Financial Accounting
(International)
Time allowed: 2 hours
ALL FIFTY questions are compulsory and MUST be attempted.
Paper F3 (INT)
Fundamentals Pilot Paper – Knowledge module
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
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
1
Should details of material adjusting or material non-adjusting events after the balance sheet date be disclosed in
the notes to financial statements according to IAS 10 Events After the Balance Sheet Date?
A
Adjusting events
B Non-Adjusting events
(1 mark)
2
At 30 June 2005 a company’s allowance for receivables was $39,000. At 30 June 2006 trade receivables totalled
$517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the
equivalent of 5 per cent of the trade receivables based on past events.
What figure should appear in the income statement for the year ended 30 June 2006 for these items?
A
$61,000
B
$22,000
C
$24,000
D $23,850
(2 marks)
3
In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset values
and profit?
A
Asset values and profit both understated
B
Asset values and profit both overstated
C
Asset values understated and profit overstated
D Asset values overstated and profit understated.
(2 marks)
4
The IASB’s Framework for the preparation and presentation of financial statements gives qualitative characteristics
that make financial information reliable.
Which of the following are examples of those qualitative characteristics?
A
Faithful Representation, neutrality and prudence
B
Neutrality, comparability and true and fair view
C
Prudence, comparability and accruals
D Neutrality, accruals and going concern
(2 marks)
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5
The following bank reconciliation statement has been prepared by a trainee accountant:
Overdraft per bank statement less: Outstanding cheques add: Deposits credited after date Cash at bank as calculated above $
3,860
9,160
5,300
16,690
21,990
What should be the correct balance per the cash book?
A
$21,990 balance at bank as stated
B
$3,670 balance at bank
C
$11,390 balance at bank
D $3,670 overdrawn.
(2 marks)
6
Which of the following calculates a trader’s net profit for a period?
A
Closing net assets + drawings – capital introduced – opening net assets
B
Closing net assets – drawings + capital introduced – opening net assets
C
Closing net assets – drawings – capital introduced – opening net assets
D Closing net assets + drawings + capital introduced – opening net assets.
7
(2 marks)
A sole trader took some goods costing $800 from inventory for his own use. The normal selling price of the goods is
$1,600.
Which of the following journal entries would correctly record this?
Dr Cr
$
$
A Drawings account 800
Inventory account 800
B
Drawings account
Purchases account
C Sales account Drawings account
800
800
1,600
1,600
(1 mark)
8
The debit side of a company’s trial balance totals $800 more than the credit side.
Which one of the following errors would fully account for the difference?
A
$400 paid for plant maintenance has been correctly entered in the cash book and credited to the plant asset
account.
B
Discount received $400 has been debited to discount allowed account
C
A receipt of $800 for commission receivable has been omitted from the records
D The petty cash balance of $800 has been omitted from the trial balance.
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(2 marks)
9
A company’s income statement for the year ended 31 December 2005 showed a net profit of $83,600. It was later
found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the
company’s policy to depreciate motor vans at 25 per cent per year on the straight line basis, with a full year’s charge
in the year of acquisition.
What would the net profit be after adjusting for this error?
A
$106,100
B
$70,100
C
$97,100
D $101,600
(2 marks)
10 Should dividends paid appear on the face of a company’s income statement?
A
Yes
B No
(1 mark)
11 The following control account has been prepared by a trainee accountant:
Receivables ledger control account
$
Opening balance
308,600 Cash received from credit customers Credit sales
154,200 Discounts allowed to credit customers Cash sales
88,100 Interest charged on overdue accounts Contras against credit balances in payables ledger 4,600 Bad debts written off Allowance for receivables Closing balance 555,500 $
147,200
1,400
2,400
4,900
2,800
396,800
555,500
What should the closing balance be when all the errors made in preparing the receivables ledger control account
have been corrected?
A
$395,200
B
$304,300
C
$309,500
D $307,100
(2 marks)
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12 At 31 December 2004 Q, a limited liability company, owned a building that cost $800,000 on 1 January 1995. It
was being depreciated at two per cent per year.
On 1 January 2005 a revaluation to $1,000,000 was recognised. At this date the building had a remaining useful life
of 40 years.
What is the depreciation charge for the year ended 31 December 2005 and the revaluation reserve balance as at
1 January 2005?
Depreciation charge
for year ended 31 December 2005
$ A
25,000 Revaluation reserve
as at 1 January 2005
$
200,000
B
25,000
360,000
C
20,000
200,000
20,000
360,000
D
(2 marks)
13 P and Q are in partnership, sharing profits equally.
On 30 June 2005, R joined the partnership and it was agreed that from that date all three partners should share
equally in the profit.
In the year ended 31 December 2005 the profit amounted to $300,000, accruing evenly over the year, after charging
a bad debt of $30,000 which it was agreed should be borne equally by P and Q only.
What should P’s total profit share be for the year ended 31 December 2005?
A $ 95,000
B $122,500
C $125,000
D $110,000
(2 marks)
14 A company has made a material change to an accounting policy in preparing its current financial statements.
Which of the following disclosures are required by IAS 8 Accounting policies, changes in accounting estimates and
errors in the financial statements?
1
2
3
The reasons for the change.
The amount of the adjustment in the current period and in comparative information for prior periods.
An estimate of the effect of the change on the next five accounting periods.
A
1 and 2 only
B
1 and 3 only
C
2 and 3 only
D 1, 2 and 3
(2 marks)
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15 According to IAS 2 Inventories, which of the following costs should be included in valuing the inventories of a
manufacturing company?
(1) Carriage inwards
(2) Carriage outwards
(3) Depreciation of factory plant
(4) General administrative overheads
A
All four items
B
1, 2 and 4 only
C
2 and 3 only
D 1 and 3 only
(2 marks)
16 Part of a company’s cash flow statement is shown below:
Operating profit
Depreciation charges
Increase in inventory Increase in accounts payable
$’000
8,640
(2,160)
(330)
440
The following criticisms of the extract have been made:
(1) Depreciation charges should have been added, not deducted.
(2) Increase in inventory should have been added, not deducted.
(3) Increase in accounts payable should have been deducted, not added.
Which of the criticisms are valid?
A
2 and 3 only
B
1 only
C
1 and 3 only
D 2 only
(2 marks)
17 Which of the following explains the imprest system of operating petty cash?
A
Weekly expenditure cannot exceed a set amount.
B
The exact amount of expenditure is reimbursed at intervals to maintain a fixed float.
C
All expenditure out of the petty cash must be properly authorised.
D Regular equal amounts of cash are transferred into petty cash at intervals.
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(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 company’s financial statements are sent to shareholders and may
be publicly filed
(2) Only companies have capital invested into the business
(3) A sole trader is fully and personally liable for any losses that the business might make; a company’s shareholders
are not personally liable for any losses that the company might make.
A
1 and 2 only
B
2 and 3 only
C
1 and 3 only
D 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?
A
False
B True
(1 mark)
21 Which of the following journal entries are correct, according to their narratives?
Dr CR
$ $
1 Suspense account
18,000
Rent received account 18,000
Correction of error in posting $24,000 cash received for rent to the rent received account as $42,000
2
Share premium account 400,000
Share capital account 1 for 3 bonus issue on share capital of 1,200,000 50c shares
3
Trade investment in X 750,000
Share capital account 250,000
Share premium account
500,000
500,000 50c shares issued at $1.50 per share in exchange for shares in X
A
1 and 2
B
2 and 3
C
1 only
400,000
D 3 only
(2 marks)
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22 The plant and machinery account (at cost) of a business for the year ended 31 December 2005 was as follows:
Plant and machinery – cost
2005
2005
$
1 Jan Balance
240,000
31 March Transfer disposal account
30 June Cash – purchase of plant 160,000 31 Dec Balance 400,000
$
60,000
340,000
400,000
The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation
in the years of purchase and disposal.
What should be the depreciation charge for the year ended 31 December 2005?
A
$68,000
B
$64,000
C
$61,000
D $55,000
(2 marks)
23 Which of the following should appear in a company’s statement of changes in equity?
1
2
3
Profit for the financial year
Amortisation of capitalised development costs
Surplus on revaluation of non-current assets
A
All three items
B
2 and 3 only
C
1 and 3 only
D 1 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.
A
2 only
B
2 and 3
C
1 only
D 1 and 3
(2 marks)
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25 A fire on 30 September destroyed some of a company’s inventory and its inventory records.
The following information is available:
Inventory 1 September
Sales for September Purchases for September Inventory in good condition at 30 September $
318,000
612,000
412,000
214,000
Standard gross profit percentage on sales is 25%
Based on this information, what is the value of the inventory lost?
A
$96,000
B
$271,000
C
$26,400
D $57,000
(2 marks)
26 At 31 December 2004 a company’s capital structure was as follows:
Ordinary share capital
(500,000 shares of 25c each)
Share premium account $
125,000
100,000
In the year ended 31 December 2005 the company made a rights issue of 1 share for every 2 held at $1 per share
and this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the
share premium account for the purpose.
What was the company’s capital structure at 31 December 2005?
Ordinary share capital
$
A
450,000
B
225,000 C
225,000
D
212,500
Share premium account
$
125,000
250,000
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
on 4 June 2006, which gave a total inventory value of $836,200.
Between 31 May and 4 June 2006, the following transactions took place:
Purchases of goods Sales of goods (profit margin 30% on sales)
Goods returned by Q to supplier $
8,600
14,000
700
What adjusted figure should be included in the financial statements for inventories at 31 May 2006?
A
$838,100
B
$853,900
C
$818,500
D $834,300
(2 marks)
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28 In preparing a company’s bank reconciliation statement at March 2006, the following items are causing the difference
between the cash book balance and the bank statement balance:
(1) Bank charges $380
(2) Error by bank $1,000 (cheque incorrectly debited to the account)
(3) Lodgements not credited $4,580
(4) Outstanding cheques $1,475
(5) Direct debit $350
(6) Cheque paid in by the company and dishonoured $400.
Which of these items will require an entry in the cash book?
A
2, 4 and 6
B
1, 5 and 6
C
3, 4 and 5
D 1, 2 and 3
(2 marks)
29 At 31 December 2005 the following require inclusion in a company’s financial statements:
(1) On 1 January 2005 the company made a loan of $12,000 to an employee, repayable on 1 January 2006,
charging interest at 2 per cent per year. On the due date she repaid the loan and paid the whole of the interest
due on the loan to that date.
(2) The company has paid insurance $9,000 in 2005, covering the year ending 31 August 2006.
(3) In January 2006 the company received rent from a tenant $4,000 covering the six months to 31 December
2005.
For these items, what total figures should be included in the company’s balance sheet at 31 December 2005?
A
Current assets
$
10,000
Current liabilities
$
12,240
B
22,240
nil
C
10,240
nil
D
16,240
6,000
(2 marks)
30 How should a contingent liability be included in a company’s financial statements if the likelihood of a transfer of
economic benefits to settle it is remote?
A
Disclosed by note with no provision being made
B No disclosure or provision is required
(1 mark)
10
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31 Which of the following material events after the balance sheet date and before the financial statements are
approved are adjusting events?
(1) A valuation of property providing evidence of impairment in value at the balance sheet date.
(2) Sale of inventory held at the balance sheet date for less than cost.
(3) Discovery of fraud or error affecting the financial statements.
(4) The insolvency of a customer with a debt owing at the balance sheet date which is still outstanding.
A
1, 2, 3 and 4
B
1, 2 and 4 only
C
3 and 4 only
D 1, 2 and 3 only.
(2 marks)
32 Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alpha’s payables
ledger account for Beta shows a balance due to Beta of $4,140.
Investigation reveals the following:
(1) Cash paid to Beta $4,080 has not been allowed for by Beta
(2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta.
What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?
A
$690
B
$770
C
$9,850
D $9,930
(2 marks)
33 The business entity concept requires that a business is treated as being separate from its owners.
Is this statement true or false?
A
True
B False
(1 mark)
34 Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premises
quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year
until 30 June 2005. It was increased from that date to $96,000 per year.
What rent expense and end of year prepayment should be included in the financial statements for the year ended
30 April 2006?
A
Expense
Prepayment
$93,000
$8,000
B
$93,000
$16,000
C
$94,000
$8,000
D $94,000
$16,000
(2 marks)
11
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35 Which of the following items could appear in a company’s cash flow statement?
(1) Surplus on revaluation of non-current assets
(2) Proceeds of issue of shares
(3) Proposed dividend
(4) Dividends received
A
1 and 2
B
3 and 4
C
1 and 3
D 2 and 4
(2 marks)
36 What is the role of the International Financial Reporting Interpretations Committee?
A
To create a set of global accounting standards
B To issue guidance on the application of International Financial Reporting Standards
(1 mark)
37 Q’s trial balance failed to agree and a suspense account was opened for the difference. Q does not keep receivables
and payables control accounts. The following errors were found in Q’s accounting records:
(1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capital
account as $330,000
(2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant asset
account
(3) The petty cash book balance $500 had been omitted from the trial balance
(4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as
$87,400.
Which of the errors will require an entry to the suspense account to correct them?
A
1, 2 and 4 only
B
1, 2, 3 and 4
C
1 and 4 only
D 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
discount if goods are paid for within 14 days. Hill bought goods with a list price of $200,000 from Mountain. Sales
tax is at 17.5%.
What amount should be included in Mountain’s receivables ledger for this transaction?
A
$235,000
B
$211,500
C
$200,925
D $209,925
(2 marks)
12
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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
B True
(1 mark)
40 A company receives rent from a large number of properties. The total received in the year ended 30 April 2006 was
$481,200.
The following were the amounts of rent in advance and in arrears at 30 April 2005 and 2006:
30 April 2005 3
0 April 2006
$
$
Rent received in advance
28,700 31,200
Rent in arrears (all subsequently received) 21,200 18,400
What amount of rental income should appear in the company’s income statement for the year ended 30 April
2006?
A
$486,500
B
$460,900
C
$501,500
D $475,900
(2 marks)
41 Annie is a sole trader who does not keep full accounting records. The following details relate to her transactions with
credit customers and suppliers for the year ended 30 June 2006:
$
Trade receivables, 1 July 2005 130,000
Trade payables, 1 July 2005
60,000
Cash received from customers
686,400
Cash paid to suppliers
302,800
Discounts allowed 1,400
Discounts received
2,960
Contra between payables and receivables ledgers 2,000
Trade receivables, 30 June 2006 181,000
Trade payables, 30 June 2006 84,000
What figure should appear in Annie’s income statement for the year ended 30 June 2006 for purchases?
A
$331,760
B
$740,800
C
$283,760
D $330,200
(2 marks)
13
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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?
A Discounts allowed
Discounts received
Suspense account
DR
$7,680
$5,920
$1,760
B
Discounts allowed
$880
Discounts received
$880
Suspense account $1,760
C
Discounts allowed $6,800
Discounts received $6,800
D Discounts allowed
Discounts received
Suspense account
$3,840
CR
$2,960
$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 terms can be
recognised in financial statements.
A
2 only
B
1, 2 and 3
C
1 only
D 3 only
(2 marks)
44 The total of the list of balances in Valley’s payables ledger was $438,900 at 30 June 2006. This balance did not agree
with Valley’s payables ledger control account balance. The following errors were discovered:
1
2
3
A contra entry of $980 was recorded in the payables ledger control account, but not in the payables ledger.
The total of the purchase returns daybook was undercast by $1,000.
An invoice for $4,344 was posted to the supplier’s account as $4,434.
What amount should Valley report in its balance sheet as accounts payable at 30 June 2006?
A
$436,830
B
$438,010
C
$439,790
D $437,830
(2 marks)
14
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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 from
that produced if the indirect method is used.
(2) Rights issues of shares do not feature in cash flow statements.
(3) A surplus on revaluation of a non-current asset will not appear as an item in a cash flow statement
(4) A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing Activities in a
cash flow statement.
A
1 and 4
B
2 and 3
C
3 only
D 2 and 4
(2 marks)
46 Gareth, a sales tax registered trader purchased a computer for use in his business. The invoice for the computer showed
the following costs related to the purchase:
$
Computer
890
Additional memory
95
Delivery
10
Installation
20
Maintenance (1 year)
25
1,040
Sales tax (17.5%)
182
Total
1,222
How much should Gareth capitalise as a non-current asset in relation to the purchase?
A
$1,222
B
$1,040
C
$890
D $1,015
(2 marks)
47 A and B are in partnership sharing profits and losses in the ratio 3:2 respectively. Profit for the year was $86,500. The
partners’ capital and current account balances at the beginning of the year were as follows:
A
B
$
$
Current accounts 5,750CR 1,200CR
Capital accounts 10,000CR 8,000CR
A’s drawings during the year were $4,300, and B’s were $2,430.
What should A’s current account balance be at the end of the year?
