ACCA F3 Financial Accounting INT Solved Past Papers 0107

Fundamentals Pilot Paper Knowledge module
Financial Accounting (International)
Time 2 hours allowed: ALL FIFTY questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor. This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
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ALL 50 questions are compulsory and MUST be attempted the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice Please use question. 1 Should details of material adjusting or material non-adjusting events after the balance sheet date be disclosed in to financial statements according to the notes Events After the Balance Sheet ? IAS 10 Date A Adjusting events BNon-Adjusting events (1 mark)
2 At 30 June 2005 a companys 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 companys assetand values profit? A Asset values and profit both understated BAsset values and profit both overstated CAsset values understated and profit overstated DAsset values overstated and profit understated.
(2 marks)
4 The IASBs Framework for the preparation and presentation of financial that make statements information financial 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
gives characteristics
qualitative
( (2 marks)
5 The following bank reconciliation statement has been prepared by a trainee accountant: $ Overdraft per bank statement 3,860 Outstanding less: 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 traders net profit for a period? A Closing net assets + drawings capital introduced opening net assets BClosing net assets drawings + capital introduced opening net assets CClosing net assets drawings capital introduced opening net assets DClosing 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 $ $ ADrawings account 800 Inventory account 800 BDrawings account 800 Purchases account 800 CSales account 1,600 Drawings account 1,600 (1 mark)
8 The debit side of a companys 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. BDiscount received $400 has been debited to discount allowed account CA receipt of $800 for commission receivable has been omitted from the records DThe petty cash balance of $800 has been omitted from the trial balance.
(2 marks)
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9 A companys income statement for the year ended 31 December 2005 showed a net profit of $83,600. It was lateround that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. f It is the companys policy to depreciate motor vans at 25 per cent per year on the straight line basis, with a full years chargethe in 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 companys 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 sales Cash 88,100 Interest charged on overdue accounts 2,400 against credit balances in payables ledger Contras 4,600 Bad debts written off 4,900 Allowance for receivables Closing balance 396,800 555,500 555,500
2,800
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)
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 atJanuary 1 2005? Depreciation charge Revaluation reserve ended 31 December 2005 for year as at 1 January 2005 $ $ A25,000 200,000 B25,000 C20,000 D20,000 360,000 200,000 360,000 (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 in the equally profit. In the year ended 31 December 2005 the profit amounted to $300,000, accruing evenly over the year, after charging debt of $30,000 which it was agreed should be borne equally by P and Q a bad only. What should Ps 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 Accounting policies, changes in accounting estimates IAS 8 and errorsin the financial statements? 1 The reasons for the change.amount of the adjustment in the current period and in comparative information for prior 2 The periods. 3 An estimate of the effect of the change on the next five accounting periods. A1 and 2 only B1 and 3 only C2 and 3 only D1, 2 and 3
( (2 marks)
15 According to IAS 2 manufacturing company? (1) Carriage inwards (2) Carriage outwards
Inventories , which of the following costs should be included in valuing the inventories of a
(3) Depreciation of factory plant (4) General administrative overheads AAll four items B1, 2 and 4 only C2 and 3 only D1 and 3 only (2 marks)
16 Part of a companys 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 C D 1 only 1 and 3 only 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)
18 Which of the following are differences between sole traders and limited liability companies? (1) A sole traders financial statements are private; a companys financial statements are sent to shareholders and may publicly be 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 companys shareholders personally liable for any losses that the company might are not make. A 1 and 2 only B C D 2 and 3 only 1 and 3 only 1, 2 and 3 (2 marks)
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? AFalse BTrue (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 A1 and 2 B2 and 3 C1 only D3 only
( (2 marks)
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 $ $ Jan Balance 1 240,000 31 March Transfer disposal account 60,000 Cash purchase of plant 30 June 160,000 31 Dec Balance 340,000 400,000 400,000 The companys policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation years of purchase and in the 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 companys statement of changes in equity? 1 Profit for the financial yearAmortisation of capitalised development 2 costs 3 Surplus on revaluation of non-current assets AAll three items B2 and 3 only C1 and 3 only D1 and 2 only (2 marks)
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. A2 only B2 and 3 C1 only D1 and 3
( (2 marks)
25 A fire on 30 September destroyed some of a companys 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 companys capital structure was as follows: $ Ordinary share capital shares of 25c each) (500,000 125,000 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 shareand 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 companys capital structure at 31 December 2005? Ordinary share capital Share premium account $ $ A450,000 1 25,000 B225,000 250,000 C225,000 D212,500 325,000 262,500 (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 June 2006, which gave a total inventory value of $836,200. on 4 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 C D $853,900 $818,500 $834,300
( (2 marks)
28 In preparing a companys bank reconciliation statement at March 2006, the following items are causing the difference the cash book balance and the bank statement between 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 B1, 5 and 6 C3, 4 and 5 D1, 2 and 3 (2 marks)
29 At 31 December 2005 the following require inclusion in a companys 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 the loan to that due on 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 companys balance sheet at 31 December 2005? Current assets Current liabilities $ $ A10,000 12,240 B22,240 nil C10,240 nil D16,240 6,000 (2 marks)
30 How should a contingent liability be included in a companys 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 BNo 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 C D 1, 2 and 4 only 3 and 4 only 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. Alphas payables account for Beta shows a balance due to Beta of ledger $4,140. Investigation reveals the following: (1) Cash paid to Beta $4,080 has not been allowed for by BetaAlphas ledger account has not been adjusted for $40 of cash discount disallowed by (2) Beta. What discrepancy remains between Alphas and Betas records after allowing for these items? A $690 B C D $770 $9,850 $9,930 (2 marks)
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The business entity concept requires that a business is treated as being separate from its owners. Is this statement true or false? ATrue BFalse (1 mark)
34 Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premises in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per quarterly year 30 June 2005. It was increased from that date to $96,000 per until 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 companys 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 C D 3 and 4 1 and 3 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 BTo issue guidance on the application of International Financial Reporting Standards
(1 mark)
37 Qs 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 Qs 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 C D 1, 2, 3 and 4 1 and 4 only 2 and 3 only (2 marks)
38 Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain and a further 5% settlement if goods are paid for within 14 days. Hill bought goods with a list price of $200,000 from Mountain. discount Sales is tax at 17.5%. What amount should be included in Mountains 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. Is this statement true or false? A False BTrue (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 companys 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 and suppliers for the year ended 30 June credit customers 2006: $ Trade receivables, 1 July 2005 130,000 Trade payables, 1 July 2005 60,000 Cash received from customers 686,400 paid Cash to suppliers 302,800 allowed Discounts 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 Annies 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 Discounts A allowed $7,680 Discounts received $5,920 Suspense account $1,760 BDiscounts allowed $880 Discounts received $880 Suspense account $1,760 CDiscounts allowed $6,800 Discounts received $6,800 DDiscounts allowed $3,840 Discounts received $2,960 Suspense account $880
(2 marks)
43 Which of the following statements are correct? (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 termsrecognised can be in financial statements. A 2 only B C D 1, 2 and 3 1 only 3 only (2 marks)
44 The total of the list of balances in Valleys payables ledger was $438,900 at 30 June 2006. This balance did not agree Valleys payables ledger control account balance. The following errors were with discovered: 1 A contra entry of $980 was recorded in the payables ledger control account, but not in the payables ledger. total of the purchase returns daybook was undercast by 2 The $1,000.invoice for $4,344 was posted to the suppliers account as 3 An $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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45 Which of the following statements are correct? (1) A cash flow statement prepared using the direct method produces a different figure for operating cash flow that produced if the indirect method is from 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 C D 2 and 3 3 only 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 showedfollowing costs related to the 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 A follows: B $ $ urrent accounts C 5,750CR 1,200CR Capital accounts 10,000CR 8,000CR As drawings during the year were $4,300, and Bs were $2,430. What should As 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 CR expense Accumulated depreciation BDR Accumulated CR depreciation 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 15 April Sold 250 engines for $125,000 at $230 each
What is the value of the companys closing inventory of engines at 30 April 2006? A $188,500 B$195,500 C$166,000 D$106,000 (2 marks)
50 A companys motor vehicles at cost account at 30 June 2006 is as follows: Motor vehicles cost $ $ alance b/f B 12,000 Additions 36,750 48,750 48,750 35,800 12,950 Disposal Balance c/f
What opening balance should be included in the following periods 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 (INT) Financial (International)
F3 Accounting
Answers
1B 2 B 37,000 + ((517,000 37,000)*5%) 39,000) = 22,000 3C 4A 5 B -3,860 9,160 + 16,690 = 3,670 6A 7B 8B 9 C 83,600 +18,000 (18,000*25%) = 97,100 10 B 11 D Receivables ledger control account $ $ Opening balance 308,600 Contras 4,600 sales Credit 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)) = 360,000 13 B ((300,000 + 30,000) / 2 * ) + (300,000 + 30,000) / 2 * 1/3) (30,000 * ) = 122,500 14 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%) = 23 55,000 C 24 A 25 D (318,000 + 412,000 214,000) (612,000*75%) = 57,000 26 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) = 250,000 27 A 836,200 8,600 + (14,000*70%) + 700 = 838,100 28 B 29 B 12,000 + (12,000*2%) + (9,000*8/12) + 4,000 = 22,240 30 B 31 A 32 A (8,950 4,080) (4,140 + 40) = 690 33 A 34 D (84,000*2/12) + (96,000*10/12) = 94,000; 96,000*2/12 = 16,000 35 D 36 B 37 B 38 D List Price 200,000 Trade discount (20,000) 180,000 Sales tax (17.5%*95%*180,000) 209,925 39 B 40 D Rent receivable $ $ O/Balance 21,200 O/Balance 28,700 statement Income 475,900 Disposal 481,200 C/Balance 31,200 C/Balance 18,400 528,300 528,300 29,925
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41 A
Payables ledger O/balance 60,000 2,960
$ $ Cash paid 302,800 Discounts received 331,760 Contra 2,000 C/balance 84,000 391,760 391,760
Purchases
42 B 43 D 44 D 438,900 980-90 = 437,830 45 C 46 D 890 + 95 + 10 + 20 = 47 1,015 + (86,500*3/5) 4,300 = 53,350 D 5,750 48 A 49 A (300@230) + (500@220) + (50@190) = 188,500 50 A
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(International Stream)
PART 1 THURSDAY 6 DECEMBER 2001
Preparing Financia S l tatements
QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered Section B ALL FIVE questions are compulsory and MUST be answered
Section A ALL TWENTY-FIVE questions are compulsory and MUST be attempted the answer sheet provided to indicate your choice in Please use each question within this section is worth 2 Each question marks 1 The trial balance totals of Gamma at 30 September 2001 are: Debit $992,640 Credit $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 2 2 and B 3 2 and C 4 3 and D 4 2 The trial balance of Delta, a limited liability company, did not agree and a suspense account was opened for the following errors were subsequently difference. The found: 1. A cash refund due to customer A was correctly treated in the cash book and then credited to the accounts receivable account of customer ledger B. 2. The sale of goods to a director for $300 was recorded by debiting sales revenue account and crediting the director s current account. 3. The total of the discount received column in the cash book had been credited in error to the discount allowed account. 4. Some of the cash received from customers had been used to pay sundry expenses before banking the money. paid for plant repairs was correctly treated in the cash book and then credited to plant and 5. $5,800 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 5 B 1, 2 and 5 1 and C 5 3 and D 4 3 Beta purchased some plant and equipment on 1 July 2001 for $40,000. The estimated scrap value of the plant in ten is estimated to be $4,000. Beta s policy is to charge depreciation on the straight line basis, years time with a proportionate charge in the period of acquisition. What should the depreciation charge for the plant be in Beta s accounting period of twelve months to 30 September 2001? A $720 B $600 C $900 D $675
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Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premises in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year quarterly until 30 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 30 April 2001? Expense Prepayment A $93,000 $8,000 $93,000 B $16,000 $94,000 C $8,000 $94,000 D $16,000
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. The had originally cost $80,000. Plant purchased during the year cost $180,000. It is the company s policy to plant charge a 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 the straight line basis. What net amount should appear in Lambda s balance sheet at 30 September 2001 for plant and equipment? A $563,000 B $467,000 C $510,000 D $606,000 At 30 September 2000, Z Ltd had a provision for doubtful debts of $37,000. During the year ended 30 September 2001 the company wrote off debts totalling $18,000, and at the end of the year it is decided that the provision for doubtful debts should be $20,000. What should be included in the income statement for bad and doubtful debts? A $35,000 debit $1,000 B debit $38,000 C debit $1,000 D 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. equal amounts of cash are transferred into petty cash at D Regular intervals.
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[P.T.O.
8 In reconciling a business cash book with the bank statement, which of the following items could require a entry in the cash subsequent book? 1. Cheques presented after date.A cheque from a customer which was 2. dishonoured. by the 3. An error bank. 4. Bank charges. 5. Deposits credited after date. 6. Standing order entered in bank statement. A 2, 3, 4 and 6 1, 2, 5 and B 6 2, 4 and C 6 1, 3 and D 5 9 The following bank reconciliation statement has been prepared for Omega by a junior clerk: $ Overdraft per bank statement 68,100 Add : Deposits not credited 141,200 209,300 Less 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 overdrawn cash at C $31,300 bank D $114,900 overdrawn 10 X and Y are in partnership, sharing profits equally and preparing their accounts to 31 December each year. On 1 July Z joined the partnership, and from that date profits are shared X 40%, Y 40% and Z 2000, 20%. In the year ended 31 December 2000, profits were: $ 6 months to 31 June 2000 200,000 6 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 months to 31 December 2000 in arriving at the $300,000 profit. Which of the following correctly states X s profit share for the year? Profit share X $ A 216,000 B 200,000 C 220,000 D 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 the partnership . Profit sharing arrangements are: Salary S $15,000 $25,000 6 months to 30 June 2000 6 months to 31December 2000
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 December 2000? STU $000 $000 $000 A 196 124 30 217 108 B 25155 130 65 C D 175 145 35 total profit shares for the year ended 31
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. achieve comparability it may sometimes be necessary to override the prudence 2. In order to 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 3 1 and B 4 C 3 only and D2 3 13 The closing inventory of Epsilon amounted to $284,000 at 30 September 2001, the balance sheet date. This total includes 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 been defective at the balance sheet date. Remedial work after the balance sheet date cost $1,800 and they were then $20 each. Selling expenses were sold for $400. 2. 100 items which had cost $10 each. After the balance sheet date they were sold for $8 each, with sellingxpenses of $150. e What figure should appear in Epsilon s balance sheet for inventory? A $283,650 B $283,800 C $292,150 D $283,950
5
[P.T.O.
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. conditions to be satisfied if development expenditure is to be capitalised is that the technical 2. One of the feasibility the project is reasonably of assured. 3. If capitalised, development expenditure must be amortised over a period not exceeding five years. amount of capitalised development expenditure for each project should be reviewed each 4. The year. circumstances no longer justify the capitalisation, the balance should be written off over a period not If exceeding five years. 5. Development expenditure may only be capitalised if it can be shown that adequate resources will be available to the completion of the finance project. A 2 and 5 3, 4 and B 5 2, 3 and C 5 1, 2 and D 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 $17,800 B $47,400 C $15,400 D $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 75,000 Share premium 200,000 account 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 $120 per share. 1 April 2001 the company made a bonus (capitalisation) issue of one share for every three in issue at that 2. On 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 account A $460,000 $287,000 $480,000 B $137,000 $120,000 C $137,000 $120,000 D $227,000
6
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 producedindirect method, but this is balanced elsewhere in the cash flow the by 2. A statement. making high profits must necessarily have a net cash inflow from operating company activities. and losses on disposals of non-current assets appear as items under cash flows from investing 3. Profits activitiescash flow statement or a note to the in it. A Item 1 only B Item 2 only Item 3 C onlyNone of the D items. 18 A cash flow statement prepared in accordance with IAS7 Cash Flow Statements opens with the calculation of cash flows operating activities from the net profit before from taxation. Which of the following lists of items consists only of items that would be ADDED to net profit before taxation in that calculation ? A Decrease in inventories, depreciation, profit on sale of noncurrent assets. trade payables, decrease in trade receivables, profit on sale of nonB Increase in current assets. of non-current assets, depreciation, increase in trade C Loss on sale receivables. in trade receivables, increase in trade payables, loss on sale of nonD Decrease current assets. 19 IAS 10 Events after the Balance Sheet Date defines the extent to which events after the balance sheet date should bein financial statements. Five such events are listed reflected below. 1 Merger with another company. 2 Insolvency of a customer. 3 Destruction of a major non-current asset. of inventory held at the balance sheet date for less than 4 Sale 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 3 2, 4 and B 5 1, 2 and C 5 1, 4 and D 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. Past experience 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 legal advisor 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 probability liability arising is of a remote. How should these items be reflected in the financial statements, if at all? A All three should be disclosed by note. provision should be created for the best estimate of the liability in 1, and items 2 and 3 BA should be disclosed by C A note. provision should be created for the best estimate of the liability in 1, item 2 should be disclosed bynot disclosed at item 3 note and D A all. provision should be created for the best estimate of the liabilities in 1 and 2 and item 3 should be disclosed by note. 7
[P.T.O.
21 The analysis of a company s financial statements revealed that the number of days sales in inventory was 80 days. The companies in the same industry was 35 average for days. Which one of the following is LEAST likely to account for the high level of 80 days? A The company s trade is seasonal B Poor inventory control C A large purchase was made just before the balance sheet date D 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 $000 Issued share capital 500 Operating profit 300 Reserves 200 Finance cost 100 Accumulated profit 800 Profit before tax 200 Non-current liabilities: notes 1,000 10% loan
22 What is the return on shareholders equity as a percentage, based on these figures? A 40% B 20% C 133% D 12%
23 What is the return on total capital employed as a percentage, based on these figures? A 12% B8% C 133% D 20%
24 Which of the following correctly states items which should be disclosed in the statement of changes in equity IAS 1 Presentation of Financial required by Statements? A Net profit for the period, surplus on revaluation of non-current assets, dividends paid, proceeds of issue of shares. B Proceeds of issue of shares, loan notes issued or repaid, retained profit for the period, surplus on revaluation of non-current assets. C Profit on ordinary activities, income tax expense, extraordinary items. D Accumulated profits, reserves, issued share capital.
8
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 before profit tax. 2. The authorised share capital of the company must be disclosed by note or on the face of the balancetotal of staff costs for the period must be disclosed by note or on the face of the income 3. The sheet. 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 4 1, 2, 3 and B 5 2, 3 and C 5 1, 4 and D 5 (50 marks)
9
[P.T.O.
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 $000 Warehouse machinery: Cost: 3,000 Accumulated depreciation at 1 October 2000 1,700 Motor vehicles: Cost 1,180 Accumulated depreciation at 1 October 2000 500 Inventory at 1 October 2000 13,000 Sales revenue 41,600 Purchases 22,600 Distribution costs 6,000 Administrative expenses 5,000 Allowance for doubtful debts, 1 October 2000 1,300 Bad debts written off 600 loan notes (issued 1999) 10,000 10% Interest paid on loan notes 500 Suspense 100 account 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 administrative allowance for doubtful debts is to be reduced to costs. The $500,000. (3) The balance on the suspense account is the proceeds of sale of motor vehicles, entered to the suspense account pending 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 the company s policy to provide for a full year s depreciation in the year of purchase of vehicles and none in the year of vehicles sold were all used in the distribution of the company s sale. The sales. (4) Depreciation is to be provided for on the straight line basis as follows: Warehouse machinery 10 per cent vehicles 25 per cent Motor Depreciation of motor vehicles is to be divided equally between distribution costs and administrative expenses, andof warehouse machinery charged wholly to distribution depreciation costs. (5) Prepayments and accruals at 30 September 2001 were: Prepayments Accruals $000 $000 Distribution costs 200 100 Administrative 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 of Financial Statements. (10 marks)
10
You are preparing an income statement and balance sheet for Lamorgan, a sole trader who does not keep adequate records. accounting The following information is available to you to compute the figures for inclusion in the accounts for sales revenue, and closing inventory for the year ended 30 June purchases 2001: (a) Sales revenue $ Cash received from credit customers 218,500 Cash sales receipts paid into bank 114,700 paid out of cash sales before banking Expenses 9,600 receivables: 30 June 2000 41,600 Trade 30 June 2001 44,200 Refunds to 800 customers Discounts 2,600 allowed Bad debts written 1,500 off Amount due from credit customer deducted by Lamorgan in paying supplier s 700 account Required : Compute the sales revenue figure from this information. (b) Purchases $ Payments to 114,400 suppliers Trade payables: 30 June 2000 22,900 30 June 2001 24,800 Cost of items taken from inventory by Lamorgan for personal use 400 Amount due from credit customer deducted by Lamorgan in settling supplier s 700 account Required : Compute the purchases figure from this information. (c) Closing inventory $ Cost of inventory obtained from physical count on 30 June 2001 77,700 This 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 needed enable the items to be sold for $1,700. Selling expenses of $100 would also be incurred in selling to these items . (ii) Goods sent to a customer on approval in May 2001 were not included in the inventory. The sale price of the goods was $4,000 and the cost $3,000. The customer notified his acceptance of the goods in July 2001. No adjustment to the sales figure in (a) above is required for this Note: item. Required : Compute the adjusted closing inventory figure from this information.
(5 marks)
(3 marks)
(2 marks) (10 marks)
11
[P.T.O.
On 1 April 1998, Evon Limited acquired 75% of the ordinary share capital of Orset Limited for $180,000. At that date balance sheet of Orset Limited was as the follows: $ Sundry net assets 160,000 Share capital 100,000 Ordinary shares of $1 each 100,000 Accumulated profit At 31 March 2001, the balance sheets of the two companies were as follows: Evon Ltd Orset Ltd $$ Sundry net assets 560,000 230,000 Investment in Orset 180,000 740,000 230,000 Share capital Shares 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)
60,000 160,000
The IASC s Framework for the Preparation and Presentation of Financial Statements, and IAS 1 Presentation of Financial together present concepts important in the preparation of financial statements, including Statements, materiality, and comparability among prudence others. Required : (a) Explain the meaning of the following terms, giving one example of the application of each of them: (i) Materiality; (ii) (6 Prudence. marks) (b) Explain how international accounting standards and the Framework promote (4 comparability. marks) (10 marks)
12
The term overtrading is used to describe the condition of an enterprise which is increasing its sales revenue with working capital to support the insufficient 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 the effect of the actions you likely propose.
End of Paper
Question
13
Answers
Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) Section A 1C Effect of errors: 2 increased debit 55,360 4 increased credit 21,520
Answers
33,840
2C 3C 4D
Items 2, 3 and 4 do not affect balancing, items 1 and 5 do.

