001 4 100,0006% loan notes 5 400,000

Notes1 On 31 December 2002 the company issued for cash 1,000,000 ordinary shares at a premium of 30c per

share. The proceeds have been debited to cash and credited to the suspense account.

2 The profit for the year is included in the figure of $7,170,000 above but does not include adjustments forNotes 3 and 4 below.

3 Depreciation is to be provided at 25% per year on the reducing balance basis, on the property, plant andequipment.

4 Debts totalling $400,000 are to be written off and the provision for doubtful debts adjusted to 3% of thereceivables.

5 The 6% loan notes are due for redemption on 31 December 2003 and the obligation is not to be refinanced.All interest due to 31 December 2002 has been paid.

Required:

Prepare the company’s balance sheet as at 31 December 2002 for publication, using the format in IAS 1Presentation of Financial Statments.

Note. The information in (b) below is not relevant for this part of the question. (8 marks)

(b) The deferred development costs of $570,000 in (a) above are made up as follows:

Project ACompleted by 31 December 2001 $ $

Balance of costs as at 31 December 2001 400,000Amortised 2002 (100,000) 300,000

–––––––––

Project BIn progress

Total costs as at 31 December 2001 150,000Further costs in 2002 120,000 270,000

––––––––– –––––––––Balance as at 31 December 2002 570,000

–––––––––



13

The charge in the income statement for 2002 was $185,000 made up as follows:$

Project A Amortisation 100,000

Project C Research costs written off 85,000

Required:

State the figures for the disclosure note summarising this information required by IAS 38 Intangible Assets.A statement of the company’s policy for research and development expenditure is NOT required. (4 marks)

(12 marks)

2 The accounting records of Riffon, a limited liability company included the following balances at 30 June 2002:$

Office buildings – cost 1,600,000Office buildings – accumulated depreciationOffice buildings – (10 years at 2% per year) 1,320,000Plant and machinery – cost (all purchased in 2000 or later) 1,840,000Plant and machinery – accumulated depreciationPlant and machinery – (straight line basis at 25% per year) 1,306,000

During the year ended 30 June 2003 the following events occurred:

20021 July It was decided to revalue the office building to $2,000,000, with no change to the estimate of its

remaining useful life.

1 October New plant costing $200,000 was purchased.

2003 1 April Plant which had cost $240,000 and with accumulated depreciation at 30 June 2002 of $180,000 was

sold for $70,000.

It is the company’s policy to charge a full year’s depreciation on plant in the year of acquisition and none in the yearof sale.

Required:

Prepare the following ledger accounts to record the above balances and events:

(a) Office building: cost/valuation(a) Office building: accumulated depreciation(a) Office building: revaluation reserve. (6 marks)

(b) Plant and machinery: cost(b) Plant and machinery: accumulated depreciation(b) Plant and machinery: disposal. (6 marks)

(12 marks)

[P.T.O.



3 On 1 November 1999 Eagle, a limited liability company, acquired 70% of the share capital of Oxer for $180,000.At this date the accumulated profits of Oxer amounted to $150,000.

The balance sheets of the two companies at 31 October 2003 were as follows:

Eagle Oxer$ $

Investment in Oxer 180,000Sundry net assets 490,000 410,000

––––––––– ––––––––670,000 410,000

––––––––– ––––––––Ordinary share capital 220,000 100,000Accumulated profits 450,000 310,000

––––––––– ––––––––670,000 410,000

––––––––– ––––––––

Eagle’s policy is to amortise goodwill arising on consolidation over five years.

Required:

Prepare the consolidated balance sheet of Eagle and its subsidiary at 31 October 2003.

(8 marks)

4 The directors of Aluki, a fashion wholesaler, are reviewing the company’s draft financial statements for the year ended30 September 2003, which show a profit of $900,000 before tax.The following matters require consideration:

(a) The closing inventory includes:

(i) 3,000 skirts at cost $40,000. Since the balance sheet date they have all been sold for $65,000, withselling expenses of $3,000.

(ii) 2,000 jackets at cost $60,000. Since the balance sheet date half the jackets have been sold for $25,000(selling expenses $1,800) and the remainder are expected to sell for $20,000 with selling expenses of$2,000. (2 marks)

(b) An employee dismissed in August 2003 began an action for damages for wrongful dismissal in October 2003.She is claiming $100,000 in damages. Aluki is resisting the claim and the company’s lawyers have advised thatthe employee has a 30% chance of success in her claim.

The financial statements currently include a provision for the $100,000 claim. (4 marks)

(c) In October 2003 a fire destroyed part of the company’s warehouse, with an uninsured loss of inventory worth$180,000 and damage to the building, also uninsured, of $228,000. The going concern status of the companyis not affected.

The financial statements currently make no mention of the fire losses. (3 marks)

Required:

Explain to the directors how these matters should be treated in the financial statements for the year ended 30 September 2003, stating the relevant accounting standards.

(9 marks)

14



15

5 The use of historical cost as a basis for accounting is widespread.

Required:

(a) Explain THREE ways in which the use of historical cost accounting may mislead users of financialstatements. (6 marks)

(b) Briefly state THREE reasons why historical cost accounting remains in use in spite of its limitations.(3 marks)

(9 marks)




Answers



19

Part 1 Examination – Paper 1.1 (INT)Preparing Financial Statements (International Stream) December 2003 Answers

Section A

1 AA 16,000 + 14,600 – 18,000B 18,000 + 14,600 – 16,000C 18,000 + 14,600 + 16,000D 16,000 + 14,600

2 B

3 B

4 BB 16,690 – 9,160 – 3,860C 16,690 + 3,860 – 9,160D As B but overdrawn

5 CA C + 2 x $3,660 discounts allowedB C + 2 x $1,800 bad debts written offC Sales ledger control account

$ $284,680 3,660189,120 1,800

4,920179,790

800Balance 282,830

–––––––– ––––––––473,800 473,800–––––––– ––––––––

D C + $1,600 (contras)

6 A

7 DA 483,700 – 38,400 + 14,800 + 400 – 1,800B 483,700 + 38,400 – 14,800 + 400 – 1,800C 483,700 + 38,400 – 14,800 – 400 + 1,800D 483,700 – 38,400 + 14,800 – 400 + 1,800 (Correct)

8 C

9 B

10 D

11 BA $181,600 x 40% = 72,640 – 67,600 = $5,040B $114,000 x 10/6 = $190,000 – 181,600 = $8,400 (correct)C $181,600 – (114,000 + 40%)

12 BA P (340,000 – 20,000)/2 + 170,000/2

Q 95,000B P 180,000 + 90,000 – 20,000 (Correct)

Q 90,000C P 180,000 + 90,000

Q 90,000D P 170,000 + 85,000

Q 85,000

13 B

14 D

15 C

16 C

17 D

18 C



19 C

20 D

21 BA All rights issue proceeds added to share capital

Bonus issue 75,000B 125,000 + 62,500 + 37,500; 100,000 + 187,500 – 37,500 (correct)C As B, but bonus issue added to share premiumD Bonus issue does not allow for previous issue.

22 DA $80,000 + 7% x $500,000 x 3/12B As D but including 7% x $500,000 x 6/12 instead of 3/12C As D but excluding 7% x $500,000 x 3/12D 8% x $1m x 3/12 + 8% x $750,000 x 9/12 + 7% x $500,000 x 3/12

23 A

24 A

25 A

20



21

Section B

1 (a) AbradorBalance sheet as at 31 December 2002

Assets $ $Non-current assets

Property, plant and equipment (W1) 3,000,000Development costs 570,000 3,570,000

––––––––––Current assets

Inventory 3,900,000Receivables (W2) 2,910,000

–––––––––– 6,810,000––––––––––

10,380,000––––––––––

Equity and liabilitiesCapital and reserves

Issued share capital 1,500,000Share premium account 700,000Accumulated profits (W3) 5,780,000

––––––––––7,980,000

Curent liabilitiesTrade payables 1,900,000Bank overdraft 100,0006% loan notes 400,000 2,400,000

–––––––––– ––––––––––10,380,000––––––––––

Workings1 Property, plant and equipment per question 5,000,000

less: depreciation at 31 December 2001 1,000,000––––––––––4,000,000

less: 25% x 4,000,000 1,000,000––––––––––3,000,000––––––––––

2 Receivables 3,400,000less: Written off 400,000

––––––––––3,000,000

less: Allowance 90,000––––––––––2,910,000––––––––––

$3 Accumulated profit

Per question 7,170,000less: Depreciation 1,000,000Bad debts 400,000Allowance for doubtful debts (10,000) 1,390,000

––––––––– ––––––––––5,780,000––––––––––



22

(b)$

Movements on deferred development expenditure during yearBalance at 31 December 2001 550,000New expenditure in 2002 120,000

–––––––––670,000

Amortisation for year (100,000)–––––––––

Deferred development expenditure at 31 December 2002 570,000–––––––––

Total expenditure on research and development charged in income statementCurrent expenditure 85,000Amortisation 100,000

–––––––––185,000

–––––––––

2 (a) Office building – cost/valuation

2002 $ $1 July Balance 1,600,0001 July Revaluation 400,000

––––––––––2,000,000

Office building – accumulated depreciation

2002 $ 2002 $1 July Revaluation reserve 320,000 1 July Balance 320,000 2003 200330 June Balance 50,000 30 June Income statement (W1) 50,000

––––––––– –––––––––370,000 370,000

––––––––– –––––––––

Revaluation reserve

$ 2002 $1 July Office building – cost 400,0001 July Office building – depreciation 320,000

–––––––––720,000

(b) Plant and machinery – cost

2002 $ 2003 $1 July Balance 840,000 1 April Transfer disposal 240,0001 Oct Cash 200,000 30 June Balance 800,000

–––––––––– ––––––––––1,040,000 1,040,000–––––––––– ––––––––––

20031 July Balance 800,000



23

Plant and machinery – accumulated depreciation

2003 $ 2002 $1 April Transfer – disposal 180,000 1 July Balance 306,000

200330 June Balance 326,000 30 June Income statement (W2) 200,000

–––––––––– ––––––––––506,000 506,000

–––––––––– ––––––––––

Plant and machinery – disposal

2003 $ 2003 $1 April Transfer – cost 240,000 1 April Transfer – depreciation 180,00030 June Income statement Cash 70,000

profit 10,000–––––––––– ––––––––––

250,000 250,000–––––––––– ––––––––––

Workings1 Depreciation of office building

$2m/40 (remaining useful life) = $50,000

2 Depreciation of plant and machinery25% x ($840,000 – $240,000 + $200,000) = $200,000

3 Cost of control

$ $Investment 180,000 Share capital 70% 70,000

Accumulated profits 70% 105,000Accumulated profits –

goodwill amortised 4/5 x $5,000 4,000Balance for CBS 1,000

–––––––––– ––––––––––180,000 180,000

–––––––––– ––––––––––

Minority interest

$ $Balance for CBS 123,000 Share capital 30% 30,000

Accumulated profits 30% 93,000–––––––––– ––––––––––

123,000 123,000–––––––––– ––––––––––

Accumulated profits

$ $Cost of control Eagle 450,000

70% pre-acq 105,000 Oxer 310,000Minority interest 30% 93,000Cost of control

goodwill amortised 4,000Balance for CBS 558,000

–––––––––– ––––––––––760,000 760,000

–––––––––– ––––––––––



Eagle Group

Consolidated balance sheet as at 31 October 2003$

Goodwill 1,000Sundry net assets 900,000

––––––––901,000––––––––

Share capital 220,000Accumulated profits 558,000

––––––––778,000

Minority interest 123,000––––––––901,000––––––––

4 (a) The basic principle for the valuation of inventory according to IAS 2 Inventories is to take the lower of cost and net realisablevalue.

The 3,000 skirts should therefore be included at cost $40,000, and the jackets should be valued at net realisable value:$

$25,000 less $1,800 23,200$20,000 less $2,000 18,000

–––––––41,200–––––––

(b) IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires contingent liabilities of this kind and degree ofprobability be disclosed by note, detailing the nature of the contingent liability and an estimate of the financial effect.

The $100,000 should therefore be removed and the note substituted. Provision should be made for legal expenses to beincurred.

(c) IAS 10 Events after the Balance Sheet Date classifies this as a non-adjusting event but a note giving details of the event andits financial effect (a loss of $180,000 plus $228,000 = $408,000) is required as the item is material enough to influencea reader of the financial statements.

5 (a) (i) Profit on a sale is calculated by taking the difference between historical cost and sale proceeds. When prices are rising,as they usually are, the ‘holding gain’ arising while the goods were held in inventory is included as part of the profit,ignoring the fact that it will cost more to replace the item.

(ii) Depreciation based on the historical cost of assets understates the real value of the benefit obtained from the use of theseassets if prices have risen since the assets were acquired. Profit is thus overstated.

(iii) The retention of historical values for non-current assets in the balance sheet understates their actual value. This canmislead shareholders when the balance sheet value of the business is used when calculating return on capital employed.

(b) (i) It is simple and cheap

(ii) Figures used are objective and verifiable.

(iii) Lack of a sound and acceptable alternative.

24



25

Part 1 Examination – Paper 1.1 (INT)Preparing Financial Statements (International Stream) December 2003 Marking Scheme

Marks1 (a) Tangible non-current assets 2 x 1/2 1

Development costs correctly displayed 1/2Receivables 2 x 1/2 1Issued share capital 1Share premium 1Accumulated profits 3 x 1/2 11/2Loan notes in current liabilities 1/2Layout 2

––– 81/2 max 8

(b) Movements in deferred development expenditureOpening balance 1Movements 2 x 1 2Income statement 2 x 1/2 1 4

––– –––12–––

2 (a) Office buildingcost/valuation 2 x 1/2 1accumulated depreciation:calculations 1entries 4 x 1/2 2revaluation reserve 2 x 1 2 6

–––

(b) Plant and machinerycost 4 x 1/2 2accumulated depreciation 4 x 1/2 2disposal 4 x 1/2 2

––– 6–––12–––

3 Goodwill 5 x 1/2 21/2Minority interest 2 x 1/2 1Accumulated profits 5 x 1/2 21/2Share capital 1/2Sundry net assets 1Heading 1/2

––– 8–––



Marks4 (a) Inventory

IAS 2 mentioned 1IAS 2 Valuation 2 x 1/2 1

––– 2(b) Contingent liability

IAS 37 mentioned 1Disclose by note stating nature and financial effect 1Remove $100,000 and replace with note 1Provide for legal expenses 1

––– 4(c) Event after the balance sheet date

IAS 10 mentioned 1Non-adjusting 1Note required detailing event and financial effect 1

––– 3–––9

–––

5 (a) 3 x 2 6

(b) 3 x 1 3––– 9

–––

26




PART 1


QUESTION PAPER





Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall


Pape

r 1.1

(IN

T)





1 A business purchased a motor car on 1 July 2003 for $20,000. It is to be depreciated at 20 per cent per year onthe straight line basis, assuming a residual value at the end of five years of $4,000, with a proportionate depreciationcharge in the year of purchase.

The $20,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles repairs account.

How will the business profit for the year ended 31 December 2003 be affected by the error?

A Understated by $18,400

B Understated by $16,800

C Understated by $18,000

D Overstated by $18,400

2 A company has sublet part of its offices and in the year ended 30 November 2003 the rent receivable was:

Until 30 June 2003 $8,400 per year

From 1 July 2003 $12,000 per year

Rent was paid quarterly in advance on 1 January, April, July, and October each year.

What amounts should appear in the company’s financial statements for the year ended 30 November 2003?

Income statementRent receivable Balance sheet

A $9,900 $2,000 in sundry payables

B $9,900 $1,000 in sundry payables

C $10,200 $1,000 in sundry payables

D $9,900 $2,000 in sundry receivables

3 At 30 September 2002 a company’s allowance for doubtful debts amounted to $38,000, which was five per cent ofthe receivables at that date.

At 30 September 2003 receivables totalled $868,500. It was decided to write off $28,500 of debts as bad and tokeep the allowance for doubtful debts at five per cent of receivables.

What should be the charge in the income statement for the year ended 30 September 2003 for bad and doubtfuldebts?

A $42,000

B $33,925

C $70,500

D $32,500

2



4 A company’s policy as regards depreciation of its plant and machinery is to charge depreciation at 20 per cent peryear on cost, with proportional depreciation for items purchased or sold during a year.

The company’s plant and machinery at cost account for the year ended 30 September 2003 is shown below:


2002 $ 2003 $1 Oct Balance (all plant purchased 200,000 30 Jun Transfer disposal account 40,000

after 1999)20031 Apr Cash-purchase of plant 50,000 30 Sept Balance 210,000

–––––––– ––––––––250,000 250,000–––––––– ––––––––

What should be the depreciation charge for plant and machinery (excluding any profit or loss on the disposal) forthe year ended 30 September 2003?

A $43,000

B $51,000

C $42,000

D $45,000

5 A company’s trial balance failed to agree, the totals being:

Debit $815,602

Credit $808,420

Which one of the following errors could fully account for the difference?

A The omission from the trial balance of the balance on the insurance expense account $7,182 debit

B Discount allowed $3,591 debited in error to the discount received account

C No entries made in the records for cash sales totalling $7,182

D The returns outwards total of $3,591 was included in the trial balance as a debit balance

3 [P.T.O.



6 The following control account has been prepared by a trainee accountant:

Receivables ledger control account

$ $Opening balance 308,600 Cash received from credit customers 147,200Credit sales 154,200 Discounts allowed to credit customers 1,400Cash sales 88,100Contras against credit balances inpayables ledger 4,600 Interest charged on overdue accounts 2,400

Bad debts written off 4,900Allowance for doubtful debts 2,800Closing balance 396,800

––––––––– –––––––––$555,500 $555,500––––––––– –––––––––

What should the closing balance be when all the errors made in preparing the receivables ledger control accounthave been corrected?

A $395,200

B $304,300

C $307,100

D $309,500

7 Listed below are five potential causes of difference between a company’s cash book balance and its bank statementbalance as at 30 November 2003:

(1) Cheques recorded and sent to suppliers before 30 November 2003 but not yet presented for payment.

(2) An error by the bank in crediting to another customer’s account a lodgement made by the company.

(3) Bank charges.

(4) Cheques paid in before 30 November 2003 but not credited by the bank until 3 December 2003.

(5) A cheque recorded and paid in before 30 November 2003 but dishonoured by the bank.

Which of the following alternatives correctly analyses these items into those requiring an entry in the cash bookand those that would feature in the bank reconciliation?

Cash book entry Bank reconciliation

A 1, 2, 4 3, 5

B 3, 5 1, 2, 4

C 3, 4 1, 2, 5

D 2, 3, 5 1, 4

4



8 At 30 September 2003 the closing inventory of a company amounted to $386,400.The following items were included in this total at cost:

(1) 1,000 items which had cost $18 each. These items were all sold in October 2003 for $15 each, with sellingexpenses of $800.

(2) Five items which had been in inventory since 1973, when they were purchased for $100 each, sold inOctober 2003 for $1,000 each, net of selling expenses.

What figure should appear in the company’s balance sheet at 30 September 2003 for inventory?

A $382,600

B $384,200

C $387,100

D $400,600

The following information is relevant for questions 9 and 10

A is a sole trader who does not keep full accounting records. The following details relate to her transactions with creditcustomers and suppliers for the year ended 30 November 2003:

$Trade receivables, 1 December 2002 130,000Trade payables, 1 December 2002 60,000Cash received from customers 686,400Cash paid to suppliers 302,800Discounts allowed 1,400Discounts received 2,960Bad debts 4,160Amount due from a customer who is also a supplier offsetagainst an amount due for goods supplied by him 2,000Trade receivables, 30 November 2003 181,000Trade payables, 30 November 2003 84,000

9 Based on the above information, what figure should appear in A’s income statement for the year ended 30 November 2003 for sales revenue?

A $748,960

B $748,800

C $744,960

D $743,560

10 Based on the above information, what figure should appear in A’s income statement for the year ended 30 November 2003 for purchases?

A $283,760

B $325,840

C $329,760

D $331,760

5 [P.T.O.



11 A sole trader fixes her prices by adding 50 per cent to the cost of all goods purchased. On 31 October 2003 a firedestroyed a considerable part of the inventory and all inventory records.

Her trading account for the year ended 31 October 2003 included the following figures:

$ $Sales 281,250Opening inventory at cost 183,600Purchases 249,200

––––––––432,800

Closing inventory at cost 204,600 228,200–––––––– ––––––––

Gross profit 53,050

Using this information, what inventory loss has occurred?

A $61,050

B $87,575

C $40,700

D $110,850

12 According to IAS 2 Inventories, which of the following costs should be included in valuing the inventories of amanufacturing company?




(4) General administrative overheads

A All four items

B 1, 2 and 4 only

C 2 and 3 only

D 1 and 3 only

6



13 G, H and I are in partnership, compiling their accounts for the year to 31 December each year.The profit-sharing arrangements are as follows:

Until 30 June 2003Annual salaries H $40,000

I $20,000

Balance of profit split G 60%, H 20%, I 20%

From 1 July 2003Salaries to be discontinued, profit to be divided: G 50%, H 30%, I 20%

The profit for the year ended 31 December 2003 was $400,000 before charging partners’ salaries, accruing evenlythrough the year and after charging an expense of $40,000, which it was agreed related wholly to the first six monthsof the year.

How should the profit for the year be divided among the partners?

G H I$ $ $

A 182,000 130,000 88,000

B 200,000 116,000 84,000

C 198,000 118,000 88,000

D 180,000 132,000 88,000

14 IAS 38 Intangible Assets governs the accounting treatment of expenditure on research and development.The following statements about the provisions of IAS 38 may or may not be correct.

(1) Capitalised development expenditure must be amortised over a period not exceeding five years.

(2) If all the conditions specified in IAS 38 are met, development expenditure may be capitalised if the directorsdecide to do so.

(3) Capitalised development costs are shown in the balance sheet under the heading of Non-current Assets.

(4) Amortisation of capitalised development expenditure will appear as an item in a company’s statement ofchanges in equity.

Which of these four statements are in fact correct?

A 3 only

B 2 and 3

C 1 and 4

D 1 and 3

7 [P.T.O.



15 A company accountant is considering how to include the following items in the financial statements:

(1) Cost of restructuring the activities of the enterprise.

(2) The correction of a fundamental error in the financial statements for the previous period.

(3) Loss from expropriation of assets by a government.

Which of these items would constitute an extraordinary item according to IAS 8 Net Profit or Loss for the Period,Fundamental Errors and Changes in Accounting Policies?

A 1 only

B 2 only

C 3 only

D All three items

16 Which of the following statements about the financial statements of limited liability companies are correctaccording to International Accounting Standards?

(1) In preparing a cash flow statement, either the direct or the indirect method may be used. Both lead to thesame figure for net cash from operating activities.

(2) Loan notes can be classified as current or non-current liabilities.

(3) Financial statements must disclose a company’s total expense for staff costs and for depreciation, if material.

(4) A company must disclose by note details of all adjusting events allowed for in the financial statements.

A 1, 2 and 3 only

B 2 and 4 only

C 3 and 4 only

D All four items

17 Which of the following could appear as separate items in the statement of changes in equity required by IAS IPresentation of Financial Statements as part of a company’s financial statements?

(1) Gain on revaluation of land.

(2) Loss on sale of investments.

(3) Prior year adjustments.

(4) Proceeds of an issue of ordinary shares.

(5) Dividends proposed after the year end.

A 1, 3 and 4 only

B 1, 2 and 4 only

C 1 and 3 only

D All five items

8



18 Which of the following must be disclosed in the financial statements of a quoted (listed) company, if material?

(1) Total spent on research and development.

(2) An analysis of operating profit into continuing and discontinuing activities.