A
$57,650
B
$51,900
C
$61,950
D $53,350
(2 marks)
15
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48 What is the correct double entry to record the depreciation charge for a period?
A DR Depreciation expense
CR Accumulated depreciation
B DR Accumulated depreciation
CR Depreciation expense
(1 mark)
49 A company values its inventory using the first in, first out (FIFO) method. At 1 May 2005 the company had 700
engines in inventory, valued at $190 each.
During the year ended 30 April 2006 the following transactions took place:
2005
1 July
1 November
Purchased 500 engines at $220 each
Sold 400 engines for $160,000
2006
1 February
15 April
Purchased
Sold What is the value of the company’s closing inventory of engines at 30 April 2006?
A
$188,500
B
$195,500
C
$166,000
300 engines at $230 each
250 engines for $125,000
D $106,000
(2 marks)
50 A company’s motor vehicles at cost account at 30 June 2006 is as follows:
Motor vehicles – cost
Balance b/f
Additions
$
35,800
Disposal
12,950 Balance c/f
48,750 $
12,000
36,750
48,750
What opening balance should be included in the following period’s trial balance for motor vehicles – cost at 1 July
2006?
A
$36,750 DR
B
$48,750 DR
C
$36,750 CR
D $48,750 CR
(2 marks)
16
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Answers
17
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Pilot Paper F3 (INT)
Financial Accounting (International)
Answers
1 B
2 B 37,000 + ((517,000 – 37,000)*5%) – 39,000) = 22,000
3 C
4 A
5 B -3,860 – 9,160 + 16,690 = 3,670
6 A 7 B
8 B
9 C 83,600 +18,000 – (18,000*25%) = 97,100
10 B
11 D
Receivables ledger control account
$
Opening balance
308,600
Contras
Credit sales
154,200 Cash received Interest charged
2,400
Discounts allowed Bad debts Closing balance
465,200 12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
B
B
A
D
B
B
C
B
A
D
D
C
A
D
B
$
4,600
147,200
1,400
4,900
307,100
465,200
1,000,000/40years = 25,000; 1,000,000 – (800,000 – (800,000*2%*10years)) = 360,000
((300,000 + 30,000) / 2 * ½ ) + (300,000 + 30,000) / 2 * 1/3) – (30,000 * ½ ) = 122,500
(240,000*20%) + (6/12*160,000*20%) – (9/12*60,000*20%) = 55,000
(318,000 + 412,000 – 214,000) – (612,000*75%) = 57,000
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
836,200 – 8,600 + (14,000*70%) + 700 = 838,100
27 A
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)
29,925
209,925
39 B
40 D
Rent receivable
$
O/Balance
21,200
O/Balance
Income statement
475,900
Disposal
C/Balance
31,200
C/Balance
528,300
$
28,700
481,200
18,400
528,300
18
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41 A
Payables ledger
$ Cash paid
302,800 O/balance Discounts received 2,960
Purchases
Contra
2,000
C/balance
84,000
391,760 42 B
43 D
44 D 438,900 – 980-90 = 437,830
45 C
46 D 890 + 95 + 10 + 20 = 1,015
47 D 5,750 + (86,500*3/5) – 4,300 = 53,350
48 A
49 A (300@230) + (500@220) + (50@190) = 188,500
50 A
$
60,000
331,760
391,760
19
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(International Stream)
PART 1
THURSDAY 6 DECEMBER 2001
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
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Paper 1.1(INT)
Preparing
Financial
Statements
Section A – ALL TWENTY-FIVE questions are compulsory and MUST be attempted
Please use the answer sheet provided to indicate your choice in each question
Each question within this section is worth 2 marks
1
The trial balance totals of Gamma at 30 September 2001 are:
Debit
Credit
$992,640
$1,026,480
Which TWO of the following possible errors could, when corrected, cause the trial balance to agree?
2
1.
2.
3.
4.
An item in the cash book $6,160 for payment of rent has not been entered in the rent payable account.
The balance on the motor expenses account $27,680 has incorrectly been listed in the trial balance as a credit.
$6,160 proceeds of sale of a motor vehicle has been posted to the debit of motor vehicles asset account.
The balance of $21,520 on the rent receivable account has been omitted from the trial balance.
A
B
C
D
1 and 2
2 and 3
2 and 4
3 and 4
The trial balance of Delta, a limited liability company, did not agree and a suspense account was opened for the
difference. The following errors were subsequently found:
1.
2.
3.
4.
5.
A cash refund due to customer A was correctly treated in the cash book and then credited to the accounts receivable
ledger account of customer B.
The sale of goods to a director for $300 was recorded by debiting sales revenue account and crediting the director’s
current account.
The total of the discount received column in the cash book had been credited in error to the discount allowed
account.
Some of the cash received from customers had been used to pay sundry expenses before banking the money.
$5,800 paid for plant repairs was correctly treated in the cash book and then credited to plant and equipment asset
account.
Which of the above errors would require an entry to the suspense account as part of the process of correcting them?
A
B
C
D
3
1, 3 and 5
1, 2 and 5
1 and 5
3 and 4
Beta purchased some plant and equipment on 1 July 2001 for $40,000. The estimated scrap value of the plant in ten
years’ time is estimated to be $4,000. Beta’s policy is to charge depreciation on the straight line basis, 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
B
C
D
$720
$600
$900
$675
2
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1D INTAD
Paper 1.1(INT)
4
Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premises
quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year until
30 June 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?
A
B
C
D
5
Expense
$93,000
$93,000
$94,000
$94,000
Prepayment
$8,000
$16,000
$8,000
$16,000
At 30 September 2000, the following balances existed in the records of Lambda:
$
860,000
397,000
Plant and equipment: Cost
Accumulated depreciation
During the year ended 30 September 2001, plant with a written down value of $37,000 was sold for $49,000. The
plant had originally cost $80,000. Plant purchased during the year cost $180,000. It is the company’s policy to 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
B
C
D
6
$563,000
$467,000
$510,000
$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
B
C
D
7
$35,000 debit
$1,000 debit
$38,000 debit
$1,000 credit
Which of the following best explains the imprest system of petty cash control?
A
B
C
D
Weekly expenditure cannot exceed a set amount.
The exact amount of expenditure is reimbursed at intervals to maintain a fixed float.
All expenditure out of the petty cash must be properly authorised.
Regular equal amounts of cash are transferred into petty cash at intervals.
3
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[P.T.O.
1D INTAH
Paper 1.1(INT)
8
9
In reconciling a business cash book with the bank statement, which of the following items could require a
subsequent entry in the cash book?
1.
2.
3.
4.
5.
6.
Cheques presented after date.
A cheque from a customer which was dishonoured.
An error by the bank.
Bank charges.
Deposits credited after date.
Standing order entered in bank statement.
A
B
C
D
2, 3, 4 and 6
1, 2, 5 and 6
2, 4 and 6
1, 3 and 5
The following bank reconciliation statement has been prepared for Omega by a junior clerk:
Overdraft per bank statement
Add: Deposits not credited
$
68,100
141,200
Less outstanding cheques
209,300
41,800
Overdraft per cash book
167,500
Which of the following should be the correct balance per the cash book?
A
B
C
D
$167,500 overdrawn as stated.
$31,300 overdrawn
$31,300 cash at bank
$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
2000, Z joined the partnership, and from that date profits are shared X 40%, Y 40% and Z 20%.
In the year ended 31 December 2000, profits were:
6 months to 31 June 2000
6 months to 31 December 2000
$
200,000
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?
A
B
C
D
Profit share
X
$
216,000
200,000
220,000
224,000
4
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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
Share of balance of profit
S
T
U
6 months to 30 June 2000 6 months to 31December 2000
$15,000
$25,000
60%
40%
40%
40%
20%
The partnership profit for the year ended 31 December 2000 was $350,000 accruing evenly over the year.
What are the partners’ total profit shares for the year ended 31 December 2000?
A
B
C
D
S
$000
196
217
155
175
T
$000
124
108
130
145
U
$000
30
25
65
35
12 Which of the following four statements about accounting concepts or principles are correct?
1.
2.
3.
4.
The money measurement concept is that items in accounts are initially measured at their historical cost.
In order to achieve comparability it may sometimes be necessary to override the prudence concept.
To facilitate comparisons between different entities it is helpful if accounting policies and changes in them are
disclosed.
To comply with the law, the legal form of a transaction must always be reflected in financial statements.
A
B
C
D
1 and 3
1 and 4
3 only
2 and 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.
2.
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
sold for $20 each. Selling expenses were $400.
100 items which had cost $10 each. After the balance sheet date they were sold for $8 each, with selling
expenses of $150.
What figure should appear in Epsilon’s balance sheet for inventory?
A
B
C
D
$283,650
$283,800
$292,150
$283,950
5
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[P.T.O.
14 Which of these statements about research and development expenditure are correct?
1.
2.
3.
4.
5.
A
B
C
D
If certain conditions are satisfied, research and development expenditure must be capitalised.
One of the conditions to be satisfied if development expenditure is to be capitalised is that the technical feasibility
of the project is reasonably assured.
If capitalised, development expenditure must be amortised over a period not exceeding five years.
The amount of capitalised development expenditure for each project should be reviewed each year. If
circumstances no longer justify the capitalisation, the balance should be written off over a period not exceeding five
years.
Development expenditure may only be capitalised if it can be shown that adequate resources will be available to
finance the completion of the project.
2 and 5
3, 4 and 5
2, 3 and 5
1, 2 and 3
15 On 30 September 2001 part of the inventory of a company was completely destroyed by fire.
The following information is available:
–
–
–
–
–
Inventory at 1 September 2001 at cost $49,800
Purchases for September 2001 $88,600
Sales for September 2001 $130,000
Inventory at 30 September 2001 – undamaged items $32,000
Standard gross profit percentage on sales 30%
Based on this information, what is the cost of the inventory destroyed?
A
B
C
D
$17,800
$47,400
$15,400
$6,400
16 At 1 July 2000 the share capital and share premium account of a company were as follows:
$
75,000
200,000
Share capital – 300,000 ordinary shares of 25c each
Share premium account
During the year ended 30 June 2001 the following events took place:
1.
2.
On 1 January 2001 the company made a rights issue of one share for every five held, at $1·20 per share.
On 1 April 2001 the company made a bonus (capitalisation) issue of one share for every three in issue at that time,
using the share premium account to do so.
What are the correct balances on the company’s share capital and share premium accounts at 30 June 2001?
A
B
C
D
Share capital
$460,000
$480,000
$120,000
$120,000
Share premium account
$287,000
$137,000
$137,000
$227,000
6
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17 In relation to cash flow statements, which, if any, of the following are correct?
1.
2.
3.
A
B
C
D
The direct method of calculating net cash from operating activities leads to a different figure from that produced by
the indirect method, but this is balanced elsewhere in the cash flow statement.
A company making high profits must necessarily have a net cash inflow from operating activities.
Profits and losses on disposals of non-current assets appear as items under cash flows from investing activities in
the cash flow statement or a note to it.
Item 1 only
Item 2 only
Item 3 only
None of the items.
18 A cash flow statement prepared in accordance with IAS7 Cash Flow Statements opens with the calculation of cash flows
from operating activities from the net profit before taxation.
Which of the following lists of items consists only of items that would be ADDED to net profit before taxation in that
calculation?
A
B
C
D
Decrease in inventories, depreciation, profit on sale of non-current assets.
Increase in trade payables, decrease in trade receivables, profit on sale of non-current assets.
Loss on sale of non-current assets, depreciation, increase in trade receivables.
Decrease in trade receivables, increase in trade payables, loss on sale of non-current assets.
19 IAS 10 Events after the Balance Sheet Date defines the extent to which events after the balance sheet date should be
reflected in financial statements. Five such events are listed below.
1
2
3
4
5
Merger with another company.
Insolvency of a customer.
Destruction of a major non-current asset.
Sale of inventory held at the balance sheet date for less than cost.
Discovery of fraud.
Which three of the listed items are, according to IAS 10, normally to be classified as adjusting?
A
B
C
D
1, 2 and 3
2, 4 and 5
1, 2 and 5
1, 4 and 5
20 In preparing the financial statements of a company, the following items have to be considered:
1.
2.
3.
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.
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.
The company has guaranteed the overdraft of a subsidiary. The subsidiary is trading profitably and the probability
of a liability arising is remote.
How should these items be reflected in the financial statements, if at all?
A
B
C
D
All three should be disclosed by note.
A provision should be created for the best estimate of the liability in 1, and items 2 and 3 should be disclosed
by note.
A provision should be created for the best estimate of the liability in 1, item 2 should be disclosed by note and
item 3 not disclosed at all.
A provision should be created for the best estimate of the liabilities in 1 and 2 and item 3 should be disclosed
by note.
7
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[P.T.O.
1D INTAU
Paper 1.1(INT)
21 The analysis of a company’s financial statements revealed that the number of days’ sales in inventory was 80 days. The
average for companies in the same industry was 35 days.
Which one of the following is LEAST likely to account for the high level of 80 days?
A
B
C
D
The company’s trade is seasonal
Poor inventory control
A large purchase was made just before the balance sheet date
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
Issued share capital
Reserves
Accumulated profit
Non-current liabilities:
10% loan notes
Income statement
$000
500
200
Operating profit
Finance cost
$000
300
100
800
Profit before tax
200
1,000
22 What is the return on shareholders’ equity as a percentage, based on these figures?
A
B
C
D
40%
20%
13·3%
12%
23 What is the return on total capital employed as a percentage, based on these figures?
A
B
C
D
12%
8%
13·3%
20%
24 Which of the following correctly states items which should be disclosed in the statement of changes in equity
required by IAS 1 Presentation of Financial Statements?
A
B
C
D
Net profit for the period, surplus on revaluation of non-current assets, dividends paid, proceeds of issue of
shares.
Proceeds of issue of shares, loan notes issued or repaid, retained profit for the period, surplus on revaluation of
non-current assets.
Profit on ordinary activities, income tax expense, extraordinary items.
Accumulated profits, reserves, issued share capital.
8
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25 Which of the following statements about financial statements are in accordance with IAS 1?
1.
2.
3.
4.
5.
A
B
C
D
Extraordinary items must be disclosed on the face of the income statement as additions to or deductions from profit
before tax.
The authorised share capital of the company must be disclosed by note or on the face of the balance sheet.
The total of staff costs for the period must be disclosed by note or on the face of the income statement.
The accounting policies adopted by the company must be disclosed but only if they do not comply with accounting
standards.
Proposed ordinary dividends should not be recognised as liabilities unless they have been proposed or declared
before the balance sheet date.
1, 2, 3 and 4
1, 2, 3 and 5
2, 3 and 5
1, 4 and 5
(50 marks)
9
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[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:
Warehouse machinery:
Cost:
Accumulated depreciation at 1 October 2000
Motor vehicles:
Cost
Accumulated depreciation at 1 October 2000
Inventory at 1 October 2000
Sales revenue
Purchases
Distribution costs
Administrative expenses
Allowance for doubtful debts, 1 October 2000
Bad debts written off
10% loan notes (issued 1999)
Interest paid on loan notes
Suspense account
$000
3,000
1,180
13,000
22,600
6,000
5,000
600
500
$000
1,700
500
41,600
1,300
10,000
100
Notes:
(1) Closing inventory at 30 September 2001 was $15,600,000.
(2) Bad debts written off and the movement on the allowance for doubtful debts are to be included in administrative
costs. The allowance for doubtful debts is to be reduced to $500,000.
(3) The balance on the suspense account is the proceeds of sale of motor vehicles, entered to the suspense 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
sale. The vehicles sold were all used in the distribution of the company’s sales.
(4) Depreciation is to be provided for on the straight line basis as follows:
Warehouse machinery
10 per cent
Motor vehicles
25 per cent
Depreciation of motor vehicles is to be divided equally between distribution costs and administrative expenses, and
depreciation of warehouse machinery charged wholly to distribution costs.
(5) Prepayments and accruals at 30 September 2001 were:
Distribution costs
Administrative expenses
Prepayments
$000
200
100
Accruals
$000
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
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2
You are preparing an income statement and balance sheet for Lamorgan, a sole trader who does not keep adequate
accounting records.
The following information is available to you to compute the figures for inclusion in the accounts for sales revenue,
purchases and closing inventory for the year ended 30 June 2001:
(a) Sales revenue
Cash received from credit customers
Cash sales receipts paid into bank
Expenses paid out of cash sales before banking
Trade receivables: 30 June 2000
30 June 2001
Refunds to customers
Discounts allowed
Bad debts written off
Amount due from credit customer deducted by Lamorgan in paying
supplier’s account
$
218,500
114,700
9,600
41,600
44,200
800
2,600
1,500
700
Required:
Compute the sales revenue figure from this information.
(5 marks)
(b) Purchases
Payments to suppliers
Trade payables: 30 June 2000
30 June 2001
Cost of items taken from inventory by Lamorgan for personal use
Amount due from credit customer deducted by Lamorgan in settling
supplier’s account
$
114,400
22,900
24,800
400
700
Required:
Compute the purchases figure from this information.