3
/12 x 10% x $36,000 = $900
10 / Charge 2 /12 x $84,000 + x $96,000 = $94,000 12 Prepayment 2 / x $96,000 = $16,000 12
5C
Cost: $860,000 $80,000 + $180,000 = $960,000 Depreciation: $397,000 $43,000 + 96,000 = $450,000 $510,000
6B 7B 8C
$37,000 = $18,000 + $20,000 = $1,000 debit
Items 1, 3 and 5 would appear in the bank reconciliation statement, and 6 in the cash book. items 2, 4 $68,100 + $41,800 $141,200 = $31,300 cash at bank X $000 6 months to 30 June 2000 100 6 months to 31 December 2000 136 Less : for bad debt 20 216
9C 10 A
236
11 A 6 months to 30 June 2000:Salaries 15 Profit share 60:40 96 64 6 months to 31 December 2000 Salaries 25 Profit share 40:40:20 60 60 30
STU $000 $000 $000
196 124 30 12 C 13 A $ 284,000 Item 1 No change (350) Reduce to net realisable Item 2 value 283,650
14 A 15 C Theoretical gross profit 30% x $130,000 39,000 Actual gross profit $130,000 $49,800 $88,600 + $32,000 23,600 Shortfall missing inventor y 15,400 $
17
16 D
Share capital $75,000 + $15,000 + $30,000 = $120,000 Share premium $200,000 + $57,000 $30,000 = $227,000 1, 2 and incorrect. 3 are all
17 D 18 D 19 B 20 C 21 D 22 C 23 A 24 A 25 C
200/1,500 correct 300/2,500 correct
is is
18
Section B 1 Tafford Limited Income statement for the year ended 30 September 2001 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance cost Profit before tax Income tax expense Net profit for the period Working 1 Cost of sales Administrative $000 $000 $000 Opening inventor y 13,000 Purchases 22,600 Distribution costs Administrative expenses Bad debts Reduction in allowance for doubtful debts Depreciation: warehouse machinery 300 motor vehicles 125 Profit on sale of125 vehicles Prepayments Accrual s Closing inventory (15,600) 20,000 6,285 4,885 Distribution costs expenses
$000 41,600 (20,000) 21,600 (6,285) (4,885) 10,430 1,000 9,430 3,000 6,430
6,000 5,000 600 (800)
(40) (200) (100) 100 60
2 (a)
Sales revenue Sales revenue total account $$ Opening receivables 41,600 Cash received from customers 218,500 to customers 800 Discounts allowed 2,600 Refunds Bad debts written off 1,500 Sales 225,100 Contra purchases 700 Closing receivables 44,200 267,500 267,500 $ 225,100 124,300 349,400
Credit sales as above Cash sales $114,700 + $9,600
19
(b)
Purchases Purchases total account $$ Payments to suppliers 114,400 Opening payables 22,900 Contra sales 700 Lamorgan goods taken 400 Closing payables 24,800 Purchases 116,600 139,900 139,900
(c)
Inventory Per inventory count Damaged item: $1,700 $300 $100 1,300 Goods on approval $ 77,700 3,000 82,000
3 Cost control
of
$$ Shares in Orset 180,000 75% share capital 75,000 75% pre-acquisition 45,000 Accumulated profit Goodwill written off 3/5 x $60,000 36,000 Balance to CBS 24,000 profits
180,000 180,000 Minority Interest $$ Balance to CBS 57,500 25% share capital 25,000 57,500 57,500 Accumulated profit
25% accumulated 32,500
profit
$$ Minority interest 25% x 130,000 32,500 Evon 240,000 Cost of control: 75% x 60,000 45,000 Orset 130,000 control: Goodwill written off Cost of 36,000 Balance to CBS 256,500 370,000 370,000 Evon Limited Group Balance sheet as at 31 March 2001 Goodwill Less: Amortisation 36,000 24,000 Sundry net assets Share capital 00,000 shares of $1 each 5 Accumulated profit Minority interest
$$ 60,000 790,000 814,000 500,000 256,500 756,500 57,500 814,000
20
4 (a) (i) Materiality Information is material to the financial statements if its misstatement or omission might reasonably be expected to influence 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 if material. (ii) Prudence Prudence in accounting means that a degree of caution is necessary when making estimates required under conditions of so that assets or income are not overstated and liabilities or expenses are not uncertainty, understated. Example: In deciding whether to make an allowance for a debt, an allowance should be made whenever there is doubt as the eventual receipt of the to cash. 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 aequirement when there is a change to disclose full details of its r effect. (ii) The requirement to disclose accounting policies and changes in them. This makes comparisons with other entities easier. 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 without increasing 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 the working capital cycle. (iv) Offer cash discounts to customers to encourage prompt payment this too would generate more cash to pay suppliers and speed up the working capital cycle. (v) Negotiate longer payment periods from suppliers this would ease the pressure on the enterprise and allow it to pay suppliers 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.
(b)
5 (a)
21
Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) Section B 1 Cost of sales Distribution costs Administrative expenses Interest Income tax expense Layout Available Maximum 1 3 3 1 1 2 11 10
Marking Scheme
2 (a) (b) (c)
mark per item 9 x + layout 5 mark per item 5 x + layout 3 (i) (ii)
2 2 10 10
Goodwill calculationamortisation Minority interest calculation Accumulated profit:Initial profit figures Minority interest Cost of control written off Goodwill Consolidated format balance sheet
3 143 32 1 1 1 143 22 13 10
4 (a)
(i) Explanation 2 Example (ii) Explanation 2 Example
1 3 1 366
(b)
Consistency of treatment of items 2 isclosure of policies D
2 44 10 10
5 (a) (b)
1 mark per item 4 x 1 1 mark per item 3 x 1 mark per explanation of effect 3 6
4 3 10 10
23
Preparing Financial Statements

PART 1 THURSDAY 13 JUNE 2002
QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered ALL FIVE questions are compulsor y and MUST be answered
Section B
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 ended 31 December 2001. $000 Depreciatio 880 n Cash paid for 2,270 expenses Increase in 370 inventoriespaid Cash to 2,820 employees Decrease in 280 receivables Cash paid to 4,940 suppliers Decrease in 390 payables Cash received from customers 12,800 Net profit before 2,370 taxation* *Marmot has no interest payable or investment income. Required : Compute Marmots net cash flow from operating activities for the companys cash flow statement for the year31 December 2001 ended using: (a) the direct method; (b) the indirect method.
(10 marks)
The following balances appeared in the balance sheet of Addax, a limited liability company, at 31 March 2001. $ Plant and equipment cost 840,000 Accumulated 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 proportionate year of acquisition and no charge in the year of sale. None of the plant was over ten years charge in the oldMarch 2001. 31 at Required : (a) Prepare ledger accounts recording the above transactions. A cash account is NOT required. (b) List the items which should appear in Addaxs cash flow statement for the year ended 31 March 2002 on these transactions and using the indirect method, including the headings under which they based should appear. Note. The headings from IAS 7 are to be used.
(5 marks)
(4 marks) (9 marks)
2
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 1,000,000 Non-current assets accumulated depreciation 230,000 Inventories 410,000 Receivables 380,000 Cash at 87,000 bank Payables 219,000 Issued share capital ordinary shares of $1 each 400,000 Accumulated profits 818,000 10% Loan notes 200,000 Loan note interest owing 10,000 Transactions during year ended 30 April 2002: $ Sales revenue 4,006,000 Purchases 2,120,000 Expenses 1,640,000 Interest on loan notes paid during year 20,000 Issue 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 114,000 bank (4) Trade 180,000 payables Required : Prepare the balance sheet of Alpaca as at 30 April 2002 using the format in IAS 1 Presentation of Financial as far as the information available Statements allows. Note: No formal income statement is required, but your answer should include a working showing yourof the accumulated profit figure in the balance sheet. This working carries 4 of the computation 11 marks in available all.
(11 marks)
3
[P.T.O.
Financial statements must be prepared according to established accounting concepts, many of which may be the IASBs Framework for the Preparation and Presentation of Financial in found . Statements Define and explain the relevance of the following accounting concepts: (a) Going concern (b) Accruals (c) Substance over form (d) Historical cost
(3 marks) (2 marks) (3 marks) (2 marks) (10 marks)
The summarised financial statements of Weden, a limited liability company engaged in manufacturing, are shown below: Income statement Year ended 31 March 2001 31 March 2002 $000 $000 $000 $000 3,200 4,000
Sales revenue Cost of sales Opening inventory 800 300 Purchases 1,800 3,200 less : Closing inventory 300 500
2,600 3,500 (2,300) (3,000) Gross profit Expenses Interest paid Net profit 900 1,000 (400) (450) (100) (200) 400 350 Balance sheets 31 March 2001 31 March 2002 $000 $000 $000 $000 Non-current assets 1,970 4,000 Current assets Inventory 300 500 Receivables trade 600 800 Prepayments 60 70 Cash 50 10 1,010 1,380 2,980 5,380 Issued share capital 600 600 Share premium account 200 200 Accumulated profits 750 1,100 1,550 1,900 Non-current liabilities loan notes 1,000 2,000 10% Current liabilities Payables trade 380 1,400 Accruals 50 430 80 1,480 2,980 5,380 4
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 (b) Comment briefly on the changes in the companys results and position between the two years, mentioning possible causes for the changes.
(5 marks)
End of Paper
Question
5
Answers
Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) Section B 1 (a) Net cash flow from operating activities direct method Cash receipts from customers to suppliers 4,940 Cash paid Cash paid to employees 2,820 Cash paid for expenses 2,270 Net cash flow from operating activities Net cash flow from operating activities indirect method before taxation Net profit Adjustment for: Depreciatio n Operating profit before working capital changes Increase in inventories receivables Decrease in Decrease in payables Net cash activities from operating
Answers
$000 $000 12,800
10,030 2,770
(b)
2,370 880 3,250 (370) 280 (390) 2,770
9
2 (a)
Plant and equipment cost 2001 $ 2001 $ 1 April Balance 840,000 10 Dec Transfer disposal 100,000 2002 1 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 370,000 2002 2002 31 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 60,000 2002 Cash 45,000 31 Mar Income statement 5,000 105,000 105,000 (b) Addax Cash flow statement for the year ended 31 March 2002 (extracts) Cash flow from operating activities before taxation Net profit Adjustments for: Depreciatio n Profit on sale of plant Cash flows from investing activities Purchase of plant Proceeds of sale of plant 45,000 3 Alpaca Balance Sheet as at 30 April 2002 ASSETS Non-current assets: cost accumulated depreciation Current assets: Stocks Receivables Cash at bank
83,000 (5,000) (180,000)
$$ 1,000,000 330,000 670,000 450,000 670,000 114,000 1,234,000 1,904,000
EQUITY AND LIABILITIES Capital and reserves Issued capital Share premium Accumulated profits (working) Non-current liabilities Loan notes 10% Current liabilities Payables Interest accrued 180,000 10,000 190,000
500,000 50,000 964,000 1,514,000 200,000
1,904,000
10
Working profits Balance at 30 April 2001 revenue Sales Purchases Expenses Opening inventories Closing inventories Interest payable Depreciatio n debts written off Bad
for
accumulated $$ 818,000 4,006,000 2,120,000 1,640,000 410,000 450,000 20,000 100,000 20,000 4,310,000 5,274,000 4,310,000
Balance at 30 April 2002
964,000
4 (a)
Going concern concern assumption means that financial statements are prepared on the basis that the business will continue The going for foreseeable future. the 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 a forced 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 companys liquidity position. Accrual s he accruals concept is that income and expenses are recognised in the period to which they relate and not in the T period in they are which paid. The relevance of the concept is that profit or loss figures would be meaningless if the inclusion of items of income or expense on whether they had been received or depended paid. Substance over form Substance over form means that if the real nature and effect of a transaction differ from its legal form, the real nature and should be recognised instead of the legal form, unless legislation prohibits this. effect The relevance of the concept is that its application improves the usefulness of the financial statements by preventing certain creative accounting practices. Historical cost historical cost convention is that assets are recorded at their initial cost and are not subsequently revalued upwards, The and liabilities 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 inflation cost can become a dubious convention to historical follow.
(b)
(c)
(d)
11
5 (a) Year ended 31 March 2001 31 March 2002 196% 141%
(i) Return on capital employed 500/2,550 550/3,900 (ii) Return on owners equity 400/1,550 350/1,900 (iii) ratio Current 1,010/430 1,380/1,480
258% 184%
235:1 093:1
(iv) turnover
Inventory 2,300/300 3,000/500 (full credit given for correct answer in days) (v) Payables days 1, 380/1,800 x 365 77 days 1,400/3,200 x 365 (b)
767 times 60 times
160 days
Commen t ll ratios show a marked deterioration in 2002 compared with A 2001. Return on capital employed (ROCE) and return on owners equity (ROOE) are at reasonable levels in 2002, but are considerably below the levels in 2001. A possible cause is the decline in the gross profit percentage caused by reducing prices to 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 that the 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, be eroding suppliers goodwill, evidenced by the increase in creditors days from 77 days to which must 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 a purchase of goods just before the balance sheet date. large
12
Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) 1 (a) (b) 1 mark per item 1 mark per item Agreement of totals
Marking scheme Available and Maximum 4 5 1 10
2 (a) (b)
1 / 2
mark per entry 12 x 1 mark per item 4 x 1
1/ 2
Available Maximum 65 44 10 9
Accumulated depreciation Receivables Issued capital Share premium Interest accrued Layout and style
11 11 11 11 11 55 22 77
Accumulated working 1 / mark per 2 item
profits 41 /2 11 1 /2 4 11
1(a) Definition Relevance 1(b) Definition Relevance 1(c) Definition Relevance 1(d) Historical Definition Relevance
2 13 1 12 2 13 1 12 10
5 (a) (b)
1 mark per ratio 5 x 1 1 mark per comment 5 x 1
5 5 10
13

Section B
Section A ALL 25 questions are compulsory and MUST be attempted the Candidate Registration Sheet provided to indicate your chosen answer to each multiple Please use choicequestion within this section is worth 2 Each question. 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 asset accoun t. B Discount received $400 has been debited to discount allowed account. CA 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.
A company receives rent from a large number of properties. The total received in the year ended 31 October 2002$481,200. was 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 31,200 Rent in arrears (all subsequently received) 21,200 18,400 What amount of rental income should appear in the companys income statement for the year ended 31 October 2002? A $486,500 B $460,900 C $501,500 D $475,900
2
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 companys financial statements for the year ended 30 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
A companys 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 36,000 1 December Cash addition 18,000 30 September Balance 363,200 399,200 The companys policy is to charge depreciation at 20% per year on the straight line basis, with proportionate in years of purchase and depreciation 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
399,200
3
[P.T.O.
The following bank reconciliation statement has been prepared by a trainee accountant: Bank reconciliation 30 September 2002 Balance per bank statement (overdrawn) 36,840Lodgements credited after date add: 51,240
88,080 less: Outstanding 43,620 cheques Balance per cash book 44,460 (credit) Assuming the amounts stated for items other than the cash book balance are correct, what should the cash book balance be? A $44,460 credit as stated B $60,020 credit C $29,220 debit D $29,220 credit
Listed below are some possible causes of difference between the cash book balance and the bank statement balance when 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
7Which of the following items could appear on the (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 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) by
credi side of a receivables ledger control t account?
A business has compiled the following information for the year ended 31 October 2002: $ Opening inventory 386,200 Purchases 989,000 Closing 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.
A fire on 30 September 2002 destroyed some of a companys inventory and its inventory records. The following available: information is $
Inventory 1 September 2002 318,000 Sales for September 2002 612,000 Purchases for September 2002 412,000 Inventory 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 atwhen prices are a time rising? A Average cost BFirst in, first out (FIFO) C Last in, first out (LIFO) DReplacement cost
11 Which of the following costs may be included when arriving at the cost of finished goods inventory for inclusion financial statements of a manufacturing in the company? (1) Carriage inwards (2) Carriage outwards (3) Depreciation of factory plant (4) Finished goods storage costs (5) Factory supervisors wages A (1) only B (2), only C (1), only D (1), only and (5) (4) and (5) (3) and (5) (2), (3) and (4)
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 IASCs Framework for the Preparation and of Presentation 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 be recognised in financial statements. (2) The prudence concept means that understating of assets and overstating of liabilities is desirable in preparing financial 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 transaction be reflected in financial statements rather than simply its should 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% and R 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? PQ 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 1,000,000 8% 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 interim of 2c per share on the ordinary shares. A final ordinary dividend of 3c per share is dividend 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 companys 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 companys income statement, according to IAS8Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Net 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. DExclude 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 500,000 Share premium 300,000 Bank 800,000 B Bank 800,000 Share capital 500,000 Share premium 300,000 C Bank 1,300,000 Share capital 1,000,000 Share premium 300,000 D Share capital 1,000,000 Share premium 300,000 Bank 1,300,000
20 Which of the following items could appear in a companys cash flow statement? (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 companys cash flow statement is the calculation of cash inflow from operating activities. 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 companys 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 expenseincurred. as (2) In deciding whether development expenditure qualifies to be recognised as an asset, it is necessary to consider whether 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. DPaying dividends on its equity shares.
25 Which one of the following would cause a companys 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.
Section B ALL FIVE questions are compulsory and MUST be attempted 1 The following items have been extracted from the trial balance of Cronos, a limited liability company, as at2002: 30 September Reference to notes $$ Opening inventory 186,400 Purchases 1,748,200 Carriage inwards 38,100 Carriage outwards 2 47,250 Sales 3,210,000 Trade receivables 318,000 Wages and salaries 2 and 3 694,200administrative expenses 2 381,000 Sundry Allowance for doubtful debts, as at 1 October 2001 4 18,200 Bad debts written off during the year 4 14,680 equipment as at 1 October Office 2001:Cost 5 214,000 Accumulated depreciation 5 88,700 Office equipment: additions during year 5 48,000 Office proceeds of sale of items during year 5 12,600 equipment: Interest 2 30,000 paid Notes 1 Closing inventory amounted to $219,600 2Prepayments accruals and Prepayments Accruals $$ 1,250 5,800 30,000
Carriage outwards Wages and salaries administrative expenses 4,900 13,600 Sundry Interest payable 3Wages and salaries cost is to be allocated: cost of sales 10% distribution costs 20%
administrative expenses 70% 4Further bad debts totalling $8,000 are to be written off, and the closing allowance for doubtful debts is to be equal to 5% of the final trade receivables figure. The bad and doubtful debt expense is to be included in administrative expenses. 5 Office equipment: epreciation is to be provided at 20% per annum on the straight line basis, with a full years charge D in theof purchase and none in the year of year sale. During the year equipment which had cost $40,000, with accumulated depreciation of $26,800, was sold for $12,600. Required : Prepare the companys income statement in accordance with IAS 1. to the income statement Notes not require are d.
(12 marks)
12
The trial balance of Rhea, a limited liability company, at 30 June 2002 failed to agree and a suspense account with a debit balance of $386,400 pending further action to find the opened was 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 been recorded by crediting ordinary share capital account with $400,000 and debiting the non-current asset account with $400,000. Required : (a) Prepare journal with narratives to correct these entries errors. (b) Write up the suspense account and bring down the balance of difference not yet found.
(9 marks)
Helios acquired 80% of the ordinary share capital of Luna for $700,000 on 1 July 1999, when the retained profits amounted to $60,000. There have been no movements on Lunas share capital or share premium of Luna account that since date. At 30 June 2002 the balance sheets of the two companies were as follows: Helios Luna $$ Tangible non-current 280,000 490,000 assets Investment in 700,000 Luna Net current assets 130,000 260,000 1,110,000 750,000 Share capital Share premium account Accumulated profit 600,000 400,000 350,000 200,000 160,000 150,000 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.
4Require d: 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. (b) Capitalised development expenditure on a project expected to begin commercial production in two years time. (c) A holding of quoted equity shares.
(3 marks) (3 marks) (2 marks) (8 marks)
The directors of a company are considering the companys draft financial statements for the year ended 30 September 2002. The following material points are unresolved: (a) One of the companys buildings was destroyed in a flood in October 2002. The estimated value of the building but it was insured for only $3m. The companys going concern status is not jeopardised. The was $4m, directors what adjustment or disclosure, if any, should be made. (2 are unsure marks) (b) The company gives warranties on its products at the time of sale, undertaking to repair or replace any defective of charge. Some directors believe that an allowance should be made for estimated warranty item free liabilities at 30 September 2002 based on sales to that date, and other directors argue that the expense of warranty work be borne in the period in which it is should (2 marks) incurred. (c) Some goods which had cost $120,000, and which were included in closing inventory at 30 September 2002 at that figure, were subsequently sold for $80,000 after they were found to have deteriorated while held in inventory. The directors are unsure whether to adjust the inventory figure downwards by $40,000 or allow the loss 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 September transaction was included as a credit sale in the accounting records, and as a result a 2002. The profit of was taken. In October 2002 the customer returned all of the items in good condition. (4 $20,000 marks) Required : Advise the board of directors as to the correct treatment of each of these items, quoting the authority for your and stating the effect, if any, on the income statement and advice in each case balance sheet. (10 marks)
End of Paper
Question
14
Answers
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) December 2002 Preparing Answers Section A 1B $400 debit which should have been credited correction will bring trial balance into agreement. 2D Rent Receivable $$ O/Balance 21,200 28,700 Income Statement 481,200 C/Balance 31,200 18,400 O/Balance 475,900 Cash C/Balance 528,300 528,300
3. C
$2,500 + $7,500 + $9,000 + $9,000 + $6,000 One month in advance = $3,000 Cr. $
4D
10 8
20% $345,200 69,040 /1 2 20% $18,000 3,000 /1 2 20% $36,000 4,800 76,840
5D 6A 7A 8B
$36,840 + $51,240 $43,620 = $29,220 overdrawn
$952,500
100/60 = $1,587,500 $$
9D
Sales Opening inventory 318,000 Purchases less: Inventory held 214,000 Shortfall Gross profit 25%
612,000 412,000 730,000 516,000 57,000 459,000 153,000
10 C 11 C 12 A 13 C 14 A 15 D 16 A 17 D 18 A 19 B 20 C 5c 10,000,000 + 8% $500,000
17
21 D 22 B 23 B 24 A 25 C
Section B 1
Cronos Limited Income statement for the year ended 30 September 2002
$$ 3,210,000 (1,823,100) 1,386,900
Sales Cost of sales (W1) Gross profit Distribution costs (W1) (188,500) Administrative expenses (W1) (944,680) (1,133,180) Profit from operations Interest payable (30,000 + 30,000) Net profit for the year Working 1 Cost of Distribution Administrative Sales Costs Expenses $$$ Opening inventory 186,400 Purchases 1,748,200 Carriage inwards 38,100 Carriage outwards (47,250 + 1,250) 48,500 Wages and salaries 694,200 5,800 700,000 70,000 140,000 490,000 Sundry administrative expenses (381,000 + 13,600 4,900) Bad and doubtful debts (14,680 + 8,000 2,700) Depreciation of office equipment (214,000 40,000 + 48,000) 44,400 20% Loss on sale Closing inventory (219,600)
253,720 (60,000) 193,720
389,700 19,980
600 1,823,100 188,500 944,680
18
2 (a)
Journal entries (1) Trial balance (no ledger entry) 48,900 Suspense account Correction for carriage outwards balance omitted from trial balance (2) Discount received Discount allowed Suspense account Suspense account 136,400 Discount received allowed Discount
48,900 38,880 38,880 77,760 68,200 68,200
(b)
Correction of discount totals discount amount posted to the wrong Wrong side (3) Ordinary share capital account 300,000 Share premium 300,000 account Correction of error in recording issue of shares $300,000 wrongly credited to ordinar y share capital account. Suspense Account $ $ Difference 386,400 Trial balance (carriage outwards) 48,900 Discount accounts 136,400 Discount accounts 77,760 Balance 396,140 522,800 522,800
3 Non-current assets Goodwill Tangible assets Net current assets
Helios Consolidated balance sheet as at 30 June 2002
$ 68,800 770,000 838,800 390,000 1,228,800
Share capital Share premium account Accumulated profit Minority interest
600,000 350,000 128,800 1,078,800 150,000 1,228,800
19
Cost control $ Investment in Luna 700,000 Share Capital 80% 320,000
of $ Share Premium 80% 160,000 Accumulated profits 80% 48,000 Balance goodwill 172,000
pre-acq
700,000 700,000 Balance 172,000 Amor tisation 20% 172,000 172,000
3 years 103,200 Balance 68,800
Minority interest $ Balance for CBS 150,000 Share Capital 20% 80,000 150,000 150,000 Accumulated profits $ Cost of control Helios 160,000 $60,000 48,000 Luna 150,000 80% Minority interest 20% $150,000 30,000 Cost of control Goodwill amortisation 103,200 Balance for CBS 128,800 310,000 310,000 $ Share Premium 20% 40,000 Accumulated profits 20% 30,000
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 of revaluation. The straight-line method is usually adopted, but other methods such as the reducing balance method the may be used. (b) Development costs should be amor tised, using a method that reflects the pattern in which the economic benefits of the costs are 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 written the extent that it is no longer off to recoverable. Investments of this kind do not depreciate, though they may fluctuate in value. Accordingly no depreciation is provided for them.
(c)
5 (a)
(b)
(c)
(d)
IAS 10 Events after the Balance Sheet Date classifies this type of event as non-adjusting no change to the figures in the financial statements is required but there should be a note to ensure that the financial statements are not misleading. The should state the amount of the loss and the extent of the insurance note cover. A provision should be made for the estimated amount of the liabilities under warranties, as required by IAS 37 Provisions, Liabilities and Contingent Assets. The provision will appear as a liability in the balance sheet and the Contingent operating be reduced by the amount of the profit will allowance. This is an adjusting event according to IAS 10 Events after the Balance Sheet Date. The closing inventor y should be reduced by $40,000 in the balance sheet and in cost of sales, thus reducing operating profit by this amount, unless it could be shown deterioration had taken place after the balance sheet that the date The goods have to be treated as trading inventory at September 2002, applying generally accepted accounting principles. on the income statement and balance sheet will The effect 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) Financial Statements (International Stream) December 2002 Marking Preparing scheme 1 Sales revenue Cost of sales 5 Distribution costs 2 Administrative expenses: Wages and salaries 1 Sundry admin. expenses 1 Bad and doubtful debts 1 Depreciation 1 Loss on sale 1 6 Interest payable Format Available Maximum 1 / 2
1 /2 1 /2
21 /2 1
1/ 2 1/ 2
91 /2 1 2 13 12
(1) Journal entry 1 Narrative (2) Journal entry 2 Narrative (3) Journal entry 1 Narrative Suspense account entry 3 Per Final balance
1/ 2
11 /2
1/ 2
21 /2
/2
11 /2
13
1/ 2
31 /2 9
Calculation of goodwill 4 Goodwill amortisation 1 3 Calculation of minority interest 3 Calculation of accumulated profitsnitial profits 2 I Adjustments 3 Consolidated balance sheet format Assets Capital and reserves 1 Minority interest
1 /2 1 /2 1 /2 13 4
2 11 /2 1
1
1
/2
21 /2 11
21
Available Maximum 4 (a) Land and buildings separated 1 Land not normally depreciated 1 evalued amount for buildings depreciated over R the remaining useful economic life 1 33 (b) Amortised Basis of amor tisation 1 Written off if no longer recoverable 1 33 Value fluctuating but does not depreciate 1 o depreciation required 1 2 N 2 1
(c)
88
5 (a)
Non-adjusting event Disclose by note IAS 10 mentioned note Contents of (b) Allowance required IAS 37 mentioned Effect on accounts 1 2 Adjusting event IAS 10 mentioned Effect on accounts 1 2 Description of adjustment 1 Generally accepted accounting principles 1 to: Adjustments Sales Receivables Closing inventor y Effect on profit
1/ 2 1/ 2 1/ 2 1/ 2
1 1
/2 /2
(c)
1/ 2 1/ 2
(d)
1 1 1 1
/2 /2 /2 /2
4 10
22