(3) Profit or loss on the disposal of a discontinuing operation.

(4) Authorised share capital.

(5) Finance costs.

A 2, 3 and 4 only

B 1, 2, 3 and 5 only

C 1 and 5 only

D All five items

19 The draft financial statements of a limited liability company are under consideration. The accounting treatment of thefollowing material events after the balance sheet date needs to be determined.

(1) The bankruptcy of a major customer, with a substantial debt outstanding at the balance sheet date.

(2) A fire destroying some of the company’s inventory (the company’s going concern status is not affected).

(3) An issue of shares to finance expansion.

(4) Sale for less than cost of some inventory held at the balance sheet date.

According to IAS 10 Events after the Balance Sheet Date, which of the above events require an adjustment tothe figures in the draft financial statements?

A 1 and 4 only

B 1, 2 and 3 only

C 2 and 3 only

D 2 and 4 only

20 A limited liability company issued 50,000 ordinary shares of 25c each at a premium of 50c per share. The cashreceived was correctly recorded but the full amount was credited to the ordinary share capital account.

Which of the following journal entries is needed to correct this error?

Debit Credit$ $

A Share premium account 25,000Share capital account 25,000

B Share capital account 25,000Share premium account 25,000

C Share capital account 37,500Share premium account 37,500

D Share capital account 25,000Cash 25,000

9 [P.T.O.



21 Which of the following journal entries could correctly record a bonus (capitalisation) issue of shares?

$ $Debit Credit

A Cash 100,000Ordinary share capital 100,000

B Ordinary share capital 100,000Share premium 100,000

C Share premium 100,000Ordinary share capital 100,000

D Investments 100,000Cash 100,000

22 Which one of the following formulas would give a valid calculation of a company’s gearing ratio?

AOrdinary share capital

––––––––––––––––––––––––––––– x 100Ordinary share capital + reserves

BLoan capital

–––––––––––––––––––––––––––––––––––––––––– x 100Ordinary share capital + preference share capital

CTotal share capital + reserves

––––––––––––––––––––––––––––––––– x 100Loan capital + preference share capital

DLoan capital + preference share capital

––––––––––––––––––––––––––––––––––––– x 100Total share capital + reserves + loan capital

The following information is relevant for questions 23 and 24.

Hyrax acquired 80 per cent of the share capital of Shrew on 1 January 2003 for $280,000.

The balance sheets of the two companies at 31 December 2003 were as follows:

Balance sheetsHyrax Shrew

$ $Sundry assets 660,000 290,000Investment in Shrew 280,000 –

––––––––– –––––––––940,000 290,000

––––––––– –––––––––

Issued share capital 400,000 140,000Share premium account 320,000 50,000

Accumulated profitsAs at 1 Jan 2003 140,000 60,000

Profit for 2003 80,000 40,000––––––––– –––––––––940,000 290,000

––––––––– –––––––––

There have been no changes in the share capital or share premium account of either company since 1 January 2003.Goodwill on consolidation is to be amortised on the straight line basis over five years.

10



23 What figure for goodwill on consolidation should appear in the consolidated balance sheet of the Hyrax group at31 December 2003?

A $96,000

B $80,000

C $64,000

D $38,400

24 What figure for minority interest should appear in the consolidated balance sheet of the Hyrax group at31 December 2003?

A $56,000

B $48,000

C $58,000

D $50,000

25 P, the parent company of a group, owns shares in three other companies. P’s holdings are:

Q Shares giving control of 60% of the voting rights in Q

R Shares giving control of 20% of the voting rights in R. P also has the right to appoint or remove all the directorsof R.

S Shares giving control of 10% of the voting rights in S. In addition, Q owns 70% of the voting rights in S.

Which of these companies must be included in the consolidated financial statements of P?

A Q, R and S

B Q and S only

C R and S only

D Q and R only

(50 marks)

11 [P.T.O.



Section B – ALL FIVE questions are compulsory and must be attempted

1 The following balances have been extracted from the accounting records of Minica, a limited liability company, at 31 December 2003:

Reference $to notes

Sales revenue 2 3,845,000Opening inventory 360,000Purchases 3 2,184,000Carriage inwards 119,000Carriage outwards 227,000Office equipment at 1 January 2003 2, 3 and 4

Cost 460,000Accumulated depreciation 92,000

Trade receivables 620,000Allowance for doubtful debts at

1 January 2003 5 20,000Bad debts written off during

the year 15,000Sundry administrative expenses 416,000

The following further information is available:

(1) Closing inventory amounts to $450,000

(2) Some office equipment, which had cost $20,000, with accumulated depreciation at 1 January 2003 of$14,000, was sold for $15,000 during the year. The sale proceeds were included in the sales figure of$3,845,000.

(3) The cost of new equipment purchased on 1 July 2003 for $60,000 has been included in the purchasesfigure of $2,184,000

(4) The company depreciates its office equipment at 20 per cent per year on the straight line basis, withproportionate depreciation in the year of purchase but none in the year of sale. None of the equipment heldat 1 January 2003 was more than three years old.

(5) The allowance for doubtful debts at 31 December 2003 is to be five per cent of trade receivables.

(6) Accruals and prepayments on sundry administrative expenses at 31 December 2003 were:

$Accrued expenses 28,700Prepaid expenses 14,400

(7) The directors propose a dividend of 6c per share on the ordinary share capital (4,000,000 shares of 25ceach) to be paid in July 2004.No dividends were paid in 2003.

Required:

(a) Prepare the company’s income statement for the year ended 31 December 2003 for internal use.(11 marks)

(b) State the total amount of the proposed dividend and explain how it would be dealt with in the company’sfinancial statements for publication. (1 mark)

(12 marks)

12



2 The draft financial statements of Arbados at 30 September 2003 have been prepared, but there remains a differenceof $100, which has been temporarily inserted as a credit in a suspense account in the company’s balance sheet.

On investigation the following errors were found:(1) $8,700 paid for repairs to premises and correctly recorded in the cash book was debited to the premises

asset account as $7,800.

(2) A $1,000 cheque received for the wreckage of a car destroyed in an accident while uninsured had beencorrectly entered in the cash book but not posted anywhere. The car had cost $30,000 and depreciation of$6,000 had already been provided on the car for the year ended 30 September 2003, making accumulateddepreciation on the car at that date $12,000. No entries have yet been made to eliminate the cost andaccumulated depreciation of the car.

It is the company’s policy to charge no depreciation on an asset in the year of its disposal.

Required:Prepare journal entries, including narratives, to correct the errors, record the loss of the car and clear thesuspense account.

(9 marks)

13 [P.T.O.



The following financial statements and notes are relevant for questions 3 and 4.The summarised financial statements of Renada, a limited liability company, at 31 October 2002 and 31 October2003 are given below:

Balance sheets31 October

Reference 2002 2003to notes $ $ $ $

Non-current assets (net bookvalue) 1,2,3 1,000,000 1,800,000

Current assetsInventories 600,000 1,600,000Receivables 1,270,000 1,800,000Cash 140,000 2,010,000 – 3,400,000

–––––––––– –––––––––– –––––––––– ––––––––––3,010,000 5,200,000–––––––––– ––––––––––

Capital and reservesOrdinary share capital 4 500,000 600,000Share premium account 4 420,000 820,000Revaluation reserve 5 – 300,000Accumulated profits 920,000 1,340,000 1,080,000 2,200,000

–––––––––– –––––––––– –––––––––– ––––––––––1,840,000 2,800,000

Current liabilitiesBank overdraft – 260,000Income tax 120,000 40,000Trade payables 1,050,000 1,170,000 2,100,000 2,400,000

–––––––––– –––––––––– –––––––––– ––––––––––3,010,000 5,200,000–––––––––– ––––––––––

Income statements31 October

Referenceto notes 2002 2003

$ $Sales revenue (all on credit) 8,400,000 9,000,000Cost of sales 6 (6,300,000) (7,200,000)

–––––––––– ––––––––––Gross profit 2,100,000 1,800,000

Operating expenses (1,500,000) (1,600,000)–––––––––– ––––––––––

Profit before tax 600,000 200,000Income tax expense (120,000) (40,000)

–––––––––– ––––––––––Profit for the year 480,000 160,000

–––––––––– ––––––––––

14



Notes(1) On 1 November 2002 office equipment that had cost $240,000, with a net book value of $80,000, was sold

for $30,000.(2) The purchase of new non-current assets took place near the end of the year.(3) The depreciation charge for the year ended 31 October 2003 was $120,000.(4) The ordinary share issue was on 31 October 2003.(5) Some of the non-current assets were revalued upwards by $300,000 on 1 November 2002.(6) Cost of sales was made up as follows:

31 October2002 2003

$ $Opening inventory 500,000 600,000Purchases 6,400,000 8,200,000

–––––––––– ––––––––––6,900,000 8,800,000

Closing inventory (600,000) (1,600,000)–––––––––– ––––––––––

Cost of sales 6,300,000 7,200,000–––––––––– ––––––––––

3 Prepare a cash flow statement for Renada for the year ended 31 October 2003, using the format in IAS 7 CashFlow Statements.

(11 marks)

4 (a) Calculate in DAYS for the two years shown, the following (use closing figures for all three calculations):(i) Inventory holding period;(ii) Average period of credit granted to customers;(iii) Average period of credit allowed by suppliers. (3 marks)

(b) (i) Comment briefly on the changes in the position of the company revealed by the changes in these ratiosbetween the two years. (3 marks)

(ii) Briefly explain how two factors shown in the financial statements and/or the notes may have contributedto the decline in the company’s pre-tax return on capital employed, which is down from 32·6 per centin 2002 to 7·1 per cent in 2003. (4 marks)

(10 marks)

5 Comparability is a characteristic which adds to the usefulness of financial statements.

Required:

(a) Explain what is meant by the term ‘comparability’ in financial statements, referring to two types ofcomparison that users of financial statements may make. (4 marks)

(b) Explain two ways in which the IASB’s Framework for the Preparation and Presentation of FinancialStatements and the requirements of accounting standards aid the comparability of financial information.

(4 marks)

(8 marks)


15 [P.T.O.



Answers



Part 1 Examination – Paper 1.1 (INT)Preparing Financial Statements (International Stream) June 2004 Answers

Section A

1 A 20,000 minus 16,000 x 20%/2

2 B (7/12 x 8,400) + (5/12 x 12,000) = 9,9001,000 paid in advance in sundry payables

3 D 28,500 + 42,000 – 38,000

4 A (160,000 x 20%) + (40,000 x 20% x 3/4) + (50,000 x 20% x 1/2)

5 D

6 C Receivables ledger control account

308,600 147,200154,200 1,400

2,400 4,9004,600

307,100–––––––– ––––––––465,200 465,200–––––––– ––––––––

7 B

8 A 386,400 minus loss on 1 3,800

9 C Receivables ledger total account

130,000 686,4001,400

Balance 744,960 4,1602,000

181,000–––––––– ––––––––874,960 874,960–––––––– ––––––––

10 D Payables ledger total account

302,800 60,0002,9602,000 Balance 331,760

84,000–––––––– ––––––––391,760 391,760–––––––– ––––––––

11 C 281,250/3 – 53,050

12 D

13 B G H I20,000 10,000

90,000 30,000 30,000110,000 66,000 44,000

––––––––– ––––––––– –––––––––200,000 116,000 84,000

––––––––– ––––––––– –––––––––

14 A

15 C

16 A

17 A

18 D

19



19 A

20 B

21 C

22 D

23 C 280,000 – (112,000 + 40,000 + 48,000) = 80,000; minus 20% = 64,000

24 C 290,000 x 20%

25 A

20



Section B

1 (a) MinicaIncome statement for the year ended 31 December 2003

$ $Sales revenue (3,845,000 – 15,000) 3,830,000

less: Cost of salesOpening inventory 360,000Purchases (2,184,000 – 60,000) 2,124,000Carriage inwards 119,000

––––––––––2,603,000

less: Closing inventory 450,000 2,153,000–––––––––– ––––––––––

Gross profit 1,677,000less: Expenses

Sundry administrative expenses (W1) 430,300Carriage outwards 227,000Bad and doubtful debts (W2) 26,000Depreciation (W3) 94,000Profit on sale of office equipment (W4) (9,000)

–––––––––– 768,300––––––––––

Net profit for the year 908,700––––––––––

(b) The proposed dividend of $240,000 would be disclosed by note in Minica’s published income statement.

Workings $ $

1 Sundry administrative expenses416,000 + 28,700 – 14,400 430,300

2 Bad and doubtful debts

Bad debts written off 15,000Allowance (31,000 – 20,000) 11,000 26,000

––––––

3 Depreciation

(460,000 – 20,000) x 20 per cent 88,00060,000 x 20 per cent x 6/12 6,000 94,000

––––––

4 Profit on sale of equipment

15,000 proceeds minus 6,000 net book value 9,000

21



2 $ $

Repairs to premises 8,700Premises asset 7,800Suspense 900

Correction of error in posting cost of repairs to premises

Suspense account 1,000Motor vehicle disposal 1,000

Entry for unposted item

Accumulated depreciation 6,000Depreciation expense 6,000(or Income statement)

Motor vehicle disposal 30,000Motor vehicles – cost 30,000

Transfer of cost of vehicle destroyedto disposal account

Accumulated depreciation 6,000Motor vehicle disposal 6,000

Transfer of depreciation on vehicledestroyed to disposal account

Income statement 23,000Motor vehicle disposal 23,000

Loss on destruction of car transferred

3 Renada

Cash flow statement for the year ended 31 October 2003

$ $Cash flows from operating activities

Net profit before taxation 200,000Adjustments for:Depreciation 120,000Loss on sale of office equipment 50,000

–––––––––––Operating profit before working

capital changes 370,000Increase in inventory (1,000,000)Increase in receivables (530,000)Increase in payables 1,050,000

–––––––––––Cash used in operations (110,000)Income taxes paid (120,000)Net cash used in operating activities ––––––––––– (230,000)

Cash flows from investing activitiesPurchase of non-current assets (700,000)Proceeds from sale of non-

current assets 30,000Net cash used in investing activities –––––––––– (670,000)Cash flows from financing activities

Proceeds from issuance ofshare capital 500,000

Net cash from financing activities –––––––––– 500,000–––––––––

Net decrease in cash and cash equivalents (400,000)Cash and cash equivalents at 31 October 2002 140,000

–––––––––Cash and cash equivalents at 31 October 2003 (260,000)

–––––––––

22



WorkingNon-current assets – net book value

$ $Balance 1,000,000 Transfer disposal 80,000Revaluation reserve 300,000 Depreciation 120,000

Assets purchased(balancing figure) 700,000

Balance 1,800,000–––––––––– ––––––––––2,000,000 2,000,000–––––––––– ––––––––––

4 (a) 31 October2002 2003

(i) Inventory holding period

600,000/6,300,000 x 365 35 days

1,600,000/7,200,000 x 365 81 days

(ii) Average period of credit granted to customers

1,270,000 / 8,400,000 x 365 55 days

1,800,000 / 9,000,000 x 365 73 days

(iii) Average period of credit allowed by suppliers

1,050,000 / 6,400,000 x 365 60 days

2,100,000 / 8,200,000 x 365 93 days

(b) (i) All three ratios show deterioration.The large increase in the inventory holding period suggests that the company is having difficulty making sales in theclosing months of the period.

Customers are taking longer to pay, placing further strain on the company’s liquid position.

The company is attempting to finance the increased inventory and receivables by paying its suppliers more slowly, whichwill probably have the effect of losing supplier goodwill.

(ii) The main reason for the decline is the reduced gross profit percentage. If the gross profit percentage of 2002(25 per cent) had continued in 2003, an additional $450,000 of profit would have been made. Instead, the gross profitpercentage went down to 20 per cent.Other contributing factors are:

– the new non-current assets ($700,000) were not acquired until near the end of the year, and thus may not befully operational

– the share issue also took place right at the end of the year, and so has not yet been deployed in profit-earningassets.

5 (a) Comparability means that users are able to draw conclusions about the performance or financial position of a business byrelating figures for a particular period to other relevant figures.

Possible types of comparison are:(i) comparison with figures for the same business for earlier periods(ii) comparison with figures for other businesses for the same period(iii) comparison with budgets or forecasts

(Two types required for full marks)

(b) Two from:(i) by requiring the disclosure of accounting policies and the effect of changes in them(ii) by reducing or eliminating the number of possible alternative treatments for similar items available to businesses(iii) by requiring businesses to treat similar items in the same way within each period and from one period to the next, unless

a change is required to comply with accounting standards or to ensure that a more appropriate presentation of eventsor transactions is provided.

23



25

Part 1 Examination – Paper 1.1 (INT)Preparing Financial Statements (International Stream) June 2004 Marking Scheme

Section BMarks

1 Sales revenue 1/2Opening inventory 1/2Purchases 1/2Carriage inwards 1Closing inventory 1/2Gross profit correct 1Sundry administrative expenses 1Carriage outwards 1/2Bad and doubtful debts 11/2Depreciation 2Profit on sale 1

Heading 1––11

Proposed dividend 1––12––

2 For each journal entry

1/2 per entry 11/2 for narrative 1/2

–––11/2

11/2 x 6 9

3 Calculation of cash used in operations

Profit 1/2Depreciation 1Loss on sale 1Working capital movements 3 x 1/2 11/2 4

––––Taxation 1/2Investing activities

Purchases 5 x 1/2 21/2Proceeds of sale

1/2

Share issue 1

Cash movement 2 x 1/2 1

Heading 1/2

Layout 1––11––

4 (a) Ratios 3 x 1 3

(b) (i) Comments 3 x 1 3

(c) (ii) Reasons for decline 2 x 2 4––10––

5 (a) Explanation 2Types of comparison 2 x 1 2

––4

(b) 2 x 2 4––8––




PART 1


QUESTION PAPER








Pape

r 1.1

(IN

T)




Please use the candidate registration sheet provided to indicate your chosen answer to each multiple choice question.

Each question within this section is worth 2 marks.

1 A trial balance extracted from a sole trader’s records failed to agree, and a suspense account was opened for thedifference.

Which of the following errors would require an entry in the suspense account in correcting them?

(1) Discount allowed was mistakenly debited to discount received account.(2) Cash received from the sale of a non-current asset was correctly entered in the cash book but was debited to the

disposal account.(3) The balance on the rent account was omitted from the trial balance.(4) Goods taken from inventory by the proprietor had been recorded by crediting Drawings account and debiting

Purchases account.

A All four items

B 2 and 3 only

C 2 and 4 only

D 1 and 3 only

2 At 1 July 2003 a limited liability company had an allowance for doubtful debts of $83,000.

During the year ended 30 June 2004 debts totalling $146,000 were written off. At 30 June 2004 it was decidedthat a doubtful debt allowance of $218,000 was required.

What figure should appear in the company’s income statement for the year ended 30 June 2004 for bad anddoubtful debts?

A $155,000

B $364,000

C $281,000

D $11,000

3 The plant and machinery at cost account of a business for the year ended 30 June 2004 was as follows:


2003 $ 2003 $1 July Balance 240,000 30 Sept. Transfer disposal account 60,0002004 20041 Jan Cash – purchase of plant 160,000 30 Jun Balance 340,000

–––––––– ––––––––400,000 400,000–––––––– ––––––––

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionatedepreciation in the years of purchase and disposal.

What should be the depreciation charge for the year ended 30 June 2004?

A $68,000

B $64,000

C $61,000

D $55,000

2



4 Which of the following correctly describes the imprest system of operating petty cash?

A The petty cash float is replenished by regular periodic transfers of equal amount.

B The petty cash float is replenished by periodic transfers of the actual expenditure in the period.

C All expenses must be supported by a properly authorised voucher.

D Petty cash is operated outside the business double entry accounting system.

5 The following receivables ledger control account prepared by a trainee accountant contains a number of errors:


2004 $ 2004 $1 Jan Balance 614,000 31 Jan Credit sales 301,00031 Jan Cash from credit customers 311,000 Discounts allowed 3,400

Bad debts written off 32,000Contras against amounts due to Interest charged on overdue accounts 1,600suppliers in payables ledger. 8,650 Balance 595,650

–––––––– ––––––––933,650 933,650–––––––– ––––––––

What should the closing balance on the control account be after the errors in it have been corrected?

A $561,550

B $578,850

C $581,550

D $568,350

6 Which of the following statements about bank reconciliations are correct?

1 A difference between the cash book and the bank statement must be corrected by means of a journal entry.

2 In preparing a bank reconciliation, lodgements recorded before date in the cash book but credited by the bankafter date should reduce an overdrawn balance in the bank statement.

3 Bank charges not yet entered in the cash book should be dealt with by an adjustment in the bank reconciliation.

4 If a cheque received from a customer is dishonoured after date, a credit entry in the cash book is required.

A 2 and 4

B 1 and 4

C 2 and 3

D 1 and 3

3 [P.T.O.



7 If a company changes a material accounting policy, which of the following statements are correct?

1 The notes to the financial statements should disclose the reason for the change and its effect.

2 The effect of the change should be disclosed in the current year’s income statement as an extraordinary item.

3 The opening balance of retained earnings should be adjusted if practicable, as if the change had been in effectfor previous periods.

4 In the financial statements for the current period, comparative figures for the previous period should be adjustedto reflect the change.

A 1, 3 and 4

B 2, 3 and 4

C 1, 2 and 3

D 1, 2 and 4

8 Which of the following most closely describes the meaning of prudence, as the term is defined in the IASB’sFramework for the Preparation and Presentation of Financial Statements?

A The use of a degree of caution in making estimates required under conditions of uncertainty.

B Ensuring that accounting records and financial statements are free from material error.

C Understating assets and gains and overstating liabilities and losses.

D Ensuring that financial statements comply with all accounting standards and legal requirements.

9 Which, if any, of the following statements about accounting concepts and the characteristics of financialinformation are correct?

1 The concept of substance over form means that the legal form of a transaction must be reflected in financialstatements, regardless of the economic substance.

2 The historical cost concept means that only items capable of being measured in monetary terms can berecognised in financial statements.

3 It may sometimes be necessary to exclude information that is relevant and reliable from financial statementsbecause it is too difficult for some users to understand.

A 1 and 2 only

B 2 and 3 only

C 1 and 3 only

D None of these statements is correct

4



10 Which of the following statements about goodwill are correct?

(1) Goodwill may only be revalued to a figure in excess of cost if there is relevant and reliable evidence to supportthe revaluation.

(2) Internally generated goodwill may not be capitalised.

(3) Impairment of goodwill should always be shown separately on the face of a company’s income statement.

(4) Purchased goodwill is the difference between the cost of acquiring a company and the fair value of its identifiablenet assets.

A 1 and 3 only

B 2 and 3 only

C 1 and 4 only

D 2 and 4 only

11 In finalising the financial statements of a company for the year ended 30 June 2004, which of the followingmaterial matters should be adjusted for?

1 A customer who owed $180,000 at the balance sheet date went bankrupt in July 2004.

2 The sale in August 2004 for $400,000 of some inventory items valued in the balance sheet at $500,000.

3 A factory with a value of $3,000,000 was seriously damaged by a fire in July 2004. The factory was back inproduction by August 2004 but its value was reduced to $2,000,000.

4 The company issued 1,000,000 ordinary shares in August 2004.

A All four items

B 1 and 2 only

C 1 and 4 only

D 2 and 3 only

12 Which of the following statements about provisions, contingencies and events after the balance sheet date is/arecorrect?

1 A company expecting future operating losses should make provision for those losses as soon as it becomesprobable that they will be incurred.

2 Details of all adjusting events after the balance sheet date must be disclosed by note in a company’s financialstatements.

