SUGGESTED SOLUTIONS

KE1 – Financial Accounting & Reporting

Fundamentals

March 2015

All Rights Reserved

 SECTION 1
1(a)

1.1.
Learning Outcome: (1.1.1) Identify the governance structure of business organisations.

Correct answer: D

1.2

Learning Outcome: (1.2.6) Explain qualitative characteristics of financial

statements/financial information
Correct answer: D

1.3

Learning Outcome: (1.2.6) Explain qualitative characteristics of financial

statements/financial information.

Correct answer: D

1.4

Learning Outcome: (1.2.3) List the elements of financial statements.

Correct answer: B

1.5

Learning Outcome: (1.2.9) Discuss the fundamentals of both accrual basis and cash basis
of accounting.
Correct answer: C

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1.6

Learning Outcome: (2.7.1) State the purpose and need for preparation of bank
reconciliation statements
Correct answer: C

1.7

Learning Outcome: (2.2.2) Relate the connection between “dual aspect” of accounting
and the accounting equation.
Correct answer: C

1.8

Learning Outcome: (3.6.2) Compute basic accounting ratios (profitability ratios, liquidity
ratios, gearing ratios excluding investor ratios)

Correct answer: B

1.9

1. Learning Outcome: (2.1.3) Identify the primary books used in accounting.

Correct answer: D

1.10

Learning Outcome: (2.5.2) Prepare journal entries for correction of errors.

Correct answer: C

[Total marks for 1(a) (MCQs) 2x10= 20 marks]

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1(b)

1.11

Learning Outcome: (1.1.4) - Identifying the stakeholders involved in a business

organization and their respective information requirements
Any appropriate answer
Shareholders- wealth maximisation,
Bankers - Repayment ability of loans
Customers – Existence of the product or service in the market
Suppliers – Repayment ability and continuing supply

1.12

Learning Outcome: (1.1.5) – State the differences between financial accounting and
management accounting.
A- True
B- True
1. Three external users- shareholders, bankers, regulatory authorities, tax
authorities
2. Managers

1.13

Learning Outcome: (4.1.3) – Explain the criteria to be used in the classification of assets
and liabilities as current and non-current

Instances where a liability is classified as a current liability:

- When it is expected to be settled in the normal operating cycle of the entity.
- When it is due to be settled within 12 months from the reporting date.
- When it is held primarily for the purpose of being traded.

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1.14

Learning Outcome: (4.6.4) – Identify the instances where changes in accounting policies
are acceptable.

Change in accounting policies are acceptable only when:

1. The change is require by a LKAS/SLFRS.
2. The change will result in more appropriate presentation of events or transactions
in the financial statements of the entity, providing more reliable and relevant
information

1.15

Learning Outcome: (2.3.3) – Prepare ledger accounts

Electricity Expense Account

Dr. Cr
Balance B/F 150,000 Accrued Expense 12,000
Accrued expense 23,000 Water Bills 5,000
Suspense Account 16,000
Balance C/D 140,000
173,000 173,000
Balance B/F 140,000

1.16

Learning Outcome: (4.7.2) – Explain adjusting events and non-adjusting events.

The destruction occurred on 15 April 2014, do not affect the situation at the reporting
date and hence, not an adjusting event, but should be disclosed in the financial
statements.

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1.17

Learning Outcome: (4.3.1) – Explain criteria to be satisfied to recognise revenue from

sale of goods and rendering of services.

i. Yes- revenue earned as the cash has been paid irrespective of the fact that
whether goods were collected later at the request and risks of the buyer

ii. Yes- Buyer has recognized his liability as at 31.3.2014 by accepting the
goods on the same day.

iii. No. Since the goods have not been dispatched to the buyer all the risks and
rewards are still with the entity. Therefore the revenue is not earned. It is
only a liability to the entity as it accepted an advance.

1.18

Learning Outcome: (4.8.3) - Explain the conditions to be satisfied to recognise a lease as

a finance lease.

(a) The lease transfers ownership of the asset to the lessee by the end of the lease
term.
(b) The lessee has the option to purchase the asset at a price that is expected to
sufficiently lower than the fair value at the date the option becomes exercisable
for it to be reasonably certain at the inception of the lease that the option will
be exercised.
(c) The lease term is for the major part of the economic life of the asset even if title
is not transferred.
(d) At the inception of the lease the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset.
(e) The leased assets of such a specialized action that only the lessee can use them
without major modifications.

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1.19

Learning Outcome: (4.5.3) – Explain the methods of inventory measurement.