(c) Closing inventory
Cost of inventory obtained from physical count on 30 June 2001
This figure does NOT include any amounts for the two items below.
(i)
(3 marks)
$
77,700
An inventory line which had cost $1,800 was found to be damaged. Remedial work costing $300 is needed
to enable the items to be sold for $1,700. Selling expenses of $100 would also be incurred in selling 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.
Note: No adjustment to the sales figure in (a) above is required for this item.
Required:
Compute the adjusted closing inventory figure from this information.
(2 marks)
(10 marks)
11
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[P.T.O.
3
On 1 April 1998, Evon Limited acquired 75% of the ordinary share capital of Orset Limited for $180,000. At that date
the balance sheet of Orset Limited was as follows:
Sundry net assets
$
160,000
Share capital
100,000 Ordinary shares of $1 each
Accumulated profit
100,000
60,000
160,000
At 31 March 2001, the balance sheets of the two companies were as follows:
Sundry net assets
Investment in Orset
Share capital
Shares of $1 each
Accumulated profit
Evon Ltd
$
560,000
180,000
Orset Ltd
$
230,000
740,000
230,000
500,000
240,000
100,000
130,000
740,000
230,000
Goodwill arising on consolidation is to be amortised over five years.
Required:
Prepare the consolidated balance sheet of Evon Limited and its subsidiary as at 31 March 2001.
(10 marks)
4
The IASC’s Framework for the Preparation and Presentation of Financial Statements, and IAS 1 Presentation of Financial
Statements, together present concepts important in the preparation of financial statements, including materiality,
prudence and comparability among others.
Required:
(a) Explain the meaning of the following terms, giving one example of the application of each of them:
(i) Materiality;
(ii) Prudence.
(6 marks)
(b) Explain how international accounting standards and the Framework promote comparability.
12
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(4 marks)
(10 marks)
5
The term ‘overtrading’ is used to describe the condition of an enterprise which is increasing its sales revenue with
insufficient working capital to support the increase.
Required:
(a) State FOUR movements in items in financial statements or in accounting ratios that could indicate overtrading.
(4 marks)
(b) State THREE actions a company suffering from overtrading could take to rectify its position, and explain the
likely effect of the actions you propose.
(6 marks)
(10 marks)
End of Question Paper
13
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
Section A
1
C
Effect of errors: 2 increased debit
4 increased credit
Answers
55,360
21,520
33,840
2
C
Items 2, 3 and 4 do not affect balancing, items 1 and 5 do.
3
C
3
4
D
Charge 2/12 x $84,000 + 10/12 x $96,000 = $94,000
Prepayment 2/12 x $96,000 = $16,000
5
C
Cost: $860,000 – $80,000 + $180,000 =
Depreciation: $397,000 – $43,000 + £96,000 =
/12 x 10% x $36,000 = $900
$960,000
$450,000
$510,000
6
B
$37,000 = $18,000 + $20,000 = $1,000 debit
7
B
8
C
Items 1, 3 and 5 would appear in the bank reconciliation statement,
items 2, 4 and 6 in the cash book.
9
C
$68,100 + $41,800 – $141,200 = $31,300 cash at bank
10
A
6 months to 30 June 2000
6 months to 31 December 2000
X
$000
100
136
236
20
Less: for bad debt
216
11
A
6 months to 30 June 2000:
Salaries
Profit share 60:40
6 months to 31 December 2000
Salaries
Profit share 40:40:20
12
C
13
A
S
$000
T
$000
15
96
64
25
60
60
30
196
124
30
$
284,000
–
(350)
Item 1
Item 2
U
$000
No change
Reduce to net realisable value
283,650
14
A
15
C
$
39,000
Theoretical gross profit 30% x $130,000
Actual gross profit
$130,000 – $49,800 – $88,600 + $32,000
23,600
Shortfall – missing inventory
15,400
17
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16
D
Share capital $75,000 + $15,000 + $30,000 = $120,000
Share premium $200,000 + $57,000 – $30,000 = $227,000
17
D
1, 2 and 3 are all incorrect.
18
D
19
B
20
C
21
D
22
C
200/1,500 is correct
23
A
300/2,500 is correct
24
A
25
C
18
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1D INTBA
1D INTIX
Paper 1.1(INT) Paper 1.1(INT)
Section B
1
Tafford Limited
Income statement for the year ended 30 September 2001
$000
41,600
(20,000)
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
21,600
(6,285)
(4,885)
Profit from operations
Finance cost
10,430
1,000
Profit before tax
Income tax expense
9,430
3,000
Net profit for the period
6,430
Working 1
Cost of sales
Opening inventory
Purchases
Distribution costs
Administrative expenses
Bad debts
Reduction in allowance for doubtful debts
Depreciation: warehouse machinery
motor vehicles
Profit on sale of vehicles
Prepayments
Accruals
Closing inventory
$000
13,000
22,600
6,000
300
125
(40)
(200)
100
(15,600)
20,000
1D INTBB
Paper 1.1(INT)
2
(a)
Sales revenue
6,285
Administrative
expenses
$000
5,000
600
(800)
125
(100)
60
4,885
Sales revenue total account
$
41,600
800
Opening receivables
Refunds to customers
Sales
Distribution
costs
$000
225,100
Cash received from customers
Discounts allowed
Bad debts written off
Contra purchases
Closing receivables
267,500
$
218,500
2,600
1,500
700
44,200
267,500
$
225,100
124,300
Credit sales as above
Cash sales $114,700 + $9,600
349,400
19
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1D INTBB
Paper 1.1(INT)
(b)
Purchases
Purchases total account
$
114,400
700
24,800
Payments to suppliers
Contra sales
Closing payables
Opening payables
Lamorgan – goods taken
Purchases
139,900
(c)
$
22,900
400
116,600
139,900
Inventory
$
77,700
1,300
3,000
Per inventory count
Damaged item: $1,700 – $300 – $100
Goods on approval
1D INTBC
Paper 1.1(INT)
82,000
3
Cost of control
$
180,000
Shares in Orset
75% share capital
75% pre-acquisition profits
Accumulated profit
Goodwill written off
3/5 x $60,000
Balance to CBS
180,000
$
75,000
45,000
36,000
24,000
180,000
Minority Interest
$
57,500
Balance to CBS
25% share capital
25% accumulated profit
57,500
$
25,000
32,500
57,500
Accumulated profit
Minority interest 25% x 130,000
Cost of control: 75% x 60,000
Cost of control: Goodwill written off
Balance to CBS
$
32,500
45,000
36,000
256,500
$
240,000
130,000
Evon
Orset
370,000
370,000
Evon Limited Group
Balance sheet as at 31 March 2001
$
60,000
36,000
Goodwill
Less: Amortisation
Sundry net assets
$
24,000
790,000
814,000
Share capital
500,000 shares of $1 each
Accumulated profit
500,000
256,500
Minority interest
756,500
57,500
814,000
20
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1D INTBD
Paper 1.1(INT)
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
uncertainty, so that assets or income are not overstated and liabilities or expenses are not understated.
Example: In deciding whether to make an allowance for a debt, an allowance should be made whenever there is doubt as
to the eventual receipt of the cash.
1D INTBE
Paper 1.1(INT)
(b)
5
(a)
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 a
requirement when there is a change to disclose full details of its effect.
(ii)
The requirement to disclose accounting policies and changes in them. This makes comparisons with other entities easier.
Four from:
(i)
(ii)
(iii)
(iv)
(v)
(b)
Longer payment period for suppliers
Increasing overdraft
Increasing inventories
Deterioration in quick ratio (acid test)
Rapid increase in sales revenues and trade receivables.
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.
21
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1D INTMS
Paper 1.1(INT)
Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
Section B
1
2
3
Marking Scheme
Cost of sales
Distribution costs
Administrative expenses
Interest
Income tax expense
Layout
(a)
(b)
(c)
½ mark per item
½ mark per item
(i)
(ii)
9 x ½ + ½ layout
5 x ½ + ½ layout
2
½
Goodwill – calculation
– amortisation
3
1
Minority interest – calculation
Accumulated profit:
Initial profit figures
Minority interest
Cost of control
Goodwill written off
1
1
1
1
Consolidated balance sheet – format
4
(a)
(i)
Explanation
Example
2
1
(ii)
Explanation
Example
2
1
5
Consistency of treatment of items
Disclosure of policies
(a)
1 mark per item 4 x 1
(b)
1 mark per item 3 x 1
1 mark per explanation of effect
Maximum
11½
10
5
3
2½
10½
10
4
3
3
2
4
3
2
2
13
10
6
6
4
4
10
10
3
3
(b)
Available
1½
3
3
1
1
2
2
2
4
3
3
6
10
23
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10
(International Stream)
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
Section B
ALL FIVE questions are compulsory and MUST be
answered
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Paper 1.1(INT)
Preparing Financial
Statements
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
Depreciation
880
Cash paid for expenses
2,270
Increase in inventories
370
Cash paid to employees
2,820
Decrease in receivables
280
Cash paid to suppliers
4,940
Decrease in payables
390
Cash received from customers
12,800
Net profit before taxation*
2,370
*Marmot has no interest payable or investment income.
Required:
Compute Marmot’s net cash flow from operating activities for the company’s cash flow statement for the year
ended 31 December 2001 using:
(a) the direct method;
(b) the indirect method.
(10 marks)
2
The following balances appeared in the balance sheet of Addax, a limited liability company, at 31 March 2001.
$
840,000
370,000
Plant and equipment – cost
Accumulated depreciation
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
charge in the year of acquisition and no charge in the year of sale. None of the plant was over ten years old at
31 March 2001.
Required:
(a) Prepare ledger accounts recording the above transactions. A cash account is NOT required.
(5 marks)
(b) List the items which should appear in Addax’s cash flow statement for the year ended 31 March 2002 based
on these transactions and using the indirect method, including the headings under which they should appear.
Note. The headings from IAS 7 are to be used.
(4 marks)
(9 marks)
2
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3
The following information is available about the balances and transactions of Alpaca, a limited liability company.
Balances at 30 April 2001
Non-current assets – cost
Non-current assets – accumulated depreciation
Inventories
Receivables
Cash at bank
Payables
Issued share capital – ordinary shares of $1 each
Accumulated profits
10% Loan notes
Loan note interest owing
$
1,000,000
230,000
410,000
380,000
87,000
219,000
400,000
818,000
200,000
10,000
Transactions during year ended 30 April 2002:
Sales revenue
Purchases
Expenses
Interest on loan notes paid during year
Issue of 100,000 $1 ordinary shares at a premium of 50c
$
4,006,000
2,120,000
1,640,000
20,000
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)
(2)
(3)
(4)
Inventory
Receivables (before writing off debts shown above)
Cash at bank
Trade payables
$
450,000
690,000
114,000
180,000
Required:
Prepare the balance sheet of Alpaca as at 30 April 2002 using the format in IAS 1 Presentation of Financial
Statements as far as the information available allows.
Note: No formal income statement is required, but your answer should include a working showing your
computation of the accumulated profit figure in the balance sheet. This working carries 4 of the 11 marks
available in all.
(11 marks)
3
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[P.T.O.
4
Financial statements must be prepared according to established accounting concepts, many of which may be found
in the IASB’s Framework for the Preparation and Presentation of Financial Statements.
Define and explain the relevance of the following accounting concepts:
(a) Going concern
(3 marks)
(b) Accruals
(2 marks)
(c) Substance over form
(3 marks)
(d) Historical cost
(2 marks)
(10 marks)
5
The summarised financial statements of Weden, a limited liability company engaged in manufacturing, are shown
below:
Income statement
Year ended
31 March 2001
$000
$000
3,200
Sales revenue
Cost of sales
Opening inventory
Purchases
less: Closing inventory
800
1,800
300
3,200
2,600
300
3,500
500
(2,300)
(3,000)
900
(400)
(100)
1,000
(450)
(200)
400
350
Balance sheets
31 March 2001
$000
$000
1,970
31 March 2002
$000
$000
4,000
Gross profit
Expenses
Interest paid
Net profit
Non-current assets
Current assets
Inventory
Receivables – trade
Prepayments
Cash
300
600
60
50
500
800
70
10
Issued share capital
Share premium account
Accumulated profits
Non-current liabilities
10% loan notes
Current liabilities
Payables – trade
Accruals
31 March 2002
$000
$000
4,000
380
50
1,010
1,380
2,980
5,380
600
200
750
600
200
1,100
1,550
1,900
1,000
2,000
430
1,400
80
2,980
4
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1,480
5,380
Required:
(a) Compute the following five ratios for each of the two years:
(i)
return on capital employed
(ii) return on owners’ equity
(iii) current ratio
(iv) inventory turnover (use closing figures)
(v) number of days’ purchases in trade payables
(5 marks)
(b) Comment briefly on the changes in the company’s results and position between the two years, mentioning
possible causes for the changes.
(5 marks)
(10 marks)
End of Question Paper
5
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
Answers
Section B
1
(a)
Net cash flow from operating activities – direct method
$000
Cash
Cash
Cash
Cash
receipts from customers
paid to suppliers
paid to employees
paid for expenses
$000
12,800
4,940
2,820
2,270
10,030
Net cash flow from operating activities
(b)
2,770
Net cash flow from operating activities – indirect method
Net profit before taxation
Adjustment for:
Depreciation
2,370
880
Operating profit before working capital changes
Increase in inventories
Decrease in receivables
Decrease in payables
3,250
(370)
280
(390)
Net cash from operating activities
2,770
9
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2
(a)
Plant and equipment – cost
$
2001
840,000
10 Dec Transfer disposal
2002
180,000
31 Mar Balance
2001
1 April Balance
1 Oct Cash
$
100,000
920,000
1,020,000
1,020,000
Plant and equipment – depreciation
2001
10 Dec Transfer – disposal
2002
31 Mar Balance
$
60,000
393,000
2001
1 April Balance
2002
31 March Income statement
(74,000 + 9,000)
$
370,000
83,000
453,000
453,000
Plant and equipment – disposal
2001
10 Dec Transfer – cost
$
100,000
2002
31 Mar Income statement
2001
10 Dec Transfer
– depreciation
Cash
$
60,000
45,000
5,000
105,000
(b)
105,000
Addax
Cash flow statement for the year ended 31 March 2002
(extracts)
$
Cash flow from operating activities
Net profit before taxation
Adjustments for:
Depreciation
Profit on sale of plant
83,000
(5,000)
Cash flows from investing activities
Purchase of plant
Proceeds of sale of plant
(180,000)
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
$
$
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)
500,000
50,000
964,000
1,514,000
Non-current liabilities
10% Loan notes
200,000
Current liabilities
Payables
Interest accrued
180,000
10,000
190,000
1,904,000
10
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Working for accumulated profits
$
Balance at 30 April 2001
Sales revenue
Purchases
Expenses
Opening inventories
Closing inventories
Interest payable
Depreciation
Bad debts written off
$
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
4
(a)
964,000
Going concern
The going concern assumption means that financial statements are prepared on the basis that the business will continue for
the foreseeable future.
The application of the concept is relevant to many items in the financial statements.
(i)
Inventory is valued on the basis that it will be disposed of in sales in the normal course of business rather than in 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 company’s liquidity position.
(b)
Accruals
The accruals concept is that income and expenses are recognised in the period to which they relate and not in the period in
which they are paid.
The relevance of the concept is that profit or loss figures would be meaningless if the inclusion of items of income or expense
depended on whether they had been received or paid.
(c)
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
effect should be recognised instead of the legal form, unless legislation prohibits this.
The relevance of the concept is that its application improves the usefulness of the financial statements by preventing certain
creative accounting practices.
(d)
Historical cost
The historical cost convention is that assets are recorded at their initial cost and are not subsequently revalued upwards, 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
historical cost can become a dubious convention to follow.
11
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5
(a)
Year ended
31 March 2001
(i)
(ii)
Return on capital employed
500/2,550
550/3,900
19·6%
Return on owners’ equity
400/1,550
350/1,900
25·8%
14·1%
18·4%
(iii) Current ratio
1,010/430
1,380/1,480
2·35:1
0·93:1
(iv) Inventory turnover
2,300/300
3,000/500
(full credit given for correct answer in days)
(v)
(b)
31 March 2002
7·67 times
6·0 times
Payables’ days
1,380/1,800 x 365
1,400/3,200 x 365
77 days
160 days
Comment
All ratios show a marked deterioration in 2002 compared with 2001.
Return on capital employed (ROCE) and return on owners’ equity (ROOE) are at reasonable levels in 2002, but 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,
which must be eroding suppliers’ goodwill, evidenced by the increase in creditors’ days from 77 days to 160.
In effect, suppliers’ money is being used to finance the very heavy purchasing of non-current assets.