3 Contingent assets must be recognised if it is probable that they will arise.

4 Contingent liabilities must be treated as actual liabilities and provided for if it is probable that they will arise.

A 4 only

B 2 and 4 only

C 1 and 2 only

D All four statements are correct

5 [P.T.O.



13 A business compiling its financial statements for the year to 31 July each year pays rent quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from $60,000 per year to$72,000 per year as from 1 October 2003.

What figure should appear for rent expense in the business income statement for the year ended 31 July 2004?

A $69,000

B $62,000

C $70,000

D $63,000

14 Which of the following journal entries may be accepted as being correct according to their narratives?

Dr Cr$ $

1 Wages account 38,000Purchases account 49,000

Buildings account 87,000Labour and materials used in construction of extension to factory

2 Directors’ personal accounts:A 30,000B 40,000

Directors’ remuneration 70,000Directors’ bonuses transferred to their accounts

3 Suspense account 10,000Sales account 10,000

Correction of error in addition – total of credit side of sales account $10,000 understated

A 1 and 3

B 1 and 2

C 3 only

D 2 and 3

15 X and Y are in partnership, sharing profits in the ratio 2:1 and compiling their financial statements to 30 June eachyear.

On 1 January 2004 Z joined the partnership, and it was agreed that the profit-sharing arrangement should becomeX 50%, Y 30% and Z 20%.

The profit for the year ended 30 June 2004 was $540,000, after charging an expense of $30,000 which it wasagreed related to the period before 1 January 2004. The profit otherwise accrued evenly over the year.

What is X’s total profit share for the year ended 30 June 2004?

A $305,000

B $312,500

C $315,000

D $295,000

6



16 G, H and I are in partnership, sharing profits in the ratio 3:1:1, after charging salaries of $20,000 per year each forH and I. On 1 January 2004 they agreed to change the profit-sharing ratio to 3:2:1 and to discontinue H’s salary. I’ssalary continued unchanged. The partnership profit for the year ended 30 June 2004 was $380,000, accruing evenlyover the year.

How should the $380,000 profit be divided among the partners?

G H I$ $ $

A 192,000 104,000 84,000

B 192,500 103,333 84,167

C 209,000 101,333 69,667

D 209,000 111,333 89,667

17 An extract from a cash flow statement prepared by a trainee accountant is shown below.

Cash flows from operating activities$m

Net profit before taxation 28Adjustments for:

Depreciation ((9)–––

Operating profit before working capital changes 19Decrease in inventories 13Increase in receivables ((4)Increase in payables ((8)

––––Cash generated from operations 10

––––

Which of the following criticisms of this extract are correct?

1 Depreciation charges should have been added, not deducted

2 Decrease in inventories should have been deducted, not added.

3 Increase in receivables should have been added, not deducted.

4 Increase in payables should have been added, not deducted

A 2 and 4

B 2 and 3

C 1 and 3

D 1 and 4


1 Proposed dividends

2 Rights issue of shares

3 Bonus issue of shares

4 Repayment of loan

A 1 and 3

B 2 and 4

C 1 and 4

D 2 and 3

7 [P.T.O.



19 Which of these statements about limited liability companies is/are correct?

(1) A company might make a bonus (capitalisation) issue to raise funds for expansion.

(2) The profit or loss on the disposal of part of a company’s operations must be disclosed in the income statement as an extraordinary item if material.

(3) Both realised and unrealised gains and losses may be included in the statement of changes in equity requiredby IAS 1 Presentation of Financial Statements.

A 1 and 3

B 2 and 3

C 1 and 2

D 3 only

20 Which of the following statements relating to parent companies and subsidiaries are correct?

(1) A parent company could consolidate a company in which it holds less than 50% of the ordinary share capital incertain circumstances.

(2) Goodwill on consolidation must be amortised over a period not exceeding ten years.

(3) Goodwill on consolidation will appear as an item in the parent company’s individual balance sheet.

(4) A subsidiary may be excluded from consolidation if it has not previously been consolidated and the parent’sinvestment in it is held for resale in the near future.

A 1 and 4

B 2 and 3

C 1 and 2

D 3 and 4

21 A trading company makes all its sales and purchases on credit.

How will the length of its working capital cycle normally be calculated?

A Collection period for receivables plus inventory turnover period plus period of credit taken from suppliers.

B Collection period for receivables plus inventory turnover period minus period of credit taken from suppliers.

C Collection period for receivables plus period of credit taken from suppliers.

D Average time from date of purchase of goods to the receipt of cash from the sale of those goods.

8



22 A company monitors the performance of its credit control department by calculating the receivables collection periodas closing trade receivables/annual credit sales x 365.

Which of the following factors could cause the receivables collection period calculated as above to be abnormallyhigh compared to the monthly average level during the year?

1 The company’s trade is seasonal

2 A downturn in the company’s credit sales in the last few months of its accounting period.

3 A large credit sale in the final month of its accounting period

A 1 and 2

B 1 and 3

C 2 and 3

D All three factors

The following summarised financial statements for Q are relevant for questions 23 to 25.(Income tax is ignored)

QIncome statement for the year ended 31 July 2004

$mOperating profit 140Interest payable 11(8)

––––132

Dividends paid 1(18)––––114––––

Balance sheet as at 31 July 2004$m

Non-current assets plus net current assets 400––––

Ordinary share capital 200Share premium account 130Revaluation reserve 120Accumulated profits 150

––––300

Loans 100––––400––––

23 What is the company’s return on total capital employed?

A 32/200 = 16%

B 32/400 = 8%

C 40/400 = 10%

D 14/300 = 42/3%

9 [P.T.O.



24 What is the company’s return on owners’ equity?

A 32/200 = 16%

B 32/300 = 102/3%

C 18/300 = 6%

D 14/300 = 42/3%

25 What is the company’s gearing ratio?

A 300/400 = 75%

B 100/200 = 50%

C 100/400 = 25%

D 300/100 = 300%

(50 marks)

10




1 Bob is a sole trader who does not maintain complete accounting records.

The following information is available to prepare his income statement for the year ended 30 September 2004.

(1) Assets and liabilitiesAs at 30 September

2003 2004$ $

Inventory 38,000 46,000Trade receivables 119,200 125,000Payments in advance for expenses 2,400 2,600Payables – goods purchased 68,100 77,100Creditors – expenses 3,900 4,600

(2) Bank summary

2003 $ 2004 $1 Oct Balance 20,500 30 Sept Purchases 408,100200430 Sept Cash banked 12,900 30 Sept Expenses 89,40030 Sept Receipts from credit 30 Sept Drawings 30,00030 Sept sales banked 519,400 30 Sept Balance 25,300

–––––––– ––––––––552,800 552,800–––––––– ––––––––

(3) Cash summary

2003 $ 2004 $1 Oct Balance 300 30 Sept Cash banked 12,900200430 Sept Cash sales 79,000 30 Sept Purchases 14,200

30 Sept Expenses 4,10030 Sept Drawings 47,90030 Sept Balance 200

–––––––– ––––––––79,300 79,300

–––––––– ––––––––

(4) Bob has taken goods from inventory for his personal use but has kept no records of their cost. The cost of thesegoods, when calculated, is to be deducted from purchases in the income statement.

(5) Bob always fixes his selling prices by adding 50% to the buying price of goods. There is no wastage.

Required:

(a) Prepare Bob’s income statement for the year ended 30 September 2004 based on this information.(8 marks)

(b) Calculate the cost of the goods taken from inventory by Bob during the year. (4 marks)

(12 marks)

11 [P.T.O.



2 At 1 July 2003 the balance sheet of Cougar, a limited liability company, contained the following items:

$mIssued share capital – ordinary shares of 50c 100Share premium account 140Revaluation reserve 160Accumulated profits 120

––––420––––

During the year ended 30 June 2004 the following events took place:

(i) A fundamental error in calculating the inventory at 30 June 2003 was discovered. The effect of the error was areduction in the inventory at that date from $30m to $24m.

(ii) On 1 July 2003 the company issued 200m ordinary shares, ranking equally with those already in issue, at$1.40 per share.

(iii) Some land held by the company as a non-current asset was sold for $100m. The land had originally cost $25mand was revalued to $85m in 2002, giving rise to the revaluation reserve of $60m shown above.

(iv) The company’s draft pre-tax profit for the year ended 30 June 2004 was $40m. In calculating this figure theopening inventory was taken as $30m, and $15m was included as the profit on the sale of the land. (See items(i) and (iii) above).

(v) Dividends totalling 2c per share were paid in the year on the enlarged capital.

Required:

Prepare the company’s statement of changes in equity for the year ended 30 June 2004.

(8 marks)

12



3 On 1 July 1998, Leo, a limited liability company, acquired 70% of the ordinary share capital of Pard for $700,000.The summarised balance sheet of Pard at that date was as follows:

$Sundry net assets 800,000

––––––––Share capital

200,000 ordinary shares of $1 each 200,000Accumulated profits 600,000

––––––––800,000––––––––

The balance sheets of the two companies at 30 June 2004 are shown below.

Leo Pard$ $

Sundry net assets 2,000,000 1,100,000Investment in Pard 1,700,000 –

–––––––––– ––––––––––2,700,000 1,100,000–––––––––– ––––––––––

Share capitalOrdinary shares of $1 each 1,500,000 200,000

Revaluation reserve 1,800,000 –Accumulated profits 1,400,000 900,000

–––––––––– ––––––––––2,700,000 1,100,000–––––––––– ––––––––––

Required:

Prepare the consolidated balance sheet for the Leo Group as at 30 June 2004. Goodwill on consolidation wasfully written off by 30 June 2003.

(10 marks)

13 [P.T.O.



4 Lion is a company producing medicinal drugs. At 1 October 2003 the following balances existed in the records:

Deferred development expenditure $1,200,000

Project Q. $800,000. This is the balance remaining of expenditure totalling $1,000,000 on a completedproject which is being amortised on the straight line basis over 10 years.

Project R. $400,000. This is the accumulated costs to 30 September 2003 of developing a new drug.The project was completed in July 2004 and sales of the drug are expected to begin in January2005.

Equipment used in research $300,000 (cost $500,000, depreciation to date $200,000)

During the year ended 30 September 2004 the following costs were incurred:

Project R Costs to complete $250,000

Project S (a research project) $140,000

Purchase of testing equipment for use in the research department $180,000.

All equipment has an estimated useful life of five years, and a full year’s depreciation is charged in the year ofacquisition.

Required:

(a) Calculate the figures to be included in Lion’s income statement for the year ended 30 September 2004 andbalance sheet as at that date, and state the headings under which they will appear. (6 marks)

(b) Prepare the disclosure notes required by IAS 38 Intangible Assets. (The note detailing the accounting policyfor research and development expenditure is NOT required). (6 marks)

(12 marks)

5 Explain FOUR ways in which the use of historical cost accounting may cause users of financial statements to bemisled when prices are rising.

(8 marks)


14



Answers



Part 1 Examination – Paper 1.1 (INT)Preparing Financial Statements (International Stream) December 2004 Answers

Section A

1 B2 C 146,000 + 218,000 – 83,0003 D (240,000 x 20%) + (160,000 x 20% x 6/12) – (60,000 x 20% x 9/12)4 B5 A

Balance 614,000 Cash 311,000Sales 301,000 Discounts 3,400Interest 1,600 Contras 8,650

Bad Debts 32,000Balance 561,550

–––––––– ––––––––916,600 916,600–––––––– ––––––––

6 A7 A8 A9 D10 D11 B12 A13 C (2 x 5,000) + ( 10 x 6,000)14 C15 B [2/3 x 1/2 x (540,000 + 30,000)] – 20,000 + (50% x 285,000)16 A17 D18 B19 D20 A21 B22 B23 C24 B25 C

A 7B 8C 5D 5

–––25–––

17 [P.T.O.[P.T.O.



Section B

1 (a) Bob

Income statement for the year ended 30 September 2004

Reference $ $to workings

Sales 1 604,200Less: Cost of salesLess: Opening inventory 138,000Less: Purchases 2 410,800

––––––––448,800

Less: less: Closing inventory 146,000 402,800–––––––– ––––––––

Gross profit 201,400Expenses 3 194,000

––––––––Net profit 107,400

––––––––

(b) Calculation of goods taken by Bob:Purchases as above 410,800Purchases per information in question:408,100 – 68,100 + 77,100 + 14,200 431,300

––––––––Goods taken by Bob therefore total 20,500

––––––––

Workings1 Sales $

Credit sales $519,400 – $119,200 + $125,000 525,200Cash sales 79,000

––––––––Sales for income statement 604,200

––––––––

2 Purchases and cost of salesCost of sales $604,200 x 2/3 402,800Details

Opening inventory 38,000Purchases (balancing figure) 410,800

––––––––448,800

less: closing stock 46,000 402,800–––––––– ––––––––

3 Expenses $89,400 + $4,100 – $3,900 + $4,600 + $2,400 – $2,600 94,000––––––––

Alternative workings for (b)Purchases and cost of sales (before deducting goods taken by Bob)Purchases

$408,100 – $68,100 + $77,100 + $14,200 431,300Cost of sales

$431,300 + $38,000 – $46,000 423,300Calculation of goods taken by Bob

Cost of sales allowing for 50% mark-up $604,200 x 2/3 402,800Cost of sales as above 423,300

––––––––Goods taken by Bob therefore total 20,500

––––––––Purchases total becomes $431,300 – $20,500 410,800

––––––––

18



2 (a) CougarStatement of changes in equity

Year ended 30 June 2004Share Share premium Revaluation Accumulated Totalcapital account reserve profits

$m $m $m $m $mAt 1 July 2003 100 140 60 120 420Prior year adjustment 11 1((6) 1(6)

––– ––– ––– ––– –––100 140 60 114 414

Arising on issue of shares 100 180 280Surplus on land

revaluation, now realised (60) 160 –Net profit for year (40 + 6) 1 146 146Dividends paid 1((8) 1((8)

––– ––– ––– ––– ––––200 320 – 212 732––– ––– ––– ––– ––––

3 Leo GroupConsolidated balance sheet as at 30 June 2004

$Sundry net assets 3,100,000

–––––––––––$3,100,000–––––––––––

Share capital 500,000Revaluation reserve 800,000Accumulated profits 1,470,000

–––––––––––2,770,000

Minority interest 330,000–––––––––––$3,100,000–––––––––––

WorkingsCost of control

$ $Shares in Pard 700,000 Share capital 70% 1,140,000

Accumulated profits:70% pre-acq 1,420,000

Accumulated profits:goodwill written off 1,140,000

–––––––– 1,––––––––700,000 1,700,000–––––––– 1,––––––––

Minority interest

$ $Share capital 30% 1, 60,000

Balance for CBS 330,000 Accumulated profits 30% 1,270,000–––––––– 1,––––––––330,000 1,330,000–––––––– 1,––––––––

Accumulated profits

$ $Leo 1,400,000

Cost of control Pard 1,900,00070% x 600,000 1,420,000Minority interest30% x 900,000 1,270,000Cost of controlgoodwill written off 1,140,000Balance for CBS 1,470,000

––––––––– –––––––––2,300,000 2,300,000––––––––– –––––––––

19



4 (a) Research and developmentBalance at New Income statement Balance sheet1 Oct 2003 expenditure Amortisation Research 30 Sept 2004

$ $ $ $ $Project Q 1,000,000

1)(200,000) (100,000) 1,700,000R )))400,000 250,000 1,650,000S (140,000)

–––––––––– –––––––– ––––––––– ––––––––– ––––––––––1,200,000 250,000 (100,000) (140,000) 1,350,000–––––––––– –––––––– ––––––––– ––––––––– ––––––––––

Equipment Balance at New Depreciation Balance sheet1 Oct 2003 expenditure 30 Sept 2004

$ $ $ $1500,000 180,000 1,680,000((200,000) (136,000) 1,(336,000)–––––––––– –––––––– ––––––––– ––––––––––

300,000 180,000 (136,000) 1,344,000–––––––––– –––––––– ––––––––– ––––––––––

HeadingsThe amortisation of deferred development expenditure ($100,000) and the research expenditure ($140,000) and thedepreciation of the research equipment ($136,000) will appear in the income statement under cost of sales.

The total deferred development expenditure ($1,350,000) will appear in the balance sheet under intangible non-currentassets.

(b) Disclosure notesIncome statementThe aggregate amount of research and development expenditure recognised as an expense during the period was $376,000,all charged in cost of sales.

Balance sheetMovements on deferred development expenditure during the year were:

Cost Amortisation Net book value$ $ $

Balance at 1 October 2003 1,400,000 (200,000) 1,200,000Year ended 30 September 2004Amortisation (100,000) (100,000)New expenditure 250,000 250,000

–––––––––– ––––––––– ––––––––––1,650,000 (300,000) 1,350,000–––––––––– ––––––––– ––––––––––

5 The use of historical cost accounting can mislead users when prices are rising in the following ways:

(i) Depreciation is based on the original cost of non-current assets and thus understates the true value obtained by the businessfrom the use of these assets. The result is that profit is overstated.

(ii) Inventory is often valued at cost, using FIFO or average costs. If prices are rising, sales in current terms are matched withcost of sales in historical cost terms. Profit is again overstated.

(iii) Balance sheet values of assets may become seriously below their current value.

(iv) The combined effects of the above three factors mean that return on capital employed is overstated.

(v) Year on year comparison of results is likely to be misleading as figures will show an automatic increase as prices rise, whenin real terms sales and profits may have risen far less, or even have fallen.

Any four points needed for full marks.

20



Part 1 Examination – Paper 1.1 (INT)Preparing Financial Statements (International Stream) December 2004 Marking Scheme

Section BMarks

1 (a) Calculations sales 4 x 1/2 2cost of sales 1purchases as balancing figure 1expenses 6 x 1/2 3

Heading and layout 2 x 1/2 1–––8

–––

(b) Calculation of purchases 4 x 1/2 2Correct method (subtraction of net purchases) 2

–––4

–––12–––

2 Opening balances 1Prior year adjustment 1Share issue 2 x 1 2Surplus on revaluation transferred 2Net profit for year 1Dividends paid 1

–––8

–––

3 Goodwill 4 x 1/2 2Minority interest 2 x 1/2 1Accumulated profits 5 x 1/2 21/2Balance sheet

Share capital 1Sundry net assets 1Revaluation reserve 1B/S layout 1heading 1/2

–––41/2–––10–––

4 (a) Project Q 1R 1S 1

Equipment Cost 1/2Depreciation 1

HeadingsAccumulated profits 1Balance sheet 1/2

–––6

–––

(b) Income statement Total 2(b) Income statement heading used 1

Balance sheet 3–––6

–––12–––

5 4 x 2 8–––50–––

21




PART 1


QUESTION PAPER








Pape

r 1.1

(IN

T)



Section A – All 25 questions are compulsory and MUST be attempted


1 B, a limited liability company, receives rent for subletting part of its office premises to a number of tenants.

In the year ended 31 December 2004 B received cash of $318,600 from its tenants.

Details of rent in advance and in arrears at the beginning and end of 2004 are as follows:

31 December 2004 31 December 2003$ $

Rent received in advance 28,400 24,600Rent owing by tenants 18,300 16,900

All rent owing was subsequently received

What figure for rental income should be included in the income statement of B for 2004?

A $341,000

B $336,400

C $300,800

D $316,200

2 The following information is available for the year ended 31 December 2004 for a trader who does not keep properaccounting records:

$Inventories at 1 January 2004 38,000Inventories at 31 December 2004 45,000Purchases 637,000Gross profit percentage on sales 30%

Based on this information, what was the trader’s sales figure for the year?

A $900,000

B $819,000

C $920,000

D $837,200

2



3 The following bank reconciliation statement has been prepared for a company:

$Overdraft per bank statement 39,800add: Deposits credited after date 64,100

––––––––103,900

less: Outstanding cheques presented after date 44,200––––––––

Overdraft per cash book 59,700––––––––

Assuming the amount of the overdraft per the bank statement of $39,800 is correct, what should be the balancein the cash book?

A $158,100 overdrawn

B $19,900 overdrawn

C $68,500 overdrawn

D $59,700 overdrawn as stated

4 Which, if any, of the following journal entries is correct according to their narratives?

Dr Cr$ $

(1) B receivables ledger account 450Bad debts account 450

Irrecoverable balance written off

(2) Investments: Q ordinary shares 100,000Share capital 100,000

80,000 shares of 50c each issued at$1·25 in exchange for shares in Q.

(3) Suspense account 1,000Motor vehicles account 1,000

Correction of error – debit side ofMotor vehicles account undercast by $1,000

A None of them

B 1 only

C 2 only

D 3 only

5 An enterprise has made a material change to an accounting policy in preparing its current financial statements.

Which of the following disclosures are required by IAS 8 Accounting policies, changes in accounting estimatesand errors in these financial statements?

1 The reasons for the change.2 The amount of the consequent adjustment in the current period and in comparative information for prior periods.3 An estimate of the effect of the change on future periods, where possible.

A 1 and 2 only

B 1 and 3 only

C 2 and 3 only

D All three items

3 [P.T.O.



6 At 31 December 2003 Q, a limited liability company, owned a building that had cost $800,000 on 1 January 1994.It was being depreciated at two per cent per year.

On 31 December 2003 a revaluation to $1,000,000 was recognised. At this date the building had a remaining usefullife of 40 years.

Which of the following pairs of figures correctly reflects the effects of the revaluation?

Depreciation charge Revaluation reservefor year ended 31 December 2004 as at 31 December 2003

$ $A 25,000 200,000

B 25,000 360,000

C 20,000 200,000

D 20,000 360,000

7 The inventory value for the financial statements of Q for the year ended 31 December 2004 was based on aninventory count on 4 January 2005, which gave a total inventory value of $836,200.

Between 31 December and 4 January 2005, the following transactions took place:

$Purchases of goods 8,600Sales of goods (profit margin30% on sales) 14,000Goods returned by Q to supplier 700

What adjusted figure should be included in the financial statements for inventories at 31 December 2004?

A $838,100

B $853,900

C $818,500

D $834,300

8 P and Q are in partnership, sharing profits in the ratio 2:1. On 1 July 2004 they admitted P’s son R as a partner. Pguaranteed that R’s profit share would not be less than $25,000 for the six months to 31 December 2004. The profit-sharing arrangements after R’s admission were P 50%, Q 30%, R 20%. The profit for the year ended 31 December2004 is $240,000, accruing evenly over the year.

What should P’s final profit share be for the year ended 31 December 2004?

A $140,000

B $139,000

C $114,000

D $139,375

4



9 Which of the following items must be disclosed in a company’s published financial statements (including notes)if material, according to IAS1 Presentation of financial statements?

1 Finance costs.2 Staff costs.3 Depreciation and amortisation expense.4 Movements on share capital.

A 1 and 3 only

B 1, 2 and 4 only

C 2, 3 and 4 only

D All four items

10 Which of the following costs should be included in valuing inventories of finished goods held by a manufacturingcompany, according to IAS2 Inventories?

1 Carriage inwards.2 Carriage outwards.3 Depreciation of factory plant.4 Accounts department costs relating to wages for production employees.

A All four items

B 2 and 3 only

C 1, 3 and 4 only

D 1 and 4 only

11 During 2004, B, a limited liability company, paid a total of $60,000 for rent, covering the period from 1 October2003 to 31 March 2005.

What figures should appear in the company’s financial statements for the year ended 31 December 2004?

Income statement Balance sheetA $40,000 Prepayment $10,000

B $40,000 Prepayment $15,000

C $50,000 Accrual $10,000

D $50,000 Accrual $15,000

12 Wanda keeps no accounting records. The following information is available about her position and transactions forthe year ended 31 December 2004:

$Net assets at 1 January 2004 210,000Drawings during 2004 48,000Capital introduced during 2004 100,000Net assets at 31 December 2004 400,000

Based on this information, what was Wanda’s profit for 2004?