Section B
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 choicequestion within this section is worth 2 Each question. marks. 1 A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent was increased 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 companys financial statements for the year January ended 31 2003? Rent expense Accrual $$ A B C D 100,000 20,000 100,000 10,000 97,500 10,000 97,500 20,000
Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alphas ledger account for Beta shows a balance due to Beta of payables $4,140. Investigation reveals the following: (1) Cash paid to Beta $4,080 has not been allowed for by Beta. (2) Alphas 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 Alphas and Betas records after allowing for these items? A $9,310 B C D $390 $310 $1,070
2
An inexperienced bookkeeper has drawn up the following receivables ledger control account: Receivables Ledger Control Account $ Opening balance 180,000 Credit sales 190,000 Cash from credit customers 228,000 Bad debts written off 1,500 Sales returns 8,000 Contras against payables 2,400 Cash refunds to credit customers 3,300 Closing balance (balancing figure) 229,600 allowed 4,200 Discount 423,500 What should the closing balance be after correcting the errors made in preparing the account? A $130,600 B C D $129,200 $142,400 $214,600
423,500
At 31 March 2002 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil bill for $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 companys income statement for heating oil for the year? A B C D $23,900 $36,100 $45,300 $33,100
At 31 December 2002 a companys receivables totalled $400,000 and an allowance for doubtful debts of $50,000 brought forward from the year ended 31 December had been 2001. It was decided to write off debts totalling $38,000 and to adjust the allowance for doubtful debts to 10% of the receivables. What charge for bad and doubtful debts should appear in the companys income statement for the year ended 31 December 2002? A $74,200 B C D $51,800 $28,000 $24,200
3
[P.T.O.
The plant account of a company is shown below:
Plant Cost
2002 $ 2002 $ 1 January Balance (plant purchased 1999) 380,000 1 October Transfer disposalCash plant purchased 51,000 account cost of plant sold 30,000 1 April 31 December Balance 401,000 431,000 The companys policy is to charge depreciation on plant at 20% per year on the straight line basis, with proportionate in years of purchase and depreciation sale. What should the companys plant depreciation charge be for the year ended 31 December 2002? A $82,150 B C D $79,150 $77,050 $74,050
431,000
In preparing a companys bank reconciliation statement at March 2003, the following items are causing the difference cash book balance and the bank statement between the 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 C D 1, 5 and 6 3 and 4 3 and 5
4
The closing inventory at cost of a company at 31 January 2003 amounted to $284,700. The following items were include at cost in the d total: (1) 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in manufacture, they were all sold after the balance sheet date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds. (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 C D $282,800 $329,200 None of these.
A company values its inventory using the first in, first out (FIFO) method. At 1 May 2002 the company had 700 engines 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 companys closing inventory of engines at 30 April 2003? A $188,500 B C D $195,500 $166,000 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 cannot be included. (3) If LIFO (last in, first out) is used to value inventory, additional disclosures must be made in the financial statements . (4) Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable approximationcost. to actual A B C D 1, 3 and 4 only 1 and 2 only 3 only 3 and only. 4
The following information is relevant for questions 11 and 12. When Qs trial balance failed to agree, a suspense account was opened for the difference. The trial balance totalsDebit were: $864,390 Credit $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 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. (5) A contra between the receivables ledger and the payables ledger for $1,200 which should have been credited in the receivables ledger and debited in the payables ledger was actually debited in the receivables ledger and in the payables credited 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 D 2, 4 and 5 only 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 errors the affecting suspense account? A $2,440 Debit B C D $15,560 Credit $13,640 Debit $3,440 Debit.
13 Which of the following statements about research and development expenditure are correct according to IAS38 Intangible 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 noncurrent assets. A 1, 2 and 4 only B C D 1 and 3 only 2 and 4 only 3 and only. 4
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 farpossible the economic decision-making needs of as 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 financial statements, even if this differs from the commercial effect. Which, if any, of these comments is correct, according to the IASBs Framework for the Preparation and of Presentation Financial Statements? A 1 only B C D 2 only 3 only None them. of
7
[P.T.O.
15 Which of the following explanations of the prudence concept most closely follows that in the IASBs Framework Preparation and Presentation of Financial for the 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 companys assetand values 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 companys 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 interest the loan to that due on 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 December 2002. For these items, what total figures should be included in the companys balance sheet at 31 December 2002? Currents assets Current liabilities $$ A B C D 22,000 240 22,240 nil 10,240 nil 16,240 6,000
8
18
At 31 December 2001 the capital structure of a company was as follows: $ Ordinary share capital 100,000 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 the purpose, and later issued for cash another 60,000 shares at 80c per share. What is the companys capital structure at 31 December 2002? Ordinary share capital Share premium account $$ A B C D 130,000 173,000 105,000 173,000 130,000 137,000 105,000 137,000
19
Listed below are some items that may appear in a companys income statement, either separately disclosed orin another included figure. (1) Profit or loss on discontinuing operations (2) Profit or loss on the sale of part of the enterprise (3) Extraordinary items According to International Accounting Standards, which of these items mustto avoid misleading material users? A All three items B 1 and 2 only C D 1 and 3 only 2 and 3 only. alway be shown separately s if
9
[P.T.O.
20 In the course of preparing a companys cash flow statement, the following figures are to be included in the calculationcash from operating of net activities. $ Depreciation charges 980,000 Profit on sale of non-current assets 40,000 Increase in inventories 130,000 Decrease in receivables 100,000 Increase in payables 80,000 What will the net effect of these items be in the cash flow statement? $ A B C D Addition to operating profit 890,000 Subtraction from operating profit 890,000 Addition to operating profit 1,070,000 Addition to operating profit 990,000
The following information is relevant for questions 21 to 23 On 1 January 2000 Alpha purchased 80,000 ordinary $1 shares in Beta for $180,000. At that date Betas retained profits amounted to $90,000 and the fair values of Betas assets at acquisition were equal to their book values. Three years later, on 31 December 2002, the balance sheets of the two companies were: Alpha Beta $$ Sundry net assets 230,000 260,000 Shares in Beta 180,000 410,000 260,000 Share capital Ordinary 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 groups consolidated balance sheet at 31 December 2002 for goodwill? A $25,000 B C D $28,000 $7,000 $14,000
10
22 What amount should appear in the groups consolidated balance sheet at 31 December 2002 for minority interest ? A $52,000 B C D $20,000 $34,000 $32,000
23 What amount should appear in the groups consolidated balance sheet at 31 December 2002 for accumulated profits? A B C D $266,000 $338,000 $370,000 $245,000
24
A companys 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 companys capital structure at December 2002 is as follows: $m Ordinary share capital 380 Accumulated profits 120 8% Loan notes 100 600 The companys income statement shows the following for the year ended 31 December 2002: $m Operating profit 40 Interest paid 8 Taxation 10 22 Dividends paid 10 Retained profit for year 12 What is the return on equity shareholders capital employed, using closing capital figures? A 44% B C D 24% 37% 58%
500
32
(50 marks)
12
Section B ALL FIVE questions are compulsory and MUST be attempted 1 Alamute and Brador have been in partnership for several years, compiling their financial statements for the year31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances ending at 5% per year. Extracts from their trial balance at 31 March 2003 are given below:
Reference $to notes Capital accounts: Alamute Brador Current accounts: Alamute Brador Drawings: Alamute Brador Office equipment: cost 1 48,300 accumulated depreciation, 1 April 2002 12,800 Inventory, 1 April 2002 2 15,600 Trade receivables 3 68,400 Allowance for doubtful debts, 1 April 2002 3 3,800 Sales revenue Purchases Rent 4 30,000 paid Salaries Insuranc 5 4,000 e Sundry expenses
50,000 50,000 3,800 Credit 2,600 Debit 48,400 36,900
448,700 184,600 88,000 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 was increased by 10%. (5) Insurance paid in advance amounted to $1,500. Require d (a) Prepare the partnerships income statement and a statement showing the division of profit among the partners for the year ended 31 March 2003. (b) Write up the partners current accounts for the year ended 31 March 2003.
(9 marks) (3 marks) (12 marks)
13
[P.T.O.
The balance sheets of Paniel at 31 March 2002 and 2003 were as follows: Reference 2002 2003 to notes $ $ Non-current assets 2 2,140,000 3,060,000 Less: accumulated depreciation (580,000) (840,000)
31 March
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 Share premium account Accumulated profits 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 theoan notes. l 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 $14,000 31 March 2003 $18,000 All other movements in net current assets have already been allowed for in computing the net cash inflow from operating activities given in Note 1 above. Dividends paid, when computed, should be included in financing activities. 4 The loan note issue during the year took place on 1 April 2002, and all interest for the year ended 31 March003 was paid in the year. 2 5 The profit for the year ended 31 March 2003 before allowing for dividends paid was $260,000. 6 Ignore taxation. Required : Prepare the companys cash flow statement for the year ended 31 March 2003, beginning with the net from operating activities given in Note 1 inflow cash above. (9 marks) 1,000,000 1,100,000 800,000 900,000 480,000 590,000 2,280,000 2,590,000
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 Alteses net assets totalled $184,000. Required : Using this information compute Alteses total profit for the year ended 31 December 2002. (b) Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for the year ended 31 January 2003 from the following information: $ Trade payables 31 January 2002 130,400 31 January 2003 171,250 Payment to suppliers 888,400goods taken from inventory by Cost of Senji for her personal use 1,000 Refunds received from suppliers 2,400 Discounts received 11,200
(3 marks)
Required : Compute the figure for purchases for inclusion in Senjis financial (3 statements. marks) 1 / %. (c) Aluki fixes prices to make a standard gross profit percentage on sales 3 of 33 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 261,700 Purchases 595,400 Purchases returns 41,200 Required : Calculate the sales figure for the year ended 31 January 2003.
(3 marks) (9 marks)
15
[P.T.O.
Extracts from the financial statements of Apillon for the years ended 31 March 2002 and 2003 are given below: Year ended 31 March Income 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 sales Opening inventory 360,000 540,000 Purchases (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 Expenses Net profit Balance Sheet assets Current Inventory 540,000 720,000 Trade receivables 450,000 700,000 990,000 1,420,000 Current liabilities Trade payables 410,000 690,000 Bank overdraft 20,000 430,000 170,000 860,000 1,200,000 1,400,000 (900,000) (1,100,000) 300,000 300,000
Required : (a) Calculate the following for each of the two years: (i) Current ratio; (ii) Quick ratio (acid test); Inventory turnover period (use closing (iii) 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. (b) Make four brief comments on the changes in the position of the company as revealed by the changes in these ratios and/or in the given figures from the financial statements.
(5 marks)
(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. (b) A companys 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 of share issue.
(6 marks)
End of Paper
Question
17
Answers
Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) Section A 1B 8 months at 90,000 per year, 4 months at 120,000 per year; accrual 1 month 2C (8,950 4,080 380) (4,140 + 40) = 310 3B 4D 5D 6A 7B 8A 9A 10 D 11 D 12 A 13 C 14 A 15 A 16 C 17 B 18 B
June Answers
2003
180 + 190 + 33 228 8 42 15 24 = 1292 8,200 + 34,600 + 3,200 3,600 9,300 = 33,100 38,000 (50,000 36,200) = 24,200 (350,000 +
9
/12 x 30,000 +
/12 x 51,000) x 20% = 82,150
284,700 (32,000 28,500) = 281,200 300 @ 230 + 500 @ 220 + 50 @ 190 = 188,500
3,000 + 9,000 3,460 5,600 500 = 2,440
12,000 + 240 + 6,000 + 4,000 = 22,240 Share capital 50 + 25 + 30 Share premium 180 25 + 18
19 A 20 D 21 C 22 A 23 D 24 D 25 A
980 40 130 + 100 + 80 = 990 180 152 21 = 7 20% x 260 = 52 210 + 160 72 32 21 = 245
22/500 = 44%
21
Section B 1 (a)
Alamute Brador Income statement for the year ended 31 March 2003 Sales Revenue Cost of sales: Opening inventory 15,600 Purchases 184,600
and
$$ 448,700
200,200 Less : Closing 21,400 inventory (178,800) 269,900
Gross profit Less : Expenses: Salaries 88,000 Rent (30,000 + 11,000) 41,000 Insurance (4,000 1,500) 2,500 Sundry expenses 39,400 Depreciation 20%) 7,100 (35,500 doubtful debts Bad and (2,400 500) 1,900 (179,900) Net profit Division of profit Alamute Brador Total Net profit Interest on capital 2,500 2,500 (5,000)
90,000 $$ $ 90,000 85,000
Balance of profit 60:40 51,000 34,000 (85,000) 53,500 36,500 (b) Current Alamute Brador Alamute Accounts Brador $$ $$ Balance 2,600 Balance 3,800 Drawings 48,400 36,900 Share of profit 53,500 36,500 Balance 8,900 Balance 3,000 57,300 39,500 57,300 39,500
22
Paniel Cash flow statement for the year ended 31 March 2003 Net cash inflow from operating activities 746,000paid Interest Cash flows from investing activities Purchase of non-current assets (W1) (1,400,000) Proceeds from sale of non-current assets 280,000
$$
(72,000) 674,000
Net cash used in investing activities (1,120,000) Cash flows from financing activities Proceeds from issuance of share capital 200,000 Proceeds from long-term borrowings 400,000 paid (260,000 110,000) (150,000) Dividends Net cash from financing activities Increase in cash at 31 March Cash 2002 Cash at 31 March 2003 Workings 1 Fixed assets cost $$ Opening balance 2,140,000 Transfer disposal 480,000 Purchases 1,400,000 Closing balance 3,060,000 3,540,000 3,540,000 $ Opening capital 128,000 Capital introduced 50,000 178,000 Less : Drawings 48,000 130,000 Closing capital 184,000 Profit is therefore 54,000 (b) Purchases Total Account $$ Balance brought 130,400 Payments to suppliers 888,400 Goods taken by Senji 1,000 Discounts received 11,200 Refunds from suppliers 2,400 Purchases 937,050 Balance carried forward 171,250 1,070,850 1,070,850 450,000 4,000 14,000 18,000
3 (a)
forward
23
(c)
$$ Cost of sales: Opening inventory 243,000 Purchases 595,400 Less : Returns 41,200 554,200 797,200 Less : Closing 261,700 inventory 535,500 3 / = $803,250
2
Sales figure is therefore $535,500
4 (a) (i) Current ratio 990,000/430,000 2.3:1 1,420,000/860,000 165:1 (ii) Quick 105:1 (iii) turnover ratio 450,000/430,000 700,000/860,000 081:1
Year ended 31 March 2002 2003
Inventory 540,000/1,900,000 720,000/2,400,000
365 104 days 365 109 days
(iv) Average period of credit allowed to customers 450,000/2,800,000 365 59 days 700,000/3,700,000 365 69 days (v) Average period of credit allowed by suppliers 410,000/2,080,000 365 72 days 690,000/2,580,000 365 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 slightly between the two years (iv) Cash sales have decreased considerably in 2003. Making more sales for cash could contribute to an improvement in and quick ratios because this would reduce the the current overdraft. Other comments considered on their merits. 5 (a) (i) Reserves are balances in a companys balance sheet forming part of the equity interest and representing surpluses or gains, whether realised or not. (ii) Share premium account surplus arising when shares are issued at a price in excess of their par The 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 to their 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 being by the shareholders for the shares allotted to made them. The fundamental difference between them is that the rights issue raises funds for the company whereas the bonus issue does not.
24
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) June 2003 Marking Preparing Scheme 1 Gross profit (4 1 / ) 2 Rent Insurance Depreciatio n and doubtful debts Bad Division of profit 2 1 1 1 1 2 8 1 9
Marks
Layout and style
Current accounts of profit Share Drawings Balances 2 1 /
1 1 1 3 12
Interest paid Capital expenditure of non-current assets 2 Purchases Proceeds of sale of non-current assets 1 Financin g Issue of shares Issue of loan notes Dividends paid Increase in cash and cash movement 1 Format and style
1 1 2
1
1 / 2 1 1 1/ 2 3
1
10 1 / max 9
2
3 (a)
Opening capital Capital introduced Drawings Closing capital (Marks awarded for having figures the correct way round) / mark per item 1 / 2 2 6 Opening inventory Purchases Purchases returns Closing inventory Sale figure correct
(b) (c)
3 / 2 / 2 1/ 2 1/
1 1 2
1 3 9
4 (a) (b)
1 mark per pair of ratios 5 1 mark per valid comment 4
15 14 9
25
Marks 5 (a) (i) Definition Examples 2 12 Origins 2 1 2 2 6 2 2 1 5 11
(b)
Bonus issue Rights issue Difference
26

Section B
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 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 debt allowance should be $16,000 as at 30 June 2003. What amount should appear in Qs income statement for bad and doubtful debts for the year ended 30 June 2003? A B C D $12,600 $16,600 $48,600 $30,600.
A companys 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 Rent account C D No entry has been made in the records for a cash sale of $2,500 $3,000 paid for repairs to plant has been debited to the plant asset account.
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? A Discount allowed 7,680Discount received Suspense account Discount allowed 880 Discount received 880 Suspense account Discount allowed 6,800 Discount received Discount allowed 3,840 Discount received Suspense account Dr Cr $$ 5,920 1,760
1,760 6,800 2,960 880 2
C D
The following bank reconciliation statement has been prepared by a trainee accountant: $ Overdraft per bank 3,860 statement Outstanding less: 9,160 cheques 5,300 ad : Deposits credited after date d 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.
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 179,790Credit sales 189,120 Contras against amounts owing 31 Dec by company in payables ledger 800 Discounts allowed 3,660 Bad debts written off 1,800 Sales returns 4,920 Balance 303,590 484,180 What should the closing balance on the account be when the errors in it are corrected? A $290,150 B C D $286,430 $282,830 $284,430.
484,180
6 Which of the following calculations could produce an acceptable figure for a traders net profit for a period if no accounting 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.
3
[P.T.O.
A company with an accounting date of 31 October carried out a physical check of inventory on 4 November 2003, to an inventory value at cost at this date of leading $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 which cost $400. had (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 companys financial statements at 31 October 2003 for closing inventory, based on this information? A $458,700 B C D $505,900 $508,700 $461,500.
In preparing its financial statements for the current year, a companys closing inventory was understated by $300,000. What will be the effect of this error if it remains uncorrected? A The current years profit will be overstated and next years profit will be understated B The current years profit will be understated but there will be no effect on next years profit C The current years profit will be understated and next years profit will be overstated D The current years profit will be overstated but there will be no effect on next years profit.
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? A B C D Inventory account Purchases account Drawings account Purchases account Sales account Drawings account Drawings account Sales account
Dr Cr $$ 1, 800 1, 800 1, 800 1, 800 1,600 1,600 1, 800 1, 800
4
10
A companys 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 C D There have been more bad debts in 2002 than in 2001 Inventory at the end of 2002 is lower than that at the end of 2001 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 181,600 Cost of sales 114,000 Gross profit 1 67,600 Assuming that the cost of sales figure is correct, how much cash could the sales assistant have taken? A $5,040 B C D $8,400 $22,000 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 profits equally. The business profit for the year ended 31 December 2002 was $340,000, accruing evenly over the year, apart from a charge of $20,000 for a bad debt relating to trading before 1 July 2002 which it was agreed that P should bear entirely. How is the profit for the year to be divided between P and Q? PQ $000 $000 A B C D 245 95 250 90 270 90 255 85
5
[P.T.O.
13 Part of a companys draft cash flow statement is shown below: $000 Operating profit 8,640 Depreciation (2,160) charges of sale of non-current assets Proceeds 360 Increase in inventory (330) Increase in accounts 440 payable 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 C D 1 and 4 only 1 and 3 only 2 and 4 only.
14 In preparing a companys cash flow statement complying with IAS 7 Cash Flow Statements, which, if any, of theollowing items could form part of the calculation of cash flow from financing f activities? (1) Proceeds of sale of premises (2) Dividends received (3) Bonus issue of shares 1 only 2 only 3 only None them. of
A B C D
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 flow that produced if the indirect method is from 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 a cash flow in statement. A 1 and 4 B C D 2 and 3 3 only 2 and 4.
6
16 Which of the following statements concerning the accounting treatment of research and development expenditure are 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 an expense as incurred. (3) In deciding whether development expenditure qualifies to be recognised as an asset, it is necessary to whether there will be adequate finance available to complete the consider project. (4) Development projects must be reviewed at each balance sheet date, and expenditure on any project no qualifying for capitalisation must be amortised through the income statement over a longer period not five years. exceeding A B C D 1 and 4 2 and 4 2 and 3 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 reasonable knowledge 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 between companies, and must therefore take precedence over other accounting concepts such as prudence. A 1 and 4 B C D 2 and 3 3 and 4 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 acceptable to make the correction by adjusting the opening balance of retained not is 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, with adjustment to the opening balance of retained earnings. A 1 only B C D 2 only 3 only None of the statements correct. are
7
[P.T.O.
19 Which of the following statements about company financial statements is/are correct, according to International accounting standards? (1) A material profit or loss on the sale of part of the entity must appear in the income statement as an extraordinary 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 during year. the (4) The statement of changes in equity must not include unrealised gains or losses. 1, 2 and 3 2 and 4 3 only 1 and 4.
A B C D
20 Which of the following items are required to be disclosed in a limited liability companys financial statements according to IAS 1 Presentation of Financial Statements? (1) Authorised share capital (2) Finance costs (3) Staff costs (4) Depreciation amortisation 1, 2 and 3 only 1, 2 and 4 only 2, 3 and 4 only All items. four
and
A B C D
21
At 30 June 2002 a companys capital structure was as follows: $ Ordinary share capital 500,000 shares of 25c each 125,000 Share premium 100,000 account In the year ended 30 June 2003 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 companys capital structure at 30 June 2003? Ordinary share capital Share premium account $$ A B C D 450,000 225,000 250,000 225,000 325,000 212,500 262,500 1 25,000
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 that date. 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 companys income statement for interest payable in the year ended 30 June 2003? A B C D $88,750 $82,500 $65,000 $73,750.
23 Which of the following material events after the balance sheet date and before the financial statements are by the directors should be adjusted for in those financial approved 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 D 3 and 4 only 1, 2 and 3 only.
9
[P.T.O.
24 A companys summarised financial statements, ignoring tax, are shown below: Income statement Balance sheet Profit before interest 200 Interest paid (80) Net current assets 1,600 Profit after interest 120 Dividends paid (40) Reserves 800 Loan 800 capital $m Non-current assets 1,000 Ordinary share capital 1,000 1,800 2,600 2,600 $m
Retained 80
profit
What is the correct calculation of return on shareholders capital employed? A 120/1,800 = 167% B C D 200/2,600 = 40/1,800 177%
1 = 122%
120/1,000 = 120%
25 The capital of a limited liability company is made up as follows: Issued ordinary share capital 1,000 Share premium account Accumulated profits 3,000 8% loan notes 1,500
$m 1, 500
Which of the following calculations of the companys gearing ratio, based on these figures, is correct? A 1,500/6,000 = 1 25% B C D 4,500/1,500 = 300% 4,500/6,000 = 1 75%
1,500/1,000 = 150% (50 marks)
10
This is a blank page. Section B begins on page 12.
11
[P.T.O.
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 liability company Reference $to notes Issued share capital 2,000,000 ordinary shares of 50c each 1 1,000,000 Share premium account 1 400,000 Suspense account 1 800,000 Accumulated profits 2 7,170,000 Deferred development costs Property, plant and equipment cost 5,000,000 depreciation at 31 December 2001 3 1,000,000 Inventory at 31 December 2002 Trade receivables 4 3,400,000 Overdraft at bank payables Trade Allowance for doubtful debts at 31 December 2001 4 100,000 6% loan notes 5 400,000
570,000
3,900,000 100,000 1,900,000
Notes 1On 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 for and 4 Notes 3 below. 3 Depreciation is to be provided at 25% per year on the reducing balance basis, on the property, plant and equipmen t. 4 Debts totalling $400,000 are to be written off and the provision for doubtful debts adjusted to 3% of the receivables. 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 companys balance sheet as at 31 December 2002 for publication, using the format in IAS 1 Presentation of Financial Statments. Note. The information in (b) below is not relevant for this part of the question. (b) The deferred development costs of $570,000 in (a) above are made up as follows: Project A Completed by 31 December 2001 $ $ Balance of costs as at 31 December 2001 400,000 Amortised 2002 (100,000) 300,000 Project B In progress Total costs as at 31 December 2001 150,000 Fur ther costs in 2002 120,000 270,000 Balance as at 31 December 2002 570,000
(8 marks)
12
The charge in the income statement for 2002 was $185,000 made up as follows: Project A Amortisation Project C Research costs written off
$ 100,000 85,000
Required : State the figures for the disclosure note summarising this information required by IAS 38 Intangible Assets. companys policy for research and development expenditure is NOT A statement of the required.
The accounting records of Riffon, a limited liability company included the following balances at 30 June 2002: $ Office buildings 1,600,000 cost Office accumulated buildings Office buildings depreciationat 2% per year) (10 years 1, 320,000 Plant and machinery cost (all purchased in 2000 or 1, 840,000 later) Plant and accumulated machinery machinery depreciationline basis at 25% per Plant and (straight 1, 306,000 year) During the year ended 30 June 2003 the following events occurred: 2002 1 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 companys policy to charge a full years depreciation on plant in the year of acquisition and none in thesale. of year Required : Prepare the following ledger accounts to record the above balances and events: (a) Office building: cost/valuation (a) Office accumulated building: Office depreciation (a) revaluation building: reserve. (b) Plant and machinery: cost (b) Plant and accumulated machinery: depreciation (b) Plant and disposal machinery: .
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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 180,000 Sundry net assets 490,000 410,000 670,000 410,000 Ordinary share capital 220,000 100,000 Accumulated profits 450,000 310,000 670,000 410,000 Eagles 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)
The directors of Aluki, a fashion wholesaler, are reviewing the companys draft financial statements for the year ended 30 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, with selling 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. (b) An employee dismissed in August 2003 began an action for damages for wrongful dismissal in October 2003. claiming $100,000 in damages. Aluki is resisting the claim and the companys lawyers have advised She is that employee has a 30% chance of success in her the 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 companys 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 company not is 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 September 2003, stating the relevant accounting 30 year ended standards.
(2 marks)
(9 marks)
14
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 financial statements . (b) Briefly state THREE reasons why historical cost accounting remains in use in spite of its limitations.
End of Paper
Question
15
Answers
Part 1 Examination Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2003 Answers Section A 1A A 16,000 + 14,600 18,000 B 18,000 + 14,600 16,000 C 18,000 + 14,600 + 16,000 D 16,000 + 14,600 2B 3B 4B B C D 5C A B C 16,690 9,160 3,860 16,690 + 3,860 9,160 As B but overdrawn C + 2 x $3,660 discounts allowed $1,800 bad debts written off C+2x Sales ledger account $$ 284,680 3,660 189,120 1,800
control
4,920 179,790 800 Balance 282,830 473,800 473,800 $1,600
D 6A 7D A B C D 8C 9B 10 D 11 B A B C 12 B A B C D 13 B 14 D 15 C 16 C 17 D 18 C
C + (contras)
483,700 38,400 + 14,800 + 400 1,800 483,700 + 38,400 14,800 + 400 1,800 483,700 + 38,400 14,800 400 + 1,800 483,700 38,400 + 14,800 400 + 1,800 (Correct)
$181,600 x 40% = 72,640 67,600 = $5,040 $114,000 x 10/6 = $190,000 181,600 = $8,400 (correct) (114,000 + 40%) $181,600 P (340,000 20,000)/2 + 170,000/2 Q 95,000 P 180,000 + 90,000 20,000 (Correct) Q 90,000 P 180,000 + 90,000 Q 90,000 P 170,000 + 85,000 Q 85,000
19
19 C 20 D 21 B A B C D 22 D A B C D 23 A 24 A 25 A
3/ $80,000 + 7% x $500,000 x 12 As D but including 7% x $500,000 x D but excluding 7% x $500,000 As x x $1m x 3 /12 + 8% x $750,000 x 8% 6 3
All rights issue proceeds added to share capital issue 75,000 Bonus 125,000 + 62,500 + 37,500; 100,000 + 187,500 37,500 (correct) As B, but bonus issue added to share premium Bonus issue does not allow for previous issue.
/12 instead of 3 /12 /12 9/ 12 + 7% x $500,000 x
/12
20
Section B 1 (a)
Abrador Balance sheet as at 31 December 2002 Assets $$ Non-current assets Property, plant and equipment (W1) 3,000,000 Development costs 570,000 3,570,000 Current assets Inventory 3,900,000 Receivables (W2) 2,910,000 6,810,000 10,380,000 Equity and liabilities Capital and reserves Issued share capital Share premium account 700,000 Accumulated profits (W3) 5,780,000
1,500,000
7,980,000 Curent liabilities payables 1,900,000 Trade Bank overdraft 100,000 6% loan notes 400,000 2,400,000 Workings 1Property, plant and equipment per question 5,000,000 less : depreciation at 31 December 2001 1,000,000 less : 25% x 4,000,000 1,000,000 3,000,000 2Receivables less : Written off 3,400,000 400,000 3,000,000 90,000 2,910,000 $ 3 Accumulated profitPer question less : Depreciation 1,000,000 Bad debts 400,000 Allowance for doubtful debts (10,000) 1,390,000 7,170,000 10,380,000
4,000,000
less : Allowance
5,780,000
21
(b) $ Movements on deferred development expenditure during year Balance at 31 December 2001 expenditure in 2002 New 550,000 120,000 670,000 (100,000) 85,000 100,000 185,000
Amortisation for year Deferred development expenditure at 31 December 2002 570,000 Total expenditure on research and development charged in income statement Current expenditure Amortisation
2 (a) 2002 $ 1 July Balance 1,600,000 1 July Revaluation 400,000
Office building cost/valuation
2,000,000
Office building depreciation 2002 $ 2002 $ 1 July Revaluation reserve 320,000 1 July Balance 320,000 2003 30 June Balance 50,000 30 June Income statement (W1) 50,000 370,000
accumulated
2003 370,000
Revaluation reser ve $ 2002 $ 1 July Office building cost 400,000Office building depreciation 1 July 320,000
720,000
(b)
Plant and machinery cost 2002 $ 2003 $ 1 July Balance 840,000 1 April Transfer disposal 240,000 Cash 200,000 30 June Balance 1 Oct 800,000 1,040,000 2003 1 July Balance 800,000
1,040,000
22
Plant and machiner y depreciation 2003 $ 2002 $ 1 April Transfer disposal 180,000 1 July Balance 306,000 30 June Balance 326,000 30 June Income statement (W2) 200,000 506,000
accumulated
2003 506,000
Plant and machiner y disposal 2003 $ 2003 $ 1 April Transfer cost 240,000 1 April Transfer depreciation 180,000 Income statement Cash 30 June 70,000 profit 10,000 250,000 Workings 1 Depreciation of office building $2m/40 (remaining useful life) = $50,000 2 Depreciation of plant and machinery x ($840,000 $240,000 + $200,000) = $200,000 25%
250,000
3 $ Investment 180,000 Share capital 70% 70,000
Cost control
of $ Accumulated profits 70% 105,000 Accumulated profits goodwill amortised 4/5 x $5,000 4,000 Balance for CBS 1,000
180,000
180,000
Minority interest $ Balance for CBS 123,000 Share capital 30% 30,000 123,000 Accumulated profits $ Cost of control Eagle 450,000 70% pre-acq 105,000 310,000 Minority interest 30% 93,000 Cost of control goodwill amor tised 4,000 Balance for CBS 558,000 Oxer $ $ Accumulated 93,000 profits 30% 123,000
760,000
760,000
23
Eagle Group Consolidated balance sheet as at 31 October 2003 Goodwill Sundry net assets $ 1,000 900,000 901,000 220,000 558,000 778,000 123,000 901,000
Share capital Accumulated profits Minority interest
4 (a)
The basic principle for the valuation of inventory according to IAS 2 Inventories is to take the lower of cost and net realisable value. 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 of probability 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 be incurred . IAS 10 Events after the Balance Sheet Date classifies this as a non-adjusting event but a note giving details of the event and its financial effect (a loss of $180,000 plus $228,000 = $408,000) is required as the item is material enough to influence a reader of the financial statements.
(c)
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, the fact that it will cost more to replace the ignoring item. (ii) Depreciation based on the historical cost of assets understates the real value of the benefit obtained from the use of these assets 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 can mislead shareholders when the balance sheet value of the business is used when calculating return on capital employed. (i) It is simple and cheap (ii) Figures used are objective and verifiable. (iii) Lack of a sound and acceptable alternative.
(b)
24
Part 1 Examination Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2003 Marking Scheme Marks 1 (a)
1/ Tangible non-current assets 2 2 x Development costs correctly displayed 2 x 1 / Receivables 2 Issued share capital Share premium Accumulated profits 3 1 /2 x Loan notes in current liabilities Layout
1 /2 1 1 1 11 /2 1 / 2 2 8
1
/2 max 8
(b)
Movements in deferred development expenditure Opening balance Movements 2 x 1 1/ Income statement 2 2 x
1 2 14 12
2 (a)
Office building cost/valuation 2 1 /2 x accumulated depreciation: calculation s entries 4 x 1 /2 revaluation reserve 2 x 1
1 1 2 26
(b)
Plant and machinery cost 4 x 1 /2 accumulated depreciation 4 x disposal 4 x 1 /2
/2
2 2 2 6 12
Goodwill 5 x 1 /2 Minority interest 2 1 /2 x Accumulated profits 5 x Share capital net assets Sundry Heading
/2
21 /2 1 21 /2 1 / 2 1 1 / 2
25
Marks 4 (a) Inventory IAS 2 mentioned IAS 2 Valuation 2 x (b) 1 1 2 1 1 1 4 1 1 1 3 9
/2
Contingent liability IAS 37 mentioned note stating nature and financial effect Disclose by 1 emove $100,000 and replace with R note Provide for legal expenses Event after the balance sheet date IAS 10 mentioned Non-adjusting Note required detailing event and financial effect
(c)
5 (a) (b)
3x2 3x1
6 3
26