Value of physical quantity 180,000

Written off for net realizable value (12,000)
Uncounted Inventory (60 + 2) 62,000
230,000

1.20

Learning Outcome: (4.4.1) – Identify the different types of cash flows associated with an
organization.

(i) Cash out flow = 2,100,000–[2,270,000–420,000+(320,000–240,000)] = 170,000

(ii) Under cash flow from investment activities, Rs. 170,000 will be shown as
acquisition of PPE.

[Total marks for 1(b) 3 x10= 30 marks]

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 SECTION 2

Learning Outcome:
(3.3.1 ) Explain the nature of partnerships and special accounts relating to partnership.
(3.3.2) Prepare the financial statements for a partnership including appropriation accounts
(simple financial statements for a partnership without change in the ownership during the
period)
Answer 02

I. Appropriation account

Net Profit available for appropriation (640 – 30 loan interest) 610,000

Interest on Capital - Elmo 800 @ 8% 64,000

- Niles 600 @ 8% 48,000

Partners’ salary - Niles 108,000

Share of profit - Elmo 260,000

- Niles 130,000
610,000 (4 marks)

2. Partners Current account

Elmo Niles Elmo Niles
Balance b/d 220,000 Balance b/d 260,000
Partners’ drawing 120,000 240,000 Interest on loan 30,000
Interest on capital 64,000 48,000
Partners salary 108,000
Balance c/d 14,000 306,000 Share of profit 260,000 130,000
354,000 546,000 354,000 546,000

(4 marks)

3. These are not business expenses and hence not charged in Profit or Loss account. Owners
of a business are entitled to the profit on their investment (i.e. the capital invested).
Appropriation account is a profit sharing mechanism for the different contribution made
by each partners.
(2 marks)
(Total: 10 marks)

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 Learning Outcome:
(2.6.2) Prepare a reconciliation of control account balances with a total of individual
accounts.
(2.7.2) Prepare a reconciliation statement reconciling the cash book balance with the
bank statement balance.

Answer 03
(a) (1) Cash Account No. 2

Balance
Dr. (Rs) Cr(Rs) (Rs)
Balance BF 255,000 255,000
Cash AC No. 1 Correction 175,000 80,000
Cash AC No. 1 Correction 45,000 35,000
Cash AC No. 1 Correction 650,000 685,000
Balance at 31.3.2014 685,000
(3 marks)
(2) Bank Reconciliation statement -Account NO.1
Rs.
Balance as per cash book 50,000
Less Cheques unrealised (475,000)
Add Cheques Unpresented 215,000
Balance as per Bank Statement (210,000)
(4 marks)
(3) Debtors Control Account
Dr(Rs) Cr(Rs) Balance(Rs)
Balance 500,000 500,000
Sales Returns 45,000 455,000
Sales 60,000 515,000
Balance 515,000
(2 marks)
(4)
Rs.
Corrected Total 515,000
Unrecorded discount allowed 15,000
Total of the trade receivable sub-ledger before
Correction 530,000
(1 mark)
(Total: 10 marks)

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 Learning Outcome:
(2.5.1) Identify omission and errors in accounting.
(2.5.2) Prepare journal entries for correction of errors.
(2.5.3) Solve omissions and errors embedded in accounting records and financial
statements, using suspense accounts.
Answer 04

(1) Journal entries:

(a) Trade receivable control account Dr 78,000
Sales account Cr 78,000
(b) Rent account Dr 25,000
Suspense account Cr 25,000
(c) Suspense account Dr 24,000
Discount allowed account Cr 12,000
Discount received account Cr 12,000
(d) Suspense account Dr 18,000
Salary account Cr 18,000
(e) Sales account Dr 28,000
Trade receivable control account Cr 28,000
(f) Trade payable account Dr 52,000
Goods returned Cr 52,000
(6 marks)
(2)
Suspense account
Balance 17,000
Discount allowed 12,000 Rent 25,000
Discount received 12,000
Salary account 18,000
42,000 42,000
(2 marks)
(3)
Net profit before adjustments 520,000
Sales 78,000
Rent (25,000)
Discount allowed 12,000
Discount received 12,000
Salary 18,000
Sales (28,000)
Purchases 52,000
Adjusted profit 639,000

(2 marks)
(Total: 10 marks)

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 Answer 05

Learning Outcome: (3.5.2) Prepare financial statements from incomplete records.