A $42,000

B $242,000

C $138,000

D $338,000

5 [P.T.O.



13 The following receivables ledger control account has been prepared by a trainee accountant:


2005 $ 2005 $1 Jan Balance 318,650 31 Jan Cash from credit customers 181,140

Credit sales 161,770 Interest charged on overdue accounts 280Bad debts written off 1,390

Cash sales 84,260 Sales returns from creditDiscounts allowed to customers 3,990credit customers 1,240 Balance 379,120

–––––––– ––––––––565,920 565,920–––––––– ––––––––

What should the closing balance at 31 January 2005 be after correcting the errors in the account?

A $292,380

B $295,420

C $292,940

D $377,200

14 At 31 December 2004 a company’s trade receivables totalled $864,000 and the allowance for doubtful debts was$48,000.

It was decided that debts totalling $13,000 were to be written off, and the allowance for doubtful debts adjusted tofive per cent of the receivables.

What figures should appear in the balance sheet for trade receivables (after deducting the allowance) and in theincome statement for the total of bad and doubtful debts?

Income statement Balance sheetBad and doubtful debts Net trade receivables

$ $A 8,200 807,800

B 7,550 808,450

C 18,450 808,450

D 55,550 808,450

15 A trader who fixes her prices by adding 50% to cost actually achieved a mark-up of 45%.

Which of the following factors could account for the shortfall?

1 Sales were lower than expected.2 The opening inventories had been overstated.3 The closing inventories of the business were higher than the opening inventories.4 Goods taken from inventories by the proprietor were recorded by debiting drawings and crediting purchases with

the cost of the goods.

A All four factors

B 1, 2 and 4 only

C 2 only

D 3 and 4 only

6



16 Which of the following statements about accounting concepts and conventions are correct?

(1) The entity concept requires that a business is treated as being separate from its owners.(2) The use of historical cost accounting tends to understate assets and profit when prices are rising.(3) The prudence concept means that the lowest possible values should be applied to income and assets and the

highest possible values to expenses and liabilities.(4) The money measurement concept means that only assets capable of being reliably measured in monetary terms

can be included in the balance sheet of a business.

A 1 and 2

B 2 and 3

C 3 and 4

D 1 and 4

17 A business income statement for the year ended 31 December 2004 showed a net profit of $83,600. It was laterfound that $18,000 paid for the purchase of a motor van had been debited to motor expenses account. It is thecompany’s policy to depreciate motor vans at 25 per cent per year, with a full year’s charge in the year of acquisition.

What would the net profit be after adjusting for this error?

A $106,100

B $70,100

C $97,100

D $101,600

18 How should interest charged on partners’ drawings appear in partnership financial statements?

A As income in the income statement

B Added to net profit and charged to partners in the division of profit

C Deducted from net profit and charged to partners in the division of profit

D Deducted from net profit in the division of profit and credited to partners

19 Which of the following statements about intangible assets in company financial statements are correct accordingto international accounting standards?

1 Internally generated goodwill should not be capitalised.2 Purchased goodwill should normally be amortised through the income statement.3 Development expenditure must be capitalised if certain conditions are met.

A 1 and 3 only

B 1 and 2 only

C 2 and 3 only

D All three statements are correct

7 [P.T.O.



20 Which of the following events occurring after the balance sheet date are classified as adjusting, if material?

1 The sale of inventories valued at cost at the balance sheet date for a figure in excess of cost.2 A valuation of land and buildings providing evidence of an impairment in value at the year end.3 The issue of shares and loan notes.4 The insolvency of a customer with a balance outstanding at the year end.

A 1 and 3

B 2 and 4

C 2 and 3

D 1 and 4

21 Which of the following statements about contingent assets and contingent liabilities are correct?

1 A contingent asset should be disclosed by note if an inflow of economic benefits is probable.2 A contingent liability should be disclosed by note if it is probable that a transfer of economic benefits to settle it

will be required, with no provision being made.3 No disclosure is required for a contingent liability if it is not probable that a transfer of economic benefits to settle

it will be required.4 No disclosure is required for either a contingent liability or a contingent asset if the likelihood of a payment or

receipt is remote.

A 1 and 4 only

B 2 and 3 only

C 2, 3 and 4

D 1, 2 and 4

22 Which of the following statements about limited liability companies’ accounting is/are correct?

1 A revaluation reserve arises when a non-current asset is sold at a profit.2 The authorised share capital of a company is the maximum nominal value of shares and loan notes the company

may issue.3 The notes to the financial statements must contain details of all adjusting events as defined in IAS10 Events after

the balance sheet date.

A All three statements

B 1 and 2 only

C 2 and 3 only

D None of the statements

8



The following information is relevant for questions 23 and 24:

On 1 January 2004, J, a limited liability company, acquired 80% of the ordinary share capital of K, another limitedliability company, for $160,000.

The balance sheets of the two companies at 31 December 2004 were as follows:

J K$ $

Net assets 130,000 120,000Investment in K 160,000 –

–––––––– ––––––––290,000 120,000–––––––– ––––––––

Issued share capital 200,000 50,000Retained earnings

At 31 December 2003 40,000 30,000Profit for 2004 50,000 40,000

–––––––– ––––––––290,000 120,000–––––––– ––––––––

Goodwill as calculated at 1 January 2004 is to be reduced in value by $24,000 because of impairment during 2004.

23 What figure should appear in the consolidated balance sheet of the J group as at 31 December 2004 for goodwill?

A $48,000

B $96,000

C $72,000

D $64,000

24 What figure should appear in the consolidated balance sheet of the J group as at 31 December 2004 for minorityinterest?

A $32,000

B $16,000

C $10,000

D $24,000

9 [P.T.O.



25 On 1 April 2000, X, a limited liability company, paid $120,000 for 48,000 $1 shares in Y, another limited liabilitycompany, representing 80% of Y’s $60,000 share capital. The retained earnings of Y at that date were $70,000.

At 31 March 2005 the retained earnings of the companies were:

$X 180,000Y 100,000

All goodwill arising has been written off because of impairment.

What figure should appear in the consolidated balance sheet of the X group at 31 March 2005 for retainedearnings?

A $208,000

B $8,000

C $204,000

D $188,000(50 marks)

10




1 The draft balance sheet shown below has been prepared for Shuswap, a limited liability company, as at 31 December2004:

Cost Accumulated Net book valuedepreciation

Assets $000 $000 $000Non-current assets

Land and buildings 9,000 1,000 8,000Plant and equipment 21,000 9,000 12,000

––––––– ––––––– –––––––30,000 10,000 20,000––––––– –––––––

Current assetsInventories 3,000Receivables 2,600Cash at bank 1,900

–––––––Total assets 27,500

–––––––

Equity and liabilitiesCapital and reservesIssued share capital (ordinary shares of 50c each) 6,000Retained earnings 12,400

Non-current liabilitiesLoan notes (redeemable 2010) 2,000

Current liabilitiesTrade payables 2,100

–––––––22,500

Suspense account 5,000–––––––27,500–––––––


1 It has been decided to revalue the land and buildings to $12,000,000 at 31 December 2004.2 Trade receivables totalling $200,000 are to be written off.3 During the year there was a contra settlement of $106,000 in which an amount due to a supplier was set off

against the amount due from the same company for goods sold to it. No entry has yet been made to record theset-off.

4 Some inventory items included in the draft balance sheet at cost $500,000 were sold after the balance sheetdate for $400,000, with selling expenses of $40,000.

5 The suspense account is made up of two items:(a) The proceeds of issue of 4,000,000 50c shares at $1·10 per share, credited to the suspense account from

the cash book.(b) The balance of the account is the proceeds of sale of some plant on 1 January 2004 with a net book value

at the date of sale of $700,000 and which had originally cost $1,400,000. No other accounting entrieshave yet been made for the disposal apart from the cash book entry for the receipt of the proceeds.Depreciation on plant has been charged at 25% (straight line basis) in preparing the draft balance sheetwithout allowing for the sale. The depreciation for the year relating to the plant sold should be adjusted forin full.

Required:

Prepare the company’s balance sheet as at 31 December 2004, complying as far as possible with IAS1 Presentation of financial statements.

Details of non-current assets, adjusted appropriately, should appear as they are presented in the question.

(12 marks)

11 [P.T.O.



2 The draft financial statements of Choctaw, a limited liability company, for the year ended 31 December 2004 showeda profit of $86,400. The trial balance did not balance, and a suspense account with a credit balance of $3,310 wasincluded in the balance sheet.

In subsequent checking the following errors were found:

(a) Depreciation of motor vehicles at 25 per cent was calculated for the year ended 31 December 2004 on thereducing balance basis, and should have been calculated on the straight-line basis at 25 per cent.Relevant figures:Cost of motor vehicles $120,000, net book value at 1 January 2004, $88,000

(b) Rent received from subletting part of the office accommodation $1,200 had been put into the petty cash box.No receivable balance had been recognised when the rent fell due and no entries had been made in the pettycash book or elsewhere for it. The petty cash float in the trial balance is the amount according to the records,which is $1,200 less than the actual balance in the box.

(c) Bad debts totalling $8,400 are to be written off.(d) The opening accrual on the motor repairs account of $3,400, representing repair bills due but not paid at

31 December 2003, had not been brought down at 1 January 2004.(e) The cash discount totals for December 2004 had not been posted to the discount accounts in the nominal ledger.

The figures were:

$Discount allowed 380Discount received 290

After the necessary entries, the suspense account balanced.

Required:

Prepare journal entries, with narratives, to correct the errors found, and prepare a statement showing thenecessary adjustments to the profit.

(10 marks)

12



3 The following information is available for Sioux, a limited liability company:

Balance sheets31 December

2004 2003$000 $000 $000 $000

Non-current assetsCost or valuation 11,000 8,000Accumulated depreciation (5,600) (4,800)

––––––– –––––––Net book value 5,400 3,200

Current assetsInventories 3,400 3,800Receivables 3,800 2,900Cash at bank 400 7,600 100 6,800

––––––– ––––––– ––––––– –––––––13,000 10,000––––––– –––––––

Equity and liabilitiesCapital and reservesOrdinary share capital 1,000 1,000Revaluation reserve 1,500 1,000Retained earnings 3,100 5,600 2,200 4,200

––––––– –––––––

Non-current liabilities10% Loan notes 3,000 2,000

Current liabilitiesTrade payables 3,700 3,200Income tax 700 4,400 600 3,800

––––––– ––––––– ––––––– –––––––13,000 10,000––––––– –––––––

Summarised income statement for the year ended 31 December 2004$000

Profit from operations 2,650Finance cost (loan note interest) (300)

––––––2,350

Income tax expense (700)––––––

Net profit for the period 1,650––––––

Notes(1) During the year non-current assets which had cost $800,000, with a net book value of $350,000, were sold

for $500,000.

(2) The revaluation surplus arose from the revaluation of some land that was not being depreciated.

(3) The 2003 income tax liability was settled at the amount provided for at 31 December 2003.

(4) The additional loan notes were issued on 1 January 2004. Interest was paid on 30 June 2004 and 31 December2004.

(5) Dividends paid during the year amounted to $750,000.

Required:

Prepare the company’s cash flow statement for the year ended 31 December 2004, using the indirect method,adopting the format in IAS7 Cash flow statements.

(11 marks)

13 [P.T.O.



4 (a) A company may choose to finance its activities mainly by equity capital, with low borrowings (low gearing) or byrelying on high borrowings with relatively low equity capital (high gearing).

Required:

Explain why a highly geared company is generally more risky from an investor’s point of view than a companywith low gearing. (3 marks)

(b) Ratio analysis in general can be useful in comparing the performance of two companies, but it has its limitations.

Required:

State and briefly explain three factors which can cause accounting ratios to be misleading when used forsuch comparison. (6 marks)

(9 marks)

5 The directors of Quapaw, a limited liability company, are reviewing the company’s draft financial statements for theyear ended 31 December 2004.

The following material matters are under discussion:

(a) During the year the company has begun selling a product with a one-year warranty under which manufacturingdefects are remedied without charge. Some claims have already arisen under the warranty. (2 marks)

(b) During the inventory count on 31 December, some goods which had cost $80,000 were found to be damaged.In February 2005 the damaged goods were sold for $85,000 by an agent who received a 10% commission outof the sale proceeds. (2 marks)

(c) In August 2004 it was discovered that the inventory at 31 December 2003 had been overstated by $100,000.(4 marks)

Required:

Advise the directors on the correct treatment of these matters, stating the relevant accounting standard whichjustifies your answer in each case.

NOTE: The mark allocation is shown against each of the three matters.(8 marks)


14



Answers




Section A

1 D Rent received

Balance 16,900 Balance 24,600Income statement 316,200 Cash 318,600Balance 28,400 Balance 18,300

–––––––– ––––––––361,500 361,500–––––––– ––––––––

2 A 38,000 + 637,000 – 45,000 = 630,000 x 10/7 = 900,000

3 B 39,800 + 44,200 – 64,100 = 19,900 overdrawn

4 A

5 A

6 B Depreciation 1/40 x 1,000,000Revaluation 1,000,000 – 640,000

7 A 836,200 – 8,600 + 700 + (14,000 x 70%) = 838,100

8 B 80,000 + 60,000 – 1,000 = 139,000

9 D

10 C

11 A Income statement 12/18 x 60,000 = 40,000Prepayment 3/12 x 40,000 = 10,000

12 C 400,000 – 210,000 – 100,000 + 48,000 = 138,000

13 C

318,650 181,140161,770 1,390

280 3,9901,240

292,940–––––––– ––––––––480,700 480,700–––––––– ––––––––

14 B 864,000 – 13,000 = 851,000 – 5% = 808,45013,000 – (48,000 – 42,550) 7,550

15 C

17



16 D

17 C 83,600 + 18,000 – 4,500 = 97,100

18 B

19 A

20 B

21 A

22 D

23 C 160,000 – 80% (50,000 + 30,000) – 24,000

24 D 20% x 120,000

25 D 180,000 + 100,000 – 56,000 – 20,000 – 16,000 = 188,000

18



Section B

1 ShuswapBalance sheet as at 31 December 2004

Cost or Accumulated Net bookvaluation depreciation value

Assets $000 $000 $000Non-current assetsLand and buildings 12,000 – 12,000Plant and equipment 19,600 7,950 11,650

––––––– –––––– –––––––31,600 7,950 23,650––––––– ––––––

Current assetsInventories (3,000 – 140) 2,860Receivables (2,600 – 200 – 106) 2,294Cash at bank 1,900 7,054

–––––– –––––––30,704–––––––

Equity and liabilitiesCapital and reservesCalled up share capital (6,000 + 2,000) 8,000Share premium account 2,400Revaluation reserve 4,000Retained earnings (working) 12,310 26,710

––––––Non-current liabilities

Loan notes 2,000Current liabilities

Trade payables (2,100 – 106) 1,994–––––––30,704–––––––

Working

Retained earnings balance$000

Per question 12,400Bad debts written off (200)Loss on sale of plant (100)Depreciation adjustment 350Inventory adjustment (140)

–––––––12,310–––––––

$ $2 (a) Income statement 8,000

Accumulated depreciation of motor vehicles 8,000Adjustment to depreciation from reducing balance basis to straight-line basis

(b) Petty cash 1,200Rent receivable 1,200

Rent received omitted from records

(c) Bad debts 8,400Sundry receivables ledger accounts 8,400

Bad debts written off

(d) Suspense account 3,400Motor vehicle repairs 3,400

Correction of error – opening balance not brought forward

(e) Discounts allowed 380Discounts received 290Suspense account 90

December 2004 discount totals not posted

19



Profit adjustments$

Profit per draft financial statements 86,400(a) Depreciation adjustment (8,000)(b) Rent receivable not recorded 1,200(c) Bad debts written off (8,400)(d) Motor repairs adjustment 3,400(e) Discounts not posted: 380 – 290 (90)

––––––––Adjusted profit 74,510

––––––––

3 Sioux Cash flow statement for the year ended 31 December 2004.

$000 $000Cash flows from operating activitiesNet profit before taxation 2,350Adjustments for:Depreciation 1,250Profit on sale of plant (150)Interest expense 300

––––––Operating profit before working capital changes 3,750

Decrease in inventories 400Increase in receivables (900)Increase in payables 500

––––––Cash generated from operations 3,750

Interest paid (300)Income taxes paid (600)

–––––– 2,850

Cash flows from investing activitiesPurchase of non-current assets (3,300)Proceeds of sale of non-current assets 500Net cash used in investing activities –––––– (2,800)

Cash flows from financing activitiesProceeds of issue of loan notes 1,000Dividends paid (750)

Net cash from financing activities –––––– 250––––––

Net increase in cash 300Cash at 1 January 2004 100

––––––Cash at 31 December 2004 400

––––––

Workings

Non-current assets – cost

$000 $000Opening balance 8,000 Disposal 800Revaluation reserve 500Cash (balancing figure) 3,300

Closing balance 11,000––––––– –––––––11,800 11,800––––––– –––––––

Non-current assets – depreciation

$000 $000Disposal 450 Opening balance 4,800

Income statement 1,250Closing balance 5,600

––––––– –––––––6,050 6,050

––––––– –––––––

20



Non-current assets – disposal

$000 $000Cost 800 Depreciation 450Profit on sale 150 Cash 500

–––– ––––950 950–––– ––––

4 (a) A highly-geared company has an obligation to pay interest on its loans regardless of its profit level. It will show high profits ifits overall rate of return on capital is greater than the rate of interest being paid on its borrowings, but a low profit or a loss ifthere is a down-turn in its profit such that the rate of interest to be paid exceeds the return on its assets.

(b) (i) One company may have revalued its assets while the other has not.

(ii) Accounting policies and estimation techniques may differ. For example, one company may use higher depreciation ratesthan the other.

(iii) The use of historical cost accounting may distort the capital and profit of the two companies in different ways.

Other answers considered on their merits.

5 (a) The correct treatment is to provide for the best estimate of the costs likely to be incurred under the warranty, as required byIAS37 Provisions, contingent liabilities and contingent assets.

(b) The inventories should be valued at the lower of cost and net realisable value. Cost is $80,000, net realisable value is$85,000 less 10%, or $76,500. The net realisable value of $76,500 should therefore be taken (IAS2 Inventories)

(c) The opening inventory should be included in the current year’s income statement at the corrected figure, and the openingbalance of retained profit reduced by $100,000. The $100,000 reduction will appear in the statement of changes in equity.

(IAS8 Accounting policies, changes in accounting estimates and errors)

21




1 Land and buildings 1Plant and equipment

depreciation 1adjustment for disposal 1 2

Inventory adjustment 1Receivables-adjustment for write-off 1/2Payables Contra 1/2Payables Contra 1/2Share capital 1Share premium 1Revaluation reserve 1Retained earnings

bad debts 1loss on plant 1depreciation adjustment 1Inventory adjustment 1

Heading 1–––––131/2 max 12

2 Journal entries1/2 mark per entry 11/2 mark for narrative 1/2–––––

11/2 x 5 71/2Profit adjustments 5 x 1/2 21/2–––––

10

3 Workings:Non-current assets:

cost 3 x 1/2 11/2depreciation 2 x 1/2 1disposal 3 x 1/2 11/2

Cash flow statement1/2 per item 13 x 1/2 61/2Layout 1Heading 1

–––––121/2 max 11

4 (a) 3

(b) 3 x 2 6–––––

9

5 (a) Provision 1IAS 37 1 2

(b) Correct treatment 1IAS2 1 2

(c) Prior year adjustment 1Reconciliation 1Comparative figures adjusted 1IAS8 1 4

–––––8

–––––50

–––––

23




PART 1


QUESTION PAPER








Pape

r 1.1

(IN

T)





1 The following information is available for a sole trader who keeps no accounting records:

$Net business assets at 1 July 2004 186,000Net business assets at 30 June 2005 274,000

During the year ended 30 June 2005:

Cash drawings by proprietor 68,000Additional capital introduced by proprietor 50,000Business cash used to buy a car for the proprietor’s wife,who takes no part in the business 20,000

Using this information, what is the trader’s profit for the year ended 30 June 2005?

A $126,000

B $50,000

C $86,000

D $90,000

2 Evon, a limited liability company, issued 1,000,000 ordinary shares of 25c each at a price of $1·10 per share, allreceived in cash.

What should be the accounting entries to record this issue?

A Debit: Cash $1,100,000Credit: Share capital $250,000

Share premium $850,000

B Debit: Share capital $250,000Share premium $850,000

Credit: Cash $1,100,000

C Debit: Cash $1,100,000Credit: Share capital $1,100,000

D Debit: Cash $1,100,000Credit: Share capital $250,000

Retained earnings $850,000

2



3 P and Q are in partnership, sharing profits equally.

On 1 January 2005, R joined the partnership and it was agreed that from that date all three partners should shareequally in the profit.

In the year ended 30 June 2005 the profit amounted to $300,000, accruing evenly over the year, after charging abad debt of $30,000 which it was agreed should be borne equally by P and Q only.

What should be the partners’ total profit shares for the year ended 30 June 2005?

P Q R$ $ $

A 95,000 95,000 110,000

B 122,500 122,500 55,000

C 125,000 125,000 50,000

D 110,000 110,000 50,000

4 At 1 July 2004 a limited liability company’s capital structure was as follows:

$Share capital 1,000,000 shares of 50c each 500,000Share premium account 400,000

In the year ended 30 June 2005 the company made the following share issues:

1 January 2005A bonus issue of one share for every four in issue at that date, using the share premium account.

1 April 2005A rights issue of one share for every ten in issue at that date, at $1·50 per share.

What will be the balances on the company’s share capital and share premium accounts at 30 June 2005 as aresult of these issues?

Share capital Share premium account$ $

A 687,500 650,000

B 675,000 375,000

C 687,500 150,000

D 687,500 400,000

5 Which of the following factors could cause a company’s gross profit percentage on sales to fall below the expectedlevel?

1 Understatement of closing inventories.2 The incorrect inclusion in purchases of invoices relating to goods supplied in the following period.3 The inclusion in sales of the proceeds of sale of non-current assets.4 Increased cost of carriage charges borne by the company on goods sent to customers.

A 3 and 4

B 2 and 4

C 1 and 2

D 1 and 3

3 [P.T.O.



6 Which of the following journal entries are correct, according to their narratives?

Dr Cr$ $

1 Suspense account 18,000Rent received account 18,000

Correction of error in posting $24,000 cashreceived for rent to the rent received account as $42,000

––––––––––––––––––––––––––––––––––––––––––––

2 B receivables ledger account 22,000A receivables ledger account 22,000

Correction of error: cash receivedfrom A wrongly entered to B’s account

––––––––––––––––––––––––––––––––––––––––––––

3 Share premium account 400,000Share capital account 400,000

1 for 3 bonus issue on share capitalof 1,200,000 50c shares

––––––––––––––––––––––––––––––––––––––––––––

4 Shares in X 750,000Share capital account 250,000Share premium account 500,000

500,000 50c shares issued at $1·50 per sharein exchange for shares in X

––––––––––––––––––––––––––––––––––––––––––––

A 1 and 3

B 2 and 3

C 1 and 4

D 2 and 4

7 The receivables ledger control account below contains several incorrect entries.


$ $Opening balance 138,400 Credit sales 80,660

Contras against credit balances in payables ledger 1,000

Cash received from credit customers 78,420 Discounts allowed to credit customers 1,950Bad debts written off 3,000Dishonoured cheques from credit customers 850Closing balance 129,360

–––––––– ––––––––216,820 216,820–––––––– ––––––––

What should the closing balance be when all the errors are corrected?

A $133,840

B $135,540

C $137,740

D $139,840

4



8 A limited liability company’s trial balance does not balance. The totals are:

Debit $384,030Credit $398,580

A suspense account is opened for the difference.