Section B
Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hal l
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 business purchased a motor car on 1 July 2003 for $20,000. It is to be depreciated at 20 per cent per year on straight line basis, assuming a residual value at the end of five years of $4,000, with a proportionate the depreciation the year of charge in 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 C D Understated by $16,800 Understated by $18,000 Overstated by $18,400
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 companys financial statements for the year ended 30 November 2003? Income statement Rent receivable Balance sheet A $9,900 $2,000 in sundry payables B C D $9,900 $1,000 in sundry payables $10,200 $1,000 in sundry payables $9,900 $2,000 in sundry receivables
At 30 September 2002 a companys allowance for doubtful debts amounted to $38,000, which was five per cent of receivables at that the date. At 30 September 2003 receivables totalled $868,500. It was decided to write off $28,500 of debts as bad and tothe allowance for doubtful debts at five per cent of keep receivables. What should be the charge in the income statement for the year ended 30 September 2003 for bad and doubtful debts? A $42,000 B $33,925 C $70,500 D $32,500
2
A companys policy as regards depreciation of its plant and machinery is to charge depreciation at 20 per cent per cost, with proportional depreciation for items purchased or sold during a year on year. The companys plant and machinery at cost account for the year ended 30 September 2003 is shown below: Plant and machinery cost 2002 $ 2003 $ 1 Oct Balance (all plant purchased 200,000 30 Jun Transfer disposal account 40,000 after 1999) 2003 1 Apr Cash-purchase of plant 50,000 30 Sept Balance 210,000 250,000 What should be the depreciation charge for plant and machinery (excluding any profit or loss on the disposal) for the year ended 30 September 2003? A $43,000 B C D $51,000 $42,000 $45,000
250,000
A companys 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
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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 Contras against credit balances in payables ledger 4,600 Interest charged on overdue accounts 2,400 Bad debts written off 4,900 Allowance for doubtful debts 2,800 Closing balance 396,800 $555,500 What should the closing balance be when all the errors made in preparing the receivables ledger control accountbeen have corrected? A $395,200 B C D $304,300 $307,100 $309,500
$555,500
Listed below are five potential causes of difference between a companys cash book balance and its bank statement at 30 November 2003: balance as (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 customers 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 book and those that would feature in the bank reconciliation? Cash book entry Bank reconciliation A 1, 2, 4 3, 5 B C D 3, 5 1, 2, 4 3, 4 1, 2, 5 2, 3, 5 1, 4
4
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 sellingxpenses of $800. e (2) Five items which had been in inventory since 1973, when they were purchased for $100 each, sold in October 2003 for $1,000 each, net of selling expenses. What figure should appear in the companys balance sheet at 30 September 2003 for inventory? A $382,600 B C D $384,200 $387,100 $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 credit customers and suppliers for the year ended 30 November 2003: $ Trade receivables, 1 December 2002 130,000 Trade payables, 1 December 2002 60,000 Cash received from customers 686,400 to suppliers 302,800 Cash paid Discounts 1,400 allowed Discounts 2,960 received Bad 4,160 debts Amount due from a customer who is also a supplier offset an amount due for goods supplied by him against 2,000 receivables, 30 November 2003 181,000 Trade Trade payables, 30 November 2003 84,000
9 Based on the above information, what figure should appear in As income statement for the year 30 November 2003 for sales ended revenue? A $748,960 B C D $748,800 $744,960 $743,560
10 Based on the above information, what figure should appear in As income statement for the year 30 ended November 2003 for purchases? A $283,760 B C D $325,840 $329,760 $331,760
5
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11 A sole trader fixes her prices by adding 50 per cent to the cost of all goods purchased. On 31 October 2003 a fire destroyed a considerable part of the inventory and all inventory records. Her trading account for the year ended 31 October 2003 included the following figures: $$ Sales 281,250 Opening inventory at cost 183,600 Purchases 249,200 432,800 Closing inventory at cost 204,600 228,200 Gross profit 53,050 Using this information, what inventory loss has occurred? A $61,050 B C D $87,575 $40,700 $110,850
12 According to IAS 2 Inventories, which of the following costs should be included in valuing the inventories of a manufacturing company? (1) Carriage inwards (2) Carriage outwards (3) Depreciation of factory plant (4) General administrative overheads All four items 1, 2 and 4 only 2 and 3 only 1 and 3 only
A B C D
6
13
G, H and I are in partnership, compiling their accounts for the year to 31 December each year. profit-sharing arrangements are as The follows: Until 30 June 2003 salaries H $40,000 Annual I $20,000 Balance of profit split G 60%, H 20%, I 20% From 1 July 2003 Salaries to be discontinued, profit to be divided: G 50%, H 30%, I 20% The profit for the year ended 31 December 2003 was $400,000 before charging partners salaries, accruing evenly through the year and after charging an expense of $40,000, which it was agreed related wholly to the first six months of the year. How should the profit for the year be divided among the partners? GH I $$ $ A 182,000 130,000 88,000 B C D 200,000 116,000 84,000 198,000 118,000 88,000 180,000 132,000 88,000
14
IAS 38 Intangible Assets governs the accounting treatment of expenditure on research and development. statements about the provisions of IAS 38 may or may not be The following 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 directors to do so. decide (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 companys statement of changes in equity. Which of these four statements are in fact correct? A 3 only B C D 2 and 3 1 and 4 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 C D 2 only 3 only All items three
16 Which of the following statements about the financial statements of limited liability companies are correct according to International Accounting Standards? (1) In preparing a cash flow statement, either the direct or the indirect method may be used. Both lead to the figure for net cash from operating same activities. (2) Loan notes can be classified as current or non-current liabilities. (3) Financial statements must disclose a companys 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 C D 2 and 4 only 3 and 4 only All four items
17 Which of the following could appear as separate items in the statement of changes in equity required by IAS I of Financial Statements as part of a companys financial Presentation 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. 1, 3 and 4 only 1, 2 and 4 only 1 and 3 only All items five
A B C D
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 B C D 2, 3 and 4 only 1, 2, 3 and 5 only 1 and 5 only All items five
19
The draft financial statements of a limited liability company are under consideration. The accounting treatment of the following 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 companys inventory (the companys 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 to in the draft financial the figures statements? A 1 and 4 only B C D 1, 2 and 3 only 2 and 3 only 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 cash received 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 $$ A Share premium account 25,000 Share capital account 25,000 B C D Share capital account 25,000 Share premium account 25,000 Share capital account 37,500 Share premium account 37,500 Share capital account 25,000 Cash 25,000
9
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21 Which of the following journal entries could correctly record a bonus (capitalisation) issue of shares? $$ Debit Credit A Cash 100,000 Ordinary share capital 100,000 B C D Ordinary share capital 100,000 Share premium 100,000 Share premium 100,000 Ordinary share capital 100,000 Investments 100,000 Cash 100,000
22 Which one of the following formulas would give a valid calculation of a companys gearing ratio? Ordinary share A x 100 capital Ordinary share capital + reserves Loan x 100 capital Ordinary share capital + preference share capital Total share capital + reserves C x 100 Loan capital + preference share capital Loan capital + preference share D x 100 capital Total share capital + reserves + loan capital B
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 sheets Hyrax Shrew $$ Sundry assets 660,000 290,000 Investment in Shrew 280,000 940,000 290,000 Issued share capital 400,000 140,000 Share premium account 320,000 50,000 Accumulated profits Jan 2003 140,000 60,000 As at 1 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 at 31 December 2003? A $96,000 B C D $80,000 $64,000 $38,400
24 What figure for minority interest should appear in the consolidated balance sheet of the Hyrax group at 31 December 2003? A $56,000 B C D $48,000 $58,000 $50,000
25
P, the parent company of a group, owns shares in three other companies. Ps 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 directors of 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 C D Q and S only R and S only 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 2003: 31 December Reference $to notes 2 3,845,000 360,000 3 2,184,000 119,000 227,000 460,000 92,000 620,000
Sales revenue Opening inventory Purchases Carriage inwards Carriage outwards Office equipment at 1 January 2003 2, 3 and 4 Cost Accumulated Trade depreciation receivables Allowance for doubtful debts at 1 January 2003 5 20,000 Bad debts written off during the year Sundry administrative expenses The following further information is available: (1) Closing inventory amounts to $450,000
15,000 416,000
(2) Some office equipment, which had cost $20,000, with accumulated depreciation at 1 January 2003 $14,000, was sold for $15,000 during the year. The sale proceeds were included in the sales figure of of $3,845,000. (3) The cost of new equipment purchased on 1 July 2003 for $60,000 has been included in the purchases of $2,184,000 figure (4) The company depreciates its office equipment at 20 per cent per year on the straight line basis,proportionate depreciation in the year of purchase but none in the year of sale. None of the with equipment held at 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 28,700 Prepaid expenses 14,400 (7) The directors propose a dividend of 6c per share on the ordinary share capital (4,000,000 shares of 25c each) to be paid in July 2004.dividends were paid in No 2003. Required : (a) Prepare the companys income statement for the year ended 31 December 2003 for internal use. (b) State the total amount of the proposed dividend and explain how it would be dealt with in the companys financial statements for publication.
(11 marks) (1 mark) (12 marks)
12
The draft financial statements of Arbados at 30 September 2003 have been prepared, but there remains a difference of $100, which has been temporarily inserted as a credit in a suspense account in the companys 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 account as $7,800. asset (2) A $1,000 cheque received for the wreckage of a car destroyed in an accident while uninsured had been correctly entered in the cash book but not posted anywhere. The car had cost $30,000 and depreciation already been provided on the car for the year ended 30 September 2003, making $6,000 had of accumulated on the car at that date $12,000. No entries have yet been made to eliminate the depreciation cost and accumulated depreciation of the car. It is the companys policy to charge no depreciation on an asset in the year of its disposal. Required : repare journal entries, including narratives, to correct the errors, record the loss of the car P and clear the suspense 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 October given below: 2003 are Balance sheets Reference 2002 2003 to notes $$$ $ Non-current assets (net book value) 1,2,3 1,000,000 1,800,000 Current assets Inventories 600,000 1,600,000 Receivables 1,270,000 1,800,000 Cash 140,000 2,010,000 3,400,000
31 October
3,010,000 5,200,000
Capital and reserves Ordinary share capital 4 500,000 600,000 Share premium account 4 420,000 820,000 Revaluation reserve 5 300,000 Accumulated profits 920,000 1,340,000 1,080,000 2,200,000 1,840,000 2,800,000 Current liabilities Bank overdraft 260,000 Income tax 120,000 40,000 Trade payables 1,050,000 1,170,000 2,100,000 2,400,000 3,010,000 5,200,000
Income statements Reference to notes 2002 2003 $$ Sales revenue (all on credit) 8,400,000 9,000,000 Cost of sales 6 (6,300,000) (7,200,000) Gross profit 2,100,000 1,800,000 Operating expenses (1,500,000) (1,600,000) Profit before tax 600,000 200,000 Income tax expense (120,000) (40,000) Profit for the year 480,000 160,000
31 October
14
Notes (1) On 1 November 2002 office equipment that had cost $240,000, with a net book value of $80,000, was sold for $30,000. (2) The purchase of new non-current assets took place near the end of the year. depreciation charge for the year ended 31 October 2003 was $120,000. (3) The (4) The ordinary share issue was on 31 October 2003. (5) Some of the non-current assets were revalued upwards by $300,000 on 1 November 2002. (6) Cost of sales was made up as follows: 31 October 2002 2003 $$ Opening inventory 500,000 600,000 Purchases 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
3Prepare a cash flow statement for Renada for the year ended 31 October 2003, using the format in IAS 7 Cash Flow Statements.
(11 marks)
4 (a) Calculate in DAYS for the two years shown, the following (use closing figures for all three calculations): Inventory holding (i) period; (ii) Average period of credit granted to customers; (iii) Average period of credit allowed by suppliers. (b) (i) Comment briefly on the changes in the position of the company revealed by the changes in these ratios between the two years. (ii) Briefly explain how two factors shown in the financial statements and/or the notes may have contributeddecline in the companys pre-tax return on capital employed, which is down from to the 326 per to 71 per cent in in 2002 cent 2003.
(3 marks) (3 marks) (4 marks) (10 marks)
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 of comparison that users of financial statements may make. (b) Explain two ways in which the IASBs Framework for the Preparation and Presentation of Financial Statements and the requirements of accounting standards aid the comparability of financial information.
End of Paper 15
Question
[P.T.O.
Answers
Part 1 Examination Paper 1.1 (INT) Preparing Financial Statements (International Stream) Section A 1A 20,000 minus 16,000 x 20%/2 2B 3D 4A 5D 6C Receivables ledger account 308,600 147,200 154,200 1,400 2,400 4,900 control (7/12 x 8,400) + (5/12 x 12,000) = 9,900 1,000 paid in advance in sundry payables 28,500 + 42,000 38,000 (160,000 x 20%) + (40,000 x 20% x
3
June Answers
2004
/4 ) + (50,000 x 20% x
/2 )
4,600 307,100 465,200 465,200 7B 8A 9C 386,400 minus loss on 1 3,800 Receivables account 130,000 686,400 Balance 744,960 4,160 2,000 181,000 874,960 874,960 ledger total 1,400
10 D
Payables ledger account 302,800 60,000 2,960 2,000 Balance 331,760 84,000 391,760 391,760 281,250/3 53,050
total
11 C 12 D 13 B
14 A 15 C 16 A 17 A 18 D
GH I 20,000 10,000 90,000 30,000 30,000 110,000 66,000 44,000 200,000 116,000 84,000
19
19 A 20 B 21 C 22 D 23 C 24 C 25 A 280,000 (112,000 + 40,000 + 48,000) = 80,000; minus 20% = 64,000 290,000 x 20%
20
Section B 1 (a)
Minica Income statement for the year ended 31 December 2003 $$ Sales revenue (3,845,000 15,000) 3,830,000 less: Cost of sales Opening inventory 360,000 Purchases (2,184,000 60,000) 2,124,000 Carriage inwards 119,000 2,603,000 less: Closing inventor y 450,000 2,153,000 1,677,000
Gross profit less: Expenses Sundry administrative expenses (W1) 430,300 Carriage outwards 227,000 Bad and doubtful debts (W2) 26,000 Depreciation (W3) 94,000 Profit on sale of office equipment (W4) (9,000)
768,300 Net profit for the year (b) 908,700
The proposed dividend of $240,000 would be disclosed by note in Minicas published income statement. Workings $$ 1 Sundry administrative expenses 416,000 + 28,700 14,400 430,300 2 Bad and doubtful debts Bad debts written off 15,000 Allowance (31,000 20,000) 11,000 26,000 3 Depreciation (460,000 20,000) x 20 per cent 88,000 60,000 x 20 per cent x 6/12 6,000 94,000 4Profit on sale of equipment 15,000 proceeds minus 6,000 net book value 9,000
21
2 Repairs to premises 8,700 Premises asset Suspense Correction of error in posting cost of repairs to premises Suspense account 1,000 Motor vehicle disposal Entry for unposted item Accumulated depreciation 6,000 Depreciation expense (or Income statement) Motor vehicle disposal 30,000 Motor vehicles cost cost of vehicle destroyed Transfer of to disposal account Accumulated depreciation 6,000 Motor vehicle disposal Transfer of depreciation on vehicle destroyed to disposal account Income statement 23,000 Motor vehicle disposal 23,000 Loss on destruction of car transferred 3
$$ 7,800 900
1,000
6,000
30,000
6,000
Renada Cash flow statement for the year ended 31 October 2003 $$ Cash flows from operating activities profit before taxation 200,000 Net Adjustments for: Depreciation 120,000 Loss on sale of office equipment 50,000 Operating profit before working capital changes 370,000 Increase in inventory (1,000,000) Increase in receivables (530,000) payables 1,050,000 Increase in Cash used in operations (110,000) Income taxes paid (120,000) Net cash used in operating activities (230,000) Cash flows from investing activities Purchase of non-current assets (700,000) Proceeds from sale of noncurrent assets 30,000 Net cash used in investing activities (670,000) Cash flows from financing activities Proceeds from issuance of share 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
Working Non-current assets net book value $ Balance 1,000,000 Transfer disposal 80,000 Revaluation reserve 300,000 Depreciation 120,000 Assets purchased (balancing figure) 700,000 Balance 1,800,000 2,000,000 2,000,000 4 (a) 2002 2003 (i) Inventory holding period 600,000/6,300,000 31 October $
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. increase in the inventory holding period suggests that the company is having difficulty making sales in The large the closing months of the period. Customers are taking longer to pay, placing further strain on the companys liquid position. The company is attempting to finance the increased inventor y and receivables by paying its suppliers more slowly, whichprobably have the effect of losing supplier will 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 profit percentage went down to 20 per cent. contributing factors Other 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 profitearning assets.
5 (a)
Comparability means that users are able to draw conclusions about the per formance or financial position of a business by relating 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 reducing or eliminating the number of possible alternative treatments for similar items available to (ii) by businesses (iii) by requiring businesses to treat similar items in the same way within each period and from one period to the next, unless change is required to comply with accounting standards or to ensure that a more appropriate presentation of a events transactions or is provided.
23
Part 1 Examination Paper 1.1 (INT) Preparing Financial Statements (International Stream) June 2004 Marking Scheme Section B 1 Sales revenue Opening inventory Purchases Carriage inwards Closing inventory Gross profit correct administrative expenses Sundry Carriage outwardsdoubtful debts Bad and Depreciatio n Profit on sale Heading
Marks /2 /2 /2 1 /2 1 1 1/ 2 11 /2 2 1
1 1 1 1
Proposed dividend
1 11 1 12
For each journal entry 1 / per entry 2 1 / for narrative 2 1 1 /2 x 6
1 1 / 2 11 /2
Calculation of cash used in operations Profit Depreciatio n Loss on sale Working capital movements 3 x Taxation Investing activities Purchases Proceeds of sale Share issue Cash movement Heading Layout
/2
/2 1 1 11 /2
1 1
4 /2
5 x 1 /2
21 /2
1
/2 1 1
2 x 1 /2
1
/2
1 11 3x13 3x13 2x24 10
4 (a)
Ratios (b) (i) (c) (ii) Comments Reasons for decline
5 (a)
Explanation Types of comparison (b) 2x2
2 2x12 4 4 8
25