The inventory turnover ratio has declined, indicating a possible slowing of activity. The decline could be caused simply by a
large purchase of goods just before the balance sheet date.
12
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
1
(a)
1 mark per item
(b)
1 mark per item
Agreement of totals
Marking scheme
Available and Maximum
4
5
1
10
2
3
(a)
1/
2
mark per entry 12 x 1/2
(b)
1 mark per item 4 x 1
Accumulated depreciation
Receivables
Issued capital
Share premium
Interest accrued
Layout and style
Accumulated profits working
mark per item
1/
2
4
Available
6
Maximum
5
4
4
10
9
1
1
1
1
1
1
1
1
1
1
5
5
2
2
7
7
41/2
4
111/
11
2
1(a) Definition
Relevance
2
1
3
1(b) Definition
Relevance
1
1
2
1(c) Definition
Relevance
2
1
3
1(d) Historical Definition
Relevance
1
1
2
10
5
(a)
1 mark per ratio 5 x 1
5
(b)
1 mark per comment 5 x 1
5
10
13
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(International Stream)
PART 1
THURSDAY 5 DECEMBER 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
Section B
ALL FIVE questions are compulsory and MUST be
answered
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Paper 1.1(INT)
Preparing Financial
Statements
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 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?
2
A
$400 paid for plant maintenance has been correctly entered in the cash book and credited to the plant asset
account.
B
Discount received $400 has been debited to discount allowed account.
C
A receipt of $800 for commission receivable has been omitted from the records.
D
The petty cash balance of $800 has been omitted from the trial balance.
A company receives rent from a large number of properties. The total received in the year ended 31 October 2002
was $481,200.
The following were the amounts of rent in advance and in arrears at 31 October 2001 and 2002:
31 October 2001
$
28,700
21,200
Rent received in advance
Rent in arrears (all subsequently received)
31 October 2002
$
31,200
18,400
What amount of rental income should appear in the company’s income statement for the year ended 31 October
2002?
A
$486,500
B
$460,900
C
$501,500
D
$475,900
2
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3
A company receives rent for subletting part of its office block.
Rent, receivable quarterly in advance, is received as follows:
Date of receipt
1 October 2001
30 December 2001
4 April 2002
1 July 2002
1 October 2002
Period covered
$
3 months to 31 December 2001
31 March 2002
30 June 2002
30 September 2002
31 December 2002
7,5007,500
9,000
9,000
9,000
What figures, based on these receipts, should appear in the company’s financial statements for the year ended
30 November 2002?
4
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 company’s plant and machinery ledger account for the year ended 30 September 2002 was as follows:
Plant and machinery – cost
2001
1 October Balance
1 December Cash – addition
$
381,200
18,000
2002
$
1 June Disposal account – cost of asset sold
36,000
30 September Balance
363,200
399,200
399,200
The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate
depreciation in years of purchase and sale.
What is the depreciation charge for the year ended 30 September 2002?
A
$74,440
B
$84,040
C
$72,640
D
$76,840
3
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[P.T.O.
5
The following bank reconciliation statement has been prepared by a trainee accountant:
Bank reconciliation 30 September 2002
Balance per bank statement (overdrawn)
add: Lodgements credited after date
$
36,840
51,240
less: Outstanding cheques
88,080
43,620
Balance per cash book (credit)
44,460
Assuming the amounts stated for items other than the cash book balance are correct, what should the cash book
balance be?
6
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
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7
Which of the following items could appear on the credit side of a receivables ledger control account?
(1) Cash received from customers
(2) Bad debts written off
(3) Increase in allowance for doubtful debts
(4) Discounts allowed
(5) Sales
(6) Credits for goods returned by customers
(7) Cash refunds to customers
8
A
(1), (2), (4) and (6)
B
(1), (2), (4) and (7)
C
(3), (4), (5) and (6)
D
(5) and (7)
A business has compiled the following information for the year ended 31 October 2002:
Opening inventory
Purchases
Closing inventory
$
386,200
989,000
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
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[P.T.O.
9
A fire on 30 September 2002 destroyed some of a company’s inventory and its inventory records.
The following information is available:
$
318,000
612,000
412,000
214,000
Inventory 1 September 2002
Sales for September 2002
Purchases for September 2002
Inventory in good condition at 30 September 2002
Standard gross profit percentage on sales is 25%
Based on this information, what is the value of the inventory lost?
A
$96,000
B
$271,000
C
$26,400
D
$57,000
10 Which of the following inventory valuation methods is likely to lead to the lowest figure for closing inventory at a
time when prices are rising?
A
Average cost
B
First in, first out (FIFO)
C
Last in, first out (LIFO)
D
Replacement cost
11 Which of the following costs may be included when arriving at the cost of finished goods inventory for inclusion
in the financial statements of a manufacturing company?
(1) Carriage inwards
(2) Carriage outwards
(3) Depreciation of factory plant
(4) Finished goods storage costs
(5) Factory supervisors’ wages
A
(1) and (5) only
B
(2), (4) and (5) only
C
(1), (3) and (5) only
D
(1), (2), (3) and (4) only
6
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12 Listed below are some characteristics of financial information.
(1) Neutrality
(2) Prudence
(3) Completeness
(4) Timeliness
Which of these characteristics contribute to reliability, according to the IASC’s Framework for the Preparation and
Presentation of Financial Statements?
A
(1), (2) and (3) only
B
(1), (2) and (4) only
C
(1), (3) and (4) only
D
(2), (3) and (4) only
13 Which of the following statements about accounting concepts are correct?
(1) The money measurement concept is that only items capable of being measured in monetary terms can 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
should be reflected in financial statements rather than simply its legal form.
A
(1), (2) and (3)
B
(1), (2) and (4)
C
(1), (3) and (4)
D
(2), (3) and (4)
14 P and Q are in partnership, sharing profits in the ratio 3:2 and compiling their accounts to 30 June each year.
On 1 January 2002 R joined the partnership, and from that date the profit-sharing ratio became P 50%, Q 25% 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?
A
P
$
256,000
Q
$
162,000
R
$
62,000
B
248,000
168,000
64,000
C
264,000
166,000
66,000
D
264,000
156,000
60,000
7
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[P.T.O.
15 The issued share capital of Alpha, a limited liability company, is as follows:
Ordinary shares of 10c each
8% Preference shares of 50c each
$
1,000,000
500,000
In the year ended 31 October 2002, the company has paid the preference dividend for the year and an interim
dividend of 2c per share on the ordinary shares. A final ordinary dividend of 3c per share is proposed.
What is the total amount of dividends relating to the year ended 31 October 2002?
A
$580,000
B
$90,000
C
$130,000
D
$540,000
16 When a company makes a rights issue of equity shares which of the following effects will the issue have?
(1) Working capital is increased
(2) Gearing ratio is increased
(3) Share premium account is reduced
(4) Investments are increased
A
(1) only
B
(1) and (2)
C
(3) only
D
(1) and (4)
17 Which of the following items may appear as current liabilities in a company’s balance sheet?
(1) Minority interests in subsidiaries.
(2) Loan due for repayment within one year.
(3) Taxation.
(4) Preference dividend payable
A
(1), (2) and (3)
B
(1), (2) and (4)
C
(1), (3) and (4)
D
(2), (3) and (4)
8
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18 What is the correct treatment of extraordinary items in a company’s income statement, according to IAS8 Net
Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies?
A
Add to or subtract from profit after tax.
B
Include in calculating profit from operations with an explanatory note.
C
Show separately in the income statement as part of profit from operations with an explanatory note.
D
Exclude from income statement and disclose by note.
19 A company made an issue for cash of 1,000,000 50c shares at a premium of 30c per share.
Which of the following journal entries correctly records the issue?
A
B
Share capital
Share premium
Bank
Bank
Debit
$
500,000
300,000
Credit
$
800,000
800,000
Share capital
Share premium
C
Bank
500,000
300,000
1,300,000
Share capital
Share premium
D
Share capital
Share premium
Bank
1,000,000
300,000
1,000,000
300,000
1,300,000
20 Which of the following items could appear in a company’s cash flow statement?
(1) Surplus on revaluation of non-current assets.
(2) Proceeds of issue of shares.
(3) Proposed dividend.
(4) 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
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[P.T.O.
21 Part of the process of preparing a company’s 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 company’s statement of changes in equity?
(1) Profit on disposal of properties.
(2) Surplus on revaluation of properties
(3) Equity dividends proposed after the balance sheet date.
(4) Issue of share capital.
A
(1), (3) and (4) only
B
(2) and (4) only
C
(1) and (2) only
D
(3) and (4) only
23 Which of the following statements about research and development expenditure are correct?
(1) Research expenditure, other than capital expenditure on research facilities, should be recognised as an expense
as incurred.
(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
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24 Which one of the following would help a company with high gearing to reduce its gearing ratio?
A
Making a rights issue of equity shares.
B
Issuing further long-term loan notes.
C
Making a bonus issue of shares.
D
Paying dividends on its equity shares.
25 Which one of the following would cause a company’s gross profit percentage on sales to fall?
A
Sales volume has declined.
B
Closing inventory is lower than opening inventory.
C
Some closing inventory items were included at less than cost.
D
Selling and distribution costs have risen.
(50 marks)
11
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[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 at
30 September 2002:
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
694,200
Sundry administrative expenses
2
381,000
Allowance for doubtful debts, as at
1 October 2001
4
18,200
Bad debts written off during the year
4
14,680
Office equipment as at 1 October 2001:
Cost
5
214,000
Accumulated depreciation
5
88,700
Office equipment: additions during year
5
48,000
Office equipment: proceeds of sale of items during year
5
12,600
Interest paid
2
30,000
Notes
1 Closing inventory amounted to $219,600
2
Prepayments and accruals
Prepayments
$
Carriage outwards
Wages and salaries
Sundry administrative expenses
Interest payable
3
4,900
Accruals
$
1,250
5,800
13,600
30,000
Wages and salaries cost is to be allocated:
–
cost of sales
10%
–
distribution costs
20%
–
administrative expenses
70%
4
Further bad debts totalling $8,000 are to be written off, and the closing allowance for doubtful debts is to 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:
Depreciation is to be provided at 20% per annum on the straight line basis, with a full year’s charge in the
year of purchase and none in the year of sale.
During the year equipment which had cost $40,000, with accumulated depreciation of $26,800, was sold
for $12,600.
Required:
Prepare the company’s income statement in accordance with IAS 1.
Notes to the income statement are not required.
(12 marks)
12
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2
The trial balance of Rhea, a limited liability company, at 30 June 2002 failed to agree and a suspense account was
opened with a debit balance of $386,400 pending further action to find the difference.
Subsequent checking revealed the following errors:
(1) The balance of $48,900 on the carriage outwards account was omitted from the trial balance.
(2) Discount columns in the cash book had been misposted:
–
Discount allowed $38,880 had been credited to discount received account.
–
Discount received $68,200 had been debited to discount allowed account.
(3) An issue of 100,000 $1 ordinary shares in exchange for an asset with an agreed value of $400,000 had 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 entries with narratives to correct these errors.
(b) Write up the suspense account and bring down the balance of difference not yet found.
(9 marks)
3
Helios acquired 80% of the ordinary share capital of Luna for $700,000 on 1 July 1999, when the retained profits
of Luna amounted to $60,000. There have been no movements on Luna’s share capital or share premium account
since that date.
At 30 June 2002 the balance sheets of the two companies were as follows:
Tangible non-current assets
Investment in Luna
Net current assets
Share capital
Share premium account
Accumulated profit
Helios
$
280,000
700,000
130,000
Luna
$
490,000
1,110,000
750,000
600,000
350,000
160,000
400,000
200,000
150,000
1,110,000
750,000
260,000
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
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[P.T.O.
4
Required:
Explain the extent, if any, to which the following assets should be depreciated/amortised.
(a) Land and buildings that have been revalued upwards since acquisition.
(3 marks)
(b) Capitalised development expenditure on a project expected to begin commercial production in two years’
time.
(3 marks)
(c) A holding of quoted equity shares.
(2 marks)
(8 marks)
5
The directors of a company are considering the company’s draft financial statements for the year ended 30 September
2002.
The following material points are unresolved:
(a) One of the company’s buildings was destroyed in a flood in October 2002. The estimated value of the building
was $4m, but it was insured for only $3m. The company’s going concern status is not jeopardised. The directors
are unsure what adjustment or disclosure, if any, should be made.
(2 marks)
(b) The company gives warranties on its products at the time of sale, undertaking to repair or replace any defective
item free of charge. Some directors believe that an allowance should be made for estimated warranty liabilities
at 30 September 2002 based on sales to that date, and other directors argue that the expense of warranty work
should be borne in the period in which it is incurred.
(2 marks)
(c) Some goods which had cost $120,000, and which were included in closing inventory at 30 September 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
2002. The transaction was included as a credit sale in the accounting records, and as a result a profit of
$20,000 was taken. In October 2002 the customer returned all of the items in good condition.
(4 marks)
Required:
Advise the board of directors as to the correct treatment of each of these items, quoting the authority for your
advice in each case and stating the effect, if any, on the income statement and balance sheet.
(10 marks)
End of Question Paper
14
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
December 2002 Answers
Section A
1
B
$400 debit which should have been credited – correction will bring trial balance into agreement.
2
D
Rent Receivable
$
21,200
475,900
31,200
O/Balance
Income Statement
C/Balance
$
28,700
481,200
18,400
O/Balance
Cash
C/Balance
528,300
3.
C
528,300
$2,500 + $7,500 + $9,000 + $9,000 + $6,000
One month in advance = $3,000 Cr.
4
D
$
69,040
3,000
4,800
20% × $345,200
10/
12 × 20% × $18,000
8/
12 × 20% × $36,000
76,840
5
D
–$36,840 + $51,240 – $43,620 = $29,220 overdrawn
6
A
7
A
8
B
$952,500 × 100/60 = $1,587,500
9
D
Sales
Opening inventory
Purchases
318,000
412,000
less: Inventory held
730,000
214,000
Shortfall
516,000
57,000
$
Gross profit 25%
$
612,000
459,000
153,000
10 C
11 C
12 A
13 C
14 A
15 D
5c × 10,000,000 + 8% × $500,000
16 A
17 D
18 A
19 B
20 C
17
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21 D
22 B
23 B
24 A
25 C
Section B
1
Cronos Limited
Income statement for the year ended 30 September 2002
$
Sales
Cost of sales (W1)
Gross profit
Distribution costs (W1)
Administrative expenses (W1)
$
3,210,000
(1,823,100)
1,386,900
(188,500)
(944,680)
(1,133,180)
Profit from operations
Interest payable (30,000 + 30,000)
253,720
(60,000)
Net profit for the year
193,720
Working 1
Opening inventory
Purchases
Carriage inwards
Carriage outwards (47,250 + 1,250)
Wages and salaries
694,200
5,800
700,000
Sundry administrative expenses
(381,000 + 13,600 – 4,900)
Bad and doubtful debts
(14,680 + 8,000 – 2,700)
Depreciation of office equipment
20% × (214,000 – 40,000 + 48,000)
Loss on sale
Closing inventory
Cost of
Sales
$
186,400
1,748,200
38,100
Distribution
Costs
$
Administrative
Expenses
$
48,500
70,000
140,000
490,000
389,700
19,980
44,400
600
(219,600)
1,823,100
188,500
944,680
18
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2
(a)
Journal entries
(1) Trial balance (no ledger entry)
Suspense account
Correction for carriage outwards balance omitted from trial balance
48,900
(2) Discount received
Discount allowed
Suspense account
Suspense account
Discount received
Discount allowed
38,880
38,880
48,900
77,760
136,400
68,200
68,200
Correction of discount totals
Wrong discount amount posted to the wrong side
(3) Ordinary share capital account
Share premium account
300,000
300,000
Correction of error in recording issue of shares – $300,000 wrongly credited to ordinary share capital account.
Suspense Account
(b)
Difference
Discount accounts
$
386,400
136,400
Trial balance (carriage outwards)
Discount accounts
Balance
522,800
3
$
48,900
77,760
396,140
522,800
Helios
Consolidated balance sheet as at 30 June 2002
Non-current assets
Goodwill
Tangible assets
$
68,800
770,000
Net current assets
838,800
390,000
1,228,800
Share capital
Share premium account
Accumulated profit
600,000
350,000
128,800
1,078,800
150,000
Minority interest
1,228,800
19
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Cost of control
Investment in Luna
$
700,000
Share Capital 80%
Share Premium 80%
Accumulated profits 80% pre-acq
Balance – goodwill
700,000
Balance
172,000
$
320,000
160,000
48,000
172,000
700,000
Amortisation 20% × 3 years
Balance
172,000
103,200
68,800
172,000
Minority interest
Balance for CBS
$
150,000
Share Capital 20%
Share Premium 20%
Accumulated profits 20%
150,000
$
80,000
40,000
30,000
150,000
Accumulated profits
$
Cost of control
80% × $60,000
Minority interest
20% × $150,000
Cost of control
Goodwill amortisation
Balance for CBS
48,000
Helios
Luna
30,000
103,200
128,800
310,000
4
(a)
$
160,000
150,000
310,000
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
the revaluation. The straight-line method is usually adopted, but other methods such as the reducing balance method may
be used.