Which of the following pairs of errors could clear the balance on the suspense account when corrected?

A Debit side of cash book undercast by $10,000; $6,160 paid for rent correctly entered in the cash book butentered in the rent account as $1,610.

B Debit side of cash book overcast by $10,000; $1,610 paid for rent correctly entered in the cash book but enteredin the rent account as $6,160.

C Debit side of cash book undercast by $10,000; $1,610 paid for rent correctly entered in the cash book butentered in the rent account as $6,160.

D Debit side of cash book overcast by $10,000; $6,160 paid for rent correctly entered in the cash book but enteredin the rent account as $1,610.

9 A draft cash flow statement contains the following calculation of net cash inflow from operating activities:

$mOperating profit 13Depreciation 2Decrease in inventories (3)Decrease in trade and other receivables 5Decrease in trade payables 4

–––Net cash inflow from operating activities 21

Which of the following corrections need to be made to the calculation?

1 Depreciation should be deducted, not added.2 Decrease in inventories should be added, not deducted.3 Decrease in receivables should be deducted, not added.4 Decrease in payables should be deducted, not added.

A 1 and 3

B 2 and 3

C 1 and 4

D 2 and 4

10 Which of the following factors would cause a company’s gearing ratio to fall?

1 A bonus issue of ordinary shares.2 A rights issue of ordinary shares.3 An issue of loan notes.4 An upward revaluation of non-current assets.

A 1 and 3

B 2 and 3

C 1 and 4

D 2 and 4

5 [P.T.O.



11 The following information is available for Orset, a sole trader who does not keep full accounting records:

$Inventory 1 July 2004 138,600

30 June 2005 149,100Purchases for year ended 30 June 2005 716,100

Orset makes a standard gross profit of 30 per cent on sales.

Based on these figures, what is Orset’s sales figure for the year ended 30 June 2005?

A $2,352,000

B $1,038,000

C $917,280

D $1,008,000

12 At 1 July 2004 a company had prepaid insurance of $8,200. On 1 January 2005 the company paid $38,000 forinsurance for the year to 30 September 2005.

What figures should appear for insurance in the company’s financial statements for the year ended 30 June2005?

Income statement Balance sheetA $27,200 Prepayment $19,000

B $39,300 Prepayment $9,500

C $36,700 Prepayment $9,500

D $55,700 Prepayment $9,500

13 Which of the following correctly describes the imprest system for operating petty cash?

A All expenditure out of petty cash must be supported by a properly authorised voucher.

B A regular equal amount of cash is transferred into petty cash.

C The exact amount of expenditure out of petty cash is reimbursed at intervals.

D A budget is fixed for a period which petty cash expenditure must not exceed.

14 Alpha buys goods from Beta. At 30 June 2005 Beta’s account in Alpha’s records showed $5,700 owing to Beta.Beta submitted a statement to Alpha as at the same date showing a balance due of $5,200.

Which of the following could account fully for the difference?

A Alpha has sent a cheque to Beta for $500 which has not yet been received by Beta.

B The credit side of Beta’s account in Alpha’s records has been undercast by $500.

C An invoice for $250 from Beta has been treated in Alpha’s records as if it had been a credit note.

D Beta has issued a credit note for $500 to Alpha which Alpha has not yet received.

6



15 Which of the following statements about intangible assets are correct?

1 If certain criteria are met, research expenditure must be recognised as an intangible asset.2 Goodwill may not be revalued upwards.3 Internally generated goodwill should not be capitalised.

A 2 and 3 only

B 1 and 3 only

C 1 and 2 only


16 Which of the following events between the balance sheet date and the date the financial statements areauthorised for issue must be adjusted in the financial statements?

1 Declaration of equity dividends.2 Decline in market value of investments.3 The announcement of changes in tax rates.4 The announcement of a major restructuring.

A 1 only

B 2 and 4

C 3 only

D None of them

17 A company sublets part of its office accommodation. In the year ended 30 June 2005 cash received from tenantswas $83,700.

Details of rent in arrears and in advance at the beginning and end of the year were:

In arrears In advance$ $

30 June 2004 3,800 2,40030 June 2005 4,700 3,000

All arrears of rent were subsequently received.

What figure for rental income should be included in the company’s income statement for the year ended 30 June2005?

A $84,000

B $83,400

C $80,600

D $85,800

18 Which of the following statements about accounting ratios and their interpretation are correct?

1 A low-geared company is more able to survive a downturn in profit than a highly-geared company.2 If a company has a high price earnings ratio, this will often indicate that the market expects its profits to rise. 3 All companies should try to achieve a current ratio (current assets/current liabilities) of 2:1.

A 2 and 3 only

B 1 and 3 only

C 1 and 2 only


7 [P.T.O.



19 At 30 June 2004 a company’s allowance for receivables was $39,000. At 30 June 2005 trade receivables totalled$517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to theequivalent of 5 per cent of the trade receivables based on past events.

What figure should appear in the income statement for these items?

A $61,000

B $22,000

C $24,000

D $23,850

20 IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories of finished goods.

Which of the following statements about the IAS 2 requirements in this area are correct?

1 Finished goods inventories may be valued on the basis of labour and materials cost only, without includingoverheads.

2 Carriage inwards, but not carriage outwards, should be included in overheads when valuing inventories offinished goods.

3 Factory management costs should be included in fixed overheads allocated to inventories of finished goods.

A All three statements are correct

B 1 and 2 only

C 1 and 3 only

D 2 and 3 only

21 A limited liability company sold a building at a profit.

How will this transaction be treated in the company’s cash flow statement?

Proceeds of sale Profit on saleA Cash inflow under Added to profit in

Financing activities calculating cash flowfrom operating activities

B Cash inflow under Deducted from profit in Investing activities calculating cash flow

from operating activities

C Cash inflow under Added to profit inInvesting activities calculating cash flow from

operating activities

D Cash inflow under Deducted from profit in Financing activities calculating cash flow

from operating activities

8



22 Which of the following items may appear in a company’s statement of changes in equity, according to IAS 1Presentation of financial statements?

1 Unrealised revaluation gains.2 Dividends paid.3 Proceeds of equity share issue.4 Profit for the period.

A 2, 3 and 4 only

B 1, 3 and 4 only

C All four items

D 1, 2 and 4 only

23 The capital structure of a company at 30 June 2005 is as follows:

$mOrdinary share capital 100Share premium account 40Retained earnings 6010% Loan notes 40

The company’s income statement for the year ended 30 June 2005 showed:

$mOperating profit 44Loan note interest (4)

–––Profit for year 40

–––

What is the company’s return on capital employed?

A 40/240 = 162/3 per cent

B 40/100 = 40 per cent

C 44/240 = 181/3 per cent

D 44/200 = 22 per cent

24 Sigma’s bank statement shows an overdrawn balance of $38,600 at 30 June 2005. A check against the company’scash book revealed the following differences:

1 Bank charges of $200 have not been entered in the cash book.2 Lodgements recorded on 30 June 2005 but credited by the bank on 2 July $14,700.3 Cheque payments entered in cash book but not presented for payment at 30 June 2005 $27,800.4 A cheque payment to a supplier of $4,200 charged to the account in June 2005 recorded in the cash book as

a receipt.

Based on this information, what was the cash book balance BEFORE any adjustments?

A $43,100 overdrawn

B $16,900 overdrawn

C $60,300 overdrawn

D $34,100 overdrawn

9 [P.T.O.



25 The following is an extract from the income statement of a business:

$000 $000Sales revenue 22,000Opening inventories 5,000Purchases 15,000

–––––––20,000

less: Closing inventories 3,000 17,000––––––– –––––––

Gross profit 5,000–––––––

To the nearest day, how many days’ sales are held in the closing inventories?

A 3,000/22,000 x 365 = 50 days

B 3,000/17,000 x 365 = 64 days

C 3,000/15,000 x 365 = 73 days

D 3,000/20,000 x 365 = 55 days

(50 marks)

10




1 Airn is a sole trader who does not keep a full set of accounting records. An analysis of his cash transactions for theyear ended 30 June 2005 is given below:

Reference Receipts Paymentsto notes $ $

Overdraft, 1 July 2004 32,400Cash banked 1 418,200Proceeds of sale of old motor van 2,3 4,500Payments for purchases 316,300New motor van (purchased 1 January 2005) 3 22,000Rent and general expenses 49,200Drawings 80,400Overdraft, 30 June 2005 77,600

–––––––– –––––––––500,300 500,300–––––––– –––––––––

Airn’s other assets and liabilities at the beginning and end of the year ended 30 June 2005 were:

Reference 30 Juneto notes 2005 2004

$ $Shop fittings (cost $45,000) to be calculated 35,000Motor van (cost $18,000) 2,3 sold 4,000New motor van 3 22,000 –Trade receivables 48,600 44,700Trade payables 24,200 19,600Inventories 63,200 58,900Owing for rent and general expenses 13,000 12,500

Notes:(1) Before banking the cash received from customers, Airn made the following payments:

$Wages 74,000Purchases for cash 13,700General expenses 7,400

–––––––95,100–––––––

(2) The motor van held at 30 June 2004 was sold during the year.

(3) Airn’s depreciation policy is to charge depreciation on the straight line basis as follows, assuming no residualvalue:

Motor van 20% per yearShop fittings 10% per year

No depreciation is charged in the year of sale of assets, but there is a full year’s depreciation in the year ofpurchase.

Required:

Prepare Airn’s income statement for the year ended 30 June 2005.

(11 marks)

11 [P.T.O.



2 The following land and buildings account for the year ended 31 December 2004 has been written up by a bookkeeperwho has since been dismissed. The notes under the account explain each entry.

Land and buildings

2004 Notes $000 2004 Notes $0001 Jan Balance 1 1,00030 June Cash 2 700

30 Sep Cash proceeds of sale 3 50031 Dec Revaluation reserve 5 2,200 31 Dec Income statement 4 20

31 Dec Balance 3,380–––––– ––––––3,900 3,900

–––––– ––––––

Notes1 This is the net balance appearing in the company’s balance sheet at 1 January 2004. It is made up as follows:

$000 $000Land-cost 400Buildings-cost 800Buildings-accumulated depreciation (200) 600

–––– ––––––1,000

––––––

2 Cash paid for new land and building: $000Land 200Building 500

––––700––––

3 Cash received on sale of land and buildings:Details of the transaction were:

$000 $000 $000Proceeds of sale 500Cost: Land (100)

Building (100)Accumulated depreciation at 1 January 2004 20 (80) (180)

–––– –––– ––––Profit 320

––––

4 This is the depreciation charge for the year, calculated as 2 per cent of the opening balance $1,000,000.It is the company’s policy to charge depreciation on buildings only, at 2 per cent per year on the straight linebasis, with a full year’s depreciation in the year of purchase and none in the year of sale.

5 This entry was made to reflect a revaluation of the land and buildings held at 31 December 2004.

The valuer placed the following values on the property:$000

Land 800Buildings 1,400

––––––2,200

––––––

The revaluation is not to be reflected in the depreciation charge for the year to 31 December 2004.

12



Required:

Prepare the following ledger accounts for the year ended 31 December 2004 correctly recording the abovetransactions:– Land, cost or valuation;– Buildings, cost or valuation;– Buildings, accumulated depreciation;– Disposal of land and buildings.

(11 marks)

3 On 1 October 1999 Kye, a limited liability company, purchased 80 per cent of the share capital of Rye for $260,000.The retained earnings balance of Rye at this date was $180,000.

At 30 September 2005 the balance sheets of the two companies were:

Kye Rye $ $

Investment in Rye 260,000 –Sundry net assets 420,000 360,000

––––––––– –––––––––680,000 360,000

––––––––– –––––––––Ordinary share capital 200,000 100,000Retained earnings 480,000 260,000

––––––––– –––––––––680,000 360,000

––––––––– –––––––––

Goodwill arising on the acquisition has been fully written off.

Required:

Prepare the consolidated balance sheet of Kye and the subsidiary as at 30 September 2005, showing workingsfor the retained earnings figure in the consolidated balance sheet.

(8 marks)

4 The directors of Umbria, a limited liability company, are reviewing the company’s draft financial statements for theyear ended 30 June 2005. The following material matters are under discussion:

(1) After the balance sheet date one of the company’s factories was seriously damaged by fire. Insurance will onlycover part of the loss suffered. The company’s going concern status is not affected.

(2) Umbria guaranteed the overdraft of another company in 2003. No disclosure has been made in previousfinancial statements, but events in the latter part of the year ended 30 June 2005 suggest that it is probable thata liability will fall on Umbria in 2006.

(3) One of the company’s directors was dismissed during 2005 for disclosing confidential information to acompetitor. Umbria has commenced an action against this director, and the company has been advised that it isprobable that substantial damages will be awarded.

(4) One of the company’s buildings was revalued during the year. The directors are uncertain as to how therevaluation surplus should be included in the financial statements. The surplus has been separately disclosed asan item in the draft income statement.

Required:

Explain how each of these four matters should be dealt with in the financial statements for the year ended30 June 2005, stating in each case the relevant accounting standard.

(10 marks)

13 [P.T.O.



5 State four accounting concepts, and explain how each one contributes to fair presentation in the financialstatements.

(10 marks)


14



Answers




Section A

1 A2 A3 B4 D5 C6 D7 B8 A9 D10 D11 D12 C13 C14 D15 A16 D17 A18 C19 B20 D21 B22 C23 C24 A25 B

17



SECTION B

1 AirnIncome statement for the year ended 30 June 2005

$ $Sales revenue (Working 1) 517,200Opening inventories 58,900Purchases (Working 2) 334,600

––––––––393,500

less: Closing inventories 63,200330,300

–––––––– ––––––––Gross profit 186,900

Wages 74,000Rent and general expenses (49,200 + 7,400 – 12,500 + 13,000) 57,100Depreciation: shop fittings (45,000 x 10%) 4,500

motor van (22,000 x 20%) 4,400Profit on sale of van (4,500 – 4,000) (500) 139,500

–––––––– ––––––––Net profit $47,400

––––––––

Workings

(1) Calculation of sales

Receivables ledger total account

$ $Opening balance 44,700 Cash banked 418,200

Payments out of takings 95,100Sales 517,200

Closing balance 48,600–––––––– ––––––––561,900 561,900–––––––– ––––––––

(2) Calculation of purchases

Payables ledger total account

$ $Opening balance 19,600

Cash paid for purchases 316,300 Purchases 320,900Closing balance 24,200

–––––––– ––––––––340,500 340,500–––––––– ––––––––

Credit purchases 320,900Cash purchases 13,700

––––––––Total purchases 334,600

––––––––

18



2 Land – cost/valuation

2004 $000 2004 $0001 Jan Balance 400 30 Sept Disposal 10030 June Cash 20031 Dec Revaluation reserve 300 31 Dec Balance 800

––––– –––––900 900

––––– –––––

Buildings – cost/valuation

2004 $000 2004 $0001 Jan Balance 800 30 Sept Disposal 10030 June Cash 50031 Dec Revaluation reserve 200 31 Dec Balance 1,400

––––– –––––1,500 1,500––––– –––––

Buildings – accumulated depreciation

2004 $000 2004 $00030 Sept Disposal 20 1 Jan Balance 200

31 Dec Income statement depreciation31 Dec Revaluation reserve 204 2% x 1,200 24

––––– –––––224 224

––––– –––––

Land and Buildings – disposal

2004 $000 2004 $00030 Sept Land 100 30 Sept Depreciation 20

Buildings 100 Cash 500Income statement – profit 320

––––– –––––520 520

––––– –––––

3 Goodwill

$ $Investment in Rye 260,000 Share capital 80% 80,000

Retained earnings 80% 144,000Goodwill-retained earnings 36,000

–––––––– ––––––––260,000 260,000–––––––– ––––––––

Minority interest

$ $Balance to CBS 72,000 Share capital 20% 20,000

Retained earnings 20% 52,000–––––––– ––––––––

72,000 72,000–––––––– ––––––––

Retained earnings

$ $Cost of control Balances Kye 480,00080% x $180,000 144,000 Rye 260,000Goodwill 36,000Minority interest 20% 52,000Balance to CBS 508,000

–––––––– ––––––––740,000 740,000–––––––– ––––––––

19



Kye groupBalance sheet as at 30 September 2005

$Sundry net assets (420, 000 + 360,000) 780,000

––––––––Share capital 200,000Retained earnings 508,000

––––––––708,000

Minority interest 72,000––––––––780,000––––––––

4 (1) The factory was in good condition at 30 June 2005, and thus the fire is a non-adjusting event according to IAS 10 Eventsafter the balance sheet date. Details of the fire and an estimate of the loss suffered should be disclosed by note.

(2) According to IAS 37 Provisions, contingent liabilities and contingent assets, contingencies such as this are to be provided foras soon as it becomes probable that a liability will arise. A provision should therefore be made for the best estimate of theloss that will arise.

(3) This constitutes a ‘probable’ contingent asset under IAS 37, and thus should be disclosed by note, explaining the nature ofthe contingent asset and, if possible, an estimate of the financial effect.

(4) It is incorrect to include the revaluation gain in the income statement, because the gain is unrealised. It should be creditedto revaluation reserve and shown in the balance sheet. The gain should also be shown in the statement of changes in equity(IAS 16 Property, Plant and Equipment and IAS 1 Presentation of Financial Statements).

5 Four accounting concepts needed for full marks.Examples:

(i) Accruals conceptThe accruals concept is that transactions are reflected in the accounting period in which they occur, rather than the period inwhich any cash involved is received or paid. If this concept is not followed, expenses, income, assets and liabilities are allliable to be misstated and fair presentation will not be achieved.

(ii) Going concern conceptThe going concern concept is that financial statements should be prepared on the basis that the business will continue forthe foreseeable future. If this concept is not followed, assets and liabilities, and hence income and expenses, will be distorted,except, of course, in the rare case that the business is in fact no longer a going concern.

(iii) Prudence conceptPrudence means that a degree of caution should be exercised in making estimates of figures for the financial statements, sothat assets are not overstated and liabilities are not understated. If the prudence concept is not followed, fair presentation isunlikely to be achieved because assets and liabilities may be shown at unrealistic values.

(iv) NeutralityNeutrality means that information in financial statements should be free from deliberate or systematic bias. If this concept isnot followed, information may be presented in a misleading way and a fair presentation will not result.

(v) Substance over formThe legal form of a transaction may not represent the true nature of that transaction. The concept of substance over form isthat, whenever legally possible, the substance or reality of a transaction should be accounted for rather than its legal form.

Other concepts considered on their merits.

20



Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) December 2005 Marking Scheme

Section B

1 Heading 1Sales revenue 2Opening inventories 1/2Purchases 2Closing inventories 1/2Wages 1/2Rent and general expenses 2Depreciation: shop fittings 1

motor van 1Profit on sale of van 1

–––––111/2 max 11

2 Land – cost/valuation 21/2Buildings – cost/valuation 21/2Buildings – accumulated depreciation 31/2Land and buildings – disposal 21/2–––––

11

3 Goodwill 11/2Minority interest 1Retained earnings 21/2Heading 1Sundry net assets 1Share capital 1/2Minority interest in B/S 1/2–––––

8

4 (1) IAS 10 1Non-adjusting 1Details in note 2 x 1/2 1

–––––3

(2) IAS 37 1Provide for 1

–––––2

(3) IAS 37 1Disclose by note 2 x 1/2 1

–––––2

(4) IASs 16/1 1Must not be in income statement 1Include as revaluation reserve in balance sheet 1Include in statement of changes in equity 1

–––––4

–––––11 max 10

5 Concepts stated 4 x 1 4explained 4 x 1 8

–––––12 max 10

21




PART 1


QUESTION PAPER








Pape

r 1.1

(IN

T)





1 The plant and machinery cost account of a company is shown below. The company’s policy is to charge depreciationat 20% on the straight line basis, with proportionate depreciation in years of acquisition and disposal.

Plant and machinery - cost

2005 $ 2005 $1 Jan Balance 280,000 30 June Transfer disposal 14,0001 Apr Cash 48,0001 Sept Cash 36,000 31 Dec Balance 350,000

–––––––– ––––––––364,000 364,000–––––––– ––––––––

What should be the depreciation charge for the year ended 31 December 2005?

A $67,000

B $70,000

C $64,200

D $68,600

2 Which of the following are correct?

1. The balance sheet value of inventory should be as close as possible to net realisable value.

2. The valuation of finished goods inventory must include production overheads.

3. Production overheads included in valuing inventory should be calculated by reference to the company’s normallevel of production during the period.

4. In assessing net realisable value, inventory items must be considered separately, or in groups of similar items,not by taking the inventory value as a whole.

A 1 and 2 only

B 3 and 4 only

C 1 and 3 only

D 2, 3 and 4

3 A business sublets part of its office accommodation.

The rent is received quarterly in advance on 1 January, 1 April, 1 July and 1 October. The annual rent has been$24,000 for some years, but it was increased to $30,000 from 1 July 2005.

What amounts for this rent should appear in the company’s financial statements for the year ended 31 January2006?

Income statement Balance sheet

A $27,500 $5,000 in sundry receivables

B $27,000 $2,500 in sundry receivables

C $27,000 $2,500 in sundry payables

D $27,500 $5,000 in sundry payables

2



4 A trainee accountant has prepared the following receivables ledger total account to calculate the credit sales of abusiness which does not keep proper accounting records (all sales are on credit):

Receivables ledger total account

$ $Opening receivables 148,200 Credit sales 870,800Cash received from customers 819,300Discounts allowed to credit customers 16,200Irrecoverable debts written off 1,500

Returns from customers 38,700 Closing receivables 153,100–––––––––– ––––––––––1,023,900 1,023,900–––––––––– ––––––––––

The account contains several errors.

What is the sales figure when all the errors have been corrected?

A $848,200

B $877,600

C $835,400

D $880,600

5 Which of the following events after the balance sheet date would normally qualify as adjusting events accordingto IAS 10 Events after the balance sheet date?

1 The bankruptcy of a credit customer with a balance outstanding at the balance sheet date.

2 A decline in the market value of investments.

3 The declaration of an ordinary dividend.

4 The determination of the cost of assets purchased before the balance sheet date.

A 1, 3, and 4

B 1 and 2 only

C 2 and 3 only

D 1 and 4 only

6 Ordan received a statement from one of its suppliers, Alta, showing a balance due of $3,980. The amount dueaccording to the payables ledger account of Alta in Ordan’s records was only $230.Comparison of the statement and the ledger account revealed the following differences:

1 A cheque sent by Ordan for $270 has not been allowed for in Alta’s statement.

2 Alta has not allowed for goods returned by Ordan $180.

3 Ordan made a contra entry, reducing the amount due to Alta by $3,200, for a balance due from Alta in Ordan’sreceivables ledger. No such entry has been made in Alta’s records.

What difference remains between the two companies’ records after adjusting for these items?

A $460

B $640

C $6,500

D $100

3 [P.T.O.



7 A company’s trial balance failed to agree, and a suspense account was opened for the difference.

Subsequent checking revealed that discounts allowed $13,000 had been credited to discounts received account andan entry on the credit side of the cash book for the purchase of some machinery $18,000 had not been posted tothe plant and machinery account.

Which two of the following journal entries would correct the errors?

Debit Credit$ $

(1) Discounts allowed 13,000Discounts received 13,000

(2) Discounts allowed 13,000Discounts received 13,000

Suspense account 26,000

(3) Suspense account 26,000Discounts allowed 13,000Discounts received 13,000

(4) Plant and machinery 18,000Suspense account 18,000

(5) Suspense account 18,000Plant and machinery 18,000

A 1 and 4

B 2 and 5

C 2 and 4

D 3 and 5

8 Which of the following statements about accounting concepts and conventions are correct?

(1) The money measurement concept requires all assets and liabilities to be accounted for at historical cost.