Section B
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 trial balance extracted from a sole traders records failed to agree, and a suspense account was opened for the difference . 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. received from the sale of a non-current asset was correctly entered in the cash book but was debited (2) Cash to thedisposal account. (3) The balance on the rent account was omitted from the trial balance. taken from inventory by the proprietor had been recorded by crediting Drawings account and (4) Goods debiting Purchases account. A B C D All four items 2 and 3 only 2 and 4 only 1 and 3 only
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 decided doubtful debt allowance of $218,000 was that a required. What figure should appear in the companys income statement for the year ended 30 June 2004 for bad and doubtful debts? A $155,000 B C D $364,000 $281,000 $11,000
The plant and machinery at cost account of a business for the year ended 30 June 2004 was as follows: Plant and machinery cost 2003 $ 2003 $ 1 July Balance 240,000 30 Sept. Transfer disposal account 60,000 2004 2004 1 Jan Cash purchase of plant 160,000 30 Jun Balance 340,000 400,000 The companys policy is to charge depreciation at 20% per year on the straight line basis, with proportionate in the years of purchase and depreciation disposal. What should be the depreciation charge for the year ended 30 June 2004? A $68,000 B C D $64,000 $61,000 $55,000
400,000
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: Receivables ledger control account 2004 $ 2004 $ 1 Jan Balance 614,000 31 Jan Credit sales 301,000 31 Jan Cash from credit customers 311,000 Discounts allowed 3,400 Bad debts written off 32,000 Contras against amounts due to Interest charged on overdue accounts 1,600 suppliers in payables ledger. 8,650 Balance 595,650 933,650 What should the closing balance on the control account be after the errors in it have been corrected? A $561,550 B C D $578,850 $581,550 $568,350
933,650
6 Which of the following statements about bank reconciliations are correct? 1A 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 bank date should reduce an overdrawn balance in the bank after 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 years income statement as an extraordinary item. 3 The opening balance of retained earnings should be adjusted if practicable, as if the change had been foreffect in previous periods. 4 In the financial statements for the current period, comparative figures for the previous period should be adjusted reflect to 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 IASBs Framework 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 financial information are correct? 1 The concept of substance over form means that the legal form of a transaction must be reflected in financial statements, regardless of the economic substance. 2 The historical cost concept means that only items capable of being measured in monetary terms can be recognised in financial statements. 3 It may sometimes be necessary to exclude information that is relevant and reliable from financial statements because it is too difficult for some users to understand. A 1 and 2 only B C D 2 and 3 only 1 and 3 only 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 support the revaluation. (2) Internally generated goodwill may not be capitalised. (3) Impairment of goodwill should always be shown separately on the face of a companys income statement. (4) Purchased goodwill is the difference between the cost of acquiring a company and the fair value of its identifiable net assets. A B C D 1 and 3 only 2 and 3 only 1 and 4 only 2 and 4 only
11 In finalising the financial statements of a company for the year ended 30 June 2004, which of the following matters should be adjusted material for? 1A 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. 3A factory with a value of $3,000,000 was seriously damaged by a fire in July 2004. The factory was back in production 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 B C D All four items 1 and 2 only 1 and 4 only 2 and 3 only
12 Which of the following statements about provisions, contingencies and events after the balance sheetcorrect? date is/are 1A company expecting future operating losses should make provision for those losses as soon as it becomes probable that they will be incurred. 2 Details of all adjusting events after the balance sheet date must be disclosed by note in a companys financial statements . 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 C D 2 and 4 only 1 and 2 only All four correct statements are
5
[P.T.O.
13 A business compiling its financial statements for the year to 31 July each year pays rent quarterly in advance on1 April, 1 July and 1 October each year. The annual rent was increased from $60,000 per year 1 January, 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 C D $62,000 $70,000 $63,000
14 Which of the following journal entries may be accepted as being correct according to their narratives? Dr Cr $$ 1Wages account 38,000 Purchases account 49,000 Buildings account Labour and materials used in construction of extension to factory 2 Directors personal accounts: A 30,000 B 40,000 Directors remuneration Directors bonuses transferred to their accounts 3 Suspense 10,000 account Sales account Correction of error in addition total of credit side of sales account $10,000 understated 1 and 3 1 and 2 3 only 2 3 and
87,000
70,000
10,000
A B C D
15 X and Y are in partnership, sharing profits in the ratio 2:1 and compiling their financial statements to 30 June each year. On 1 January 2004 Z joined the partnership, and it was agreed that the profit-sharing arrangement should become Y 30% and Z 20%. X 50%, The profit for the year ended 30 June 2004 was $540,000, after charging an expense of $30,000 which it was related to the period before 1 January 2004. The profit otherwise accrued evenly over the agreed year. What is Xs total profit share for the year ended 30 June 2004? A $305,000 B C D $312,500 $315,000 $295,000
6
16
G, H and I are in partnership, sharing profits in the ratio 3:1:1, after charging salaries of $20,000 per year each forand I. On 1 January 2004 they agreed to change the profit-sharing ratio to 3:2:1 and to discontinue Hs H salary. continued unchanged. The partnership profit for the year ended 30 June 2004 was $380,000, accruing salary Is evenly year. over the How should the $380,000 profit be divided among the partners? GH I $$ $ A 192,000 104,000 84,000 B C D 192,500 103,333 84,167 209,000 101,333 69,667 209,000 111,333 89,667
17
An extract from a cash flow statement prepared by a trainee accountant is shown below. Cash flows from operating activities Net profit before taxation Adjustments for: Depreciatio n Operating profit before working capital changes 19 Decrease in inventories Increase in receivables Increase in payables Cash generated from operations 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 4 and
$m 28 ((9) 13 ((4) ((8) 10
18 Which of the following items could appear in a companys cash flow statement? 1Proposed dividends 2 Rights issue of shares 3 Bonus issue of shares 4Repayment 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 companys 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 required IAS 1 Presentation of Financial by Statements. A 1 and 3 B 2 and 3 C D 1 and 2 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 in certain 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 companys individual balance sheet. (4) A subsidiary may be excluded from consolidation if it has not previously been consolidated and the parents investment in it is held for resale in the near future. A 1 and 4 B 2 and 3 C 1 and 2 D 3 4 and
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 period as closing trade receivables/annual credit sales x 365. Which of the following factors could cause the receivables collection period calculated as above to be abnormally to the monthly average level during the high compared year? 1 The companys trade is seasonal 2A downturn in the companys credit sales in the last few months of its accounting period. 3A large credit sale in the final month of its accounting period A 1 and 2 B C D 1 and 3 2 and 3 All three factors
The following summarised financial statements for Q are relevant for questions 23 to 25. (Income tax is ignored) Q Income statement for the year ended 31 July 2004 $m Operating profit 140 Interest 11 (8) payable 132 Dividends 1(18) paid 114 Balance sheet as at 31 July 2004 Non-current assets plus net current assets 400 Ordinary share capital Share premium account Revaluation reserve Accumulated profits Loans $m 200 130 120 150 300 100 400
23 What is the companys return on total capital employed? A 32/200 = 16% B C D 32/400 = 8% 40/400 = 10% 14/300 = 4
2/3
9
[P.T.O.
24 What is the companys return on owners equity? A 32/200 = 16% B C D 32/300 = 10 18/300 = 6% 14/300 = 4
2/3 2/3
25 What is the companys gearing ratio? A 300/400 = 75% B C D 100/200 = 50% 100/400 = 25% 300/100 = 300% (50 marks)
10
Section B ALL FIVE questions are compulsory and MUST be attempted 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 liabilities As at 30 September 2003 2004 $$ Inventory 38,000 46,000 Trade receivables 119,200 125,000 Payments in advance for expenses 2,400 2,600 Payables goods purchased 68,100 77,100 Creditors expenses 3,900 4,600 (2) Bank summary 2003 $ 2004 $ 1 Oct Balance 20,500 30 Sept Purchases 408,100 2004 30 Sept Cash banked 12,900 30 Sept Expenses 89,400 30 Sept Receipts from 30 Sept Drawings 30,000 30 Sept creditbanked 519,400 sales 30 Sept Balance 25,300 552,800 552,800 Cash summary
(3) 2003 $ 2004 $ 1 Oct Balance 300 30 Sept Cash banked 12,900 2004 30 Sept Cash sales 79,000
79,300
30 Sept 30 Sept 30 Sept 30 Sept
Purchases 14,200 Expenses 4,100 Drawings 47,900 Balance 200 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 Bobs income statement for the year ended 30 September 2004 based on this information. (b) Calculate the cost of the goods taken from inventory by Bob during the year.
11
[P.T.O.
At 1 July 2003 the balance sheet of Cougar, a limited liability company, contained the following items: $m Issued share capital ordinary shares of 50c 100 Share premium 140 account Revaluation reserve 160 Accumulated 120 profits 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 $25m was revalued to $85m in 2002, giving rise to the revaluation reserve of $60m shown above. and (iv) The companys draft pre-tax profit for the year ended 30 June 2004 was $40m. In calculating this figure the opening 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 companys statement of changes in equity for the year ended 30 June 2004.
(8 marks)
12
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 200,000 Accumulated 600,000 profits 800,000 The balance sheets of the two companies at 30 June 2004 are shown below. Leo Pard $$ Sundry net assets 2,000,000 1,100,000 Investment in 1,700,000 Pard 2,700,000 1,100,000 Share capital Ordinary 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 was by 30 June fully written off 2003.
(10 marks)
13
[P.T.O.
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 completed project 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 January 2005. 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 years depreciation is charged in the year of acquisition . Required : (a) Calculate the figures to be included in Lions income statement for the year ended 30 September 2004 and at that date, and state the headings under which they balance sheet as will appear. (b) Prepare the disclosure notes required by IAS 38 Intangible Assets. (The note detailing the accounting policy and development expenditure is NOT for research required).
5 Explain FOUR ways in which the use of historical cost accounting may cause users of financial statements to when prices are misled be rising.
(8 marks)
End of Paper
Question
14
Answers
Part 1 Examination Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2004 Answers Section A 1B 2C 146,000 + 218,000 83,000 6/12 ) (60,000 x 20% x 3D (240,000 x 20%) + (160,000 x 20% x 4B 5A Balance 614,000 Cash 311,000 Sales 301,000 Discounts 3,400 Interest 1,600 Contras 8,650 916,600 916,600 6A 7A 8A 9D 10 D 11 B 12 A 13 C 14 C 15 B 16 A 17 D 18 B 19 D 20 A 21 B 22 B 23 C 24 B 25 C A7 B8 C5 D5
9/12
Bad Debts 32,000 Balance 561,550
(2 x 5,000) + ( 10 x 6,000) [2/3 x 1/2 x (540,000 + 30,000)] 20,000 + (50% x 285,000)
25
[P.T.O. [P.T.O.
17
Section B 1 (a)
Bob Income statement for the year ended 30 September 2004 Reference $ $ to workings Sales 1 604,200 Less : Cost of sales Less : Opening Less : inventory 2 410,800 Purchases
138,000 448,800 146,000 402,800 201,400 1 94,000 107,400
Less : less : Closing inventory Gross profit Expenses 3 Net profit
(b)
Calculation of goods taken by Bob: Purchases as above Purchases per information in question: 68,100 + 77,100 + 14,200 431,300 408,100 Goods taken by Bob therefore total 20,500 Workings 1 Sales Credit sales $519,400 $119,200 + $125,000 525,200 Cash sales Sales for income statement 2Purchases and cost of sales 2/3 Cost of sales $604,200 x Details Opening inventory 38,000 Purchases (balancing figure) 410,800 448,800 less : closing stock 46,000 402,800
410,800
$ 79,000 604,200 402,800
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 + $14,200 431,300 Cost of sales $431,300 + $38,000 $46,000 Calculation of goods taken by 2/3 Bob Cost of sales allowing for 50% mark-up $604,200 x Cost of sales as above Goods taken by Bob therefore total Purchases total becomes $431,300 $20,500 410,800
423,300 402,800 423,300 20,500
18
2 (a)
At 1 July 2003 100 140 60 120 420 year adjustment Prior Arising on issue of shares 100 180 280 Surplus on land revaluation, now realised (60) Net profit for year (40 + 6) Dividends paid
Cougar Statement of changes in equity Year ended 30 June 2004 Share Share premium Revaluation Accumulated Total capital account reserve profits $m $m $m $m $m 11 1( 100 140 60 114 414
(6)
1 (6)
11 200 320 212 732
1 60 46 1( (8)
1 46 1( (8)
Leo Group Consolidated balance sheet as at 30 June 2004 Sundry net assets
Share capital Revaluation reserve Accumulated profits Minority interest
$ 3,100,000 $3,100,000 500,000 800,000 1,470,000 2,770,000 330,000 $3,100,000
Workings $ Shares in Pard 700,000 Share capital 70% Cost control of $ 1, 140,000 Accumulated profits: 70% preacq Accumulated profits: written off goodwill 700,000 Minority interest $ Balance for CBS 330,000 Accumulated profits 30% 330,000 Share 30% capital $ 1, 60,000 1, 270,000 1, 1, 330,000 1, 1, 420,000 1, 140,000 1, 1, 700,000 1,
$ Cost of control Pard x 600,000 70% Minority interest 30% x 900,000 Cost of control written off goodwill Balance for CBS 1,470,000
Accumulated profits Leo 1,400,000
$ 1, 900,000
1, 420,000 1, 270,000 1, 140,000 2,300,000 2,300,000
19
4 (a)
Research and development Balance at New Income statement Balance 1sheet 2003 expenditure Amortisation Research 30 Sept Oct 2004 $$$$$ Project Q 1,000,000 1) (200,000) (100,000) 1, 700,000 R )))400,000 250,000 1, 650,000 S (140,000) 1,200,000 250,000 (100,000) (140,000) 1,350,000 Equipment Balance at New Depreciation Balance sheet 1 Oct 2003 expenditure 30 Sept 2004 $$$ $ 1 500,000 180,000 1, 680,000 ((200,000) (136,000) 1, (336,000) 300,000 180,000 (136,000) 1, 344,000 Headings The amortisation of deferred development expenditure ($100,000) and the research expenditure ($140,000) and the depreciation 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 noncurrent assets. (b) Disclosure notes Income statement The aggregate amount of research and development expenditure recognised as an expense during the period was $376,000, in cost of sales. all charged Balance sheet Movements on deferred development expenditure during the year were: Cost Amortisation Net book value $$$ Balance at 1 October 2003 1,400,000 (200,000) 1,200,000 Year ended 30 September 2004 Amortisation (100,000) (100,000) New expenditure 250,000 250,000 1,650,000 (300,000) 1,350,000
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 business the use of these assets. The result is that profit is overstated. from (ii) Inventory is often valued at cost, using FIFO or average costs. If prices are rising, sales in current terms are matched with cost 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, when in 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 B 1/2 1 (a) Calculations sales 4 x cost of sales purchases as balancing figure 1/2 1xpenses 6 x e 1/2 Heading and layout 2 x
Marks 2 1 3 1 8 2 2 4 12 1 1 2 1 1 8
(b)
Calculation of purchases 4 x Correct method (subtraction purchases)
1/2
of
net
Opening balances Prior year adjustment Share issue 2 x 1 2 Surplus on revaluation transferredfor year Net profit Dividends paid
Goodwill Minority interest 2 x Accumulated profits 5 x Balance sheet Share capital net assets Sundry Revaluation reserve B/S layout heading
4x
1/2 1/2 1/2
2 1 21/2 1 1 1 1
1/2
4 1/2 10 4 (a) Project Q R S Equipment Cost Depreciatio n Headings Accumulated profits sheet Balance 1 1 1
1/2
1 1
1/2
6 (b) (b) Income statement Total Income heading used statement Balance sheet 2 1 3 6 12 8 50
4x2
21

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered ALL FIVE questions are compulsory and MUST be answered
Section B
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 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 $$ Rent received in advance 28,400 24,600 Rent owing by tenants 18,300 16,900 All rent owing was subsequently received What figure for rental income should be included in the income statement of B for 2004? A $341,000 B C D $336,400 $300,800 $316,200
The following information is available for the year ended 31 December 2004 for a trader who does not keep proper accounting records: $ Inventories at 1 January 2004 38,000 Inventories at 31 December 2004 45,000 Purchases 637,000 Gross profit percentage on sales 30% Based on this information, what was the traders sales figure for the year? A $900,000 B C D $819,000 $920,000 $837,200
2
The following bank reconciliation statement has been prepared for a company: Overdraft per bank statement 39,800 add: Deposits credited after date 64,100 less: Outstanding cheques presented after date 44,200 Overdraft per cash book 59,700
103,900
Assuming the amount of the overdraft per the bank statement of $39,800 is correct, what should be the balancecash in the book? A $158,100 overdrawn B C D $19,900 overdrawn $68,500 overdrawn $59,700 overdrawn as stated
4 Which, if any, of the following journal entries is correct according to their narratives? Dr Cr $$ (1) B receivables ledger account 450 Bad debts 450 account Irrecoverable balance written off (2) Investments: Q ordinary shares 100,000 Share 100,000 capital 80,000 shares of 50c each issued at $125 in exchange for shares in Q. (3) Suspense account 1,000 Motor vehicles account 1,000 Correction of error debit side of Motor vehicles account undercast by $1,000 A B C D None of them 1 only 2 only 3 only
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 Accounting policies, changes in accounting IAS errors in estimates and 8 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 C D 1 and 3 only 2 and 3 only All items three
3
[P.T.O.
At 31 December 2003 Q, a limited liability company, owned a building that had cost $800,000 on 1 January 1994. being depreciated at two per cent per It was year. On 31 December 2003 a revaluation to $1,000,000 was recognised. At this date the building had a remaining useful 40 years. life of Which of the following pairs of figures correctly reflects the effects of the revaluation? Depreciation charge Revaluation for year reserve 31 December 2004 as at 31 December ended 2003 $$ A 25,000 200,000 B C D 25,000 360,000 20,000 200,000 20,000 360,000
The inventory value for the financial statements of Q for the year ended 31 December 2004 was based on an inventory 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 8,600 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 December 2004? A $838,100 B C D $853,900 $818,500 $834,300
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. P that Rs profit share would not be less than $25,000 for the six months to 31 December 2004. The guaranteed profit- arrangements after Rs admission were P 50%, Q 30%, R 20%. The profit for the year ended 31 sharing December 2004 is $240,000, accruing evenly over the year. What should Ps final profit share be for the year ended 31 December 2004? A $140,000 B C D $139,000 $114,000 $139,375
4
9 Which of the following items must be disclosed in a companys published financial statements (including notes) according to Presentation if material, of financial ? IAS1 statements 1Finance costs. 2 Staff costs. 3 Depreciation and amortisation expense. 4 Movements on share capital. A 1 and 3 only B C D 1, 2 and 4 only 2, 3 and 4 only All items four
10 Which of the following costs should be included in valuing inventories of finished goods held by a manufacturing according to Inventories? company, IAS2 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 D 1, 3 and 4 only 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 October 31 March 2005. 2003 to What figures should appear in the companys financial statements for the year ended 31 December 2004? Income statement Balance sheet$40,000 Prepayment $10,000 A B C D $40,000 Prepayment $15,000 $50,000 Accrual $10,000 $50,000 Accrual $15,000
12
Wanda keeps no accounting records. The following information is available about her position and transactions for the year ended 31 December 2004: $ Net assets at 1 January 2004 210,000 Drawings during 2004 48,000 Capital introduced during 2004 100,000 Net assets at 31 December 2004 400,000 Based on this information, what was Wandas profit for 2004? A $42,000 B C D $242,000 $138,000 $338,000
5
[P.T.O.
13 The following receivables ledger control account has been prepared by a trainee accountant: Receivables ledger control account 2005 $ 2005 $ 1 Jan Balance 318,650 31 Jan Cash from credit customers 181,140 Credit sales 161,770 Interest charged on overdue accounts 280 Bad debts written 1,390 Cash sales 84,260 Sales returns from credit Discounts allowed to customers 3,990 customers 1,240 Balance 379,120 credit 565,920 What should the closing balance at 31 January 2005 be after correcting the errors in the account? A $292,380 B C D $295,420 $292,940 $377,200
off
565,920
14 At 31 December 2004 a companys 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 to cent of the five per receivables. What figures should appear in the balance sheet for trade receivables (after deducting the allowance) and in the income statement for the total of bad and doubtful debts? Income statement Balance sheet Bad and doubtful debts Net trade receivables $$ A 8,200 807,800 B C D 7,550 808,450 18,450 808,450 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. opening inventories had been 2 The overstated. 3 The closing inventories of the business were higher than the opening inventories. from inventories by the proprietor were recorded by debiting drawings and crediting purchases 4 Goods taken with the cost of the goods. A B C D All four factors 1, 2 and 4 only 2 only 3 and only 4
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. use of historical cost accounting tends to understate assets and profit when prices are (2) The rising. prudence concept means that the lowest possible values should be applied to income and (3) The assets and the possible values to expenses and highest liabilities. (4) The money measurement concept means that only assets capable of being reliably measured in monetary be included in the balance sheet of a can terms business. A 1 and 2 B C D 2 and 3 3 and 4 1 and 4
17
A business income statement for the year ended 31 December 2004 showed a net profit of $83,600. It was later that $18,000 paid for the purchase of a motor van had been debited to motor expenses account. found It is the companys policy to depreciate motor vans at 25 per cent per year, with a full years charge in the year of acquisition. What would the net profit be after adjusting for this error? A $106,100 B C D $70,100 $97,100 $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 according to international accounting standards? 1 Internally generated goodwill should not be capitalised. goodwill should normally be amortised through the income 2Purchased statement. 3 Development expenditure must be capitalised if certain conditions are met. A 1 and 3 only B C D 1 and 2 only 2 and 3 only All three correct statements are
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. 2A valuation of land and buildings providing evidence of an impairment in value at the year end. 3 The issue of shares and loan notes. insolvency of a customer with a balance outstanding at the year 4 The end. A 1 and 3 B C D 2 and 4 2 and 3 1 and 4
21 Which of the following statements about contingent assets and contingent liabilities are correct? 1A contingent asset should be disclosed by note if an inflow of economic benefits is probable. 2A contingent liability should be disclosed by note if it is probable that a transfer of economic benefits to settlewill be required, with no provision being it 3 No made. disclosure is required for a contingent liability if it is not probable that a transfer of economic benefits to settle will it be required. is required for either a contingent liability or a contingent asset if the likelihood of a 4 No disclosure payment or receipt is remote. A 1 and 4 only B C D 2 and 3 only 2, 3 and 4 1, 2 and 4
22 Which of the following statements about limited liability companies accounting is/are correct? 1A revaluation reserve arises when a non-current asset is sold at a profit. authorised share capital of a company is the maximum nominal value of shares and loan notes the 2 The company issue. may 3 The notes to the financial statements must contain details of all adjusting events as defined in IAS10 balance sheet the . date A All three statements B 1 and 2 only C D 2 and 3 only None of statements the
Events ter
af
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 limited company, for $160,000. liability The balance sheets of the two companies at 31 December 2004 were as follows: JK $$ Net assets 130,000 120,000 Investment in K 160,000 290,000 120,000 Issued share capital 200,000 50,000 Retained earnings31 December 2003 40,000 30,000 At Profit 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 C D $96,000 $72,000 $64,000
24 What figure should appear in the consolidated balance sheet of the J group as at 31 December 2004 for minority interest ? A $32,000 B C D $16,000 $10,000 $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 liability representing 80% of Ys $60,000 share capital. The retained earnings of Y at that date were company, $70,000. At 31 March 2005 the retained earnings of the companies were: $ X 180,000 Y 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 retained earnings? A B C D $208,000 $8,000 $204,000 $188,000 (50 marks)
10
Section B ALL FIVE questions are compulsory and MUST be attempted 1 The draft balance sheet shown below has been prepared for Shuswap, a limited liability company, as at 31 December 2004: Cost Accumulated Net book value depreciatio $000 $000 $000 n
Assets Non-current assets Land and buildings 9,000 1,000 8,000 Plant and equipment 21,000 9,000 12,000
30,000 10,000 20,000 3,000 2,600 1,900 27,500
Current assets Inventories Receivables Cash at bank Total assets Equity and liabilities Capital and reserves Issued share capital (ordinary shares of 50c each) 6,000 Retained earnings Non-current liabilities notes (redeemable 2010) Loan Current liabilities payables Trade Suspense account
12,400 2,000 2,100 22,500 5,000 27,500
The following further information is available: 1 It has been decided to revalue the land and buildings to $12,000,000 at 31 December 2004. receivables totalling $200,000 are to be written off. 2Trade 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 the setoff. 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: The proceeds of issue of 4,000,000 50c shares at $110 per share, credited to the suspense account from (a) 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 valueat the date of sale of $700,000 and which had originally cost $1,400,000. No other accounting entries have 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 sheet without allowing for the sale. The depreciation for the year relating to the plant sold should be adjusted for in full. Required : Prepare the companys 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. 11
(12 marks) [P.T.O.
The draft financial statements of Choctaw, a limited liability company, for the year ended 31 December 2004 showed of $86,400. The trial balance did not balance, and a suspense account with a credit balance of a profit $3,310 was the balance included in 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 theeducing balance basis, and should have been calculated on the straight-line basis at 25 r per cent. Relevant figures: motor vehicles $120,000, net book value at 1 January 2004, $88,000 Cost of (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 petty or elsewhere for it. The petty cash float in the trial balance is the amount according to the cash book records, $1,200 less than the actual balance in the which is box. (c) Bad debts totalling $8,400 are to be written off. The opening accrual on the motor repairs account of $3,400, representing repair bills due but not (d) paid at December 2003, had not been brought down at 1 January 31 2004. (e) The cash discount totals for December 2004 had not been posted to the discount accounts in the nominal ledger. figures were: The $ Discount allowed 380 Discount 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 theadjustments to the necessary profit. (10 marks)
12
The following information is available for Sioux, a limited liability company: Balance sheets 31 2004 2003December $000 $000 $000 $000 Non-current assets Cost or valuation 11,000 8,000 Accumulated depreciation (5,600) (4,800) Net book value 5,400 3,200 Current assets Inventories 3,400 3,800 Receivables 3,800 2,900 Cash at bank 400 7,600 100 6,800
13,000 10,000
Equity and liabilities Capital and reserves share capital 1,000 1,000 Ordinary Revaluation reserve 1,500 1,000 Retained earnings 3,100 5,600 2,200 4,200 Non-current liabilities Loan notes 10% Current liabilities payables 3,700 3,200 Trade Income tax 700 4,400 600 3,800
3,000 2,000
13,000 10,000
Summarised income statement for the year ended 31 December 2004 $000 Profit from operations 2,650 Finance 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 December 2004. (5) Dividends paid during the year amounted to $750,000. Required : Prepare the companys cash flow statement for the year ended 31 December 2004, using the indirect method, the format in adopting Cash flow . IAS7 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 by relying on high borrowings with relatively low equity capital (high gearing). Required : Explain why a highly geared company is generally more risky from an investors point of view than a company with low (3 gearing. 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 for such (6 comparison. marks) (9 marks)
The directors of Quapaw, a limited liability company, are reviewing the companys draft financial statements for the ended 31 December year 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 manufacturing defects 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. 2005 the damaged goods were sold for $85,000 by an agent who received a 10% commission out In February of the sale (2 marks) proceeds. (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 your answer in each justifies which case. NOTE: The mark allocation is shown against each of the three matters. (8 marks)
End of Paper
Question
14
Answers
Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) Section A 1D Rent received Balance 16,900 Balance 24,600 statement 316,200 Cash 318,600 Income Balance 28,400 Balance 18,300 361,500 361,500
June Answers
2005
2A
38,000 + 637,000 45,000 = 630,000 x 10/7 = 900,000
3B
39,800 + 44,200 64,100 = 19,900 overdrawn
4A
5A
6B
Depreciation 1/40 x 1,000,000 Revaluation 1,000,000 640,000
7A
836,200 8,600 + 700 + (14,000 x 70%) = 838,100
8B
80,000 + 60,000 1,000 = 139,000
9D
10 C
11 A
Income statement 12/18 x 60,000 = 40,000 Prepayment 3/12 x 40,000 = 10,000
12 C
400,000 210,000 100,000 + 48,000 = 138,000
13 C 318,650 181,140 161,770 1,390 280 3,990 480,700 480,700 1,240 292,940
14 B
864,000 13,000 = 851,000 5% = 808,450 13,000 (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
Assets $000 $000 $000 Non-current assets Land and buildings 12,000 12,000 Plant and equipment 19,600 7,950 11,650
Shuswap Balance sheet as at 31 December 2004 Cost or Accumulated Net book valuation depreciation value
Current assets Inventories (3,000 140) 2,860 Receivables (2,600 200 106) 2,294 Cash at bank
31,600 7,950 23,650
1,900 7,054
30,704
Equity and liabilities Capital and reserves Called up share capital (6,000 + 2,000) 8,000 Share premium account 2,400 Revaluation reserve Retained earnings (working) 12,310 26,710 Non-current liabilities notes Loan Current liabilities payables (2,100 106) Trade
4,000 2,000 1,994 30,704
Working Retained earnings balance $000 Per question 12,400 Bad debts written off (200) Loss on sale of plant (100) Depreciation adjustment 350 Inventory adjustment (140)
12,310
$$ 2 (a) Income statement 8,000 Accumulated depreciation of motor vehicles 8,000 Adjustment to depreciation from reducing balance basis to straight-line basis (b) Petty cash 1,200 Rent receivable Rent received omitted from records (c) Bad debts 8,400 Sundry receivables ledger accounts 8,400 Bad debts written off (d) Suspense account 3,400 Motor vehicle repairs Correction of error opening balance not brought forward (e) Discounts allowed 380 Discounts received Suspense account December 2004 discount totals not posted
1,200
3,400
290 90
19
Profit adjustments $ Profit per draft financial statements 86,400 (a) Depreciation adjustment (8,000) (b) Rent receivable not recorded 1,200 debts written off (8,400) (c) Bad (d) Motor repairs adjustment 3,400 (e) Discounts not posted: 380 290 (90) Adjusted profit 74,510
Sioux Cash flow statement for the year ended 31 December 2004. $000 $000 Cash flows from operating activities Net profit before taxation 2,350 Adjustments for: Depreciation 1,250 Profit on sale of plant (150) Interest expense 300 Operating profit before working capital changes 3,750 Decrease in inventories 400 Increase in receivables (900) in payables 500 Increase Cash generated from operations 3,750 Interest paid (300) Income taxes paid 2,850 (600) Cash flows from investing activities Purchase of non-current assets (3,300) Proceeds of sale of non-current assets 500 Net cash used in investing activities (2,800) Cash flows from financing activities Proceeds of issue of loan notes 1,000 Dividends paid (750) Net cash from financing activities 250 Net increase in cash at 1 January Cash 2004 Cash at 31 December 2004 Workings Non-current cost $000 $000 Opening balance 8,000 Disposal 800 Revaluation reserve 500 Cash (balancing figure) 3,300 Closing balance 11,000 11,800 11,800 Non-current depreciation $000 $000 Disposal 450 Opening balance 4,800 Income statement 1,250 Closing balance 5,600 6,050 6,050 assets assets
300 100 400
20
Non-current assets disposal $000 $000 Cost 800 Depreciation 450 on sale 150 Cash 500 Profit 950 950
4 (a)
(b)
A highly-geared company has an obligation to pay interest on its loans regardless of its profit level. It will show high profits if rate of return on capital is greater than the rate of interest being paid on its borrowings, but a low profit or a its overall loss ifis a down-turn in its profit such that the rate of interest to be paid exceeds the return on its there assets. (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 rates than 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 requiredProvisions, contingent liabilities and contingent assets IAS37 by . (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 ) The opening inventory should be included in the current years income statement at the corrected figure, and the opening of retained profit reduced by $100,000. The $100,000 reduction will appear in the statement of changes in balance equity. (IAS8 Accounting policies, changes in accounting estimates and errors )
(c)
21
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) June 2005 Marking Preparing Scheme 1 Land and buildings Plant and equipment depreciation 1djustment for disposal 1 2 a Inventory adjustment Receivables-adjustment for write-off Payables Contra Payables Contra Share capital Share premium reserve Revaluation Retained earnings bad debts loss on plant depreciation adjustment Inventory adjustment Heading
1 1 1
1 / 2 / 2 / 2 1 1 1
1 1 1 1 1 13 1 /
2
max 12
Journal
1 / mark entries 2 1/ 1 mark 2
per entry for