(b)
Development costs should be amortised, 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
off to the extent that it is no longer recoverable.
5
(c)
Investments of this kind do not depreciate, though they may fluctuate in value. Accordingly no depreciation is provided for
them.
(a)
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
note should state the amount of the loss and the extent of the insurance cover.
(b)
A provision should be made for the estimated amount of the liabilities under warranties, as required by IAS 37 Provisions,
Contingent Liabilities and Contingent Assets. The provision will appear as a liability in the balance sheet and the operating
profit will be reduced by the amount of the allowance.
(c)
This is an adjusting event according to IAS 10 Events after the Balance Sheet Date. The closing inventory should be 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
that the deterioration had taken place after the balance sheet date
(d)
The goods have to be treated as trading inventory at September 2002, applying generally accepted accounting principles.
The effect on the income statement and balance sheet will be:
(i)
Sales and trade receivables both reduced by $100,000.
(ii)
Closing inventory increased by $80,000.
The combined effect of the two adjustments is to reduce current assets and profit by $20,000.
20
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
1
Sales revenue
Cost of sales
Distribution costs
Administrative expenses:
Wages and salaries
Sundry admin. expenses
Bad and doubtful debts
Depreciation
Loss on sale
December 2002 Marking scheme
Available
1/
2
5 × 1/2
2 × 1/2
21/2
1
1
1
11/2
11/2
1
6
91/2
1
2
Interest payable
Format
13
2
(1) Journal entry
Narrative
1/
2
1
(2) Journal entry
Narrative
1/
2
(3) Journal entry
Narrative
1/
2
11/2
2
21/2
1
Suspense account
Per entry
Final balance
3×1
11/2
3
1/
2
31/2
9
3
Maximum
Calculation of goodwill
Goodwill amortisation
4 × 1/2
Calculation of minority interest
Calculation of accumulated profits
Initial profits
Adjustments
3 × 1/2
2
1
2 × 1/2
3×1
1
3
Consolidated balance sheet – format
Assets
Capital and reserves
Minority interest
1
1
1/
2
3
11/2
4
21/2
11
21
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12
Available
4
(a)
(b)
(c)
5
(a)
(b)
(c)
(d)
Land and buildings separated
Land not normally depreciated
Revalued amount for buildings depreciated over the
remaining useful economic life
1
Amortised
Basis of amortisation
Written off if no longer recoverable
1
1
1
Value fluctuating but does not depreciate
No depreciation required
1
1
Maximum
1
1
Non-adjusting event
Disclose by note
IAS 10 mentioned
Contents of note
1/
2
1/
2
1/
2
1/
2
Allowance required
IAS 37 mentioned
Effect on accounts
1/
2
1/
2
Adjusting event
IAS 10 mentioned
Effect on accounts
1/
2
1/
2
1
1
Description of adjustment
Generally accepted accounting principles
Adjustments to:
Sales
Receivables
Closing inventory
Effect on profit
3
3
3
3
2
2
8
8
2
2
2
1
1
1/
2
1/
2
1/
2
1/
2
4
10
22
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(International Stream)
PART 1
THURSDAY 5 JUNE 2003
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
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Paper 1.1(INT)
Preparing Financial
Statements
Section A – ALL 25 questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1
A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent 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 company’s financial statements for the year ended
31 January 2003?
Rent expense
$
2
Accrual
$
A
100,000
20,000
B
100,000
10,000
C
97,500
10,000
D
97,500
20,000
Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alpha’s
payables ledger account for Beta shows a balance due to Beta of $4,140.
Investigation reveals the following:
(1) Cash paid to Beta $4,080 has not been allowed for by Beta.
(2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta.
(3) Goods returned by Alpha $380 have not been recorded by Beta.
What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?
A
$9,310
B
$390
C
$310
D
$1,070
2
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3
An inexperienced bookkeeper has drawn up the following receivables ledger control account:
Receivables Ledger Control Account
Opening balance
Cash from credit customers
Sales returns
Cash refunds to credit customers
Discount allowed
$
180,000
228,000
8,000
3,300
4,200
————
423,500
————
Credit sales
Bad debts written off
Contras against payables
Closing balance (balancing figure)
$
190,000
1,500
2,400
229,600
————
423,500
————
What should the closing balance be after correcting the errors made in preparing the account?
4
A
$130,600
B
$129,200
C
$142,400
D
$214,600
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 company’s income statement for heating oil for the
year?
5
A
$23,900
B
$36,100
C
$45,300
D
$33,100
At 31 December 2002 a company’s receivables totalled $400,000 and an allowance for doubtful debts of $50,000
had been brought forward from the year ended 31 December 2001.
It was decided to write off debts totalling $38,000 and to adjust the allowance for doubtful debts to 10% of the
receivables.
What charge for bad and doubtful debts should appear in the company’s income statement for the year ended
31 December 2002?
A
$74,200
B
$51,800
C
$28,000
D
$24,200
3
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[P.T.O.
6
The plant account of a company is shown below:
Plant – Cost
2002
$
1 January Balance (plant purchased 1999) 380,000
1 April Cash – plant purchased
51,000
2002
1 October Transfer disposal
account – cost of plant sold
31 December Balance
————
431,000
————
$
30,000
401,000
————
431,000
————
The company’s policy is to charge depreciation on plant at 20% per year on the straight line basis, with proportionate
depreciation in years of purchase and sale.
What should the company’s plant depreciation charge be for the year ended 31 December 2002?
7
A
$82,150
B
$79,150
C
$77,050
D
$74,050
In preparing a company’s bank reconciliation statement at March 2003, the following items are causing the difference
between the cash book balance and the bank statement balance:
(1) Bank charges $380
(2) Error by bank $1,000 (cheque incorrectly debited to the account)
(3) Lodgements not credited $4,580
(4) Outstanding cheques $1,475
(5) Direct debit $350
(6) Cheque paid in by the company and dishonoured $400
Which of these items will require an entry in the cash book?
A
2, 4 and 6
B
1, 5 and 6
C
3 and 4
D
3 and 5
4
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8
The closing inventory at cost of a company at 31 January 2003 amounted to $284,700.
The following items were included at cost in the total:
(1) 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in manufacture, 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 2003
cost $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?
9
A
$281,200
B
$282,800
C
$329,200
D
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
1 February
Purchased
300 engines
at $230 each
15 April
Sold
250 engines
for $125,000
2003
What is the value of the company’s closing inventory of engines at 30 April 2003?
A
$188,500
B
$195,500
C
$166,000
D
None of these figures.
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[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 approximation
to actual cost.
A
1, 3 and 4 only
B
1 and 2 only
C
3 only
D
3 and 4 only.
The following information is relevant for questions 11 and 12.
When Q’s trial balance failed to agree, a suspense account was opened for the difference. The trial balance totals were:
Debit
$864,390
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
credited in the payables ledger.
11 Which of these errors will require an entry to the suspense account to correct them?
A
All five items
B
3 and 5 only
C
2, 4 and 5 only
D
1, 2, 3 and 4 only.
6
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12 What will the balance on the suspense account be after making the necessary entries to correct the errors
affecting the suspense account?
A
$2,440 Debit
B
$15,560 Credit
C
$13,640 Debit
D
$3,440 Debit.
13 Which of the following statements about research and development expenditure are correct according to 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 non-current assets.
A
1, 2 and 4 only
B
1 and 3 only
C
2 and 4 only
D
3 and 4 only.
14 Listed below are some comments on accounting concepts.
(1) In achieving a balance between relevance and reliability, the most important consideration is satisfying as far as
possible the economic decision-making needs of users.
(2) Materiality means that only items having a physical existence may be recognised as assets.
(3) The substance over form convention means that the legal form of a transaction must always be shown in financial
statements, even if this differs from the commercial effect.
Which, if any, of these comments is correct, according to the IASB’s Framework for the Preparation and
Presentation of Financial Statements?
A
1 only
B
2 only
C
3 only
D
None of them.
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[P.T.O.
15 Which of the following explanations of the prudence concept most closely follows that in the IASB’s Framework
for the Preparation and Presentation of Financial Statements?
A
The application of a degree of caution in exercising judgement under conditions of uncertainty
B
Revenue and profits are not recognised until realised, and provision is made for all known liabilities
C
All legislation and accounting standards have been complied with
D
Understatement of assets or gains and overstatement of liabilities or losses.
16 In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset values
and profit?
A
Asset values and profit both understated
B
Asset values and profit both overstated
C
Asset values understated and profit overstated
D
Asset values overstated and profit understated.
17 At 31 December 2002 the following matters require inclusion in a company’s financial statements:
(1) On 1 January 2002 the company made a loan of $12,000 to an employee, repayable on 30 April 2003,
charging interest at 2 per cent per year. On the due date she repaid the loan and paid the whole of the interest
due on the loan to that date.
(2) The company has paid insurance $9,000 in 2002, covering the year ending 31 August 2003.
(3) In January 2003 the company received rent from a tenant $4,000 covering the six months to 31 December
2002.
For these items, what total figures should be included in the company’s balance sheet at 31 December 2002?
Currents assets
$
Current liabilities
$
A
22,000
240
B
22,240
nil
C
10,240
nil
D
16,240
6,000
8
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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 company’s capital structure at 31 December 2002?
Ordinary share capital
$
Share premium account
$
A
130,000
173,000
B
105,000
173,000
C
130,000
137,000
D
105,000
137,000
19 Listed below are some items that may appear in a company’s income statement, either separately disclosed or
included in another figure.
(1) Profit or loss on discontinuing operations
(2) Profit or loss on the sale of part of the enterprise
(3) Extraordinary items
According to International Accounting Standards, which of these items must always be shown separately if
material to avoid misleading users?
A
All three items
B
1 and 2 only
C
1 and 3 only
D
2 and 3 only.
9
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[P.T.O.
20 In the course of preparing a company’s cash flow statement, the following figures are to be included in the calculation
of net cash from operating activities.
$
Depreciation charges
980,000
Profit on sale of non-current assets
40,000
Increase in inventories
130,000
Decrease in receivables
100,000
Increase in payables
80,000
What will the net effect of these items be in the cash flow statement?
$
A
Addition to operating profit
890,000
B
Subtraction from operating profit
890,000
C
Addition to operating profit
1,070,000
D
Addition to operating profit
990,000
The following information is relevant for questions 21 to 23
On 1 January 2000 Alpha purchased 80,000 ordinary $1 shares in Beta for $180,000. At that date Beta’s retained profits
amounted to $90,000 and the fair values of Beta’s assets at acquisition were equal to their book values.
Three years later, on 31 December 2002, the balance sheets of the two companies were:
Sundry net assets
Shares in Beta
Share capital
Ordinary shares of $1 each
Accumulated profits
Alpha
$
Beta
$
230,000
180,000
————
410,000
————
260,000
–
————
260,000
————
200,000
210,000
————
410,000
————
100,000
160,000
————
260,000
————
The share capital of Beta has remained unchanged since 1 January 2000.
Goodwill on consolidation is being amortised over four years.
21 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for goodwill?
A
$25,000
B
$28,000
C
$7,000
D
$14,000
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22 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for minority
interest?
A
$52,000
B
$20,000
C
$34,000
D
$32,000
23 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for accumulated
profits?
A
$266,000
B
$338,000
C
$370,000
D
$245,000
24 A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December 2001 to 27%
in the year ended 31 December 2002.
Which of the following events is most likely to have caused the increase?
A
An increase in sales volume
B
A purchase in December 2001 mistakenly being recorded as happening in January 2002
C
Overstatement of the closing inventory at 31 December 2001
D
Understatement of the closing inventory at 31 December 2001.
11
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[P.T.O.
25 A company’s capital structure at December 2002 is as follows:
$m
Ordinary share capital
Accumulated profits
8% Loan notes
380
120
——
500
100
——
600
——
The company’s income statement shows the following for the year ended 31 December 2002:
$m
Operating profit
Interest paid
Taxation
Dividends paid
Retained profit for year
40
8
——
32
10
——
22
10
——
12
——
What is the return on equity shareholders’ capital employed, using closing capital figures?
A
4·4%
B
2·4%
C
3·7%
D
5·8%
(50 marks)
12
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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 year
ending 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5%
per year.
Extracts from their trial balance at 31 March 2003 are given below:
Reference
to notes
Capital accounts: Alamute
Brador
Current accounts: Alamute
Brador
Drawings:
Alamute
Brador
Office equipment: cost
1
accumulated depreciation, 1 April 2002
Inventory, 1 April 2002
2
Trade receivables
3
Allowance for doubtful debts, 1 April 2002
3
Sales revenue
Purchases
Rent paid
4
Salaries
Insurance
5
Sundry expenses
$
50,000
50,000
3,800 Credit
2,600 Debit
48,400
36,900
48,300
12,800
15,600
68,400
3,800
448,700
184,600
30,000
88,000
4,000
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 trade
receivables.
(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.
Required
(a) Prepare the partnership’s income statement and a statement showing the division of profit among the
partners for the year ended 31 March 2003.
(9 marks)
(b) Write up the partners’ current accounts for the year ended 31 March 2003.
(3 marks)
(12 marks)
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[P.T.O.
2
The balance sheets of Paniel at 31 March 2002 and 2003 were as follows:
31 March
Reference
to notes
2002
$
2003
$
Non-current assets
Less: accumulated depreciation
2
2,140,000
(580,000)
—————
1,560,000
3,060,000
(840,000)
—————
2,220,000
Net current assets
3
1,520,000
—————
3,080,000
—————
1,570,000
—————
3,790,000
—————
1,000,000
800,000
480,000
—————
2,280,000
800,000
—————
3,080,000
—————
1,100,000
900,000
590,000
—————
2,590,000
1,200,000
—————
3,790,000
—————
Ordinary share capital
Share premium account
Accumulated profits
6% Loan notes
4
Notes
1
The net cash generated from operating activities for the year is $746,000, before deducting interest paid on the
loan notes.
2
During the year the company sold non-current assets which had cost $480,000 for $280,000.
3
The net current asset figures include cash at bank:
31 March 2002
31 March 2003
$14,000
$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 March
2003 was paid in the year.
5
The profit for the year ended 31 March 2003 before allowing for dividends paid was $260,000.
6
Ignore taxation.
Required:
Prepare the company’s cash flow statement for the year ended 31 March 2003, beginning with the net cash
inflow from operating activities given in Note 1 above.
(9 marks)
14
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3
(a) The net assets of Altese, a trader, at 1 January 2002 amounted to $128,000.
During the year to 31 December 2002 Altese introduced a further $50,000 of capital and made drawings of
$48,000.
At 31 December 2002 Altese’s net assets totalled $184,000.
Required:
Using this information compute Altese’s total profit for the year ended 31 December 2002.
(3 marks)
(b) Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for the year
ended 31 January 2003 from the following information:
$
130,400
171,250
888,400
Trade payables 31 January 2002
31 January 2003
Payment to suppliers
Cost of goods taken from inventory by
Senji for her personal use
Refunds received from suppliers
Discounts received
1,000
2,400
11,200
Required:
Compute the figure for purchases for inclusion in Senji’s financial statements.
(3 marks)
(c) Aluki fixes prices to make a standard gross profit percentage on sales of 331/3%.
The following information for the year ended 31 January 2003 is available to compute her sales total for the year.
Inventory: 1 February 2002
31 January 2003
Purchases
Purchases returns
$
243,000
261,700
595,400
41,200
Required:
Calculate the sales figure for the year ended 31 January 2003.
(3 marks)
(9 marks)
15
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[P.T.O.
4
Extracts from the financial statements of Apillon for the years ended 31 March 2002 and 2003 are given below:
Year ended 31 March
Income statement
2002
$
Sales revenue (including cash sales
$300,000 in 2002 and $100,000 in 2003)
2003
$
$
3,100,000
$
3,800,000
Cost of sales
Opening inventory
Purchases (all on credit)
Less: closing inventory
360,000
2,080,000
—————
2,440,000
540,000
—————
540,000
2,580,000
—————
3,120,000
(1,900,000)
720,000
————— —————
1,200,000
(900,000)
—————
300,000
—————
540,000
450,000
————
720,000
700,000
————
Gross profit
Expenses
Net profit
Balance Sheet
Current assets
Inventory
Trade receivables
Current liabilities
Trade payables
Bank overdraft
410,000
20,000
————
990,000
430,000
690,000
170,000
————
(2,400,000)
—————
1,400,000
(1,100,000)
—————
300,000
—————
1,420,000
860,000
Required:
(a) Calculate the following for each of the two years:
(i)
(ii)
(iii)
(iv)
(v)
Current ratio;
Quick ratio (acid test);
Inventory turnover period (use closing inventory);
Average period of credit allowed to customers;
Average period of credit taken from suppliers.