(2) The substance over form convention means that the economic substance of a transaction should be reflected inthe financial statements, not necessarily its legal form.

(3) The realisation concept means that profits or gains cannot normally be recognised in the income statement untilrealised.

(4) The application of the prudence concept means that assets must be understated and liabilities must be overstatedin preparing financial statements.

A 1 and 3

B 2 and 3

C 2 and 4

D 1 and 4.

4



The following information is relevant for questions 9 and 10A company’s draft financial statements for 2005 showed a profit of $630,000. However, the trial balance did not agree,and a suspense account appeared in the company’s draft balance sheet.Subsequent checking revealed the following errors:

(1) The cost of an item of plant $48,000 had been entered in the cash book and in the plant account as $4,800.Depreciation at the rate of 10% per year ($480) had been charged.

(2) Bank charges of $440 appeared in the bank statement in December 2005 but had not been entered in thecompany’s records.

(3) One of the directors of the company paid $800 due to a supplier in the company’s payables ledger by a personalcheque. The bookkeeper recorded a debit in the supplier’s ledger account but did not complete the double entryfor the transaction. (The company does not maintain a payables ledger control account).

(4) The payments side of the cash book had been understated by $10,000.

9 Which of the above items would require an entry to the suspense account in correcting them?

A All four items

B 3 and 4 only

C 2 and 3 only

D 1, 2 and 4 only

10 What would the company’s profit become after the correction of the above errors?

A $634,760

B $624,760

C $624,440

D $625,240


1 A company might make a rights issue if it wished to raise more equity capital.

2 A rights issue might increase the share premium account whereas a bonus issue is likely to reduce it.

3 A bonus issue will reduce the gearing (leverage) ratio of a company.

4 A rights issue will always increase the number of shareholders in a company whereas a bonus issue will not.

A 1 and 2

B 1 and 3

C 2 and 3

D 2 and 4

5 [P.T.O.




(1) Contingent assets are included as assets in financial statements if it is probable that they will arise.

(2) Contingent liabilities must be provided for in financial statements if it is probable that they will arise.

(3) Details of all adjusting events after the balance sheet date must be given in notes to the financial statements.

(4) Material non-adjusting events are disclosed by note in the financial statements.

A 1 and 2

B 2 and 4

C 3 and 4

D 1 and 3

13 At 1 January 2005 a company had an allowance for receivables of $18,000

At 31 December 2005 the company’s trade receivables were $458,000. It was decided:

(a) To write off debts totalling $28,000 as irrecoverable;

(b) To adjust the allowance for receivables to the equivalent of 5% of the remaining receivables based on pastexperience.

What figure should appear in the company’s income statement for the total of debts written off as irrecoverableand the movement in the allowance for receivables for the year ended 31 December 2005?

A $49,500

B $31,500

C $32,900

D $50,900

14 The following payables ledger control account contains some errors.All goods are purchased on credit

Payables ledger control account

$ $Purchases 963,200 Opening balance 384,600

Cash paid to suppliers 988,400Discounts received 12,600 Purchases returns 17,400Contras with amounts

receivable in receivables ledger 4,200Closing balance 410,400

–––––––––– ––––––––––1,390,400 1,390,400–––––––––– ––––––––––

What should the closing balance be when the errors have been corrected?

A $325,200

B $350,400

C $358,800

D $376,800

6



15 What journal entry is required to record goods taken from inventory by the owner of a business?

A Debit DrawingsCredit Purchases

B Debit Sales Credit Drawings

C Debit Drawings Credit Inventory

D Debit Purchases Credit Drawings

16 The following information is available about the transactions of Razil, a sole trader who does not keep properaccounting records:

$Opening inventory 77,000Closing inventory 84,000Purchases 763,000

Gross profit as a percentage of sales 30%

Based on this information, what is Razil’s sales revenue for the year?

A $982,800

B $1,090,000

C $2,520,000

D $1,080,000


(1) All non-current assets must be depreciated.

(2) If goodwill is revalued, the revaluation surplus appears in the statement of changes in equity.

(3) If a tangible non-current asset is revalued, all tangible assets of the same class should be revalued.

(4) In a company’s published balance sheet, tangible assets and intangible assets must be shown separately.

A 1 and 2

B 2 and 3

C 3 and 4

D 1 and 4

7 [P.T.O.




Extracts from a company’s financial statements for 2005 are given below:

Balance sheetas at 31 December 2005

$m

Non-current assets 90Current assets 80

––––170––––

Ordinary share capital 40Share premium account 25Retained earnings 35

––––100

10% Loan notes 50Current liabilities 20

––––170––––

Income statementfor the year ended 31 December 2005

$mProfit before finance costs 20Finance costs (5)

––––Profit before tax 15

––––

18 What is the company’s return on total capital employed?

A 20/150 = 13·3%

B 15/150 = 10%

C 20/100 = 20%

D 15/100 = 15%

19 What is the company’s return on shareholders’ equity?

A 15/40 = 37·5%

B 20/100 = 20%

C 15/100 = 15%

D 20/150 = 13·3%

8



20 The following bank reconciliation statement has been prepared by an inexperienced bookkeeper at 31 December2005.

Bank reconciliation statement$

Balance per bank statement (overdrawn) 38,640Add: lodgements not credited 19,270

–––––––57,910

Less: unpresented cheques 14,260–––––––

Balance per cash book 43,650–––––––

What should the final cash book balance be when all the above items have been properly dealt with?

A $43,650 overdrawn

B $33,630 overdrawn

C $5,110 overdrawn

D $72,170 overdrawn

21 Which of the following items must be disclosed in a company’s published financial statements?

1 Authorised share capital

2 Movements in reserves

3 Finance costs

4 Movements in non-current assets

A 1, 2 and 3 only

B 1, 2 and 4 only

C 2, 3 and 4 only

D All four items

22 On 1 January 2005 a company purchased some plant.

The invoice showed$

Cost of plant 48,000Delivery to factory 400One year warranty covering breakdown during 2005 800

–––––––49,200–––––––

Modifications to the factory building costing $2,200 were necessary to enable the plant to be installed.

What amount should be capitalised for the plant in the company’s records?

A $51,400

B $48,000

C $50,600

D $48,400

9 [P.T.O.



23 A business had an opening inventory of $180,000 and a closing inventory of $220,000 in its financial statementsfor the year ended 31 December 2005.

Which of the following entries for these opening and closing inventory figures are made when completing thefinancial records of the business?

Debit Credit$ $

A Inventory account 180,000Income statement 180,000

Income statement 220,000Inventory account 220,000

B Income statement 180,000Inventory account 180,000

Inventory account 220,000Income statement 220,000

C Inventory account 40,000Purchases account 40,000

D Purchases account 40,000Inventory account 40,000


24 On 1 January 2001 H acquired 80% of the share capital of S for $1,100,000.

The share capital and reserves of the two companies were:

At 1 January At 31 December2001 2005$000 $000

Share capital H 1,000 1,200

S 400 400

Retained earnings H 800 1,300

S 500 800

What was the goodwill arising on H’s acquisition of S?

A $200,000

B $780,000

C $380,000

D $880,000

25 What should the minority interest figure be in the group’s consolidated balance sheet at 31 December 2005?

A $240,000

B $80,000

C $180,000

D $140,000

(50 marks)

10




1 The following balances are in the accounting records of a partnership as at 31 December 2005:

$Capital accounts Leon, as at 1 January 2005 400,000

Mark, introduced 1 July 2005 200,000

Drawings Leon 160,000

Mark 80,000

Notes(1) Until 30 June 2005, Leon had run the business as a sole trader. Mark joined him on 1 July 2005 introducing

capital of $200,000.

(2) The following profit-sharing arrangements were agreed from that date:(i) Both partners to receive interest on their capital account balances at 5% per year(ii) Mark to receive a salary of $20,000 per year(iii) Balance of profit to be shared – Leon 60%, Mark 40%.

(3) The profit for the year ended 31 December 2005 was $250,000. It was agreed that this profit had accrued onethird in the six months ended 30 June 2005 and two thirds in the six months ended 31 December 2005, exceptfor an irrecoverable debt of $20,000 charged in arriving at the profit which was to be regarded as occurring inthe six months ended 30 June 2005.

Required:

Prepare a statement showing the division of the profit and prepare the partners’ current accounts for the yearended 31 December 2005.

(9 marks)

11 [P.T.O.



2 The draft financial statements of Rampion, a limited liability company, for the year ended 31 December 2005included the following figures:

$Profit 684,000Closing inventory 116,800Trade receivables 248,000Allowance for receivables 10,000

No adjustments have yet been made for the following matters:

(1) The company’s inventory count was carried out on 3 January 2006 leading to the figure shown above. Salesbetween the close of business on 31 December 2005 and the inventory count totalled $36,000. There were nodeliveries from suppliers in that period. The company fixes selling prices to produce a 40% gross profit on sales.The $36,000 sales were included in the sales records in January 2006.

(2) $10,000 of goods supplied on sale or return terms in December 2005 have been included as sales andreceivables. They had cost $6,000. On 10 January 2006 the customer returned the goods in good condition.

(3) Goods included in inventory at cost $18,000 were sold in January 2006 for $13,500. Selling expenses were$500.

(4) $8,000 of trade receivables are to be written off.

(5) The allowance for receivables is to be adjusted to the equivalent of 5% of the trade receivables after allowing forthe above matters, based on past experience.

Required:

(a) Prepare a statement showing the effect of the adjustments on the company’s net profit for the year ended31 December 2005. (5 marks)

(b) Show how the adjustments affect:

(i) Closing inventory;

(ii) Receivables, showing separately the deduction of the allowance for receivables. (6 marks)

(11 marks)

12



3 The summarised financial statements of Ganda for 2004 and 2005 are given below:Balance sheets as at

Reference 31 December 31 Decemberto notes 2005 2004

$000 $000 $000 $000Non-current assets: cost 1 3,400 2,100

less Accumulated depreciation (720) 2,680 (550) 1,550–––––– ––––––

Current assetsInventory 600 400Receivables 1,500 1,700Cash 80 2,180 50 2,150

–––––– –––––– –––––– ––––––4,860 3,700

–––––– ––––––Equity and liabilities

Ordinary share capital 900 600Share premium account 500 320Retained earnings 2 920 1,420 500 820

–––––– –––––– –––––– ––––––2,320 1,420

Net current liabilities10% loan notes 1,200 1,000

Current liabilitiesBank overdraft 140 280Trade payables 900 800Current tax payable 300 1,340 200 1,280

–––––– –––––– –––––– ––––––4,860 3,700

–––––– ––––––Notes

(1) Non-current assets that had cost $200,000 with a written down value of $60,000 were sold for $80,000 duringthe year.

(2) The increase in the retained earnings is made up as follows:

$000 $000Opening balance 500Operating profit 1,090

less: Finance costs paid (120)––––––

Profit before taxation 970Income tax expense (300)Dividends paid (250)Retained profit for year –––––– 420

––––––Closing balance 920

––––––

Required:Prepare a cash flow statement for Ganda for the year ended 31 December 2005, using the format inIAS 7 Cash flow statements.

(12 marks)

13 [P.T.O.



4 (a) Explain the meaning of the term ‘working capital cycle’ for a trading company. (4 marks)

(b) Calculate the working capital cycle in days from the information below.

$000 $000Sales (all on credit) 1,000

less: Cost of goods soldOpening inventory 100Purchases (all on credit) 800

––––900

less: Closing inventory (200) 700–––– ––––

Gross profit 300––––

Closing receivables 250Closing payables 150

(4 marks)

(c) State one advantage to a business of keeping its working capital cycle as short as possible.(2 Marks)

(10 marks)

5 At 31 December 2005 the capital structure of Ambia, a limited liability company, was as follows:

$1,000,000 ordinary shares of $1 each 1,000,000Share premium account 200,000Revaluation reserve 100,000Retained earnings 50,000

The authorised share capital of the company was $1,000,000.

The directors of the company are considering the following proposals. None of them is a qualified accountant:

(a) Making a bonus issue of one ordinary share for every two held, in order to raise $500,000 for the company.(4 marks)

(b) Paying a dividend of 10c per share (1 mark)

(c) Increasing the revaluation reserve to $300,000 by revaluing goodwill from $800,000 to $1,000,000.(1 mark)

(d) Combining all reserves into a single figure. (2 marks)

Required:

Comment on the validity of these proposals. (The mark allocation is shown against each of the four proposals).

(8 marks)


14



Answers



Part 1 Examination – Paper 1.1(INT)

Preparing Financial Statements (International Stream) June 2006 Answers

Section A

1 C (280,000 x 20%) + (48,000 x 20% x 9/12 ) + (36,000 x 20% x 4/12 ) – (14,000 x 20% x 6/12 )

2 D

3 D 5/12 x 24,000 + 7/12 x 30,000 = 27,500; 2/3 x 7,500 = 5,000

4 D Receivables ledger control account

Opening receivables 148,200 Cash received from customers 819,300Sales 880,600 Discounts allowed 16,200

Irrecoverable debts written off 1,500Returns from customers 38,700Closing receivables 153,100

–––––––––– ––––––––––1,028,800 1,028,800–––––––––– ––––––––––

5 D

6 D 3,980 – 270 – 180 – 3,200 = 330 : difference 100

7 C

8 B

9 B

10 D 630,000 – 4,320 – 440

11 A

12 B

13 B 430,000 x 5% = 21,500 – 18,000 + 28,000

14 A Payables ledger control account

Cash paid to suppliers 988,400 Opening balance 384,600Discounts received 12,600 Purchases 963,200Contras with amounts

receivable in receivables ledger 4,200Purchases returns 17,400Closing balance 325,200

–––––––––– ––––––––––1,347,800 1,347,800–––––––––– ––––––––––

15 A

16 D 756,000 x 10/7

17 C

18 A

19 C

20 B 38,640 + 14,260 – 19,270 = 33,630

21 D

22 C 48,000 + 400 + 2,200

23 B

24 C 1,100,000 – 4/5 (400,000 + 500,000)

25 A 20% x (400,000 + 800,000)

17



Section B

1 Leon and MarkStatement of division of profit for the year ended 31 December 2005

Six months ended 30 June 2005$ $

Leon: (90,000 – 20,000) (see working) 70,000––––––––

Six months ended 31 December 2005Profit 180,000Interest on capital

Leon 5% x 400,000 x 6/12 10,000Mark 5% x 200,000 x 6/12 5,000 (15,000)

–––––––– ––––––––165,000

SalaryMark 20,000 x 6/12 (10,000)

––––––––155,000

Balance of profitLeon 60% 93,000Mark 40% 62,000 155,000

–––––––– ––––––––0

––––––––

Working $Profit for year 250,000Add: irrecoverable debt 20,000

––––––––Profit for division 270,000

––––––––

Six months ended 30 June 2005 90,000less: irrecoverable debt 20,000 70,000

––––––––Six months ended 31 December 2005 180,000

––––––––250,000––––––––

Current accounts

Leon Mark Leon Mark$ $ $ $

Drawings 160,000 80,000 30 June Profit 70,000Balance 13,000 31 Dec Interest on capital 10,000 5,000

Salary 10,000Share of balance 60:40 93,000 62,000Balance 3,000

173,000 80,000 173,000 80,000

18



Alternative formatLeon and Mark

Statement of division of profit for the year ended 31 December 2006

Leon Mark Total$ $ $

Six months ended 30 June 2005Leon: (90,000 – 20,000)(see working) 70,000 70,000

––––––– –––––––Six months ended 31 December 2005

Interest on capitalLeon 5% x 400,000 x 6/12 10,000Mark 5% x 200,000 x 6/12 5,000 15,000

SalaryMark 20,000 x 6/12 10,000 10,000

Balance of profit 60:40 93,000 62,000 155,000––––––– ––––––– –––––––

103,000 77,000 180,000––––––– ––––––– –––––––

Current accounts

Leon Mark Leon Mark$ $ 2005 $ $

Drawings 160,000 80,000 30 June Profit 70,000Balance 13,000 31 Dec Share of profit 103,000 77,000

Balance 3,000

173,000 80,000 173,000 80,000

2 (a) Net profit adjustments$

Profit per draft financial statements 684,000(1) Inventory movement

Adjustment for sales $36,000 x 60% 21,600(2) Goods on sale or return

Elimination of profit (4,000)(3) Reduction in inventory:

$18,000 – ($13,500 – $500) (5,000)(4) Debts written off (8,000)(5) Increase in allowance for receivables

($11,500 – $10,000) (1,500)–––––––––

Revised net profit $687,100–––––––––

(b) Adjustments to inventory and receivables(i) Inventory $

Inventories per draft financial statements 116,800(1) Inventory movement – as (a) above 21,600(2) Goods on sale or return

cost introduced into inventory 6,000(3) Reduction in inventory (a) above (5,000)

–––––––––Revised closing inventory $139,400

–––––––––

$(ii) Receivables

per draft financial statements 248,000(2) Deduction of goods on sale or return (10,000)(4) Debts written off (8,000)

–––––––––230,000

(5) less: allowance for receivables (11,500)–––––––––$218,500–––––––––

19



3 GandaCash flow statement for the year ended 31 December 2005

$000 $000

Cash flows from operating activitiesProfit before taxation 970Adjustment for:

Depreciation (W2) 310Profit on sale of non-current asset (W3) (20)Interest expense 120

–––––1,380

Increase in inventory (200)Decrease in receivables 200Increase in payables 100

–––––Cash generated from operations 1,480Interest paid (120)Income taxes paid (200)

–––––Net cash from operating activities 1,160

Cash flows from investing activitiesPurchase of non-current assets (W1) (1,500)Proceeds of sale of non-current assets (W3) 80Net cash used in investing activities ––––– (1,420)

Cash flows from financing activitiesProceeds from issue of share capital (300 + 180) 480Proceeds from issue of loan notes 200Dividends paid (250) 430

––––– –––––Net cash from financing activities 170Cash at beginning of period (230)

–––––Cash at end of period (60)

–––––

Workings

(1) Non-current assets – cost

$000 $000Opening balance 2,100 Transfer disposal 200Purchases (balancing figure) 1,500

Closing balance 3,400–––––– ––––––3,600 3,600

–––––– ––––––

(2) Non-current assets - accumulated depreciation

$000 $000Transfer disposal 140 Opening balance 550

Income statement – depreciation(balancing figure) 310

Closing balance 720–––––– ––––––

860 860–––––– ––––––

(3) Non-current assets - disposal

$000 $000Transfer – cost 200 Transfer – depreciation 140Income statement 20 Cash 80

–––––– ––––––220 220

–––––– ––––––

20



4 (a) The working capital cycle illustrates the changing make-up of working capital in the course of the trading operations of abusiness:

1 Purchases are made on credit and the goods go into inventory.

2 Inventory is sold and converted into receivables

3 Credit customers pay their accounts

4 Cash is used to pay suppliers.

(b) Collection period for receivables

250––––– x 365 91 days1,000

Inventory turnover

200 104 days––––– x 365 –––––––– (see Note below)700 195 days

Payment period for payables

150 68 days––––– x 365800

––––––––Length of working capital cycle 127 days

Note. If average inventory is used the inventory turnover becomes:

100 + 200––––––––––– ÷ 2 x 365 78 days

700

The length of the cycle becomes 101 days.Either answer is acceptable.

(c) The advantage to a company of keeping its working capital cycle short is that fewer resources are tied up in working capital,thus freeing them for other purposes.(Other answers considered on their merits)

5 To the directors of Ambia 8 June 2006

Comments on proposals under consideration

(a) Proposed bonus issue.There are several problems in connection with the proposed bonus issue:

(i) A bonus issue would not raise any capital for the company. To raise capital a rights issue (or an issue at full marketprice) would be necessary.

(ii) For either a bonus issue or a rights issue to be possible, the authorised capital would have to be increased.

(iii) There are insufficient reserves to make a bonus issue of $500,000 worth of shares.

(b) Paying a dividend of 10c per share.There are insufficient retained earnings to pay a dividend of more than 5c per share.

(c) IFRS 3 Business combinations does not allow goodwill to be revalued upwards.

(d) It is not possible to combine the reserves as suggested. IAS1 Presentation of financial statements requires retained earningsto be shown seperately from other reserves.

21



Part 1 Examination – Paper 1.1(INT)

Preparing Financial Statements (International Stream) June 2006 Marking Scheme

Section B Marks

1 Statement of division of profitLeon profit for first six months 2Profit for second six months 1Interest on capital 1Salary 1/2Balance of profit 1

––––51/2

Current accountsDrawings 2 x 1/2 1Leon profit 70,000 1/2Interest on capital 2 x 1/2 1Salary 1/2Share of balance 1/2

––––9

––––

Alternative marking scheme (if statement of division of profit shows partners’ total shares)Leon : profit for first six months 2Profit for second six months (as total) 1Interest on capital 1Salary 1/2Balance of profit 1Total shares 1

––––61/2

Current accountsDrawings 2 x 1/2 1Leon profit 70,000 1/2Total profit shares 1

––––9

––––

2 (a) Profit adjustments1 mark per item 5 x 1 5

(b) Adjustments to inventory and receivablesInventory

Movements 1Goods on sale or return 1Reduction to net realisable value 1

––––3

ReceivablesGoods on sale or return 1Debts written off 1Allowance for receivables 1

––––3 6

–––– ––––11

23



Marks

3 Cash flows from operating activities 31/21/2 mark per item other than interest

Interest added and deducted 1/2Cash flows from investing activities

1/2 mark per item 2 x 1/2 1Cash flows from financing activities

1/2 mark per item 3 x 1/2 11/2Cash movement 2 x 1/2 1

Workings: non-current assets – cost 11/2– depreciation 11/2– disposal 11/2

Heading 1/2Layout 1

––––131/

2max12

––––

4 (a) Purchases into inventory 1Inventory into recievables 1Receivables into cash 1Cash to pay suppliers 1 4

––––

(b) per ratio 1 3 x 1 3correct calculation 1 4

––––

(c) Up to 2––––10

5 (a) (i) 2(ii) 1(iii) 1

(b) 1

(c) 1

(d) 2 x 1 2 8–––– ––––

50

––––

24



Workings for MCQ answers

1 C 280,000 x 20% + 48,000 x 20% x 9/12 + 36,000 x 20% x 4/12 – 14,000 x 20% x 6/12

A as C, but plus 1,400

B 350,000 x 20%

D as B, but – 1,400

4 A as D, but discounts on wrong side

B as D, but irrecoverable debts on wrong side

C as in Q, but with discounts and irrecoverable debts on credit side

D all items on debit side except opening balance moved to credit side

6 A as D, but 180 adjusted in wrong direction

B as D, but 270 adjusted in wrong direction

C as D, but 3,200 adjusted in wrong direction

D 3,920 – 270 – 180 – 3,200 = 330 : 100 difference

10 A 630,000 – 4,320 + 440

B 630,000 – 4,800 – 440

C 630,000 – 4,320 – 440 – 800

D 630,000 – 4,320 – 440

13 B 430,000 x 5% = 21,500 – 18,000 + 28,000

A as B but 18,000 not deducted

C as B but provision based on 458,000

D as B but provision based on 458,000 and 18,000 not deducted

14 A Purchase returns 17,400 O/Bal 384,600Cash 988,400 Purchases 963,200Discounts 12,600Contras 4,200c/bal 325,200

––––––––– –––––––––1,347,800 1,347,800––––––––– –––––––––

B as A but discounts on wrong side

C as A but contras and discounts on wrong side

D as in Q but contras and discounts on credit side (410,000 – 33,600)

16 A (77 + 763 – 84) = 756 + 30%

B 763 x 10/7

C 756 x 10/3

D 756 x 10/7

25

5D–G

BR

AA

Pap

er T

3GB

R



20 A as in question

B (38,640 – 19,270 + 14,260)

C as B but plus 140

D as B but minus 140

22 A 48,000 + 400 + 800 + 2,200

C 48,000 + 400 + 2,200

D 48,000 + 400

24 A (1,100,000 – (400,000 + 500,000))

B (1,100,000 – 4/5 x 400,000)

C (1,100,000 – 4/5 (400,000 + 500,000))

D 4/5 x 1,100,000

26

5D–G

BR

AA

Pap

er T

3GB

R




PART 1


QUESTION PAPER








Pape

r 1.1

(IN

T)



Section A – ALL TWENTY-FIVE questions are compulsory and MUST be attempted


1 On 1 September 2006, a business had inventory of $380,000. During the month, sales totalled $650,000 andpurchases $480,000. On 30 September 2006 a fire destroyed some of the inventory. The undamaged goods ininventory were valued at $220,000. The business operates with a standard gross profit margin of 30%.