1
narrative /
2
1/ 2 2
11 / x 5 7
Profit adjustments 5 x
1/ 2 21 / 2
10
Workings: Non-current assets: ost 3 x c depreciation 2 x disposal 3 x Cash flow statement 1 / per item 13 x
2
1/ 2 1/ 2 1/ 2
11 / 2 1 11 /
2
61 /
Layout Heading
1 1 12 1 /
2
max 11
4 (a) (b) 3x2
3 6
5 (a)
Provision 1 IAS 37 1 2 (b) Correct treatment 1AS2 1 2 I Prior year adjustment 1 Reconciliation 1 omparative figures adjusted 1 C IAS8 1 4
(c)
8 50
23

Section B
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 The following information is available for a sole trader who keeps no accounting records: $ Net business assets at 1 July 2004 186,000 Net business assets at 30 June 2005 274,000 During the year ended 30 June 2005: Cash drawings by proprietor 68,000 Additional capital introduced by proprietor 50,000 Business cash used to buy a car for the proprietors wife,takes no part in the business 20,000 who Using this information, what is the traders profit for the year ended 30 June 2005? A $126,000 B C D $50,000 $86,000 $90,000
Evon, a limited liability company, issued 1,000,000 ordinary shares of 25c each at a price of $110 per share, all received in cash. What should be the accounting entries to record this issue? A Debit: Cash $1,100,000 Credit: Share capital $250,000 Share premium $850,000 B Debit: Share capital $250,000 Share premium $850,000 Credit: Cash $1,100,000 Debit: Cash $1,100,000 Credit: Share capital $1,100,000 Debit: Cash $1,100,000 Credit: Share capital $250,000 Retained earnings $850,000
C D
2
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 share equally in the profit. In the year ended 30 June 2005 the profit amounted to $300,000, accruing evenly over the year, after charging a ad debt of $30,000 which it was agreed should be borne equally by P and Q b only. What should be the partners total profit shares for the year ended 30 June 2005? PQ R $$ $ A 95,000 95,000 110,000 B C D 122,500 122,500 55,000 125,000 125,000 50,000 110,000 110,000 50,000
At 1 July 2004 a limited liability companys capital structure was as follows: $ Share capital 1,000,000 shares of 50c each 500,000 Share premium account 400,000 In the year ended 30 June 2005 the company made the following share issues: 1 January 2005 A bonus issue of one share for every four in issue at that date, using the share premium account. 1 April 2005 A rights issue of one share for every ten in issue at that date, at $150 per share. What will be the balances on the companys share capital and share premium accounts at 30 June 2005 as a these result of issues? Share capital Share premium account $$ A 687,500 650,000 B C D 675,000 375,000 687,500 150,000 687,500 400,000
5 Which of the following factors could cause a companys gross profit percentage on sales to fall below the expected level? 1 Understatement of closing inventories. 2 The incorrect inclusion in purchases of invoices relating to goods supplied in the following period.inclusion in sales of the proceeds of sale of non-current 3 The 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 D 1 and 2 1 and 3
3
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6 Which of the following journal entries are correct, according to their narratives? Dr Cr $$ 1 Suspense account 18,000 Rent received account Correction of error in posting $24,000 cash received for rent to the rent received account as $42,000 2B receivables ledger account 22,000 A receivables ledger account 22,000 Correction of error: cash received from A wrongly entered to Bs account 3 Share premium account 400,000 Share capital account 400,000 1 for 3 bonus issue on share capital of 1,200,000 50c shares 4 Shares in X 750,000 Share capital account 250,000 Share premium account 500,000 500,000 50c shares issued at $150 per share in exchange for shares in X A B C D 1 and 3 2 and 3 1 and 4 2 and 4
18,000
The receivables ledger control account below contains several incorrect entries. Receivables ledger control account $ Opening balance 138,400 Credit sales 80,660 Contras against credit in payables ledger 1,000 balances Cash received from credit customers 78,420 Discounts allowed to credit customers 1,950 Bad debts written off 3,000 Dishonoured cheques from credit customers 850 Closing balance 129,360 216,820 216,820 What should the closing balance be when all the errors are corrected? A $133,840 B C D $135,540 $137,740 $139,840 4
A limited liability companys trial balance does not balance. The totals are: Debit $384,030 Credit $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 but entered 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 entered rent account as in the $6,160. C Debit side of cash book undercast by $10,000; $1,610 paid for rent correctly entered in the cash book but entered 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 entered rent account as in the $1,610.
A draft cash flow statement contains the following calculation of net cash inflow from operating activities: $m Operating profit 13 Depreciatio 2 n Decrease in inventories (3) Decrease in trade and other receivables 5 ecrease in trade payables D 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. in receivables should be deducted, not 3 Decrease added. 4 Decrease in payables should be deducted, not added. A 1 and 3 B C D 2 and 3 1 and 4 2 and 4
10 Which of the following factors would cause a companys gearing ratio to fall? 1A bonus issue of ordinary shares. 2A rights issue of ordinary shares. 3 An issue of loan notes. upward revaluation of non-current 4 An assets. A 1 and 3 B C D 2 and 3 1 and 4 2 and 4
5
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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 149,100 Purchases 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 Orsets sales figure for the year ended 30 June 2005? A $2,352,000 B C D $1,038,000 $917,280 $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 for insurance for the year to 30 September 2005. What figures should appear for insurance in the companys financial statements for the year ended 30 June 2005? A B C D Income statement Balance sheet Prepayment $19,000 $27,200 $39,300 Prepayment $9,500 $36,700 Prepayment $9,500 $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 Betas account in Alphas 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 Betas account in Alphas records has been undercast by $500. C An invoice for $250 from Beta has been treated in Alphas 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 C D 1 and 3 only 1 and 2 only All three correct statements are
16 Which of the following events between the balance sheet date and the date the financial statements are for issue must be adjusted in the financial authorised 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 C D 2 and 4 3 only None of them
17
A company sublets part of its office accommodation. In the year ended 30 June 2005 cash received from tenants was $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 2,400 30 June 2005 4,700 3,000 All arrears of rent were subsequently received. What figure for rental income should be included in the companys income statement for the year ended 30 June 2005? A B C D $84,000 $83,400 $80,600 $85,800
18 Which of the following statements about accounting ratios and their interpretation are correct? 1A 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 toAll companies should try to achieve a current ratio (current assets/current liabilities) of 3 rise. 2:1. A 2 and 3 only B C D 1 and 3 only 1 and 2 only All three correct statements are 7
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19 At 30 June 2004 a companys allowance for receivables was $39,000. At 30 June 2005 trade receivables totalled It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to $517,000. the equivalent 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 C D $22,000 $24,000 $23,850
20 IAS 2 Inventorie defines the extent to which overheads are included in the cost of inventories of finished s goods. Which of the following statements about the IAS 2 requirements in this area are correct? 1Finished goods inventories may be valued on the basis of labour and materials cost only, without including overheads. 2 Carriage inwards, but not carriage outwards, should be included in overheads when valuing inventories of finished goods. 3Factory 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 D 1 and 3 only 2 and 3 only
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A limited liability company sold a building at a profit. How will this transaction be treated in the companys cash flow statement? Proceeds of sale Profit on sale A Cash inflow under Added to profit in Financing activities calculating cash flow from operating activities B Cash inflow under Deducted from profit in activities calculating cash Investing flow from operating activities C Cash inflow under Added to profit in Investing activities calculating cash flow from operating activities D Cash inflow under Deducted from profit in activities calculating cash Financing flow from operating activities
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22 Which of the following items may appear in a companys statement of changes in equity, according to IAS 1 Presentation of financial ? statements 1 Unrealised revaluation gains. Dividends 2 paid. 3Proceeds of equity share issue. 4Profit for the period. A 2, 3 and 4 only B C D 1, 3 and 4 only All four items 1, 2 and 4 only
23
The capital structure of a company at 30 June 2005 is as follows: $m Ordinary share capital 100 Share premium account 40 Retained earnings 60 Loan notes 40 10% The companys income statement for the year ended 30 June 2005 showed: $m Operating profit 44 Loan note interest (4) Profit for year 40 What is the companys return on capital employed? 2 / per cent A 40/240 = 16 3 B C D 40/100 = 40 per cent 44/240 = 18
1
/3 per cent
44/200 = 22 per cent
24
Sigmas bank statement shows an overdrawn balance of $38,600 at 30 June 2005. A check against the companys cash book revealed the following differences: 1 Bank charges of $200 have not been entered in the cash book. 2Lodgements recorded on 30 June 2005 but credited by the bank on 2 July $14,700. payments entered in cash book but not presented for payment at 30 June 2005 3 Cheque $27,800. payment to a supplier of $4,200 charged to the account in June 2005 recorded in the cash 4A cheque bookaas receipt. Based on this information, what was the cash book balance BEFORE any adjustments? A $43,100 overdrawn B C D $16,900 overdrawn $60,300 overdrawn $34,100 overdrawn
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25 The following is an extract from the income statement of a business: $000 $000 Sales revenue Opening inventories 5,000 Purchases 15,000 20,000 less: Closing inventories 3,000 17,000 Gross profit
22,000
5,000
To the nearest day, how many days sales are held in the closing inventories? A 3,000/22,000 x 365 = 50 days B C D 3,000/17,000 x 365 = 64 days 3,000/15,000 x 365 = 73 days 3,000/20,000 x 365 = 55 days (50 marks)
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Section B ALL FIVE questions are compulsory and MUST be attempted 1 Airn is a sole trader who does not keep a full set of accounting records. An analysis of his cash transactions for the year ended 30 June 2005 is given below: Reference Payments$ $ to notes Overdraft, 1 July 2004 Cash banked 1 418,200 Proceeds of sale of old motor van 2,3 4,500 Payments for purchases New motor van (purchased 1 January 2005) 3 22,000 Rent and general expenses Drawings Overdraft, 30 June 2005 77,600 Receipts 32,400
316,300 49,200 80,400 500,300 500,300
Airns other assets and liabilities at the beginning and end of the year ended 30 June 2005 were: Reference 30 June to notes 2005 2004 $$ Shop fittings (cost $45,000) to be calculated 35,000 Motor van (cost $18,000) 2,3 sold 4,000 New motor van 3 22,000 Trade receivables 48,600 44,700 Trade payables 24,200 19,600 Inventories 63,200 58,900 Owing for rent and general expenses 13,000 12,500 Notes: (1) Before banking the cash received from customers, Airn made the following payments: $ Wages 74,000 Purchases for cash 13,700 General expenses 7,400 95,100 (2) The motor van held at 30 June 2004 was sold during the year. (3) Airns depreciation policy is to charge depreciation on the straight line basis as follows, assuming no residual value: Motor van 20% per year Shop fittings 10% per year No depreciation is charged in the year of sale of assets, but there is a full years depreciation in the year of purchase. Required : Prepare Airns income statement for the year ended 30 June 2005. (11 marks)
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The following land and buildings account for the year ended 31 December 2004 has been written up by a bookkeeper been dismissed. The notes under the account explain each who has since entry. Land and buildings 2004 Notes $000 2004 Notes $000 1 Jan Balance 1 1,000 30 June Cash 2 700 30 Sep Cash proceeds of sale 3 500 31 Dec Revaluation reserve 5 2,200 31 Dec Income statement 4 20 31 Dec Balance 3,380 3,900 3,900 Notes 1 This is the net balance appearing in the companys balance sheet at 1 January 2004. It is made up as follows: $000 $000 Land400 cost Buildings800 cost Buildings-accumulated depreciation (200) 600 1,000 2 Cash paid for new land and building: Lan d Buildin g 3 Cash received on sale of land and buildings: Details of the transaction were: Proceeds of sale Cost: Land Buildin g Accumulated depreciation at 1 January 2004 20 (80) (180) Profit $000 200 500 700
$000 $000 $000 500 (100) (100) 320
4 This is the depreciation charge for the year, calculated as 2 per cent of the opening balance $1,000,000. companys policy to charge depreciation on buildings only, at 2 per cent per year on the straight It is the line with a full years depreciation in the year of purchase and none in the year of basis, 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 Lan 800 d Building 1,400 s 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 above transaction s: Land, cost or valuation; Buildings, cost or valuation; Buildings, accumulated depreciation; of land and Disposal buildings. (11 marks)
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 200,000 100,000 Retained 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 workingsretained earnings figure in the consolidated for the balance sheet. (8 marks)
The directors of Umbria, a limited liability company, are reviewing the companys draft financial statements for the year ended 30 June 2005. The following material matters are under discussion: (1) After the balance sheet date one of the companys factories was seriously damaged by fire. Insurance will only cover part of the loss suffered. The companys going concern status is not affected. (2) Umbria guaranteed the overdraft of another company in 2003. No disclosure has been made in previous financial statements, but events in the latter part of the year ended 30 June 2005 suggest that it is probable that fall on Umbria in a liability will 2006. (3) One of the companys directors was dismissed during 2005 for disclosing confidential information to a competitor. Umbria has commenced an action against this director, and the company has been advised that it is that substantial damages will be probable awarded. (4) One of the companys buildings was revalued during the year. The directors are uncertain as to how revaluation surplus should be included in the financial statements. The surplus has been separately the disclosed as the draft income an item in statement. Required : Explain how each of these four matters should be dealt with in the financial statements for the June ended stating in each case the relevant accounting 30 year 2005, standard.
(10 marks)
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5 State four accounting concepts, and explain how each one contributes to fair presentation in the financial statements . (10 marks)
End of Paper
Question
14
Answers
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) December 2005 Preparing Answers Section A 1A 2A 3B 4D 5C 6D 7B 8A 9D 10 D 11 D 12 C 13 C 14 D 15 A 16 D 17 A 18 C 19 B 20 D 21 B 22 C 23 C 24 A 25 B
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SECTION B 1 Airn Income statement for the year ended 30 June 2005 Sales revenue (Working 1) Opening inventories Purchases (Working 2) less: Closing inventories Gross profit Wages Rent and general expenses (49,200 + 7,400 12,500 + 13,000) 57,100 Depreciation: shop fittings (45,000 x 10%) 4,500 motor van (22,000 x 20%) 4,400 Profit on sale of van (4,500 4,000) (500) 139,500 Net profit Workings (1) Calculation of sales Receivables account $ Opening balance 44,700 Cash banked 418,200 Payments out of takings 95,100 Sales 517,200 Closing balance 48,600 561,900 561,900 (2) Calculation purchases of Payables account $ ledger total $ Opening balance 19,600 Cash paid for purchases 316,300 Purchases 320,900 Closing balance 24,200 340,500 340,500 Credit purchases 320,900 Cash purchases 13,700 Total purchases 334,600 ledger total $
$$ 517,200 58,900 334,600 393,500 63,200 74,000 330,300 186,900
$47,400
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2 2004 $000 2004 $000 Balance 400 30 Sept Disposal 1 Jan 100 June Cash 30 200Dec Revaluation reserve 300 31 Dec Balance 31 800
Land cost/valuation
900
900
Buildings cost/valuation 2004 $000 2004 $000 Balance 800 30 Sept Disposal 1 Jan 100 June Cash 30 500 Dec Revaluation reserve 200 31 Dec Balance 31 1,400 1,500 Buildings depreciation 2004 $000 2004 $000 30 Sept Disposal 20 1 Jan Balance 200 31 Dec Revaluation reserve 204 2% x 1,200 24
1,500 accumulated
224 Land and disposal
31 Dec depreciation
Income
statement 224
Buildings
2004 $000 2004 $000 Land 100 30 Sept Depreciation 30 Sept 20 Buildings 100 Cash 500 Income statement profit 320
520
520
3 $ Investment in Rye 260,000 Share capital 80% 80,000
Goodwill $
Retained earnings 80% 144,000 Goodwill-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 Retained earnings $
72,000
Cost of control Balances Kye 480,000 80% x $180,000 144,000 Rye 260,000 Goodwill 36,000 Minority interest 20% 52,000 Balance to CBS 508,000
740,000 740,000
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Kye group Balance sheet as at 30 September 2005 Sundry net assets (420, 000 + 360,000) Share capital earnings Retained Minority interest $ 780,000 200,000 508,000 708,000 72,000 780,000
(1) The factory was in good condition at 30 June 2005, and thus the fire is a non-adjusting event according to IAS 10 after the balance sheet date . Details of the fire and an estimate of the loss suffered should be disclosed by note.
Events
(2) According to IAS Provisions, contingent liabilities and contingent assets , contingencies such as this are to be provided 37 as soon as it becomes probable that a liability will arise. A provision should therefore be made for the best estimate of for the that will arise. loss (3) This constitutes a probable contingent asset under IAS 37, and thus should be disclosed by note, explaining the nature of the 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 credited revaluation reserve and shown in the balance sheet. The gain should also be shown in the statement of changes in to equity Property, (IAS 16 Plant and and IAS 1 Presentation of Financial Statements ). Equipment 5 Four accounting concepts needed for full marks. Examples: (i) Accruals concept accruals concept is that transactions are reflected in the accounting period in which they occur, rather than the The period any cash involved is received or paid. If this concept is not followed, expenses, income, assets and liabilities are which in all liable to be misstated and fair presentation will not be achieved. (ii) Going concern concept going concern concept is that financial statements should be prepared on the basis that the business will continue The for foreseeable future. If this concept is not followed, assets and liabilities, and hence income and expenses, will be distor ted, the except, of course, in the rare case that the business is in fact no longer a going concern. (iii) Prudence concept Prudence means that a degree of caution should be exercised in making estimates of figures for the financial statements, so assets are not overstated and liabilities are not understated. If the prudence concept is not followed, fair presentation that is unlikely to be achieved because assets and liabilities may be shown at unrealistic values. (iv) Neutrality Neutrality means that information in financial statements should be free from deliberate or systematic bias. If this concept is not followed, information may be presented in a misleading way and a fair presentation will not result. (v) Substance over form The legal form of a transaction may not represent the true nature of that transaction. The concept of substance over form whenever legally possible, the substance or reality of a transaction should be accounted for rather than its legal that, is form. Other concepts considered on their merits.
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Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) December 2005 Marking Preparing Scheme Section B 1 Heading Sales revenue Opening inventories Purchases Closing inventories Wages Rent and general expenses Depreciation: shop fittings motor van Profit on sale of van
1 2 / 2 2 / 2 1/ 2 2 1 1 1 11 1 /
1 1 2
max 11
Land cost/valuation Buildings cost/valuation Buildings accumulated depreciation Land and buildings disposal
21 / 2 21 / 2 31 / 2 21 / 2
11
Goodwill Minority interest Retained earnings Heading Sundry net assets Share capital Minority interest in B/S
11 / 2 1 21 / 2 1 1 1/ 2 1/ 2
(1) IAS 10 Non-adjusting Details in note 2 x
1 1 1 3 1 1 2
(2) IAS 37 Provide for
(3) IAS 37 Disclose by note 2 x
1 1 2 1 1 4 11 max 10 4 8 12 max 10
(4) IASs 16/1 Must not be in income statement revaluation reserve in balance sheet Include as 1nclude in statement of changes in equity I 1
Concepts stated 4 x 1 explained 4 x 1
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QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL 25 questions are compulsor y and MUST be answered ALL FIVE questions are compulsory and MUST be answered
Section B
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 The plant and machinery cost account of a company is shown below. The companys policy is to charge depreciationthe straight line basis, with proportionate depreciation in years of acquisition and at 20% on disposal. Plant and machinery cost 2005 $ 2005 $ 1 Jan Balance 280,000 30 June Transfer disposal 14,000 1 Apr Cash 48,000 1 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 C D $70,000 $64,200 $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 companys normal level of production during the period. 4. In assessing net realisable value, inventory items must be considered separately, or in groups of similar items, ot by taking the inventory value as a n whole. A 1 and 2 only B C D 3 and 4 only 1 and 3 only 2, 3 and 4
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 companys financial statements for the year ended 31 January 2006? Income statement Balance sheet $27,500 $5,000 in sundry receivables $27,000 $2,500 in sundry receivables $27,000 $2,500 in sundry payables $27,500 $5,000 in sundry payables 2
A B C D
A trainee accountant has prepared the following receivables ledger total account to calculate the credit sales of a which does not keep proper accounting records (all sales are on business credit): Receivables ledger total account $ $ Opening receivables 148,200 Credit sales 870,800 Cash received from customers 819,300 Discounts allowed to credit customers 16,200 Irrecoverable 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 C D $877,600 $835,400 $880,600
5 Which of the following events after the balance sheet date would normally qualify as adjusting events according to 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 C D 1 and 2 only 2 and 3 only 1 and 4 only
Ordan received a statement from one of its suppliers, Alta, showing a balance due of $3,980. The amount due the payables ledger account of Alta in Ordans records was only according to $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 Altas 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 Ordans receivables ledger. No such entry has been made in Altas records. What difference remains between the two companies records after adjusting for these items? A $460 B C D $640 $6,500 $100 3
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A companys 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 and the credit side of the cash book for the purchase of some machinery $18,000 had not been an entry on posted to the plant and machinery account. Which two of the following journal entries would correct the errors? Debit Credit $$ (1) Discounts allowed 13,000 Discounts received 13,000 (2) Discounts allowed 13,000 Discounts received 13,000 Suspense account 26,000 (3) Suspense account 26,000 Discounts allowed 13,000 Discounts received 13,000 (4) Plant and machinery 18,000 Suspense account 18,000 (5) Suspense account 18,000 Plant and machinery 18,000 A B C D 1 and 4 2 and 5 2 and 4 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 financial statements, not necessarily its legal the in form. (3) The realisation concept means that profits or gains cannot normally be recognised in the income statement until realised. (4) The application of the prudence concept means that assets must be understated and liabilities must be overstated preparing in financial statements. A 1 and 3 B C D 2 and 3 2 and 4 1 and 4.
4
The following information is relevant for questions 9 and 10 companys draft financial statements for 2005 showed a profit of $630,000. However, the trial balance did not A agree, suspense account appeared in the companys draft balance and a 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 the records. companys (3) One of the directors of the company paid $800 due to a supplier in the companys payables ledger by a personal cheque. The bookkeeper recorded a debit in the suppliers ledger account but did not complete the double entry for 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 companys profit become after the correction of the above errors? A $634,760 B C D $624,760 $624,440 $625,240
11 Which of the following statements are correct? 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 C D 1 and 3 2 and 3 2 and 4
5
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12 Which of the following statements are correct? (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 C D 2 and 4 3 and 4 1 and 3
13
At 1 January 2005 a company had an allowance for receivables of $18,000 At 31 December 2005 the companys 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 past experience . What figure should appear in the companys income statement for the total of debts written off as irrecoverable and the movement in the allowance for receivables for the year ended 31 December 2005? A $49,500 B C D $31,500 $32,900 $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 Discounts received 12,600 Purchases returns 17,400 Contras with amounts receivable in receivables ledger 4,200 Closing balance 410,400 1,390,400 1,390,400 Cash paid 988,400 to suppliers $
What should the closing balance be when the errors have been corrected? A $325,200 B C D $350,400 $358,800 $376,800
6
15 What journal entry is required to record goods taken from inventory by the owner of a business? A Debit Drawings Credit Purchases B C D Debit Sales Drawings Credit Debit Drawings Credit Inventory Debit Purchases Credit Drawings
16
The following information is available about the transactions of Razil, a sole trader who does not keep proper accounting records: $ Opening inventory 77,000 Closing inventory 84,000 Purchases 763,000 Gross profit as a percentage of sales 30% Based on this information, what is Razils sales revenue for the year? A $982,800 B C D $1,090,000 $2,520,000 $1,080,000
17 Which of the following statements are correct? (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 companys published balance sheet, tangible assets and intangible assets must be shown separately. A 1 and 2 B C D 2 and 3 3 and 4 1 and 4
7
[P.T.O.
The following information is relevant for questions 18 and 19 Extracts from a companys financial statements for 2005 are given below: Balance sheet as at 31 December 2005 $m Non-current assets 90 Current assets 80 170 Ordinary share capital 40 Share premium account 25 Retained earnings 35 10% Loan notes 50 Current liabilities 20
100
170
Income for the year statement December 2005 ended 31 $m Profit before finance costs 20 Finance costs Profit before tax 15 (5)
18 What is the companys return on total capital employed? A 20/150 = 133% B C D 15/150 = 10% 20/100 = 20% 15/100 = 15%
19 What is the companys return on shareholders equity? A 15/40 = 375% B C D 20/100 = 20% 15/100 = 15% 20/150 = 133%
8
20
The following bank reconciliation statement has been prepared by an inexperienced bookkeeper at 31 December 2005. Bank reconciliation statement Balance per bank statement (overdrawn) 38,640 lodgements not credited Add : 19,270 Less : unpresented 14,260 Balance per cash 43,650 cheques book $
57,910
What should the final cash book balance be when all the above items have been properly dealt with? A $43,650 overdrawn B C D $33,630 overdrawn $5,110 overdrawn $72,170 overdrawn
21 Which of the following items must be disclosed in a companys 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 C D 1, 2 and 4 only 2, 3 and 4 only All items four
22
On 1 January 2005 a company purchased some plant. The invoice showed $ Cost of plant 48,000 Delivery to factory 400 One 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 companys records? A $51,400 B C D $48,000 $50,600 $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 statements ended 31 December 2005. for the year Which of the following entries for these opening and closing inventory figures are made when completing records of the financial the business? Debit Credit $$ A Inventory account 180,000 Income statement 180,000 Income statement 220,000 Inventory account 220,000 B Income statement 180,000 Inventory account 180,000 Inventory account 220,000 Income statement 220,000 C D Inventory account 40,000 Purchases account 40,000 Purchases account 40,000 Inventory account 40,000
The following information is relevant for questions 24 and 25 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 December 2005 2001 $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 Hs acquisition of S? A $200,000 B C D $780,000 $380,000 $880,000
At
31
25 What should the minority interest figure be in the groups consolidated balance sheet at 31 December 2005? A $240,000 B C D $80,000 $180,000 $140,000 (50 marks) 10
Section B ALL FIVE questions are compulsory and MUST be attempted 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. introducing of $200,000. capital
Mark joined him on 1 July 2005
(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 one third in the six months ended 30 June 2005 and two thirds in the six months ended 31 December 2005, except irrecoverable debt of $20,000 charged in arriving at the profit which was to be regarded as occurring for an in six months ended 30 June the 2005. Required : Prepare a statement showing the division of the profit and prepare the partners current accounts for the year December ended 31 2005.
(9 marks)
11
[P.T.O.
The draft financial statements of Rampion, a limited liability company, for the year ended 31 December 2005 included the following figures: $ Profit 684,000 Closing inventory 116,800 Trade receivables 248,000 Allowance for receivables 10,000 No adjustments have yet been made for the following matters: (1) The companys 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 no deliveries from suppliers in that period. The company fixes selling prices to produce a 40% gross profit on sales.$36,000 sales were included in the sales records in January The 2006. (2) $10,000 of goods supplied on sale or return terms in December 2005 have been included as sales and receivables. 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 for the above matters, based on past experience. Required : (a) Prepare a statement showing the effect of the adjustments on the companys net profit for the year 31 ended December 2005. (b) Show how the adjustments affect: (i) Closing inventory; (ii) Receivables, showing separately the deduction of the allowance for receivables.
(5 marks)
12
The summarised financial statements of Ganda for 2004 and 2005 are given below: Balance sheets as Reference 31 December 31 at December to notes 2005 2004 $000 $000 $000 $000 Non-current assets: cost 1 3,400 2,100 less Accumulated depreciation (720) 2,680 (550) 1,550 Current assets Inventory 600 400 Receivables 1,500 1,700 Cash 80 2,180 50 2,150 4,860 3,700 Equity and liabilities Ordinary share 900 600 capitalpremium account 500 320 Share Retained earnings 2 920 1,420 500 820 2,320 1,420 Net current liabilities loan notes 10% 1,200 1,000 Current liabilities overdraft Bank Trade payables Current tax payable 300 1,340 200 1,280
140 280 900 800 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 during the year. (2) The increase in the retained earnings is made up as follows: Opening balance profit 1,090 Operating less: Finance costs paid (120) Profit before taxation 970 Income tax expense (300) Dividends paid Retained profit for year 420 Closing balance Required : repare a cash flow statement for Ganda for the year ended 31 December 2005, using the P formatCash IAS 7 in flow . statements
$000 $000 500
(250) 920
(12 marks)
13
[P.T.O.
4 (a) Explain the meaning of the term working capital cycle for a trading company. (b) Calculate the working capital cycle in days from the information below. $000 $000 Sales (all on 1,000 credit) : Cost of goods sold less Opening inventory 100 Purchases (all on credit) 800 900 less : Closing inventory (200) 700 Gross profit 300 Closing receivables 250 Closing payables 150
(4 marks)
(4 marks) (c) State one advantage to a business of keeping its working capital cycle as short as possible. (2 Marks) (10 marks)
At 31 December 2005 the capital structure of Ambia, a limited liability company, was as follows: $ 1,000,000 ordinary shares of $1 each 1,000,000 Share premium account 200,000 Revaluation reserve 100,000 Retained 50,000 earnings 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) (1 mark)
(b) Paying a dividend of 10c per share (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. Required : Comment on the validity of these proposals. (The mark allocation is shown against each of the four proposals). (2 marks)
(8 marks)
End of Paper
Question
14
Answers
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) June 2006 Preparing Answers Section A 9/ 1C (280,000 x 20%) + (48,000 x 20% ) + (36,000 x 20% x 12 x 2D 3D 4D
5
12
) (14,000 x 20% x
12
12
x 24,000 +
7/ 12
x 30,000 = 27,500;
/ x 7,500 = 5,000
3
5D 6D 7C 8B 9B 10 D 11 A 12 B 13 B 14 A
Receivables ledger control account Opening receivables 148,200 Cash received from customers 819,300 Sales 880,600 Discounts allowed 16,200 Irrecoverable debts written off 1,500 Returns from customers 38,700 Closing receivables 153,100 1,028,800 1,028,800 3,980 270 180 3,200 = 330 : difference 100
630,000 4,320 440
430,000 x 5% = 21,500 18,000 + 28,000 Payables ledger control account Cash paid to suppliers 988,400 Opening balance 384,600 received 12,600 Purchases 963,200 Discounts Contras with amounts receivable in receivables ledger 4,200 Purchases returns 17,400 Closing balance 325,200 1,347,800 1,347,800 756,000 x
10
15 A 16 D 17 C 18 A 19 C 20 B 21 D 22 C 23 B 24 C 25 A
38,640 + 14,260 19,270 = 33,630
48,000 + 400 + 2,200
1,100,000
/ (400,000 + 500,000)
5
20% x (400,000 + 800,000)
17
Section B 1 Leon and Mark Statement of division of profit for the year ended 31 December 2005 Six months ended 30 June 2005 Leon: (90,000 20,000) (see working) Six months ended 31 December 2005 Profit Interest on capital eon 5% x 400,000 x 6/ L Mark 5% x 200,000 x
$$ 70,000 180,000 10,000 5,000 (15,000) 165,000
12 6/ 12
Salary Mark 20,000 x
12
(10,000) 155,000 93,000 62,000 155,000 0
Balance of profit Leon 60% Mark 40%
Working Profit for year Add : irrecoverable debt Profit for division Six months ended 30 June 2005 90,000 : less irrecoverable debt Six months ended 31 December 2005
$ 250,000 20,000 270,000 20,000 70,000 180,000 250,000 Current accounts
Leon Mark $$ Drawings 160,000 80,000 30 June Profit 70,000 Balance 13,000 31 Dec Interest on capital 10,000 5,000
Leon Mark $$
Salary 10,000 Share of balance 60:40 93,000 62,000 Balance 3,000
173,000 80,000 173,000 80,000
18
Alternative format Leon and Mark Statement of division of profit for the year ended 31 December 2006 Six months ended 30 June 2005 (90,000 20,000)(see working) 70,000 70,000 Leon: Six months ended 31 December 2005 Interest on capital x 400,000 x 6/ Leon 5% 12 6/ Mark 5% x 200,000 x
12
Leon Mark Total $$$
10,000 5,000 15,000 10,000 10,000 93,000 62,000 155,000 103,000 77,000 180,000 Leon Mark
Salary Mark 20,000 x Balance 60:40 of profit
12
Current accounts Leon Mark $ $ 2005 $ $ Drawings 160,000 80,000 30 June Profit 70,000 Balance 13,000 31 Dec Share of profit 103,000 77,000 173,000 80,000 173,000 80,000
Balance 3,000
2 (a)
Net profit adjustments Profit per draft financial statements (1) Inventory movement Adjustment for sales $36,000 x 60% (2) Goods on sale or return Elimination of profit (3) Reduction in inventory: $18,000 ($13,500 $500) (4) Debts written off (5) Increase in allowance for receivables ($11,500 $10,000) Revised net profit $ 684,000 21,600 (4,000) (5,000) (8,000) (1,500) $687,100
(b)
Adjustments to inventory and receivables (i) Inventory Inventories per draft financial statements y movement as (a) above (1) Inventor (2) Goods on sale or return cost introduced into inventor y (3) Reduction in inventory (a) above Revised closing inventory (ii) Receivables per draft financial statements (2) Deduction of goods on sale or return (4) Debts written off (5) less : allowance receivables for
$ 116,800 21,600 6,000 (5,000) $139,400 $ 248,000 (10,000) (8,000) 230,000 (11,500) $218,500
19
Ganda Cash flow statement for the year ended 31 December 2005 $000 $000 Cash flows from operating activities before taxation Profit Adjustment for: Depreciation (W2) Profit on sale of non-current asset (W3) (20) Interest expense 970 310 120 1,380 (200) 200 100 (120) (200) 1,160
Increase in inventor y Decrease in receivables Increase in payables Cash generated from operations 1,480 Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Purchase of non-current assets (W1) (1,500) Proceeds of sale of non-current assets (W3) 80 Net cash used in investing activities Cash (1,420) flows from financing activities Proceeds from issue of share capital (300 + 180) 480 Proceeds from issue of loan notes 200 Dividends paid Net cash from financing activities Cash at beginning of period Cash at end of period Workings (1) Non-current assets cost $000 Opening balance 2,100 Transfer disposal 200 Purchases (balancing figure) 1,500 Closing balance 3,400 3,600 (2) Non-current depreciation assets accumulated $000 Transfer disposal 140 Opening balance 550
(250) 430 170 (230) (60)
$000
3,600
$000 Income statement depreciation (balancing figure) 310
Closing 720
balance 860 assets $000 860
(3) Non-current disposal
$000 Transfer cost 200 Transfer depreciation 140 Income 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 a business: 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 receivables period for
250 x 365 91 days 1,000
Inventory turnover
200 104 days x 365 (see Note below) 700 195 days
Payment period for payables 150 68 days x 365 800 Length of working capital cycle 127 days Note. If average inventory is used the inventory turnover becomes: 100 + 200 2 x 365 78 days700 The length of the cycle becomes 101 days. answer is acceptable. Either (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) 8 June 2006
To the directors of Ambia 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 market price) 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 reser ves 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. IFRS 3 Business combinations does not allow goodwill to be revalued upwards. It is not possible to combine the reserves as suggested. Presentation of financial statements IAS1 shown seperately from other reserves. to be
(c) (d)
requires retained earnings
21
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) June 2006 Marking Preparing Scheme Section B 1 Statement of division of profit Leon profit for first six months Profit for second six months Interest on capital Salary Balance of profit
Marks
2 1 1 / 2 1 51 /
1 2
Current accounts 2 x 1 / Drawings 2 Leon profit 70,000 Interest on capital 2 x Salary Share of balance
1 / 2 1 1 / 2 1 / 2 9
1
Alternative marking scheme (if statement of division of profit shows partners total shares)profit for first six months Leon : Profit for second six months (as total) Interest on capital Salary Balance of profit Total shares
2 1 1 / 2 1 1 61 /
1 2
Current accounts 2 x 1 / Drawings 2 Leon profit 70,000 Total profit shares
1 / 2 1 9
1
2 (a)
(b)
Profit adjustments 1 mark per item 5 x 1 Adjustments to inventory and receivables Inventory Movements Goods on sale or return Reduction to net realisable value 1 Receivables Goods on sale or return Debts written off Allowance for receivables
1 1 3 1 1 1 3
6 11
23
Marks 3 Cash
1 / mark activities 2
flows from operating per item other than interest Interest added and deducted Cash flows from investing activities 1 / mark per item 2 2 x Cash flows from financing activities mark per item 3 1 / 2 x Cash movement 2 x Workings: non-current assets cost depreciation disposal Heading Layout
31 /
1
1 11 / 2 1 11 / 2 11 / 2 11 / 2 1/ 2 1 13 1 / 2
1 1
/ 2 /
2
max12
4 (a)
Purchases into inventory Inventory into recievables into cash Receivables Cash to pay suppliers
1 1 1 14 3 14 2 10
(b)
per ratio 1 3 x 1 correct calculation Up to
(c)
5 (a) (i) (ii) (iii) (b) (c) (d) 2x1
2 1 1 1 1 28 50
24
Workings for MCQ answers 1C A B D 280,000 x 20% + 48,000 x 20% x 20% x 6 /