Calculate items (iii), (iv) and (v) in days.
(5 marks)
(b) Make four brief comments on the changes in the position of the company as revealed by the changes in these
ratios and/or in the given figures from the financial statements.
(4 marks)
(9 marks)
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5
(a) The term ‘reserves’ is frequently found in company balance sheets.
Required:
(i)
Explain the meaning of ‘reserves’ in this context;
(ii) Give two examples of reserves and explain how each of your examples comes into existence.
(6 marks)
(b) A company’s issued share capital may be increased by a bonus (capitalisation) issue or by a rights issue.
Required:
Define ‘bonus issue’ and ‘rights issue’ and explain the fundamental difference between these two types of
share issue.
(5 marks)
(11 marks)
End of Question Paper
17
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
June 2003 Answers
Section A
1
B
8 months at 90,000 per year, 4 months at 120,000 per year; accrual 1 month
2
C
(8,950 – 4,080 – 380) – (4,140 + 40) = 310
3
B
180 + 190 + 3·3 – 228 – 8 – 4·2 – 1·5 – 2·4 = 129·2
4
D
8,200 + 34,600 + 3,200 – 3,600 – 9,300 = 33,100
5
D
38,000 – (50,000 – 36,200) = 24,200
6
A
(350,000 + 9/12 x 30,000 + 9/12 x 51,000) x 20% = 82,150
7
B
8
A
284,700 – (32,000 – 28,500) = 281,200
9
A
300 @ 230 + 500 @ 220 + 50 @ 190 = 188,500
10 D
11 D
12 A
3,000 + 9,000 – 3,460 – 5,600 – 500 = 2,440
13 C
14 A
15 A
16 C
17 B
12,000 + 240 + 6,000 + 4,000 = 22,240
18 B
Share capital 50 + 25 + 30
Share premium 180 – 25 + 18
19 A
20 D
980 – 40 – 130 + 100 + 80 = 990
21 C
180 – 152 – 21 = 7
22 A
20% x 260 = 52
23 D
210 + 160 – 72 – 32 – 21 = 245
24 D
25 A
22/500 = 4·4%
21
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Section B
1
(a)
Alamute and Brador
Income statement for the year ended 31 March 2003
$
Sales Revenue
Cost of sales:
Opening inventory
Purchases
Less: Closing inventory
Gross profit
Less: Expenses:
Salaries
Rent (30,000 + 11,000)
Insurance (4,000 – 1,500)
Sundry expenses
Depreciation (35,500 × 20%)
Bad and doubtful debts
(2,400 – 500)
15,600
184,600
————
200,200
21,400
————
Alamute
$
Net profit
Interest on capital
Balance of profit 60:40
1,900
————
2,500
51,000
————
53,500
————
34,000
————
36,500
————
(179,900)
————
90,000
————
Total
$
90,000
(5,000)
————
85,000
(85,000)
————
–
————
Current Accounts
Alamute
$
Balance
Drawings
Balance
Brador
$
2,500
(b)
(178,800)
————
269,900
88,000
41,000
2,500
39,400
7,100
Net profit
Division of profit
$
448,700
48,400
8,900
–––––––
57,300
–––––––
Brador
$
2,600
36,900
–––––––
39,500
–––––––
Balance
Share of profit
Balance
Alamute
$
3,800
53,500
–––––––
57,300
–––––––
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Brador
$
36,500
3,000
–––––––
39,500
–––––––
2
Paniel
Cash flow statement for the year ended 31 March 2003
$
746,000
(72,000)
————
Net cash inflow from operating activities
Interest paid
Cash flows from investing activities
Purchase of non-current assets (W1)
Proceeds from sale of non-current assets
(1,120,000)
Cash flows from financing activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Dividends paid (260,000 – 110,000)
200,000
400,000
(150,000)
—————
Net cash from financing activities
450,000
————
4,000
14,000
————
18,000
————
Increase in cash
Cash at 31 March 2002
Cash at 31 March 2003
Fixed assets – cost
$
2,140,000
1,400,000
—————
3,540,000
—————
Opening balance
Purchases
3
674,000
(1,400,000)
280,000
—————
Net cash used in investing activities
Workings
1
$
(a)
Transfer – disposal
Closing balance
$
480,000
3,060,000
—————
3,540,000
—————
$
128,000
50,000
————
178,000
48,000
————
130,000
184,000
————
54,000
————
Opening capital
Capital introduced
Less: Drawings
Closing capital
Profit is therefore
(b)
Payments to suppliers
Discounts received
Balance carried forward
Purchases Total Account
$
Balance brought forward
888,400
Goods taken by Senji
11,200
Refunds from suppliers
Purchases
171,250
—————
1,070,850
—————
$
130,400
1,000
2,400
937,050
—————
1,070,850
—————
23
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(c)
$
Cost of sales:
Opening inventory
Purchases
Less: Returns
$
243,000
595,400
41,200
————
554,200
————
797,200
Less: Closing inventory
261,700
————
535,500
————
Sales figure is therefore $535,500 × 3/2 = $803,250
4
(a)
(i)
Current ratio 990,000/430,000
1,420,000/860,000
Year ended 31 March
2002
2003
2.3:1
1·65:1
(ii)
Quick ratio
1·05:1
0·81:1
(iii) Inventory turnover
540,000/1,900,000 × 365
720,000/2,400,000 × 365
104 days
(iv) Average period of credit allowed to customers
450,000/2,800,000 × 365
700,000/3,700,000 × 365
59 days
(v)
(b)
450,000/430,000
700,000/860,000
109 days
69 days
Average period of credit allowed by suppliers
410,000/2,080,000 × 365
690,000/2,580,000 × 365
72 days
98 days
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
the current and quick ratios because this would reduce the overdraft.
Other comments considered on their merits.
5
(a)
(i)
Reserves are balances in a company’s balance sheet forming part of the equity interest and representing surpluses or
gains, whether realised or not.
(ii)
Share premium account
The surplus arising when shares are issued at a price in excess of their par value.
Revaluation reserve
The unrealised gain when the amount at which non-current assets are carried is increased above cost.
(Other examples given credit on their merits)
(b)
A bonus issue is the conversion of reserves into share capital, with shares being issued to existing members in proportion 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
made by the shareholders for the shares allotted to them.
The fundamental difference between them is that the rights issue raises funds for the company whereas the bonus issue does
not.
24
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
June 2003 Marking Scheme
Marks
1
Gross profit (4 × 1/2)
Rent
Insurance
Depreciation
Bad and doubtful debts
2
1
1
1
1
Division of profit
2
——
8
Layout and style
1
——
Current accounts
Share of profit
Drawings
Balances 2 × 1/2
2
1
1
1
——
Interest paid
1
Capital expenditure
Purchases of non-current assets
Proceeds of sale of non-current assets
2
1
Financing
Issue of shares
Issue of loan notes
Dividends paid
Increase in cash and cash movement
(a)
3
——
12
——
1
1
2
11/2
Format and style
3
9
1
——
101/2 max 9
1/
2
Opening capital
Capital introduced
Drawings
Closing capital
1
1
1/
2
——
3
(Marks awarded for having figures the correct way round)
4
mark per item 6 × 1/2
(b)
1/
2
(c)
Opening inventory
Purchases
Purchases returns
Closing inventory
1/
2
1/
2
1/
2
1/
2
Sale figure correct
1
——
(a)
1 mark per pair of ratios 5 × 1
(b)
1 mark per valid comment 4 × 1
3
3
——
9
5
4
——
25
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9
Marks
5
(a)
(b)
(i)
Definition
Examples 2 × 1
Origins 2 × 1
2
2
2
——
Bonus issue
Rights issue
Difference
2
2
1
——
6
5
——
26
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11
(International Stream)
PART 1
THURSDAY 4 DECEMBER 2003
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
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Paper 1.1(INT)
Preparing Financial
Statements
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 Q’s income statement for bad and doubtful debts for the year ended 30 June
2003?
2
A
$12,600
B
$16,600
C
$48,600
D
$30,600.
A company’s trial balance totals were:
Debit
$387,642
Credit
$379,511
A suspense account was opened for the difference.
Which ONE of the following errors would have the effect of reducing the difference when corrected?
3
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
No entry has been made in the records for a cash sale of $2,500
D
$3,000 paid for repairs to plant has been debited to the plant asset account.
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
B
C
D
Dr
$
7,680
Discount allowed
Discount received
Suspense account
Cr
$
5,920
1,760
Discount allowed
Discount received
Suspense account
880
880
Discount allowed
Discount received
6,800
Discount allowed
Discount received
Suspense account
3,840
1,760
6,800
2,960
880
2
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4
The following bank reconciliation statement has been prepared by a trainee accountant:
$
Overdraft per bank statement
3,860
less: Outstanding cheques
9,160
–––––––
5,300
add: Deposits credited after date
16,690
–––––––
Cash at bank as calculated above
21,990
–––––––
What should be the correct balance per the cash book?
5
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
$
1 Jan Balance
31 Dec Credit sales
2003
31 Dec
Cash received from credit customers
Contras against amounts owing
by company in payables ledger
284,680
189,120
Discounts allowed
Bad debts written off
Sales returns
3,660
1,800
4,920
––––––––
484,180
––––––––
Balance
$
179,790
800
303,590
––––––––
484,180
––––––––
What should the closing balance on the account be when the errors in it are corrected?
6
A
$290,150
B
$286,430
C
$282,830
D
$284,430.
Which of the following calculations could produce an acceptable figure for a trader’s 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
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[P.T.O.
7
A company with an accounting date of 31 October carried out a physical check of inventory on 4 November 2003,
leading to an inventory value at cost at this date of $483,700.
Between 1 November 2003 and 4 November 2003 the following transactions took place:
(1) Goods costing $38,400 were received from suppliers.
(2) Goods that had cost $14,800 were sold for $20,000.
(3) A customer returned, in good condition, some goods which had been sold to him in October for $600 and which
had cost $400.
(4) The company returned goods that had cost $1,800 in October to the supplier, and received a credit note for them.
What figure should appear in the company’s financial statements at 31 October 2003 for closing inventory, based
on this information?
8
A
$458,700
B
$505,900
C
$508,700
D
$461,500.
In preparing its financial statements for the current year, a company’s closing inventory was understated by
$300,000.
What will be the effect of this error if it remains uncorrected?
9
A
The current year’s profit will be overstated and next year’s profit will be understated
B
The current year’s profit will be understated but there will be no effect on next year’s profit
C
The current year’s profit will be understated and next year’s profit will be overstated
D
The current year’s profit will be overstated but there will be no effect on next year’s profit.
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
Dr
$
1,800
Inventory account
Purchases account
Cr
$
1,800
Drawings account
Purchases account
1,800
Sales account
Drawings account
1,600
Drawings account
Sales account
1,800
1,800
1,600
1,800
4
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10 A company’s gross profit percentage on sales has decreased by 5% in 2002 compared with 2001.
Which one of the following matters could have caused the decrease?
A
The level of sales in 2002 is lower than that in 2001
B
There have been more bad debts in 2002 than in 2001
C
Inventory at the end of 2002 is lower than that at the end of 2001
D
Theft of inventory by staff and customers has increased.
11 A sole trader fixes his prices to achieve a gross profit percentage on sales revenue of 40%. All his sales are for cash.
He suspects that one of his sales assistants is stealing cash from sales revenue.
His trading account for the month of June 2003 is as follows:
$
181,600
114,000
––––––––
167,600
––––––––
Recorded sales revenue
Cost of sales
Gross profit
Assuming that the cost of sales figure is correct, how much cash could the sales assistant have taken?
A
$5,040
B
$8,400
C
$22,000
D
It is not possible to calculate a figure from this information.
12 P, after having been a sole trader for some years, entered into partnership with Q on 1 July 2002, sharing 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?
P
Q
$000
$000
A
245
95
B
250
90
C
270
90
D
255
85
5
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[P.T.O.
13 Part of a company’s draft cash flow statement is shown below:
$000
8,640
(2,160)
360
(330)
440
Operating profit
Depreciation charges
Proceeds of sale of non-current assets
Increase in inventory
Increase in accounts 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
1 and 4 only
C
1 and 3 only
D
2 and 4 only.
14 In preparing a company’s cash flow statement complying with IAS 7 Cash Flow Statements, which, if any, of the
following items could form part of the calculation of cash flow from financing activities?
(1) Proceeds of sale of premises
(2) Dividends received
(3) Bonus issue of shares
A
1 only
B
2 only
C
3 only
D
None of them.
15 Which of the following assertions about cash flow statements is/are correct?
(1) A cash flow statement prepared using the direct method produces a different figure for operating cash flow
from that produced if the indirect method is used.
(2) Rights issues of shares do not feature in cash flow statements.
(3) A surplus on revaluation of a non-current asset will not appear as an item in a cash flow statement.
(4) A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing Activities
in a cash flow statement.
A
1 and 4
B
2 and 3
C
3 only
D
2 and 4.
6
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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
consider whether there will be adequate finance available to complete the project.
(4) Development projects must be reviewed at each balance sheet date, and expenditure on any project no
longer qualifying for capitalisation must be amortised through the income statement over a period not
exceeding five years.
A
1 and 4
B
2 and 4
C
2 and 3
D
1 and 3.
17 Which of the following statements about accounting concepts and policies is/are correct?
(1) The effect of a change to an accounting policy should be disclosed as an extraordinary item if material.
(2) Information in financial statements should be presented so as to be understood by users with a 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
2 and 3
C
3 and 4
D
2 only.
18 Which, if any, of the following statements are correct according to IAS 8 Net Profit or Loss for the Period,
Fundamental Errors and Changes in Accounting Policies?
(1) The correction of a fundamental error relating to a past period should be made in the current period. It is
not acceptable to make the correction by adjusting the opening balance of retained earnings.
(2) A change in an accounting estimate constitutes a fundamental error and should be accounted for as such.
(3) The benchmark treatment for a change of accounting policy is normally to apply it retrospectively, with
adjustment to the opening balance of retained earnings.
A
1 only
B
2 only
C
3 only
D
None of the statements are correct.
7
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[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
the year.
(4) The statement of changes in equity must not include unrealised gains or losses.
A
1, 2 and 3
B
2 and 4
C
3 only
D
1 and 4.
20 Which of the following items are required to be disclosed in a limited liability company’s financial statements
according to IAS 1 Presentation of Financial Statements?
(1) Authorised share capital
(2) Finance costs
(3) Staff costs
(4) Depreciation and amortisation
A
1, 2 and 3 only
B
1, 2 and 4 only
C
2, 3 and 4 only
D
All four items.
21 At 30 June 2002 a company’s capital structure was as follows:
$
Ordinary share capital
500,000 shares of 25c each
Share premium account
125,000
100,000
In the year ended 30 June 2003 the company made a rights issue of 1 share for every 2 held at $1 per share and
this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the
share premium account for the purpose.
What was the company’s capital structure at 30 June 2003?
Ordinary share capital
$
Share premium account
$
A
450,000
125,000
B
225,000
250,000
C
225,000
325,000
D
212,500
262,500
8
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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 company’s income statement for interest payable in the year ended 30 June
2003?
A
$88,750
B
$82,500
C
$65,000
D
$73,750.
23 Which of the following material events after the balance sheet date and before the financial statements are
approved by the directors should be adjusted for in those financial statements?
(1) A valuation of property providing evidence of impairment in value at the balance sheet date.
(2) Sale of inventory held at the balance sheet date for less than cost.
(3) Discovery of fraud or error affecting the financial statements.
(4) The insolvency of a customer with a debt owing at the balance sheet date which is still outstanding.
A
All of them
B
1, 2 and 4 only
C
3 and 4 only
D
1, 2 and 3 only.
9
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[P.T.O.
24 A company’s summarised financial statements, ignoring tax, are shown below:
Income statement
Balance sheet
$m
Non-current assets
Profit before interest
Interest paid
200
(80)
––––
120
Profit after interest
Dividends paid
Net current assets
Ordinary share capital
Reserves
(40)
Loan capital
––––
80
––––
Retained profit
$m
1,000
1,600
––––––
2,600
––––––
1,000
800
––––––
1,800
800
––––––
2,600
––––––
What is the correct calculation of return on shareholders’ capital employed?
A
120/1,800 = 16·7%
B
200/2,600 = 17·7%
C
40/1,800 1= 12·2%
D
120/1,000 = 12·0%
25 The capital of a limited liability company is made up as follows:
$m
Issued ordinary share capital
1,000
Share premium account
1,500
Accumulated profits
3,000
8% loan notes
1,500
Which of the following calculations of the company’s gearing ratio, based on these figures, is correct?