Based on this information, what is the cost of the inventory destroyed in the fire?

A $185,000

B $140,000

C $405,000

D $360,000

2 A company had the following transactions:

1 Goods in inventory that had cost $1,000 were sold for $1,500 cash.

2 A credit customer whose $500 debt had been written off paid the amount in full.

3 The company paid credit suppliers $1,000

What will be the combined effect of these transactions on the company’s total working capital (current assetsless current liabilities)?

A Increase of $1,000

B Working capital remains unchanged

C Increase of $2,000

D Increase of $3,000

3 On 30 June 2006, H acquired 75% of the ordinary share capital of S for $500,000. At that date the balance sheetof S showed the following:

$Ordinary share capital 200,000Share premium account 150,000Retained earnings 100,000

What was the goodwill arising on the acquisition?

A $50,000

B $162,500

C $350,000

D $300,000

2



4 Which of the following should appear as items in a company’s statement of changes in equity?

1 Profit for the financial year

2 Income from investments

3 Gain on revaluation of non-current assets

4 Dividends paid

A 1, 3 and 4

B 1 and 4 only

C 2 and 3 only

D 1, 2 and 3

5 The following information is available about a company’s dividends:

$2005Sept. Final dividend for the year ended

30 June 2005 paid (declared August 2005) 100,0002006March Interim dividend for the year ended

30 June 2006 paid 40,000Sept. Final dividend for the year ended

30 June 2006 paid (declared August 2006) 120,000

What figures, if any, should be disclosed in the company’s income statement for the year ended 30 June 2006and its balance sheet as at that date?

Income statement Balance sheetfor the period liability

A $160,000 deduction $120,000

B $140,000 deduction nil

C nil $120,000

D nil nil

3 [P.T.O.



6 A and B are in partnership, sharing profits in the ratio 3:2 and preparing their accounts to 30 June each year. On 1 January 2006, C joined the partnership and the profit sharing ratio became A 40%, B 30%, and C 30%.

Profits for the year ended 30 June 2006 were:$

6 months ended 31 December 2005 300,0006 months ended 30 June 2006 450,000

A bad debt of $50,000 was written off in the six months to 30 June in computing the $450,000 profit. It was agreedthat this expense should be borne by A and B only, in their original profit-sharing ratios.

What is A’s total profit share for the year ended 30 June 2006?

$A 330,000

B 310,000

C 340,000

D 350,000

7 At 1 July 2005 a company’s allowance for receivables was $48,000.

At 30 June 2006, trade receivables amounted to $838,000. It was decided to write off $72,000 of these debts andadjust the allowance for receivables to $60,000.

What are the final amounts for inclusion in the company’s balance sheet at 30 June 2006?

Trade Allowance for Net receivables receivables balance

$ $ $A 838,000 60,000 778,000

B 766,000 60,000 706,000

C 766,000 108,000 658,000

D 838,000 108,000 730,000

8 Which of the following statements about inventory valuation for balance sheet purposes are correct?

1 According to IAS 2 Inventories, average cost and FIFO (first in and first out) are both acceptable methods ofarriving at the cost of inventories.

2 Inventories of finished goods may be valued at labour and materials cost only, without including overheads.

3 Inventories should be valued at the lowest of cost, net realisable value and replacement cost.

4 It may be acceptable for inventories to be valued at selling price less estimated profit margin.

A 1 and 3

B 2 and 3

C 1 and 4

D 2 and 4

4



9 A business received a delivery of goods on 29 June 2006, which was included in inventory at 30 June 2006. Theinvoice for the goods was recorded in July 2006.

What effect will this have on the business?

1 Profit for the year ended 30 June 2006 will be overstated.

2 Inventory at 30 June 2006 will be understated.

3 Profit for the year ending 30 June 2007 will be overstated.

4 Inventory at 30 June 2006 will be overstated.

A 1 and 2

B 2 and 3

C 1 only

D 1 and 4

10 The capital and reserves of Lamb, a limited liability company, are as follows:

$m10% Loan notes 80Ordinary share capital 100Share premium account 60Retained earnings 80

What is the company’s gearing ratio?

A 80/100 = 80%

B 80/180 = 44·4%

C 240/80 = 300%

D 80/320 = 25%


1 A company’s authorised share capital must be included in its published balance sheet as part of shareholders’funds.

2 If a company makes a bonus issue of ordinary shares, the total shareholders’ interest (share capital plus reserves)remains unchanged.

3 A company’s statement of changes in equity must include the proceeds of any share issue during the period.

4 A company must disclose its significant accounting policies by note to its financial statements.

A 1 and 2 only

B 1 and 3 only

C 3 and 4 only

D 2, 3 and 4

5 [P.T.O.



12 Which, if any, of the following statements about intangible assets are correct?

1 Goodwill arising on the acquisition of a subsidiary will appear as an intangible asset in the balance sheet of theacquiring company and in the consolidated balance sheet.

2 Deferred development expenditure must be amortised over a period not exceeding five years.

3 If the conditions specified in IAS 38 Intangible assets are met, development expenditure may be capitalised, ifthe directors decide to do so.

4 Trade investments must appear in a company’s balance sheet under the heading of intangible assets.

A 1 and 3

B 1 and 4

C 2 and 4

D None of the statements is correct

13 Which of the following characteristics of financial information contribute to reliability, according to the IASB’sFramework for the Preparation and Presentation of Financial Statements?

1 Completeness

2 Prudence

3 Neutrality

4 Faithful representation

A All four items

B 1, 2 and 3 only

C 1, 2 and 4 only

D 2, 3 and 4 only

14 Details of a company’s insurance policy are shown below:

Premium for year ended 31 March 2006 paid April 2005 $10,800Premium for year ending 31 March 2007 paid April 2006 $12,000

What figures should be included in the company’s financial statements for the year ended 30 June 2006?

Income statement Balance sheet$ $

A 11,100 9,000 prepayment (Dr)

B 11,700 9,000 prepayment (Dr)

C 11,100 9,000 accrual (Cr)

D 11,700 9,000 accrual (Cr)

6



15 Which of the following statements about bank reconciliations are correct?

1 In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of cash at bank shownin the bank statement.

2 A cheque from a customer paid into the bank but dishonoured must be corrected by making a debit entry in thecash book.

3 An error by the bank must be corrected by an entry in the cash book.

4 An overdraft is a debit balance in the bank statement.

A 1 and 3

B 2 and 3

C 1 and 4

D 2 and 4

16 Extracts from the financial statements of Kafka, a limited liability company, are given below:

Balance sheet Income statementas at 30 June 2006 for the year ended 30 June 2006

$m $mNon-current assets 15Current assets 14 Operating profit 8

–––29 Finance costs (2)

––– –––Ordinary share capital 10 Profit for year 6

–––Share premium account 3Retained earnings 7

–––20

10% Loan notes 5Current liabilities 4

–––29

–––

Using these figures, which of the following are correct calculations of return on total capital employed (ROCE)and return on owners’ equity (ROOE)? (Tax ignored)

ROCE ROOEA 8/25 = 32% 6/10 = 60%

B 8/25 = 32% 6/20 = 30%

C 6/25 = 24% 8/20 = 40%

D 8/20 = 40% 6/20 = 30%

7 [P.T.O.



17 On 30 June 2002 H acquired 80% of the share capital of S.

Extracts from the balance sheets of S at 30 June 2002 and 30 June 2006 are shown below:

S balance sheets30 June 2002 30 June 2006

$ $Ordinary share capital 1,000,000 1,000,000Share premium account 400,000 400,000Retained earnings 4,700,000 5,600,000

What figure for minority interest should appear in the consolidated balance sheet as at 30 June 2006?

A $460,000

B $200,000

C $1,120,000

D $1,400,000

18 At 30 June 2005 the capital and reserves of Meredith, a limited liability company, were:

$mShare capital

Ordinary shares of $1 each 100Share premium account 80

During the year ended 30 June 2006, the following transactions took place:

1 September 2005 A bonus issue of one ordinary share for every two held, using the share premium account.1 January 2006 A fully subscribed rights issue of two ordinary shares for every five held at that date, at

$1·50 per share.

What would the balances on each account be at 30 June 2006?

Share Share premiumcapital account$m $m

A 210 110

B 210 60

C 240 30

D 240 80

8



19 The following items have to be considered in finalising the financial statements of Q, a limited liability company:

1 The company gives warranties on its products. The company’s statistics show that about 5% of sales give riseto a warranty claim.

2 The company has guaranteed the overdraft of another company. The likelihood of a liability arising under theguarantee is assessed as possible.

What is the correct action to be taken in the financial statements for these items?

20 Which of the following errors would cause a trial balance not to balance?

1 An error in the addition in the cash book.

2 Failure to record a transaction at all.

3 Cost of a motor vehicle debited to motor expenses account. The cash entry was correctly made.

4 Goods taken by the proprietor of a business recorded by debiting purchases and crediting drawings account.

A 1 only

B 1 and 2 only

C 3 and 4 only

D All four items

21 How should interest charged on partners’ drawings be dealt with in partnership financial statements?

A Credited as income in the income statement

B Deducted from profit in allocating the profit among the partners

C Added to profit in allocating the profit among the partners

D Debited as an expense in the income statement.

9 [P.T.O.

Create a provision Disclose by note only No action

A 1, 2 2, 2

B 1, 2 2

C 1, 2

D 1, 2



22 All the sales made by a retailer are for cash, and her sale prices are fixed by doubling cost. Details recorded of hertransactions for September 2006 are as follows:

$1 Sept. Inventories 40,00030 Sept. Purchases for month 60,000

Cash banked for sales for month 95,000Inventories 50,000

Which two of the following conclusions could separately be drawn from this information?

1 $5,000 cash has been stolen from the sales revenue prior to banking

2 Goods costing $5,000 have been stolen

3 Goods costing $2,500 have been stolen

4 Some goods costing $2,500 had been sold at cost price

A 1 and 2

B 1 and 3

C 2 and 4

D 3 and 4

23 A company owns a number of properties which are rented to tenants. The following information is available for theyear ended 30 June 2006:

Rent Rentin advance in arrears

$ $30 June 2005 134,600 4,80030 June 2006 144,400 8,700

Cash received from tenants in the year ended 30 June 2006 was $834,600.

All rent in arrears was subsequently received.

What figure should appear in the company’s income statement for rent receivable in the year ended 30 June2006?

A $840,500

B $1,100,100

C $569,100

D $828,700

24 In October 2006 Utland sold some goods on sale or return terms for $2,500. Their cost to Utland was $1,500. Thetransaction has been treated as a credit sale in Utland’s financial statements for the year ended 31 October 2006. InNovember 2006 the customer accepted half of the goods and returned the other half in good condition.

What adjustments, if any, should be made to the financial statements?

A Sales and receivables should be reduced by $2,500, and closing inventory increased by $1,500.

B Sales and receivables should be reduced by $1,250, and closing inventory increased by $750

C Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory

D No adjustment is necessary

10



25 The payables ledger control account below contains a number of errors:

Payables ledger control account

$ $Opening balance (amounts 318,600 Purchases 1,268,600owed to suppliers) Contras against debitCash paid to suppliers 1,364,300 balances in receivables ledger 48,000Purchases returns 41,200 Discounts received 8,200Refunds received from suppliers 2,700 Closing balance 402,000

––––––––––– –––––––––––$1,726,800 $1,726,800––––––––––– –––––––––––

All items relate to credit purchases.

What should the closing balance be when all the errors are corrected?

A $128,200

B $509,000

C $224,200

D $144,600

(50 marks)

11 [P.T.O.



Section B – ALL FIVE questions are compulsory and MUST be attempted.

1 The following balances appear in the accounting records of Golding, a limited liability company, at 30 June 2006:

$000Land and buildings:

cost 10,000accumulated depreciation at 1 July 2005 3,600

Plant and equipment: cost 6,000accumulated depreciation at 1 July 2005 3,200

Receivables 3,600Cash at bank 1,200Payables 2,500Accruals 5008% Loan notes 1,000Ordinary share capital 5,000Share premium account 2,200Retained earnings 1 July 2005 4,600


(1) Inventory at 30 June 2006 was $4,700,000

(2) The company’s land and buildings were revalued at 1 July 2005. The revaluation has not yet been reflected inthe balances given above.

Details:Cost Accumulated Net book Revalued

depreciation value amount$000 $000 $000 $000

Land 4,000 – 4,000 5,000Buildings 6,000 3,600 2,400 4,000

(3) The draft profit for the year was $2,900,000. However, three adjustments are required:

(a) Receivables totalling $280,000 are to be written off

(b) Provision is to be made for bonuses to the directors totalling $250,000

(c) Depreciation charges for the year, based on revalued amounts:

Buildings $200,000Plant and equipment $1,200,000

Required:

Prepare the company’s balance sheet as at 30 June 2006, using the format and headings in IAS 1 Presentationof Financial Statements.

(11 marks)

12



2 The draft income statement of Lorca, a limited liability company, showed a profit of $830,000. However, the trialbalance did not balance and a suspense account with a credit balance of $20,000 has been included in the balancesheet for the difference.

The following errors were found on investigation:

(1) The proceeds of issue of 100,000 50c shares at 70c per share were correctly entered in the cash book but hadbeen credited to sales account.

(2) During the year $8,000 interest received on a holding of loan notes had been correctly entered in the cash bookbut debited to interest payable account.

(3) In arriving at the net sales and purchases totals for the year, the $48,000 balance on the returns outwardsaccount had been transferred to the debit of sales account and the $64,000 balance on the returns inwardsaccount had been transferred to the credit of purchases account.

(4) A payment of $4,000 for rent had been correctly recorded in the cash book but debited to the rent account as$40,000.

Required:

(a) Prepare journal entries to correct the errors. Narratives are NOT required. (7 marks)

(b) Calculate the revised profit after adjusting for the errors. (4 marks)

(11 marks)

13 [P.T.O.



3 The balance sheets of Joyce, a limited liability company, at 30 June 2005 and 2006 are as follows

Balance sheets

Reference 30 June 2006 30 June 2005to notes $000 $000 $000 $000

Non-current assets (net book value) 1 148,000 130,000Current assets

Inventories 14,000 9,100Receivables 21,400 12,500Cash at bank – 4,600

––––––– –––––––35,400 26,200

–––––––– ––––––––183,400 156,200–––––––– ––––––––

Ordinary share capital 110,000 109,000Share premium account 5,000 4,000Revaluation reserve 14,000 2,000Retained earnings 1 28,000 18,000

–––––––– ––––––––Total equity 157,000 133,000

Non-current liabilities8% Loan notes 3 10,000 8,000

Current liabilitiesPayables 7,100 9,200Current tax payable 2 8,000 6,000Bank overdraft 1,300 –

––––––– –––––––16,400 15,200

–––––––– ––––––––183,400 156,200–––––––– ––––––––

Notes:

(1) The depreciation charge for the year was $13,000,000

(2) $6,200,000 was paid during the year to settle the income tax liability at 30 June 2005.

(3) The additional loan notes were issued on 1 January 2006. All interest due was paid on 31 December 2005 and30 June 2006.

(4) Dividends paid during the year totalled $4,000,000.

Required:

Prepare a cash flow statement for the company for the year ended 30 June 2006, using the format in IAS 7 Cashflow statements.

(12 marks)

14



4 The directors of a recently formed company are unsure as to the policies they should adopt as regards depreciation.

Required:

Advise the directors on the following points:

(a) The fundamental objective of depreciation; (1 mark)

(b) The extent to which land and buildings should be depreciated; (3 marks)

(c) Two possible methods of calculating depreciation, with explanations. (4 marks)

(8 marks)

5 IAS 10 Events after the balance sheet date defines the accounting treatment of material events occurring after thebalance sheet date.

Required:

(a) Explain what determines whether an event after the balance sheet date must be adjusted in the financialstatements. (3 marks)

(b) Explain what changes would have to be made to the following items in the balance sheet if it became clear,shortly after the balance sheet date, that the going concern basis was no longer appropriate.

(i) Non-current assets; (2 marks)

(ii) Inventory; (2 marks)

(iii) Loan notes. (1 mark)

(8 marks)


15



Answers




Section A

1 A2 A3 B4 A5 D6 D7 B8 C9 C10 D11 D12 D13 A14 A15 C16 B17 D18 B19 A20 A21 C22 B23 D24 A25 A

Workings for computational MCQs

1 A 0/inventory 380Purchases 480

––––860

COGS 650 – 195 455––––

Inventory 405Remaining inventory 220

––––Inventory lost 185

––––

2 A 1 + 5002 + 5003 no change

–––––1,000–––––

3 B 500 – (75% x 450)

6 D 180 + (40% x 500) – 30

7 B 838,000 – 72,000 = 766,000; allowance 60,000

14 A 3/4 x 10,800 + 1/4 x 12,000 = 11,100; prepayment 3/4 x 12,000

17 D 20% x (1,000,000 + 400,000 + 5,600,000)

19



18 B 100 + 50 + 60; 80 – 50 + 30

22 B 1: (40,000 + 60,000 – 50,000) x 2 = 100,000 – 95,000 = 5,000 cash lost3: (40,000 + 60,000 – 50,000 – 2,500 inventory loss) x 2 = 95,000

23 D 834,600 + 134,600 – 4,800 + 8,700 – 144,400

25 A Payables ledger control account

Opening balance 318,600Cash paid to suppliers 1,364,300 Purchases 1,268,600Purchase returns 41,200 Refunds received fromContras against debit suppliers 2,700balances in receivables ledger 48,000Discounts 8,200Closing balance 128,200

–––––––––– ––––––––––1,589,900 1,589,900–––––––––– ––––––––––

20



Section B

1 GoldingBalance sheet as at 30 June 2006

Cost or Accumulated Net bookvaluation depreciation value

$000 $000 $000Non-current assetsLand and buildings 9,000 200 8,800Plant and equipment 6,000 4,400 1,600

––––––– –––––– –––––––15,000 4,600 10,400––––––– ––––––

Current assetsInventories 4,700Receivables (3,600 – 280) 3,320Cash 1,200

––––––9,220

–––––––19,620–––––––

Capital and reservesCalled up share capital 5,000Share premium account 2,200Revaluation reserve (5,000 + 4,000 – 4,000 – 2,400) 2,600Retained earnings (see working) 5,570

–––––––15,370

Non-current liabilities8% Loan notes 1,000

Current liabilitiesPayables 2,500Accruals (500 + 250) 750 3,250

––––––– ––––––19,620–––––––

Working $000 $000 $000Retained earnings balance1 July 2005 4,600Draft profit 2,900less: irrecoverable debts 280

bonuses 250depreciation 1,400 1,930 970

––––––– –––––– –––––––5,570

–––––––

21



2 (a) Dr Cr$ $

(1) Sales 70,000Share capital 50,000Share premium 20,000

(2) Suspense 16,000Interest payable 8,000Interest receivable 8,000

(3) Sales 16,000Purchases 16,000

Suspense 32,000

OR

Suspense 48,000Sales 48,000

Purchases 64,000Suspense 64,000

Sales 64,000Suspense 64,000

Suspense 48,000Purchases 48,000

(4) Suspense 36,000Rent 36,000

(b) – +$ $

Profit per draft accounts 830,000Adjustments(1) Sales 70,000(2) Interest 16,000(3) Sales/Purchases 32,000(4) Rent 36,000

–––––––– ––––––––102,000 882,000

102,000––––––––

Revised profit 780,000––––––––

22



3 JoyceCash flow statement for the year ended 30 June 2006

$000 $000Cash flows from operating activities

Profit before taxation (working 1) 22,200Adjustments for

Depreciation 13,000Interest expense 720

–––––––35,920

Increase in inventories (4,900)Increase in receivables (8,900)Decrease in payables (2,100)

–––––––Cash generated from operations 20,020Interest paid (720)Income taxes paid (6,200)

–––––––Net cash from operating activities 13,100

Cash flows from investing activitiesPurchase of property plant and equipment (Working 3) (19,000)

–––––––Net cash used in investing activities (19,000)

Cash flows from financing activitiesProceeds of issue of share capital 2,000Proceeds of issue of loan notes 2,000Dividends paid (4,000 )

–––––––Net cash from financing activities –

–––––––Net decrease in cash (5,900)Cash at 1 July 2005 4,600

–––––––Cash at 30 June 2006 (1,300)

–––––––

WORKINGS

1 Calculation of profit for year

$000 $000Dividends 4,000 0pening balance 18,000Tax 8,200 Profit for year 22,200Closing balance 28,000

––––––– –––––––40,200 40,200––––––– –––––––

2 Income taxes

$000 $000Cash 6,200 Opening balance 6,000Closing balance 8,000 Income statement 8,200

––––––– –––––––14,200 14,200––––––– –––––––

3 Non-current assets

$000 $000Opening balance 130,000Revaluation reserve 12,000 Depreciation 13,000Purchases 19,000

Closing balance 148,000–––––––– ––––––––161,000 161,000–––––––– ––––––––

4 (a) Following the matching concept, to reflect in operating profit the cost of use of tangible non-current assets (the amount ofeconomic benefits consumed).

(b) It is not normally necessary to depreciate land, unless it is subject to depletion in some way – a quarry for example. Buildingsshould be depreciated like any other non-current asset so as to allocate their depreciable amount (cost or valuation) over theiruseful economic life.

23



(c) (i) Straight line. The depreciable amount of an asset, less any residual value, is written off in equal instalments over itsestimated useful economic life.

(ii) Reducing balance. Depreciation is calculated as a percentage of the net book value of the asset at the end of each period.

Other answers to (c) considered on their merits.

5 (a) If the event provides evidence of conditions that existed at the balance sheet date, adjustment must be made, if material.Adjustment is also required if an event after the balance sheet date indicates that the going concern basis of accounting isno longer appropriate.

(b) (i) Non-current assets are normally valued at cost or valuation less depreciation. If the going concern basis was no longerappropriate, net realisable value on the basis of a short-term sale would have to be adopted instead, and the assetswould be included in current assets.

(ii) Inventory is normally valued at the lower of cost and net realisable value. If the going concern basis no longer applied,net realisable value on the basis of a short-term sale would have to be substituted.

(iii) Loan notes, if shown as non-current liabilities, would have to be reclassified as current liabilities.