Workings
Trade receivable control account
Rs.000s Rs.000’s
Opening balance - Cash 1,660
Credit sales during the year 2,140
(balancing amount)
Closing balance 480
2,140 2,140
Trade payable control account
Rs.000s Rs.000s
Cash 1,140 Opening balance -
Discount received 110 Credit Purchases during the 1,890
year (balancing amount)
Closing balance 640
1,890 1,890

(1) Trading account (Rs.000’s)

Credit sales 2,140
Cash sales 440
2,580
Less: Cost of Sales
Opening stock -
Cash purchases 120
Credit purchases 1,890
2,010
Closing stock (410)
Drawings (52) 1,548
Gross profit 1,032

Drawing is the above balancing figure : Rs 52,000 (4 marks)

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(2) Statement of Profit or Loss for the year ended 31.12.2014
(Rs.000’s)

Gross Profit 1,032

Discount received 110
1,142
Less Expenses;
Salaries 115
Rent 60
Depreciation charges 130
Other expenses 180 485
Net Profit for the year 657
(3 marks)

(3) Statement of financial position as at 31.12.2014

(Rs.000’s)
Accumulated Written down
Non-current Cost Depreciation value
assets
Equipment 650 130 520

Current Assets:
Inventory 410
Trade Receivable 480
Bank balance 268 1,158
Total assets 1,678
Proprietor’s Capital:
Balance on 01.01.2014 (Capital introduction) 500
Profit for the year 657
Drawings (Cash 72000 + Goods 52,000) (124)
1,033
Current Liabilities:
Trade payable 640
Accrued rent 5
1,678
(3 marks)
(Total: 10 marks)

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 SECTION 3
Learning Outcome: (3.2.3) Prepare financial statements for the purpose of management
and publication.
Answer 06
(1) Statement of Comprehensive Income for the year ended 31.12.2014
(In Rs 000’s)

Sales 11,750 – 180 (Return) - 160 (Advances) 11,410

Less: Cost of sales

Inventory on 01.01.2014 880
Purchases net of returns 7,200
Carriage inwards 220
8,300
Inventory on 31.12.2014 (1,070)
Samples (120)
Stock loss (300)
6,810
Gross Profit 4,600
Discount received 280
Reduction in provision for doubtful debt 80
4,960
Administration expenses ( W 1) (1,894)
Selling & Distribution expenses( W 2) (1,158)
Profit before taxation 1,908

Income tax expenses 520 + 30 (under provision) 550

Net Profit for the year 1,358
Other Comprehensive income:
Revaluation of Land 200
Total Comprehensive income 1,558
(7 marks)
Administration expenses ( W 1)
as per the trial balance 1,440
stock loss 60
accrued rent 12
Prepayments (10)
depreciation 392
1, 894

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 Selling & Distribution expenses( W 2)
as per the trial balance 860
bad debt 40
discount 120
accrued advert 18
Samples 120
1,158
(2) Statement of changes in equity for the year ended 31.12.2014
Stated Revaluation Retained
Capital Surplus Profit
Balance on 01.01.2014 3,500 - 2,350
Revaluation of land - 200 -
Net Profit for the year - - 1,358
Interim dividend paid - - (300)
Balance on 31.12.2014 3,500 200 3,408
(3 marks)
(3) Statement of Financial Position as at 31.12.2014
(In Rs 000’s)
Non-current Assets
Property, plant and equipment:
Item Cost Acc.Dep’n Carrying value
Land 2,800 - 3,000
Building 2,500 480 + 125 1,895
Furniture & Fitt 820 320 + 82 418
Office Equipment 950 400 + 185 365
7,070 1,592 5,678
Current Assets:
Inventory 1,070
Trade Receivable
1,240 – 40 (b.debt)– 60 (Provision)1,140
Insurance receivable 240
Prepayment 10
Cash and cash equivalent 530 2,990
Total Assets 8,668

Equity and Liabilities:

Stated Capital 3,500
Revaluation surplus 200
Retained Profit 3,408
7,108

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 Current Liabilities:
Trade payables 1,180
Income tax payable 520 – (360-30) 190
Advance received on sales 160
Accrued expenses (18 +12) 30 1,560
8,668
(10 marks)
(Total: 20 marks)

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 Notice of Disclaimer
The answers given are entirely by the Institute of Chartered Accountants of Sri Lanka (CA Sri
Lanka) and you accept the answers on an "as is" basis.

They are not intended as “Model answers’, but rather as suggested solutions.

The answers have two fundamental purposes, namely:

1. to provide a detailed example of a suggested solution to an examination question; and

2. to assist students with their research into the subject and to further their understanding and
appreciation of the subject.

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Suggested Solutions - KE1, March 2015 Page 16 of 16

KE1 - Financial Accounting & Reporting Fundamentals: Executive Level Examination March 2015