A
1,500/6,000 = 1 25%
B
4,500/1,500 = 300%
C
4,500/6,000 = 1 75%
D
1,500/1,000 = 150%
(50 marks)
10
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This is a blank page.
Section B begins on page 12.
11
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[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
Issued share capital –
2,000,000 ordinary shares of 50c each
Share premium account
Suspense account
Accumulated profits
Deferred development costs
Property, plant and equipment – cost
depreciation at 31 December 2001
Inventory at 31 December 2002
Trade receivables
Overdraft at bank
Trade payables
Allowance for doubtful debts at 31 December 2001
6% loan notes
Reference
to notes
$
1
1
1
2
1,000,000
400,000
800,000
7,170,000
570,000
5,000,000
1,000,000
3,900,000
3,400,000
100,000
1,900,000
100,000
400,000
3
4
4
5
Notes
1 On 31 December 2002 the company issued for cash 1,000,000 ordinary shares at a premium of 30c per
share. The proceeds have been debited to cash and credited to the suspense account.
2
The profit for the year is included in the figure of $7,170,000 above but does not include adjustments for
Notes 3 and 4 below.
3
Depreciation is to be provided at 25% per year on the reducing balance basis, on the property, plant and
equipment.
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 company’s 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.
(8 marks)
(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
Amortised 2002
$
400,000
(100,000)
–––––––––
Project B
In progress
Total costs as at 31 December 2001
Further costs in 2002
150,000
120,000
–––––––––
Balance as at 31 December 2002
$
300,000
270,000
–––––––––
570,000
–––––––––
12
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The charge in the income statement for 2002 was $185,000 made up as follows:
$
100,000
Project A Amortisation
Project C Research costs written off
85,000
Required:
State the figures for the disclosure note summarising this information required by IAS 38 Intangible Assets.
A statement of the company’s policy for research and development expenditure is NOT required. (4 marks)
(12 marks)
2
The accounting records of Riffon, a limited liability company included the following balances at 30 June 2002:
$
Office buildings – cost
1,600,000
Office buildings – accumulated depreciation
Office buildings – (10 years at 2% per year)
1,320,000
Plant and machinery – cost (all purchased in 2000 or later)
1,840,000
Plant and machinery – accumulated depreciation
Plant and machinery – (straight line basis at 25% per year)
1,306,000
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 company’s policy to charge a full year’s depreciation on plant in the year of acquisition and none in the year
of sale.
Required:
Prepare the following ledger accounts to record the above balances and events:
(a) Office building: cost/valuation
(a) Office building: accumulated depreciation
(a) Office building: revaluation reserve.
(6 marks)
(b) Plant and machinery: cost
(b) Plant and machinery: accumulated depreciation
(b) Plant and machinery: disposal.
(6 marks)
(12 marks)
13
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[P.T.O.
3
On 1 November 1999 Eagle, a limited liability company, acquired 70% of the share capital of Oxer for $180,000.
At this date the accumulated profits of Oxer amounted to $150,000.
The balance sheets of the two companies at 31 October 2003 were as follows:
Eagle
$
180,000
490,000
–––––––––
670,000
–––––––––
220,000
450,000
–––––––––
670,000
–––––––––
Investment in Oxer
Sundry net assets
Ordinary share capital
Accumulated profits
Oxer
$
410,000
––––––––
410,000
––––––––
100,000
310,000
––––––––
410,000
––––––––
Eagle’s policy is to amortise goodwill arising on consolidation over five years.
Required:
Prepare the consolidated balance sheet of Eagle and its subsidiary at 31 October 2003.
(8 marks)
4
The directors of Aluki, a fashion wholesaler, are reviewing the company’s draft financial statements for the year 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.
(2 marks)
(b) An employee dismissed in August 2003 began an action for damages for wrongful dismissal in October 2003.
She is claiming $100,000 in damages. Aluki is resisting the claim and the company’s lawyers have advised that
the employee has a 30% chance of success in her claim.
The financial statements currently include a provision for the $100,000 claim.
(4 marks)
(c) In October 2003 a fire destroyed part of the company’s warehouse, with an uninsured loss of inventory worth
$180,000 and damage to the building, also uninsured, of $228,000. The going concern status of the company
is not affected.
The financial statements currently make no mention of the fire losses.
(3 marks)
Required:
Explain to the directors how these matters should be treated in the financial statements for the year ended
30 September 2003, stating the relevant accounting standards.
(9 marks)
14
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5
The use of historical cost as a basis for accounting is widespread.
Required:
(a) Explain THREE ways in which the use of historical cost accounting may mislead users of financial
statements.
(6 marks)
(b) Briefly state THREE reasons why historical cost accounting remains in use in spite of its limitations.
(3 marks)
(9 marks)
End of Question Paper
15
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Answers
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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream)
December 2003 Answers
Section A
1
A
A
B
C
D
2
B
3
B
4
B
B
C
D
5
C
A
B
C
D
6
A
7
D
A
B
C
D
8
C
9
B
16,000
18,000
18,000
16,000
+
+
+
+
14,600 – 18,000
14,600 – 16,000
14,600 + 16,000
14,600
16,690 – 9,160 – 3,860
16,690 + 3,860 – 9,160
As B but overdrawn
C + 2 x $3,660 discounts allowed
C + 2 x $1,800 bad debts written off
Sales ledger control account
$
$
284,680
3,660
189,120
1,800
4,920
179,790
800
Balance
282,830
––––––––
––––––––
473,800
473,800
––––––––
––––––––
C + $1,600 (contras)
483,700
483,700
483,700
483,700
– 38,400 +
+ 38,400 –
+ 38,400 –
– 38,400 +
14,800
14,800
14,800
14,800
+ 400 –
+ 400 –
– 400 +
– 400 +
1,800
1,800
1,800
1,800 (Correct)
10 D
11 B
A
B
C
12 B
A
B
C
D
$181,600 x 40% = 72,640 – 67,600 = $5,040
$114,000 x 10/6 = $190,000 – 181,600 = $8,400 (correct)
$181,600 – (114,000 + 40%)
P
Q
P
Q
P
Q
P
Q
(340,000 –
95,000
180,000 +
90,000
180,000 +
90,000
170,000 +
85,000
20,000)/2 + 170,000/2
90,000 – 20,000 (Correct)
90,000
85,000
13 B
14 D
15 C
16 C
17 D
18 C
19
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19 C
20 D
21 B
A
B
C
D
22 D
A
B
C
D
All rights issue proceeds added to share capital
Bonus issue 75,000
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.
$80,000 + 7% x $500,000 x 3/12
As D but including 7% x $500,000 x 6/12 instead of 3/12
As D but excluding 7% x $500,000 x 3/12
8% x $1m x 3/12 + 8% x $750,000 x 9/12 + 7% x $500,000 x 3/12
23 A
24 A
25 A
20
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Section B
1
(a)
Abrador
Balance sheet as at 31 December 2002
$
Assets
Non-current assets
Property, plant and equipment (W1)
Development costs
Current assets
Inventory
Receivables (W2)
3,000,000
570,000
––––––––––
3,900,000
2,910,000
––––––––––
Equity and liabilities
Capital and reserves
Issued share capital
Share premium account
Accumulated profits (W3)
Curent liabilities
Trade payables
Bank overdraft
6% loan notes
3,570,000
6,810,000
––––––––––
10,380,000
––––––––––
1,500,000
700,000
5,780,000
––––––––––
7,980,000
1,900,000
100,000
400,000
––––––––––
Workings
1
Property, plant and equipment per question
less: depreciation at 31 December 2001
2,400,000
––––––––––
10,380,000
––––––––––
5,000,000
1,000,000
––––––––––
4,000,000
1,000,000
––––––––––
3,000,000
––––––––––
less: 25% x 4,000,000
2
$
Receivables
less: Written off
3,400,000
400,000
––––––––––
3,000,000
90,000
––––––––––
2,910,000
––––––––––
less: Allowance
$
3
Accumulated profit
Per question
less: Depreciation
Bad debts
Allowance for doubtful debts
7,170,000
1,000,000
400,000
(10,000)
–––––––––
1,390,000
––––––––––
5,780,000
––––––––––
21
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(b)
$
Movements on deferred development expenditure during year
Balance at 31 December 2001
New expenditure in 2002
550,000
120,000
–––––––––
670,000
(100,000)
–––––––––
570,000
–––––––––
Amortisation for year
Deferred development expenditure at 31 December 2002
Total expenditure on research and development charged in income statement
Current expenditure
Amortisation
2
(a)
85,000
100,000
–––––––––
185,000
–––––––––
Office building – cost/valuation
2002
1 July Balance
1 July Revaluation
$
1,600,000
400,000
––––––––––
2,000,000
$
Office building – accumulated depreciation
2002
1 July Revaluation reserve
2003
30 June Balance
$
320,000
2002
1 July Balance
2003
30 June Income statement (W1)
50,000
–––––––––
370,000
–––––––––
$
320,000
50,000
–––––––––
370,000
–––––––––
Revaluation reserve
$
(b)
2002
1 July Office building – cost
1 July Office building – depreciation
$
400,000
320,000
–––––––––
720,000
Plant and machinery – cost
2002
1 July Balance
1 Oct Cash
2003
1 July Balance
$
840,000
200,000
––––––––––
1,040,000
––––––––––
2003
1 April Transfer disposal
30 June Balance
800,000
22
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$
240,000
800,000
––––––––––
1,040,000
––––––––––
Plant and machinery – accumulated depreciation
2003
1 April Transfer – disposal
30 June Balance
$
180,000
2002
1 July Balance
2003
30 June Income statement (W2)
326,000
––––––––––
506,000
––––––––––
$
306,000
200,000
––––––––––
506,000
––––––––––
Plant and machinery – disposal
2003
1 April Transfer – cost
30 June Income statement
profit
$
240,000
2003
1 April Transfer – depreciation
Cash
10,000
––––––––––
250,000
––––––––––
$
180,000
70,000
––––––––––
250,000
––––––––––
Workings
1
Depreciation of office building
$2m/40 (remaining useful life) = $50,000
2
Depreciation of plant and machinery
25% x ($840,000 – $240,000 + $200,000) = $200,000
3
Cost of control
$
180,000
Investment
Share capital 70%
Accumulated profits 70%
Accumulated profits –
goodwill amortised 4/5 x $5,000
Balance for CBS
––––––––––
180,000
––––––––––
$
70,000
105,000
4,000
1,000
––––––––––
180,000
––––––––––
Minority interest
$
123,000
Balance for CBS
Share capital 30%
Accumulated profits 30%
––––––––––
123,000
––––––––––
$
30,000
93,000
––––––––––
123,000
––––––––––
Accumulated profits
$
Cost of control
70% pre-acq
Minority interest 30%
Cost of control
goodwill amortised
Balance for CBS
Eagle
Oxer
105,000
93,000
4,000
558,000
––––––––––
760,000
––––––––––
$
450,000
310,000
––––––––––
760,000
––––––––––
23
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Eagle Group
Consolidated balance sheet as at 31 October 2003
$
1,000
900,000
––––––––
901,000
––––––––
220,000
558,000
––––––––
778,000
123,000
––––––––
901,000
––––––––
Goodwill
Sundry net assets
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.
5
(c)
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.
(a)
(i)
Profit on a sale is calculated by taking the difference between historical cost and sale proceeds. When prices are rising,
as they usually are, the ‘holding gain’ arising while the goods were held in inventory is included as part of the profit,
ignoring the fact that it will cost more to replace the item.
(ii)
Depreciation based on the historical cost of assets understates the real value of the benefit obtained from the use of 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.
(b)
(i)
It is simple and cheap
(ii)
Figures used are objective and verifiable.
(iii) Lack of a sound and acceptable alternative.
24
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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream)
December 2003 Marking Scheme
Marks
1
(a)
(b)
2
(a)
(b)
3
Tangible non-current assets 2 x 1/2
Development costs correctly displayed
Receivables 2 x 1/2
Issued share capital
Share premium
Accumulated profits 3 x 1/2
Loan notes in current liabilities
Layout
1
1/
2
1
1
1
11/2
1/
2
2
–––
Movements in deferred development expenditure
Opening balance
Movements 2 x 1
Income statement 2 x 1/2
1
2
1
–––
Office building
cost/valuation 2 x 1/2
accumulated depreciation:
calculations
entries 4 x 1/2
revaluation reserve 2 x 1
81/2 max 8
4
–––
12
–––
1
1
2
2
–––
Plant and machinery
cost 4 x 1/2
accumulated depreciation 4 x 1/2
disposal 4 x 1/2
2
2
2
–––
Goodwill 5 x 1/2
Minority interest 2 x 1/2
Accumulated profits 5 x 1/2
Share capital
Sundry net assets
Heading
21/2
1
21/2
1/
2
1
1/
2
–––
25
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6
6
–––
12
–––
8
–––
Marks
4
(a)
(b)
(c)
5
Inventory
IAS 2 mentioned
IAS 2 Valuation 2 x 1/2
Contingent liability
IAS 37 mentioned
Disclose by note stating nature and financial effect
Remove $100,000 and replace with note
Provide for legal expenses
Event after the balance sheet date
IAS 10 mentioned
Non-adjusting
Note required detailing event and financial effect
1
1
–––
2
1
1
1
1
–––
4
1
1
1
–––
(a)
3x2
6
(b)
3x1
3
–––
26
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3
–––
9
–––
9
–––
(International Stream)
PART 1
THURSDAY 10 JUNE 2004
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
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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Paper 1.1(INT)
Preparing Financial
Statements
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
the straight line basis, assuming a residual value at the end of five years of $4,000, with a proportionate depreciation
charge in the year of purchase.
The $20,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles repairs account.
How will the business profit for the year ended 31 December 2003 be affected by the error?
2
A
Understated by $18,400
B
Understated by $16,800
C
Understated by $18,000
D
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 company’s financial statements for the year ended 30 November 2003?
3
Income statement
Rent receivable
Balance sheet
A
$9,900
$2,000 in sundry payables
B
$9,900
$1,000 in sundry payables
C
$10,200
$1,000 in sundry payables
D
$9,900
$2,000 in sundry receivables
At 30 September 2002 a company’s allowance for doubtful debts amounted to $38,000, which was five per cent of
the receivables at that date.
At 30 September 2003 receivables totalled $868,500. It was decided to write off $28,500 of debts as bad and to
keep the allowance for doubtful debts at five per cent of receivables.
What should be the charge in the income statement for the year ended 30 September 2003 for bad and doubtful
debts?
A
$42,000
B
$33,925
C
$70,500
D
$32,500
2
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4
A company’s policy as regards depreciation of its plant and machinery is to charge depreciation at 20 per cent per
year on cost, with proportional depreciation for items purchased or sold during a year.
The company’s plant and machinery at cost account for the year ended 30 September 2003 is shown below:
Plant and machinery – cost
2002
1 Oct
2003
1 Apr
Balance (all plant purchased
after 1999)
Cash-purchase of plant
$
200,000
2003
30 Jun Transfer disposal account
50,000
––––––––
250,000
––––––––
30 Sept Balance
$
40,000
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?
5
A
$43,000
B
$51,000
C
$42,000
D
$45,000
A company’s trial balance failed to agree, the totals being:
Debit
$815,602
Credit
$808,420
Which one of the following errors could fully account for the difference?
A
The omission from the trial balance of the balance on the insurance expense account $7,182 debit
B
Discount allowed $3,591 debited in error to the discount received account
C
No entries made in the records for cash sales totalling $7,182
D
The returns outwards total of $3,591 was included in the trial balance as a debit balance
3
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[P.T.O.
6
The following control account has been prepared by a trainee accountant:
Receivables ledger control account
Opening balance
Credit sales
Cash sales
Contras against credit balances in
payables ledger
$
308,600
154,200
88,100
4,600
–––––––––
$555,500
–––––––––
Cash received from credit customers
Discounts allowed to credit customers
Interest charged on overdue accounts
Bad debts written off
Allowance for doubtful debts
Closing balance
$
147,200
1,400
2,400
4,900
2,800
396,800
–––––––––
$555,500
–––––––––
What should the closing balance be when all the errors made in preparing the receivables ledger control account
have been corrected?
7
A
$395,200
B
$304,300
C
$307,100
D
$309,500
Listed below are five potential causes of difference between a company’s cash book balance and its bank statement
balance as at 30 November 2003:
(1) Cheques recorded and sent to suppliers before 30 November 2003 but not yet presented for payment.
(2) An error by the bank in crediting to another customer’s account a lodgement made by the company.
(3) Bank charges.
(4) Cheques paid in before 30 November 2003 but not credited by the bank until 3 December 2003.
(5) A cheque recorded and paid in before 30 November 2003 but dishonoured by the bank.
Which of the following alternatives correctly analyses these items into those requiring an entry in the cash book
and those that would feature in the bank reconciliation?