24



Part 1 Examination – Paper 1.1(INT)Preparing Financial Statements (International Stream) December 2006 Marking Scheme

1 Heading 1Land and building

valuation 1accumulated depreciation 1/2 11/2––––

Plant and equipmentcost 1/2accumulated depreciation 1/2 1

––––Inventory 1/2Receivables 1/2 + 1/2 1Cash 1/2Share capital 1/2Share premium account 1/2Revaluation reserve 1Retained earnings 4 x 1/2 2Loan notes 1/2Accruals 1/2 + 1/2 1Payables 1/2Format 2

–––––131/2 max 11–––––

2 (a) 1 11/22 11/23 3 x 1 (or 4 x 1 max 3) 34 1

(b) 4 x 1 4––––

11 11––––

3 Heading 1/2 + 1/2 1Operating profit 4 x 1/2 + tax 1 3Depreciation 1/2Interest expense 1/2Increase in inventory 1/2Increase in receivables 1/2Decrease in payables 1/2Net cash inflow from operating activities 1/2All other items in statement 6 x 1/2 3Calculation of non-current asset paymentBalances 1/2 + 1/2 1Revaluation reserve 1Depreciation 1/2 21/2––––Cash movement 1Layout 1

–––––141/2 max 12–––––

4 (a) 1

(b) Land – not depreciated 1/2Land – mention of depletion 1/2Buildings – cost or valuation 1Spread over useful economic life 1 3

––––

(c) 2 x 2 4––––

8 8––––

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5 (a) Conditions at b/s date 11/2Materiality 1Going concern 1/2 3

––––

(b) 2 + 2 + 1 5––––

8 8––––

26




PART 1


QUESTION PAPER








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Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choicequestion. Each question within this section is worth 2 marks.

1 A company issued one million ordinary $1 shares at a premium of 50c per share. The proceeds were correctlyrecorded in the cash book, but were incorrectly credited to the sales account.

Which of the following journal entries will correct the error?

Debit Credit$ $

A Sales 1,500,000Share capital 1,000,000Share premium 500,000

B Share capital 1,000,000Share premium 500,000

Sales 1, 500,000

C Sales 1,500,000Share capital 1,500,000

D Share capital 1,500,000Sales 1,500,000

2 Which one of the following would cause a company’s gross profit percentage on sales to fall?

A A reduction in the total value of goods returned to suppliers.

B An increase in the costs of delivery of goods to customers.

C A decline in average inventory levels.

D An increase in theft of inventory by customers and staff

3 Where, in a company’s financial statements complying with International accounting standards, should you finddividends paid?

1 Income statement

2 Balance sheet

3 Cash flow statement

4 Statement of changes in equity.

A 1 and 3

B 2 and 3

C 1 and 4

D 3 and 4

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4 A property company received cash for rent totalling $838,600 in the year ended 31 December 2006.

Figures for rent in advance and in arrears at the beginning and end of the year were:

31 December 2005 31 December 2006$ $

Rent received in advance 102,600 88,700

Rent in arrears (all subsequently received) 42,300 48,400

What amount should appear in the company’s income statement for the year ended 31 December 2006 for rentalincome?

A $818,600

B $738,000

C $939,200

D $858,600

5 Which one of the following journal entries is correct according to its narrative?

Debit Credit$ $

A Mr Smith personal account 100,000Directors’ remuneration 100,000Bonus allocated to account of

managing director (Mr Smith)

B Purchases 14,000Wages 24,000

Repairs to buildings 38,000

Transferring cost of repairs to buildingscarried out by company’s own employees, using materials from inventory.

C Discounts allowed 2,800Discounts received 2,800

Correction of error: discounts allowed total incorrectly debited to discounts received account

D Suspense account 20,000Rent receivable 10,000Rent payable 10,000

Correction of error: rent receivedcredited in error to rentpayable account.

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6 A company’s gross profit as a percentage of sales increased from 28% in the year ended 31 December 2005 to 33%in the year ended 31 December 2006.

Which one of the following could have caused the increase?

A An increase in sales volume.

B Understatement of closing inventory at 31 December 2005.

C Overstatement of closing inventory at 31 December 2005.

D Goods received in December 2005 and included in inventory at 31 December 2005 were not recorded inpurchases until January 2006.

7 Which of the following items could appear as items in a company’s cash flow statement?

1 A bonus issue of shares

2 A rights issue of shares

3 Revaluation of non-current assets

4 Dividends paid

A All four items

B 1, 3 and 4 only

C 2 and 4 only

D 2 and 3 only

8 A company has occupied rented premises for some years, paying an annual rent of $120,000. From 1 April 2006the rent was increased to $144,000 per year. Rent is paid quarterly in advance on 1 January, 1 April, 1 July and 1 October each year.

What figures should appear for rent in the company’s financial statements for the year ended 30 November2006?

Income statement Balance sheet$ $

A 136,000 Prepayment 12,000

B 136,000 Prepayment 24,000

C 138,000 Nil

D 136,000 Accrual 12,000

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9 At 1 January 2006 a company had an allowance for receivables of $49,000.

At 31 December 2006 the company’s trade receivables were $863,000 and it was decided to write off balancestotalling $23,000 and to adjust the allowance for receivables to the equivalent of 5% of the remaining receivablesbased on past experience.

What total figure should appear in the company’s income statement for bad debts and allowance for receivables?

A $16,000

B $65,000

C $30,000

D $16,150

10 At 1 January 2006, a company’s capital structure was as follows:$

Ordinary share capital2,000,000 shares of 50c each 1,000,000

Share premium account 1,400,000

In January 2006 the company issued 1,000,000 shares at $1·40 each.

In September 2006 the company made a bonus issue of 1 share for every 3 held using the share premium account.

What were the balances on the company’s share capital and share premium accounts after these transactions?

Share capital Share premium$ $

A 4,000,000 800,000

B 3,200,000 600,000

C 2,000,000 1,800,000

D 2,000,000 1,300,000

11 Which of the following statements about the treatment of inventory and work in progress in financial statementsare correct?

1 Inventory should be valued at the lowest of cost, net realisable value and replacement cost.

2 In valuing work in progress, materials costs, labour costs and variable and fixed production overheads must beincluded.

3 Inventory items can be valued using either first in, first out (FIFO) or weighted average cost.

4 A company’s financial statements must disclose the accounting policies used in measuring inventories.

A All four statements are correct.

B 1, 2 and 3 only

C 2, 3 and 4 only

D 1 and 4 only

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12 The plant and equipment account in the records of a company for the year ended 31 December 2006 is shown below:

Plant and equipment – cost

2006 $ 2006 $1 Jan Balance 960,0001 July Cash 48,000 30 Sept Transfer disposal account 84,000

31 Dec Balance 924,000––––—–––– ––––—––––1,008,000 1,008,000–––––––––– ––––––––––

The company’s policy is to charge depreciation on the straight line basis at 20% per year, with proportionatedepreciation in the years of purchase and sale.

What should be the charge for depreciation in the company’s income statement for the year ended31 December 2006?

A $184,800

B $192,600

C $191,400

D $184,200

13 X has a 40% shareholding in each of the following three companies:

P: X has the right to appoint or remove a majority of the directors of P.

Q: X has significant influence over the affairs of Q.

R: X has the power to govern the financial and operating policies of R.

Which of these companies are subsidiaries of X for financial reporting purposes?

A Q and R only

B P and R only

C P and Q only

D P, Q and R

14 The trial balance of a company did not balance, and a suspense account was opened for the difference.

Which of the following errors would require an entry to the suspense account in correcting them?

(1) A cash payment to purchase a motor van had been correctly entered in the cash book but had been debited tomotor expenses account.

(2) The debit side of the wages account had been undercast.

(3) The total of the discounts allowed column in the cash book had been credited to discounts received account.

(4) A cash refund to a customer had been recorded by debiting the cash book and crediting the customer’s account.

A 1 and 2

B 2 and 3

C 3 and 4

D 2 and 4

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15 A trader took goods that had cost $2,000 from inventory for personal use.

Which of the following journal entries would correctly record this?

Debit Credit$ $

A Drawings 2,000Inventory 2,000

B Purchases 2,000Drawings 2,000

C Sales 2,000Drawings 2,000

D Drawings 2,000Purchases 2,000

16 Which of the following statements about the requirements of IAS 37 Provisions, contingent liabilities andcontingent assets are correct?

1 A contingent asset should be disclosed by note if an inflow of economic benefits is probable.

2 No disclosure of a contingent liability is required if the possibility of a transfer of economic benefits arising isremote.

3 Contingent assets must not be recognised in financial statements unless an inflow of economic benefits isvirtually certain to arise.

A All three statements are correct

B 1 and 2 only

C 1 and 3 only

D 2 and 3 only

17 Which of the following statements are correct, according to IAS 10 Events after the balance sheet date?

1 Details of all adjusting events must be disclosed by note to the financial statements.

2 A material loss arising from the sale, after the balance sheet date, of inventory valued at cost at the balance sheetdate must be reflected in the financial statements.

3 If the market value of investments falls materially after the balance sheet date, the details must be disclosed bynote.

4 Events after the balance sheet date are those that occur between the balance sheet date and the date when thefinancial statements are authorised for issue.

A 1 and 2 only

B 1, 3 and 4

C 2 and 3 only

D 2, 3 and 4

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18 Where in the financial statements should tax on profit for the current period, and unrealised surplus onrevaluation of properties, be separately disclosed?

Tax on profit for Unrealised surpluscurrent period on revaluation of

propertiesA Income statement Income statement

B Statement of changes Income statementin equity

C Income statement Statement of changesin equity

D Statement of changes Statement of changesin equity in equity

19 Which one of the following statements is correct?

A The prudence concept requires assets to be understated and liabilities to be overstated.

B To comply with the law, the legal form of a transaction must always be reflected in financial statements.

C If a non-current asset initially recognised at cost is revalued, the surplus must be credited in the incomestatement.

D In times of rising prices, the use of historical cost accounting tends to understate assets and overstate profits.

20 A draft cash flow statement contains the following:

$mProfit before tax 22Depreciation 8Increase in inventories (4)Decrease in receivables (3)Increase in payables (2)

–––Net cash inflow from operating activities 21

Which of the following corrections need to be made to the calculation?

1 Depreciation should be deducted, not added

2 Increase in inventories should be added, not deducted

3 Decrease in receivables should be added, not deducted

4 Increase in payables should be added, not deducted

A 1 and 2

B 1 and 3

C 2 and 4

D 3 and 4

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21 What is the correct treatment of interest charged on partners’ drawings in preparing a partnership’s financialstatements?

A Credited as income in the income statement

B Debited as an expense in the income statement

C Added to total profit in calculating partners’ profit shares

D Deducted from total profit in calculating partners’ profit shares.

22 X and Y are in partnership. They share profits equally after charging a salary $40,000 per year for X and interest oncapital at 5% per year.

At 1 January 2006 their capital balances were:

$X 200,000Y 100,000

On 1 July 2006 Y introduced a further $100,000 capital, and X’s salary was discontinued.

The partnership profit for the year ended 31 December 2006 was $337,500.

What was X’s total profit share for the year ended 31 December 2006?

$A 182,500

B 178,750

C 180,000

D 190,000

23 Where, in a company’s financial statements complying with International accounting standards, should you findthe proceeds of non-current assets sold during the period?

A Cash flow statement and balance sheet

B Statement of changes in equity and balance sheet

C Income statement and cash flow statement

D Cash flow statement only

24 Which of the following events would reduce a company’s gearing?

1 An issue of loan notes

2 A rights issue of equity shares

3 A bonus issue of equity shares

A 1 and 2

B 1 and 3

C 3 only

D 2 only

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25 A payables ledger control account showed a credit balance of $768,420. The payables ledger balances totalled$781,200.

Which one of the following possible errors could account in full for the difference?

A A contra against a receivables ledger debit balance of $6,390 has been entered on the credit side of the payablesledger control account.

B The total of discount allowed $28,400 was entered to the debit of the payables ledger control account insteadof the correct figure for discount received of $15,620.

C $12,780 cash paid to a supplier was entered on the credit side of the supplier’s account in the payables ledger.

D The total of discount received $6,390 has been entered on the credit side of the payables ledger control account.

(50 marks)

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1 Hasta is an antique dealer operating from rented premises. He keeps few accounting records. All his sales andpurchases are for cash, except for some sales to other dealers which are made on credit.

The following information is available to prepare his income statement for the year ended 31 December 2006.

Assets and liabilities As at 31 December2005 2006

$ $Equipment 1,200 2,000Inventory 85,000 88,500Trade receivables 4,800 6,400Payable for expenses 1,100 1,400

Cash summary

2006 $ 2006 $1 Jan Balance – float 100 31 Dec Wages for assistant 15,600

Sundry expenses 8,30031 Dec Cash from sales 191,400 Purchases of new equipment 2,000

Proceeds of sale of equipment 700 Purchases ?Drawings ?Balance – float 150

–––––––– ––––––––192,200 192,200–––––––– ––––––––

Hasta keeps cash that is in hand at the end of each week as drawings, subject to the retention of the float. No recordhas been made of payments for purchases of goods for sale. He fixes his selling price for all items by doubling theircost. He allowed a trade discount of $9,000, representing 30% on selling price, for sales to dealers with a normalprice of $30,000. ($30,000 less $9,000 discount = $21,000).

All the equipment held at the beginning of the year was sold for $700, and new equipment purchased for $2,000.A full year’s depreciation is to be charged on the new equipment at 20%, with no depreciation on the items sold.

Required:

(a) Prepare Hasta’s income statement for the year ended 31 December 2006. Your answer should include a detailed calculation of cost of sales. (10 marks)

(b) Calculate Hasta’s drawings for the year ended 31 December 2006 (2 marks)

(12 marks)

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2 The receivables ledger control account of Atanga at 31 December 2006 shows a debit balance of $487,600. Thelist of receivables ledger balances at the same date totalled $455,800 debit. There were no credit balances.

On investigation the following errors and revisions were found:

(1) The sales day book had been overcast by $2,000

(2) A debt of $8,400 is to be written off

(3) A credit note for $1,200 was entered on the debit side of the customer’s account.

(4) Contras against amounts owing to Atanga in the payables ledger totalling $16,100 were entered on the debitside of the receivables ledger control account.

(5) A credit note for $5,600 sent to a customer and recorded at that figure should have been for $4,500.

(6) Cash discount allowed and agreed at $150 has not been recorded in the accounting system.

Required:

(a) Prepare a statement showing the necessary adjustments to the receivables ledger control account balance.(5 marks)

(b) Prepare a statement showing the necessary adjustments to the total of the list of receivables ledger balances.(4 marks)

(9 marks)

3 On 1 January 2000 Gasta acquired 75% of the share capital of Erica for $1,380,000. The retained earnings ofErica at that date was $480,000. Erica’s share capital has remained unchanged since the acquisition.

The following draft balance sheets for the two companies have been prepared at 31 December 2006.

Gasta Erica$ $

Investment in Erica 1,380,000 –Sundry net assets 2,660,000 1,660,000

–––––––––– ––––––––––4,040,000 1,660,000–––––––––– ––––––––––

Ordinary share capital 2,000,000 1,000,000Retained earnings 2,040,000 660,000

–––––––––– ––––––––––4,040,000 1,660,000–––––––––– ––––––––––

Goodwill arising on the acquisition has been fully written off.

Before consolidation, it was found that the inventories of both companies at 31 December 2006 had been overstated,Gasta’s by $400,000 and Erica’s by $150,000.

Required:

Prepare the consolidated balance sheet of Gasta and the subsidiary Erica as at 31 December 2006, afteradjusting for the inventory errors.

Note: Your workings for all figures in the consolidated balance sheet must be shown.

(9 marks)

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4 Hathan has just concluded a ratio analysis comparing its performance and position at 31 December 2006 with thoseat 31 December 2005. The directors are concerned to see that the current ratio and quick ratio show a considerabledecline.

Required:

(a) State and explain TWO possible causes for the decline in one or both of these ratios.

(b) State and explain TWO ways in which the company could improve these ratios.

(8 marks)

5 A company manufacturing aircraft engages in a number of research and development projects.

At 1 January 2006 the company’s records showed total capitalised development costs of $18,000,000 made up asfollows:

$Project A17 14,000,000

This project was completed in 2005 at a total cost of $16,000,000,and is being amortised over 8 years on the straight line basis,beginning on 1 January 2005.

Project J9 4,000,000This project began in 2004 and the $4m balance represents expenditurequalifying for capitalisation to 31 December 2005Project J9 is due to be completed in 2009

–––––––––––18,000,000–––––––––––

During the year ended 31 December 2006 the following further expenditure was incurred:

Project J9Further expenditure qualifying for capitalisation $1,500,000

Project A20Investigation into new materials for aircraft construction $3,000,000

Required:

(a) Calculate the amounts for research and development to be included in the company’s income statement andbalance sheet for the year ended 31 December 2006. (6 marks)

(b) Discuss the accounting concepts applicable to the accounting treatment of development expenditure.

Note: You are NOT required to provide the criteria for capitalisation of development expenditure in IAS 38Intangible assets. (6 marks)

(12 marks)


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Answers




Section A

1 A

2 D

3 D

4 D 838,600 + (102,600 – 42,300) – (88,700 – 48,400)

5 C

6 B

7 C

8 A (4 x 10,000) + (8 x 12,000) = 136,000; 1/12 x 144,000 = 12,000

9 A 23,000 – (49,000 – 42,000)

10 C Share capital Share premium1,000,000 1,400,000

Issue 500,000 900,000–––––––––– ––––––––––1,500,000 2,300,000

Bonus 500,000 (500,000)–––––––––– ––––––––––2,000,000 1,800,000–––––––––– ––––––––––

11 C

12 B (960,000 x 20%) + (48,000 x 20% x 1/2) – (84,000 x 20% x 1/4)

13 B

14 B

15 D

16 A

17 D

18 C

19 D

20 D

21 C

22 C X salary 20,000 + interest 10,000 + share 150,000 = 180,000

23 D

24 D

25 B

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1 (a) Hasta

Income statement for the year ended 31 December 2006$ $

Sales 193,000less: Cost of sales

Opening inventory 85,000Purchases (balancing figure) 104,500

————189,500

less: Closing inventory 88,500———— 101,000

————Gross profit 92,000

less: ExpensesWages 15,600Sundry expenses (8,300 – 1,100 + 1,400) 8,600Loss on sale of equipment (1,200 – 700) 500Depreciation (2,000 x 20%) 400

——— 25,100————

Net profit $66,900————

Workings$ $

Calculation of sales$191,400 – $4,800 + $6,400 193,000

Calculation of gross profit(193,000 – $21,000)/2 86,000$21,000 – ($30,000/2) 6,000

——— 92,000————

Cost of goods sold is therefore 101,000————

Alternative calculation of gross profit$

Sales 193,000Add: trade discount 9,000

————202,000————

Gross profit if all sales at full price 101,000less: trade discount 9,000

————92,000

————

(b) Cash not accounted for: $192,200 – $15,600 – $8,300 – $2,000 – $150 166,150less: purchases 104,500

————Drawings 61,650

————

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2 (a) Receivables ledger control account balance+ –$ $

Original balance 487,600(1) Sales day book overcast 2,000(2) Bad debt written off 8,400(4) Contras incorrectly entered 32,200(5) Credit note adjustment 1,100(6) Discount not recorded 150

————– ———–488,700 42,750

42,750————–

Revised balance $445,950————–

(b) Receivables ledger balances+ –$ $

Original balance 455,800(2) Bad debt written off 8,400(3) Credit note incorrectly entered 2,400(5) Credit note adjustment 1,100(6) Discount not recorded 150

————– ———–456,900 10,950

10,950————–

Revised balance $445,950————–

3 Gasta Group

Consolidated balance sheet as at 31 December 2006$

Sundry net assets (2,660,000 + 1,660,000 – 550,000) 3,770,000—————

Share capital 2,000,000

Retained earnings 1,392,500—————3,392,500

Minority interest 377,500—————3,770,000—————

Goodwill

$ $Investment in Erica 1,380,000 Share capital 75% 750,000

Retained earnings 75% 360,000Retained earnings –

goodwill written off 270,000————— —————1,380,000 1,380,000————— —————

Minority interest

$ $Balance to CBS 377,500 Share capital 25% 250,000

Retained earnings 25% (WI) 127,500————— —————

377,500 377,500————— —————

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Retained earnings

$ $Goodwill Balances: Gasta (W1) 1,640,000

75% × $480,000 360,000 Erica (W1) 510,000Minority interest 127,500Goodwill impairment

written off 270,000Balance to CBS 1,392,500

————— —————2,150,000 2,150,000————— —————

Working 1Retained profits: Gasta $2,040,000 – $400,000 = $1,640,000

Erica $660,000 – $150,000 = $510,000

Alternative calculations

Goodwill $ $Cost of investment 1,380,000Share of net assets acquired

Share capital 1,000,000Retained profit 480,000

—————1,480,000—————

Group share 75% 1,110,000—————

Goodwill 270,000

Minority interestShare capital 1,000,000Retained earnings 510,000

—————1,510,000—————

Minority share 25% 377,500—————

Retained earningsGasta 1,640,000Erica 510,000

Less: preacquisition 480,000————

30,000

Group share 75% 22,500—————1,662,500

less: goodwill written off 270,000—————1,392,500—————

4 (a) Two from:

(i) Heavy spending on non-current assets, depleting cash or increasing overdraft. Such expenditure comes out of currentassets, and will reduce both the current ratio and the quick ratio.

(ii) Write-downs of inventory through obsolescence or fashion changes. This will reduce the current ratio.(iii) Repayment of long-term loans(iv) Payment of high dividends(v) Reduction in receivables as a result of bad debts

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(b) Two from:

(i) Raise new long-term capital (equity shares or loan notes)(ii) Sell non-trading assets such as investments(iii) Reduce inventory levels to improve quick ratio(iv) Defer capital expenditure

These steps increase current assets or quick assets without increasing current liabilities, thus improving the ratios.

Other points considered on their merits for both (a) and (b)

5 (a) Income statement$

ProjectA17 2,000,000A20 3,000,000

—————5,000,000—————

Balance sheetCost Amortisation Net book value

$ $ $A17 16,000,000 4,000,000 12,000,000J9 5,500,000 5,500,000

––––––––––– –––––––––– –––––––––––21,500,000 4,000,000 17,500,000––––––––––– –––––––––– –––––––––––

(b) The main applicable accounting concepts are accruals and prudence. The accruals concept favours capitalisation ofdevelopment expenditure to match the expenditure against the future income to be generated from it. The prudence conceptargues for caution, having regard to the inevitable doubt as to the successful outcome of the development project. The goingconcern concept is also relevant, because doubt as to the going concern status of the company would clearly mean that thecapitalisation of development costs could not be justified.

Other concepts considered on their merits.

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Marks1 (a) Heading 2 x 1/2 1

Sales 1Gross profit

172,000/2 1$21,000 – (30,000/2) 2 3

Cost of goods soldOpening / Closing inventory 2 x 1/2 1Purchases (balancing figure) 1

—7

Wages 1/2Sundry expenses 11/2Loss on sale 1Depreciation 1 4

—11 max 10

(b) Calculation of cash not accounted for 1Deduction of cash for purchases 1 2

— —12—

Alternative calculation of gross profit

193,000 + 9,000 1Gross profit 101,000 1Deduction of trade discount 1

—3

—

2 (a) Correction of errors 5 x 1 5

(b) Correction of errors 4 x 1 4— 9

3 Heading 2 x 1/2 1Sundry net assets 1Share capital 1Retained earnings 21/2 + 1 for inventory adjustments 31/2Goodwill 11/2Minority interest 1

— 9

4 (a) 2 x 2 4

(b) 2 x 2 4— 8

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Marks5 (a) Income statement

A17 2A20 1

— 3

Balance sheetA17 2J9 1

— 3— 6

(b) Accruals conceptStated 1Explained 1

— 2

Prudence conceptStated 1Explained 1

— 2

Going concern conceptStated 1Explained 1

— 2–– 6

—12

Other valid concepts considered on their merits.

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ACCA F3 Financial Accounting INT Solved Past Papers 0107 Copy

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