12 9
12
+ 36,000 x 20% x
12
14,000 x
as C, but plus 1,400 350,000 x 20% as B, but 1,400
4A B C D
as D, but discounts on wrong side as D, but irrecoverable debts on wrong side as in Q, but with discounts and irrecoverable debts on credit side all items on debit side except opening balance moved to credit side as D, but 180 adjusted in wrong direction B C D as D, but 270 adjusted in wrong direction as D, but 3,200 adjusted in wrong direction 3,920 270 180 3,200 = 330 : 100 difference
6A
10 A B C D
630,000 4,320 + 440 630,000 4,800 440 630,000 4,320 440 800 630,000 4,320 440
13 B A C D
430,000 x 5% = 21,500 18,000 + 28,000 as B but 18,000 not deducted as B but provision based on 458,000 as B but provision based on 458,000 and 18,000 not deducted Purchase returns 17,400 O/Bal 384,600 Cash 988,400 Purchases 963,200 Discounts 12,600 Contras 4,200 c/bal 325,200 1,347,800 1,347,800 B C D as A but discounts on wrong side as A but contras and discounts on wrong side as in Q but contras and discounts on credit side (410,000 33,600) (77 + 763 84) = 756 + 30% 763 x 1 0 /
7 3 7
14 A
16 A B C D
756 x 756 x
10 10
/ /
25
20 A B C D
as in question (38,640 19,270 + 14,260) as B but plus 140 as B but minus 140
22 A C D
48,000 + 400 + 800 + 2,200 48,000 + 400 + 2,200 48,000 + 400
24 A B C D
(1,100,000 (400,000 + 500,000)) (1,100,000 (1,100,000

4 4 4
/ x 400,000)
5 5
/ (400,000 + 500,000))
/ x 1,100,000
5
26

Section B
Section A ALL TWENTY-FIVE 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 On 1 September 2006, a business had inventory of $380,000. During the month, sales totalled $650,000 and purchases $480,000. On 30 September 2006 a fire destroyed some of the inventory. The undamaged goods in inventory 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 C D $140,000 $405,000 $360,000
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 companys total working capital (current assets less current liabilities)? A Increase of $1,000 B C D Working capital unchanged Increase of $2,000 Increase of $3,000 remains
On 30 June 2006, H acquired 75% of the ordinary share capital of S for $500,000. At that date the balance sheetshowed the following: of S $ Ordinary share capital 200,000 Share premium account 150,000 Retained earnings 100,000 What was the goodwill arising on the acquisition? A $50,000 B C D $162,500 $350,000 $300,000
2
4 Which of the following should appear as items in a companys 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 C D 1 and 4 only 2 and 3 only 1, 2 and 3
The following information is available about a companys dividends: 2005 Sept. Final dividend for the year ended 30 June 2005 paid (declared August 2005) 100,000 2006 March Interim dividend for the year ended 30 June 2006 paid 40,000 Sept. Final dividend for the year ended 30 June 2006 paid (declared August 2006) 120,000
What figures, if any, should be disclosed in the companys income statement for the year ended 30 Juneits balance sheet as at that and 2006 date? Income statement Balance sheet for the period liability A $160,000 deduction $120,000 B C D $140,000 deduction nil nil $120,000 nil nil
3
[P.T.O.
A and B are in partnership, sharing profits in the ratio 3:2 and preparing their accounts to 30 June each year. On 2006, C joined the partnership and the profit sharing ratio became A 40%, B 30%, and C 1 January 30%. Profits for the year ended 30 June 2006 were: $ 6 months ended 31 December 2005 300,000 6 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 agreed expense should be borne by A and B only, in their original profit-sharing that this ratios. What is As total profit share for the year ended 30 June 2006? $ A 330,000 B C D 310,000 340,000 350,000
At 1 July 2005 a companys 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 and the allowance for receivables to $60,000. adjust What are the final amounts for inclusion in the companys balance sheet at 30 June 2006? Trade Allowance for Net receivables receivables balance $$$ A 838,000 60,000 778,000 B C D 766,000 60,000 706,000 766,000 108,000 658,000 838,000 108,000 730,000
8 Which of the following statements about inventory valuation for balance sheet purposes are correct? 1 According to IAS 2 Inventorie , average cost and FIFO (first in and first out) are both acceptable arriving at the s cost of methods 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 C D 2 and 3 1 and 4 2 and 4
4
A business received a delivery of goods on 29 June 2006, which was included in inventory at 30 June 2006. The invoice for the goods was recorded in July 2006. What effect business? 1 Profit for overstated. 2 Inventory understated. 3 Profit for overstated. 4 Inventory overstated. A 1 and 2 B C D 2 and 3 1 only 1 and 4 will this have on the the year ended 30 June 2006 will be at 30 June 2006 will be the year ending 30 June 2007 will be at 30 June 2006 will be
10
The capital and reserves of Lamb, a limited liability company, are as follows: $m 10% Loan notes 80 Ordinary share capital 100 Share premium account 60 Retained earnings 80 What is the companys gearing ratio? A 80/100 = 80% B C D 80/180 = 444% 240/80 = 300% 80/320 = 25%
11 Which of the following statements are correct? 1 A companys 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 companys 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 C D 1 and 3 only 3 and 4 only 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 acquiring company and in the consolidated balance of the sheet. 2 Deferred development expenditure must be amortised over a period not exceeding five years. 3 If the conditions specified in Intangible are met, development expenditure may IAS 38 directors decide to do assets capitalised, if the so. 4 Trade investments must appear in a companys balance sheet under the heading of intangible assets. A 1 and 3 B C D 1 and 4 2 and 4 None of the statements is correct
be
13 Which of the following characteristics of financial information contribute to reliability, according to the IASBs Framework 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 D 1, 2 and 4 only 2, 3 and 4 only
14
Details of a companys insurance policy are shown below: Premium for year ended 31 March 2006 paid April 2005 $10,800 Premium for year ending 31 March 2007 paid April 2006 $12,000 What figures should be included in the companys financial statements for the year ended 30 June 2006? Income statement Balance sheet $ $ A 11,100 9,000 prepayment (Dr) B C D 11,700 9,000 prepayment (Dr) 11,100 9,000 accrual (Cr) 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 in shownthe bank statement. 2 A cheque from a customer paid into the bank but dishonoured must be corrected by making a debit entry cash book. in the 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 C D 2 and 3 1 and 4 2 and 4
16
Extracts from the financial statements of Kafka, a limited liability company, are given below: Balance sheet Income statement as at 30 June 2006 for the year ended 30 June 2006 $m Non-current assets 15 Current assets 14 Operating profit 8 29 Finance costs (2) Ordinary share capital 10 Profit for year 6 Share premium account 3 etained earnings R 7 10% Loan notes 5 Current liabilities 4
$m
20 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 ROOE A 8/25 = 32% 6/10 = 60% B C D 8/25 = 32% 6/20 = 30% 6/25 = 24% 8/20 = 40% 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 sheets 30 June 2002 30 June 2006 $$ Ordinary share capital 1,000,000 1,000,000 Share premium account 400,000 400,000 Retained 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 C D $200,000 $1,120,000 $1,400,000
18
At 30 June 2005 the capital and reserves of Meredith, a limited liability company, were: $m Share capital Ordinary shares of $1 each 100 Share 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. 2006 A fully subscribed rights issue of two ordinary shares for every five held at that date, 1 January at $150 per share. What would the balances on each account be at 30 June 2006? Share Share premium capital account $m $m 110 A 210 B C D 210 60 240 30 240 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 companys statistics show that about 5% of sales give rise to a warranty claim. 2 The company has guaranteed the overdraft of another company. The likelihood of a liability arising underguarantee is assessed as the possible. What is the correct action to be taken in the financial statements for these items? Create a provision Disclose by note only No action A B C D 1, 2 1, 2 1, 2 2, 2 1, 2 2
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 C D 1 and 2 only 3 and 4 only 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.
22
All the sales made by a retailer are for cash, and her sale prices are fixed by doubling cost. Details recorded of her transactions for September 2006 are as follows: $ 1 Sept. Inventories 40,000 30 Sept. Purchases for month 60,000 Cash banked for sales for month 95,000 Inventories 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 B C D 1 and 2 1 and 3 2 and 4 3 and 4
23
A company owns a number of properties which are rented to tenants. The following information is available for the ended 30 June year 2006: Rent in Rent advance in arrears $$ 30 June 2005 134,600 4,800 30 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 companys income statement for rent receivable in the year ended 30 June 2006? A B C D $840,500 $1,100,100 $569,100 $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. The transaction has been treated as a credit sale in Utlands financial statements for the year ended 31 October 2006. In 2006 the customer accepted half of the goods and returned the other half in good November 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 C D Sales and receivables should be reduced by $1,250, and closing inventory increased by $750 Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory 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 1,268,600 owed to suppliers) Contras against debit paid to suppliers 1,364,300 balances in receivables ledger Cash 48,000 returns 41,200 Discounts received 8,200 Purchases Refunds 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 C D $509,000 $224,200 $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: $000 Land and buildings: cost 10,000 accumulated depreciation at 1 July 2005 Plant 3,600 and equipment: cost 6,000 accumulated depreciation at 1 July 2005 3,200 Receivables 3,600 Cash at 1,200 bank Payables 2,500 Accruals 500 8% Loan 1,000 notes Ordinary share 5,000 capital Share premium 2,200 account earnings 1 July 2005 4,600 Retained The following further information is available: (1) Inventory at 30 June 2006 was $4,700,000 (2) The companys land and buildings were revalued at 1 July 2005. The revaluation has not yet been reflected in balances the given above. Details : Cost Accumulated Net book Revalued depreciation value amount $000 $000 $000 $000 Land 4,000 4,000 5,000 Buildings 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: Building s Plant and equipment $1,200,000
$200,000
Required : Prepare the companys balance sheet as at 30 June 2006, using the format and headings in IAS 1 of Financial . Statements
Presentation
(11 marks)
12
The draft income statement of Lorca, a limited liability company, showed a profit of $830,000. However, the trial balance did not balance and a suspense account with a credit balance of $20,000 has been included in the balance sheet 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 had been 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 outwards account had been transferred to the debit of sales account and the $64,000 balance on the returns inwards had been transferred to the credit of purchases account 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. (b) Calculate the revised profit after adjusting for the errors.
13
[P.T.O.
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 2005 to notes $000 $000 $000 $000 Non-current assets (net book value) 1 148,000 130,000 Current assets Inventories 14,000 9,100 Receivables 21,400 12,500 Cash at bank 4,600 35,400 26,200 183,400 156,200 Ordinary share capital 110,000 109,000 Share premium account 5,000 4,000 Revaluation reserve 14,000 2,000 Retained earnings 1 28,000 18,000 Total equity Non-current liabilitiesLoan notes 3 10,000 8,000 8% Current liabilities Payables 7,100 9,200 Current tax payable 2 8,000 6,000 Bank overdraft 1,300
157,000 133,000
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 and 30 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 flow . statements
Cash
(12 marks)
14
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; (b) The extent to which land and buildings should be depreciated; (c) Two possible methods of calculating depreciation, with explanations.
(1 mark) (3 marks) (4 marks) (8 marks)
IAS 10 Events after the balance sheet defines the accounting treatment of material events occurring after the balance date sheet date. Required : (a) Explain what determines whether an event after the balance sheet date must be adjusted in the financial statements (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 (2 marks) assets; (ii) (2 marks) Inventory; (iii) Loan (1 mark) notes. (8 marks)
End of Paper
Question
15
Answers
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) December 2006 Preparing Answers Section A 1A 2A 3B 4A 5D 6D 7B 8C 9C 10 D 11 D 12 D 13 A 14 A 15 C 16 B 17 D 18 B 19 A 20 A 21 C 22 B 23 D 24 A 25 A Workings for computational MCQs 1A 0/inventory 380 Purchases 480 COGS 650 195 455 Inventory 405 Remaining inventory 220 Inventory lost 185 2A 1 + 500 2 + 500 3 no change
860
1,000
3B
500 (75% x 450) 180 + (40% x 500) 30 838,000 72,000 = 766,000; allowance 60,000
6D
7B
14 A
/ x 10,800 +
4
/ x 12,000 = 11,100; prepayment

4
/ x 12,000
4
17 D
20% x (1,000,000 + 400,000 + 5,600,000)
19
18 B
100 + 50 + 60; 80 50 + 30 1: (40,000 + 60,000 50,000) x 2 = 100,000 95,000 = 5,000 cash lost 3: (40,000 + 60,000 50,000 2,500 inventory loss) x 2 = 95,000
22 B
23 D
834,600 + 134,600 4,800 + 8,700 144,400
25 A
Payables ledger control account Opening balance 318,600 Cash paid to suppliers 1,364,300 Purchases 1,268,600 Purchase returns 41,200 Refunds received from Contras against debit suppliers 2,700 balances in receivables ledger 48,000 Discounts 8,200 Closing balance 128,200 1,589,900 1,589,900
20
Section B 1
Golding Balance sheet as at 30 June 2006 Cost or Accumulated Net book valuation depreciation value $000 $000 $000
Non-current assets Land and buildings 9,000 200 8,800 Plant and equipment 6,000 4,400 1,600
Current assets Inventories Receivables (3,600 280) 3,320 Cash
15,000 4,600 10,400 4,700 1,200
Capital and reser ves Called up share capital Share premium account Revaluation reserve (5,000 + 4,000 4,000 2,400) 2,600 Retained earnings (see working)
9,220 19,620 5,000 2,200 5,570 15,370 1,000
Non-current liabilities Loan notes 8% Current liabilities Payables Accruals (500 250)
2,500 750 3,250
19,620
Working $000 $000 $000 Retained earnings balance 1 July 2005 profit Draft less: irrecoverable debts 280 bonuses 250 depreciation 1,400 1,930 970
4,600 2,900
5,570
21
2 (a) (1) Sales 70,000 Share capital 50,000 Share premium 20,000 (2) Suspense 16,000 Interest payable 8,000 Interest receivable 8,000 (3) Sales 16,000 Purchases 16,000 Suspense 32,000 OR Suspense 48,000 Sales Purchases 64,000 Suspense 64,000 Sales 64,000 Suspense 64,000 Suspense 48,000 Purchases 48,000 (4) Suspense 36,000 Rent (b) Profit per draft accounts 830,000 Adjustments (1) Sales 70,000 (2) Interest (3) Sales/Purchases 32,000 (4) Rent
Dr Cr $$
48,000
36,000 + $$
16,000 102,000 882,000 36,000 102,000 780,000
Revised profit
22
Joyc e Cash flow statement for the year ended 30 June 2006 Cash flows from operating activities before taxation (working 1) 22,200 Profit Adjustments for Depreciatio n Interest expense Increase in inventories (4,900) Increase in receivables (8,900) Decrease in payables (2,100) Cash generated from operations 20,020 Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Purchase of proper ty plant and equipment (Working 3) (19,000) Net cash used in investing Cash activities from financing flows activities Proceeds of issue of share capital 2,000 Proceeds of issue of loan notes 2,000 Dividends paid Net cash from financing activities Net decrease in cash Cash at 1 July 2005 Cash at 30 June 2006 WORKING S 1 Calculation of profit for year $000 $000 Dividends 4,000 0pening balance 18,000 Tax 8,200 Profit for year 22,200 Closing balance 28,000 40,200 40,200 2 Income taxes $000 $000 Cash 6,200 Opening balance 6,000 Closing balance 8,000 Income statement 8,200 14,200 14,200 3 assets Non-current $000 $000 Opening balance 130,000 Revaluation reserve 12,000 Depreciation 13,000 Purchases 19,000 Closing balance 148,000 161,000 161,000
$000 $000
13,000 720 35,920
(720) (6,200)
13,100
(19,000)
(4,000 )
(5,900) 4,600 (1,300)
4 (a)
(b)
Following the matching concept, to reflect in operating profit the cost of use of tangible non-current assets (the amount of economic benefits consumed). It is not normally necessary to depreciate land, unless it is subject to depletion in some way a quarry for example. Buildings depreciated like any other non-current asset so as to allocate their depreciable amount (cost or valuation) should be over their useful economic life.
23
(c) (i) (ii)
Straight line. The depreciable amount of an asset, less any residual value, is written off in equal instalments over its estimated useful economic life. 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 is longer no appropriate. (b) (i) Non-current assets are normally valued at cost or valuation less depreciation. If the going concern basis was no longer appropriate, net realisable value on the basis of a short-term sale would have to be adopted instead, and the assets would 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) Financial Statements (International Stream) December 2006 Marking Preparing Scheme 1 Heading Land and building valuation accumulated depreciation Plant and equipment cost accumulated depreciation Inventory 1 / + 1/ Receivables 2 2 Cash Share capital Share premium account Revaluation reserve 1 / Retained earnings 4 x 2 Loan notes 1 / + 1/ Accrual 2 2 s Payables Format
1 1 1/ 2 / 2 / 2
1 1
11 /
1 / 2 1 / 2 1/ 2 1/ 2 1 2 1/ 2 1 1/ 2 2 13 1 / 2
1 1
max 11
2 (a)
1 2 3 3 x 1 (or 4 x 1 max 3) 3 4 (b) 4x1
11 / 2 11 /
2
1 4 11 11
1 / + 1/ Heading 2 2 1 / + tax 1 3 Operating profit 4 x 2 Depreciatio n Interest expense Increase in inventory Increase in receivables payables Decrease in Net cash inflow from operating 1 / activities items in statement 6 All other 2 x Calculation of non-current asset 1 / + 1/ payment Balances 2 2 Revaluation reserve Depreciatio n Cash movement Layout
1 / 2 / 2 1/ 2 1/ 2 1/ 2 1/ 2 3
1 1
1 1 1/ 2
21 /
1 1 14 1 / 2
max 12
4 (a) (b) Land not depreciated Land mention of depletion Buildings cost or valuation 1 pread over useful economic life 1 S 3 2x2
1 1
1 / 2 /
2
4 88
(c)
25
5 (a)
Conditions at b/s date Materiality Going concern (b) 2+2+1
11 / 2 1 1/ 2
3 5 88
26

Section B
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 within this section is worth 2 question. Each marks. 1 A company issued one million ordinary $1 shares at a premium of 50c per share. The proceeds were correctly in the cash book, but were incorrectly credited to the sales recorded account. Which of the following journal entries will correct the error? Debit Credit $$ A Sales 1,500,000 Share 1,000,000 capital Share 500,000 premium B Share capital 1,000,000 Share premium 500,000 Sales 1, 500,000 C D Sales 1,500,000 Share capital Share capital 1,500,000 Sales 1,500,000 1,500,000
2 Which one of the following would cause a companys gross profit percentage on sales to fall? A A reduction in the total value of goods returned to suppliers. B An increase in the costs of delivery of goods to customers. C A decline in average inventory levels. D An increase in theft of inventory by customers and staff
3 Where, in a companys financial statements complying with International accounting standards, should you find dividends paid? 1 Income statement 2 Balance sheet 3 Cash flow statement 4 Statement of changes in equity. A 1 and 3 B C D 2 and 3 1 and 4 3 and 4
2
A property company received cash for rent totalling $838,600 in the year ended 31 December 2006. Figures for rent in advance and in arrears at the beginning and end of the year were: 31 December 2005 31 December 2006 $$ Rent received in advance 102,600 88,700 Rent in arrears (all subsequently received) 42,300 48,400 What amount should appear in the companys income statement for the year ended 31 December 2006 for rental income? A B C D $818,600 $738,000 $939,200 $858,600
5 Which one of the following journal entries is correct according to its narrative? Debit Credit $$ A Mr Smith personal account 100,000 Directors remuneration Bonus allocated to account of managing director (Mr Smith) Purchases Wages Repairs to buildings Transferring cost of repairs to buildings carried out by companys own employees, using materials from inventory. Discounts allowed Discounts received Correction of error: discounts allowed total incorrectly debited to discounts received account Suspense account 20,000 Rent receivable Rent payable Correction of error: rent received credited in error to rent payable account. 100,000
14,000 24,000 38,000
2,800 2,800
10,000 10,000
3
[P.T.O.
A companys gross profit as a percentage of sales increased from 28% in the year ended 31 December 2005 to 33% year ended 31 December in the 2006. Which one of the following could have caused the increase? A An increase in sales volume. B Understatement of closing inventory at 31 December 2005. C Overstatement of closing inventory at 31 December 2005. D Goods received in December 2005 and included in inventory at 31 December 2005 were not recorded in purchases until January 2006.
7 Which of the following items could appear as items in a companys cash flow statement? 1 A bonus issue of shares 2 A rights issue of shares 3 Revaluation of non-current assets 4 Dividends paid A All four items B 1, 3 and 4 only C D 2 and 4 only 2 and 3 only
A company has occupied rented premises for some years, paying an annual rent of $120,000. From 1 April 2006 the rent was increased to $144,000 per year. Rent is paid quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. What figures should appear for rent in the companys financial statements for the year ended 30 November 2006? Income statement Balance sheet $$ A B C D 136,000 Prepayment 12,000 136,000 Prepayment 24,000 138,000 Nil 136,000 Accrual 12,000
4
At 1 January 2006 a company had an allowance for receivables of $49,000. At 31 December 2006 the companys trade receivables were $863,000 and it was decided to write off balances $23,000 and to adjust the allowance for receivables to the equivalent of 5% of the remaining totalling receivables on based past experience. What total figure should appear in the companys income statement for bad debts and allowance for receivables? A $16,000 B C D $65,000 $30,000 $16,150
10
At 1 January 2006, a companys 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 $140 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 companys share capital and share premium accounts after these transactions? Share capital Share premium $$ A 4,000,000 800,000 B C D 3,200,000 600,000 2,000,000 1,800,000 2,000,000 1,300,000
11 Which of the following statements about the treatment of inventory and work in progress in financial statements are 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 be include d. 3 Inventory items can be valued using either first in, first out (FIFO) or weighted average cost. 4 A companys financial statements must disclose the accounting policies used in measuring inventories. A All four statements are correct. B 1, 2 and 3 only C D 2, 3 and 4 only 1 and 4 only
5
[P.T.O.
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 960,000 1 July Cash 48,000 30 Sept Transfer disposal account 84,000 31 Dec Balance 924,000 1,008,000 1,008,000 The companys policy is to charge depreciation on the straight line basis at 20% per year, with proportionatein the years of purchase and depreciation sale. What should be the charge for depreciation in the companys income statement for the year ended 31 December 2006? A $184,800 B C D $192,600 $191,400 $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 C D P and R only P and Q only 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 to motor 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 customers account. A 1 and 2 B C D 2 and 3 3 and 4 2 and 4
6
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 2,000 Inventory 2,000 B C D Purchases 2,000 Drawings 2,000 Sales 2,000 Drawings 2,000 Drawings 2,000 Purchases 2,000
16 Which of the following statements about the requirements of Provisions, contingent liabilities IAS 37 and contingent are assets 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 is remote. 3 Contingent assets must not be recognised in financial statements unless an inflow of economic benefits is virtually certain to arise. A All three statements are correct B 1 and 2 only C D 1 and 3 only 2 and 3 only
17 Which of the following statements are correct, according to Events after the balance sheet IAS 10 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 sheet date 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 by note. 4 Events after the balance sheet date are those that occur between the balance sheet date and the date whenfinancial statements are authorised for the issue. A 1 and 2 only B C D 1, 3 and 4 2 and 3 only 2, 3 and 4
7
[P.T.O.
18 Where in the financial statements should tax on profit for the current period, and unrealised surplus of properties, be separately revaluation on disclosed? Tax on profit for Unrealised surplus period on revaluation current of properties A Income statement Income statement B Statement of changes Income statement in equity C Income statement Statement of changes in equity D Statement of changes Statement of changes in 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 income statement . 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:
$m Profit before tax 22 Depreciation 8ncrease in inventories I (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 C D 1 and 3 2 and 4 3 and 4
8
21 What is the correct treatment of interest charged on partners drawings in preparing a partnerships financial statements? A B C D Credited as income in the income statement Debited as an expense in the income statement Added to total profit in calculating partners profit shares 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 on 5% per capital at year. At 1 January 2006 their capital balances were: $ X 200,000 Y 100,000 On 1 July 2006 Y introduced a further $100,000 capital, and Xs salary was discontinued. The partnership profit for the year ended 31 December 2006 was $337,500. What was Xs total profit share for the year ended 31 December 2006? $ A 182,500 B C D 178,750 180,000 190,000
23 Where, in a companys financial statements complying with International accounting standards, should you find of non-current assets sold during the the proceeds 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 companys 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 C D 1 and 3 3 only 2 only
9
[P.T.O.
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 payables ledger control account. B C D The total of discount allowed $28,400 was entered to the debit of the payables ledger control account instead of the correct figure for discount received of $15,620. $12,780 cash paid to a supplier was entered on the credit side of the suppliers account in the payables ledger. The total of discount received $6,390 has been entered on the credit side of the payables ledger control account. (50 marks)
10
Section B ALL FIVE questions are compulsory and MUST be attempted 1 Hasta is an antique dealer operating from rented premises. He keeps few accounting records. All his sales and are for cash, except for some sales to other dealers which are made on purchases credit. The following information is available to prepare his income statement for the year ended 31 December 2006. Assets and liabilities As at 31 December 2005 2006 $$ Equipment 1,200 2,000 Inventory 85,000 88,500 Trade receivables 4,800 6,400 Payable for expenses 1,100 1,400 Cash summary 2006 $ 2006 $ 1 Jan Balance float 100 31 Dec Wages for assistant 15,600 Sundry expenses 8,300 31 Dec Cash from sales 191,400 Purchases of new equipment 2,000 Proceeds of sale of equipment 700 Purchases ? 192,200
Drawings ? Balance float 150
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 record made of payments for purchases of goods for sale. He fixes his selling price for all items by has been doubling allowed a trade discount of $9,000, representing 30% on selling price, for sales to dealers with a cost. He their normal $30,000. ($30,000 less $9,000 discount = $21,000). price of All the equipment held at the beginning of the year was sold for $700, and new equipment purchased for $2,000.years depreciation is to be charged on the new equipment at 20%, with no depreciation on the A full items sold. Required : (a) Prepare Hastas income statement for the year ended 31 December 2006.Your answer should include a detailed calculation of cost of sales. (b) Calculate Hastas drawings for the year ended 31 December 2006
11
[P.T.O.
The receivables ledger control account of Atanga at 31 December 2006 shows a debit balance of $487,600. Theof receivables ledger balances at the same date totalled $455,800 debit. There were no credit list 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 customers account. (4) Contras against amounts owing to Atanga in the payables ledger totalling $16,100 were entered on the debit side 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. (b) Prepare a statement showing the necessary adjustments to the total of the list of receivables ledger balances.
(5 marks)
(4 marks) (9 marks)
On 1 January 2000 Gasta acquired 75% of the share capital of Erica for $1,380,000. The retained earnings of Erica at that date was $480,000. Ericas 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 1,000,000 Retained 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, $400,000 and Ericas by $150,000. Gastas by Required : Prepare the consolidated balance sheet of Gasta and the subsidiary Erica as at 31 December 2006, after for the inventory adjusting errors. Note: Your workings for all figures in the consolidated balance sheet must be shown. (9 marks)
12
Hathan has just concluded a ratio analysis comparing its performance and position at 31 December 2006 with those December 2005. The directors are concerned to see that the current ratio and quick ratio show a at 31 considerable decline . 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)
A company manufacturing aircraft engages in a number of research and development projects. At 1 January 2006 the companys records showed total capitalised development costs of $18,000,000 made up as follows: Project A17 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 This project began in 2004 and the $4m balance represents expenditure for capitalisation to 31 December qualifying 2005 J9 is due to be completed in Project 2009 During the year ended 31 December 2006 the following further expenditure was incurred: Project J9 Further expenditure qualifying for capitalisation $1,500,000 Project A20 Investigation into new materials for aircraft construction $3,000,000 Required : (a) Calculate the amounts for research and development to be included in the companys income statement and balance sheet for the year ended 31 December 2006. (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 38 Intangible . assets $ 14,000,000
4,000,000
18,000,000
(6 marks)
End of Paper
Question
13
Answers
Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) Section A 1A 2D 3D 4D 5C 6B 7C 8A 9A 10 C (4 x 10,000) + (8 x 12,000) = 136,000; 23,000 (49,000 42,000) Share capital Share premium 1,400,000 1,000,000 Issue 500,000 900,000 1,500,000 2,300,000 Bonus 500,000 (500,000) 2,000,000 1,800,000 (960,000 x 20%) + (48,000 x 20% x
1 1
June Answers
2007
838,600 + (102,600 42,300) (88,700 48,400)
12
x 144,000 = 12,000
11 C 12 B 13 B 14 B 15 D 16 A 17 D 18 C 19 D 20 D 21 C 22 C 23 D 24 D 25 B
/ ) (84,000 x 20% x
2
/ )
4
X salary 20,000 + interest 10,000 + share 150,000 = 180,000
17
1(a) Income statement for the year ended 31 December 2006 Sales less: Cost of sales Opening inventory 85,000 Purchases (balancing figure) 104,500
Hasta $$ 193,000
189,500 less: Closing 88,500 inventory 101,000 92,000
Gross profit less: Expenses Wages Sundry expenses (8,300 1,100 + 1,400) 8,600 Loss on sale of equipment (1,200 700) 500 Depreciation (2,000 x 20%) 400 Net profit Workings
15,600
25,100 $66,900 $$
Calculation of sales $191,400 $4,800 + $6,400 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 Alternative calculation of gross profit Sales Add: trade discount
193,000
101,000 $ 193,000 9,000 202,000 9,000 92,000
Gross profit if all sales at full price 101,000 less: trade discount
(b)
Cash not accounted for: 166,150 purchases less: Drawings
$192,200 $15,600 $8,300 $2,000 $150 104,500 61,650
18
2(a)
Receivables balance
ledger
control
account + $$ 487,600 2,000 8,400 32,200 1,100 150 488,700 42,750 42,750 $445,950
Original balance (1) Sales day book overcast (2) Bad debt written off (4) Contras incorrectly entered note adjustment (5) Credit (6) Discount not recorded
Revised balance
(b)
Receivables ledger balances + $$ 455,800 8,400 2,400 1,100 150 456,900 10,950 10,950 $445,950
Original balance (2) Bad debt written off (3) Credit note incorrectly entered note adjustment (5) Credit (6) Discount not recorded
Revised balance
3 Consolidated balance sheet as at 31 December 2006 Sundry net assets (2,660,000 + 1,660,000 550,000) 3,770,000 Share capital Retained earnings
Gasta Group $ 2,000,000 1,392,500 3,392,500 377,500 3,770,000 Goodwill $ Investment in Erica 1,380,000 Share capital 75% 750,000 $ Retained earnings 75% 360,000 Retained earnings goodwill written off 270,000 1,380,000
Minority interest
1,380,000 Minority interest $ Balance to CBS 377,500 Share capital 25% 250,000 377,500
$ Retained earnings 25% (WI) 127,500 377,500
19
Retained earnings $ Goodwill 75% $480,000 360,000 Erica (W1) 510,000 Minority interest 127,500 Goodwill impairment off 270,000 written Balance to CBS 1,392,500 2,150,000 Working 1 Retained profits: Gasta $2,040,000 $400,000 = $1,640,000 Erica $660,000 $150,000 = $510,000 Alternative calculations Goodwill Cost of investment Share of net assets acquired Share capital profit Retained $ Balances: Gasta (W1) 1,640,000
2,150,000
$$ 1,380,000 1,000,000 480,000 1,480,000 75% 1,110,000 270,000
Group share Goodwill Minority interest Share capital earnings Retained
Minority share
1,000,000 510,000 1,510,000 25% 377,500
Retained earnings Gasta Erica Less: preacquisitio n
1,640,000 510,000 480,000 30,000 22,500 1,662,500 270,000 1,392,500
Group share 75%
less: goodwill written off
4(a)
Two from: (i) Heavy spending on non-current assets, depleting cash or increasing overdraft. Such expenditure comes out of current assets, and will reduce both the current ratio and the quick ratio. (ii) Write-downs of inventory through obsolescence or fashion changes. This will reduce the current ratio.Repayment of long-term loans (iii) (iv) Payment of high dividends (v) Reduction in receivables as a result of bad debts
20
(b)
Two from: (i) Raise new long-term capital (equity shares or loan notes) non-trading assets such as investments (ii) Sell (iii) Reduce inventory levels to improve quick ratio (iv) Defer capital expenditure These steps increase current assets or quick assets without increasing current liabilities, thus improving the ratios. Other points considered on their merits for both (a) and (b)
5(a)
Income statement Proj ect A17 2,000,000 A20 3,000,000
5,000,000 Balance sheet Cost Amortisation Net book value $$$ A17 16,000,000 4,000,000 12,000,000 J9 5,500,000 5,500,000 21,500,000 4,000,000 17,500,000 The main applicable accounting concepts are accruals and prudence. The accruals concept favours capitalisation expenditure to match the expenditure against the future income to be generated from it. The prudence development of conceptfor caution, having regard to the inevitable doubt as to the successful outcome of the development project. The argues going concept is also relevant, because doubt as to the going concern status of the company would clearly mean concern that the capitalisation of development costs could not be justified. Other concepts considered on their merits.
(b)
21
Part 1 Examination Paper 1.1(INT) Financial Statements (International Stream) June 2007 Marking Preparing Scheme 1(a) Heading 2 x 1 / 2 Sales Gross profit 172,000/2 $21,000 (30,000/2) 2 3 Cost of goods sold Opening / Closing inventory 2 x Purchases (balancing figure) Marks 1 1 1
1 1 7
1/ 2 11 / 2 1 14
Wage s Sundry expenses Loss on sale Depreciatio n (b) Calculation of cash not accounted for 1 Deduction of cash for purchases 1 2
11 max 10
12
Alternative calculation of gross profit 193,000 + 9,000 Gross profit 101,000 Deduction of trade discount
1 1 1 3
2(a) (b)
Correction of errors 5 Correction of errors 4
5x1 4x1 9 1 1 1 / 2 11 / 2 1 9
1
Heading 2 x 1 / 2 Sundry net assets Share capital earnings 2 Retained Goodwill Minority interest
/ + 1 for inventory adjustments 3

2
4(a) (b)
2x2 2x2
4 4 8
23
Marks 5(a) Income statement A17 A20 Balance sheet A17 J9 2 1 3 2 1 3 6 (b) Accruals concept Stated Explained Prudence concept Stated Explained Going concern concept Stated Explained
1 1 2 1 1 2 1 1 2 6 12
Other valid concepts considered on their merits.
24

ACCA F3 Financial Accounting INT Solved Past Papers 0107

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Fundamentals Pilot Paper Knowledge module

Financial Accounting (International)

The Association of Chartered Certified Accountants

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Pilot Paper (INT) Financial (International)

Payables ledger O/balance 60,000 2,960

Preparing Financia S l tatements

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

(2 marks) (10 marks)

(6 marks) (10 marks)

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

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

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

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

STU $000 $000 $000

200/1,500 correct 300/2,500 correct

6,000 5,000 600 (800)

(40) (200) (100) 100 60

Credit sales as above Cash sales $114,700 + $9,600

25% accumulated 32,500

$$ 60,000 790,000 814,000 500,000 256,500 756,500 57,500 814,000

2 (a) (b) (c)

(i) Explanation 2 Example (ii) Explanation 2 Example

Consistency of treatment of items 2 isclosure of policies D

Preparing Financial Statements

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(3 marks) (2 marks) (3 marks) (2 marks) (10 marks)

(5 marks) (10 marks)

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$000 $000 12,800

2,370 880 3,250 (370) 280 (390) 2,770

83,000 (5,000) (180,000)

$$ 1,000,000 330,000 670,000 450,000 670,000 114,000 1,234,000 1,904,000

500,000 50,000 964,000 1,514,000 200,000

Balance at 30 April 2002

5 (a) Year ended 31 March 2001 31 March 2002 196% 141%

767 times 60 times

Marking scheme Available and Maximum 4 5 1 10

mark per entry 12 x 1 mark per item 4 x 1

Accumulated working 1 / mark per 2 item

1 mark per ratio 5 x 1 1 mark per comment 5 x 1

Preparing Financial Statements

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credi side of a receivables ledger control t account?

(3 marks) (3 marks) (2 marks) (8 marks)

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