Cash book entry
Bank reconciliation
A
1, 2, 4
3, 5
B
3, 5
1, 2, 4
C
3, 4
1, 2, 5
D
2, 3, 5
1, 4
4
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8
At 30 September 2003 the closing inventory of a company amounted to $386,400.
The following items were included in this total at cost:
(1) 1,000 items which had cost $18 each. These items were all sold in October 2003 for $15 each, with selling
expenses of $800.
(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 company’s balance sheet at 30 September 2003 for inventory?
A
$382,600
B
$384,200
C
$387,100
D
$400,600
The following information is relevant for questions 9 and 10
A is a sole trader who does not keep full accounting records. The following details relate to her transactions with credit
customers and suppliers for the year ended 30 November 2003:
Trade receivables, 1 December 2002
Trade payables, 1 December 2002
Cash received from customers
Cash paid to suppliers
Discounts allowed
Discounts received
Bad debts
Amount due from a customer who is also a supplier offset
against an amount due for goods supplied by him
Trade receivables, 30 November 2003
Trade payables, 30 November 2003
9
$
130,000
60,000
686,400
302,800
1,400
2,960
4,160
2,000
181,000
84,000
Based on the above information, what figure should appear in A’s income statement for the year ended
30 November 2003 for sales revenue?
A
$748,960
B
$748,800
C
$744,960
D
$743,560
10 Based on the above information, what figure should appear in A’s income statement for the year ended
30 November 2003 for purchases?
A
$283,760
B
$325,840
C
$329,760
D
$331,760
5
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[P.T.O.
11 A sole trader fixes her prices by adding 50 per cent to the cost of all goods purchased. On 31 October 2003 a 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
Opening inventory at cost
Purchases
Closing inventory at cost
$
281,250
183,600
249,200
––––––––
432,800
204,600
––––––––
228,200
––––––––
53,050
Gross profit
Using this information, what inventory loss has occurred?
A
$61,050
B
$87,575
C
$40,700
D
$110,850
12 According to IAS 2 Inventories, which of the following costs should be included in valuing the inventories of a
manufacturing company?
(1) Carriage inwards
(2) Carriage outwards
(3) Depreciation of factory plant
(4) General administrative overheads
A
All four items
B
1, 2 and 4 only
C
2 and 3 only
D
1 and 3 only
6
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13 G, H and I are in partnership, compiling their accounts for the year to 31 December each year.
The profit-sharing arrangements are as follows:
Until 30 June 2003
Annual salaries
H
I
$40,000
$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?
A
G
$
182,000
H
$
130,000
I
$
88,000
B
200,000
116,000
84,000
C
198,000
118,000
88,000
D
180,000
132,000
88,000
14 IAS 38 Intangible Assets governs the accounting treatment of expenditure on research and development.
The following statements about the provisions of IAS 38 may or may not be correct.
(1) Capitalised development expenditure must be amortised over a period not exceeding five years.
(2) If all the conditions specified in IAS 38 are met, development expenditure may be capitalised if the directors
decide to do so.
(3) Capitalised development costs are shown in the balance sheet under the heading of Non-current Assets.
(4) Amortisation of capitalised development expenditure will appear as an item in a company’s statement of
changes in equity.
Which of these four statements are in fact correct?
A
3 only
B
2 and 3
C
1 and 4
D
1 and 3
7
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[P.T.O.
15 A company accountant is considering how to include the following items in the financial statements:
(1) Cost of restructuring the activities of the enterprise.
(2) The correction of a fundamental error in the financial statements for the previous period.
(3) Loss from expropriation of assets by a government.
Which of these items would constitute an extraordinary item according to IAS 8 Net Profit or Loss for the Period,
Fundamental Errors and Changes in Accounting Policies?
A
1 only
B
2 only
C
3 only
D
All three items
16 Which of the following statements about the financial statements of limited liability companies are 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
same figure for net cash from operating activities.
(2) Loan notes can be classified as current or non-current liabilities.
(3) Financial statements must disclose a company’s total expense for staff costs and for depreciation, if material.
(4) A company must disclose by note details of all adjusting events allowed for in the financial statements.
A
1, 2 and 3 only
B
2 and 4 only
C
3 and 4 only
D
All four items
17 Which of the following could appear as separate items in the statement of changes in equity required by IAS I
Presentation of Financial Statements as part of a company’s financial statements?
(1) Gain on revaluation of land.
(2) Loss on sale of investments.
(3) Prior year adjustments.
(4) Proceeds of an issue of ordinary shares.
(5) Dividends proposed after the year end.
A
1, 3 and 4 only
B
1, 2 and 4 only
C
1 and 3 only
D
All five items
8
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18 Which of the following must be disclosed in the financial statements of a quoted (listed) company, if material?
(1) Total spent on research and development.
(2) An analysis of operating profit into continuing and discontinuing activities.
(3) Profit or loss on the disposal of a discontinuing operation.
(4) Authorised share capital.
(5) Finance costs.
A
2, 3 and 4 only
B
1, 2, 3 and 5 only
C
1 and 5 only
D
All five items
19 The draft financial statements of a limited liability company are under consideration. The accounting treatment of 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 company’s inventory (the company’s going concern status is not affected).
(3) An issue of shares to finance expansion.
(4) Sale for less than cost of some inventory held at the balance sheet date.
According to IAS 10 Events after the Balance Sheet Date, which of the above events require an adjustment to
the figures in the draft financial statements?
A
1 and 4 only
B
1, 2 and 3 only
C
2 and 3 only
D
2 and 4 only
20 A limited liability company issued 50,000 ordinary shares of 25c each at a premium of 50c per share. The 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?
A
B
C
D
Share premium account
Share capital account
Debit
$
25,000
Credit
$
25,000
Share capital account
Share premium account
25,000
Share capital account
Share premium account
37,500
Share capital account
Cash
25,000
25,000
37,500
25,000
9
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[P.T.O.
21 Which of the following journal entries could correctly record a bonus (capitalisation) issue of shares?
$
Debit
A
B
C
D
Cash
Ordinary share capital
100,000
Ordinary share capital
Share premium
100,000
Share premium
Ordinary share capital
100,000
Investments
Cash
100,000
$
Credit
100,000
100,000
100,000
100,000
22 Which one of the following formulas would give a valid calculation of a company’s gearing ratio?
Ordinary share capital
A ––––––––––––––––––––––––––––– x 100
Ordinary share capital + reserves
Loan capital
B –––––––––––––––––––––––––––––––––––––––––– x 100
Ordinary share capital + preference share capital
C
Total share capital + reserves
––––––––––––––––––––––––––––––––– x 100
Loan capital + preference share capital
D
Loan capital + preference share capital
––––––––––––––––––––––––––––––––––––– x 100
Total share capital + reserves + loan capital
The following information is relevant for questions 23 and 24.
Hyrax acquired 80 per cent of the share capital of Shrew on 1 January 2003 for $280,000.
The balance sheets of the two companies at 31 December 2003 were as follows:
Balance sheets
Sundry assets
Investment in Shrew
Issued share capital
Share premium account
Accumulated profits
As at 1 Jan 2003
Profit for 2003
Hyrax
$
660,000
280,000
–––––––––
940,000
–––––––––
Shrew
$
290,000
–
–––––––––
290,000
–––––––––
400,000
320,000
140,000
50,000
140,000
80,000
–––––––––
940,000
–––––––––
60,000
40,000
–––––––––
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
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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
$80,000
C
$64,000
D
$38,400
24 What figure for minority interest should appear in the consolidated balance sheet of the Hyrax group at
31 December 2003?
A
$56,000
B
$48,000
C
$58,000
D
$50,000
25 P, the parent company of a group, owns shares in three other companies. P’s holdings are:
Q
Shares giving control of 60% of the voting rights in Q
R
Shares giving control of 20% of the voting rights in R. P also has the right to appoint or remove all the 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
Q and S only
C
R and S only
D
Q and R only
(50 marks)
11
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[P.T.O.
Section B – ALL FIVE questions are compulsory and must be attempted
1
The following balances have been extracted from the accounting records of Minica, a limited liability company, at
31 December 2003:
Reference
to notes
2
Sales revenue
Opening inventory
Purchases
Carriage inwards
Carriage outwards
Office equipment at 1 January 2003
Cost
Accumulated depreciation
Trade receivables
Allowance for doubtful debts at
1 January 2003
Bad debts written off during
the year
Sundry administrative expenses
3
$
3,845,000
360,000
2,184,000
119,000
227,000
2, 3 and 4
460,000
92,000
620,000
5
20,000
15,000
416,000
The following further information is available:
(1) Closing inventory amounts to $450,000
(2) Some office equipment, which had cost $20,000, with accumulated depreciation at 1 January 2003 of
$14,000, was sold for $15,000 during the year. The sale proceeds were included in the sales figure of
$3,845,000.
(3) The cost of new equipment purchased on 1 July 2003 for $60,000 has been included in the purchases
figure of $2,184,000
(4) The company depreciates its office equipment at 20 per cent per year on the straight line basis, with
proportionate depreciation in the year of purchase but none in the year of sale. None of the 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
Prepaid expenses
$
28,700
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.
No dividends were paid in 2003.
Required:
(a) Prepare the company’s income statement for the year ended 31 December 2003 for internal use.
(11 marks)
(b) State the total amount of the proposed dividend and explain how it would be dealt with in the company’s
financial statements for publication.
(1 mark)
(12 marks)
12
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2
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 company’s balance sheet.
On investigation the following errors were found:
(1) $8,700 paid for repairs to premises and correctly recorded in the cash book was debited to the premises
asset account as $7,800.
(2) A $1,000 cheque received for the wreckage of a car destroyed in an accident while uninsured had been
correctly entered in the cash book but not posted anywhere. The car had cost $30,000 and depreciation of
$6,000 had already been provided on the car for the year ended 30 September 2003, making accumulated
depreciation on the car at that date $12,000. No entries have yet been made to eliminate the cost and
accumulated depreciation of the car.
It is the company’s policy to charge no depreciation on an asset in the year of its disposal.
Required:
Prepare journal entries, including narratives, to correct the errors, record the loss of the car and clear the
suspense account.
(9 marks)
13
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[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
2003 are given below:
Balance sheets
31 October
Reference
to notes
Non-current assets (net book
value)
2002
$
1,2,3
Current assets
Inventories
Receivables
Cash
4
4
5
Current liabilities
Bank overdraft
Income tax
Trade payables
$
1,000,000
600,000
1,270,000
140,000
––––––––––
Capital and reserves
Ordinary share capital
Share premium account
Revaluation reserve
Accumulated profits
2003
$
2,010,000
––––––––––
3,010,000
––––––––––
1,800,000
1,600,000
1,800,000
–
––––––––––
500,000
420,000
–
920,000
––––––––––
–
120,000
1,050,000
––––––––––
1,340,000
––––––––––
1,840,000
1,170,000
––––––––––
3,010,000
––––––––––
260,000
40,000
2,100,000
––––––––––
31 October
Sales revenue (all on credit)
Cost of sales
Gross profit
Operating expenses
Profit before tax
Income tax expense
Profit for the year
6
3,400,000
––––––––––
5,200,000
––––––––––
600,000
820,000
300,000
1,080,000
––––––––––
Income statements
Reference
to notes
$
2002
$
8,400,000
(6,300,000)
––––––––––
2,100,000
2003
$
9,000,000
(7,200,000)
––––––––––
1,800,000
(1,500,000)
––––––––––
600,000
(120,000)
––––––––––
480,000
––––––––––
(1,600,000)
––––––––––
200,000
(40,000)
––––––––––
160,000
––––––––––
14
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2,200,000
––––––––––
2,800,000
2,400,000
––––––––––
5,200,000
––––––––––
Notes
(1) On 1 November 2002 office equipment that had cost $240,000, with a net book value of $80,000, was sold
for $30,000.
(2) The purchase of new non-current assets took place near the end of the year.
(3) The depreciation charge for the year ended 31 October 2003 was $120,000.
(4) The ordinary share issue was on 31 October 2003.
(5) Some of the non-current assets were revalued upwards by $300,000 on 1 November 2002.
(6) Cost of sales was made up as follows:
Opening inventory
Purchases
Closing inventory
Cost of sales
3
31 October
2002
2003
$
$
500,000
600,000
6,400,000
8,200,000
––––––––––
––––––––––
6,900,000
8,800,000
(600,000)
(1,600,000)
––––––––––
––––––––––
6,300,000
7,200,000
––––––––––
––––––––––
Prepare 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):
(i) Inventory holding period;
(ii) Average period of credit granted to customers;
(iii) Average period of credit allowed by suppliers.
(3 marks)
(b) (i)
Comment briefly on the changes in the position of the company revealed by the changes in these ratios
between the two years.
(3 marks)
(ii) Briefly explain how two factors shown in the financial statements and/or the notes may have contributed
to the decline in the company’s pre-tax return on capital employed, which is down from 32·6 per cent
in 2002 to 7·1 per cent in 2003.
(4 marks)
(10 marks)
5
Comparability is a characteristic which adds to the usefulness of financial statements.
Required:
(a) Explain what is meant by the term ‘comparability’ in financial statements, referring to two types of
comparison that users of financial statements may make.
(4 marks)
(b) Explain two ways in which the IASB’s Framework for the Preparation and Presentation of Financial
Statements and the requirements of accounting standards aid the comparability of financial information.
(4 marks)
(8 marks)
End of Question Paper
15
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[P.T.O.
Answers
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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream)
June 2004 Answers
Section A
1
A
20,000 minus
16,000 x 20%/2
2
B
(7/12 x 8,400) + (5/12 x 12,000) = 9,900
1,000 paid in advance in sundry payables
3
D
28,500 + 42,000 – 38,000
4
A
(160,000 x 20%) + (40,000 x 20% x 3/4) + (50,000 x 20% x 1/2)
5
D
6
C
Receivables ledger control account
308,600
154,200
2,400
147,200
1,400
4,900
4,600
307,100
––––––––
465,200
––––––––
––––––––
465,200
––––––––
7
B
8
A
9
C
386,400 minus loss on 1
3,800
Receivables ledger total account
130,000
Balance
686,400
1,400
4,160
2,000
181,000
––––––––
874,960
––––––––
744,960
––––––––
874,960
––––––––
10 D
Payables ledger total account
302,800
2,960
2,000
84,000
––––––––
391,760
––––––––
11 C
60,000
Balance
331,760
––––––––
391,760
––––––––
281,250/3 – 53,050
12 D
13 B
G
90,000
110,000
–––––––––
200,000
–––––––––
H
20,000
30,000
66,000
–––––––––
116,000
–––––––––
I
10,000
30,000
44,000
–––––––––
84,000
–––––––––
14 A
15 C
16 A
17 A
18 D
19
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19 A
20 B
21 C
22 D
23 C
280,000 – (112,000 + 40,000 + 48,000) = 80,000; minus 20% = 64,000
24 C
290,000 x 20%
25 A
20
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Section B
1
(a)
Sales revenue
less:
less:
Minica
Income statement for the year ended 31 December 2003
$
$
(3,845,000 – 15,000)
3,830,000
Cost of sales
Opening inventory
Purchases (2,184,000 – 60,000)
Carriage inwards
360,000
2,124,000
119,000
––––––––––
2,603,000
450,000
––––––––––
Closing inventory
Gross profit
less: Expenses
Sundry administrative expenses
Carriage outwards
Bad and doubtful debts
Depreciation
Profit on sale of office equipment
(W1)
430,300
227,000
26,000
94,000
(9,000)
––––––––––
(W2)
(W3)
(W4)
Net profit for the year
(b)
2,153,000
––––––––––
1,677,000
768,300
––––––––––
908,700
––––––––––
The proposed dividend of $240,000 would be disclosed by note in Minica’s published income statement.
Workings
1
2
$
Sundry administrative expenses
416,000 + 28,700 – 14,400
430,300
Bad and doubtful debts
Bad debts written off
Allowance (31,000 – 20,000)
3
15,000
11,000
––––––
26,000
88,000
6,000
––––––
94,000
Depreciation
(460,000 – 20,000) x 20 per cent
60,000 x 20 per cent x 6/12
4
$
Profit on sale of equipment
15,000 proceeds minus 6,000 net book value
9,000
21
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2
$
Repairs to premises
Premises asset
Suspense
$
8,700
7,800
900
Correction of error in posting cost of repairs to premises
Suspense account
Motor vehicle disposal
1,000
1,000
Entry for unposted item
Accumulated depreciation
Depreciation expense
(or Income statement)
6,000
6,000
Motor vehicle disposal
Motor vehicles – cost
Transfer of cost of vehicle destroyed
to disposal account
Accumulated depreciation
Motor vehicle disposal
Transfer of depreciation on vehicle
destroyed to disposal account
30,000
Income statement
Motor vehicle disposal
Loss on destruction of car transferred
23,000
30,000
6,000
6,000
23,000
3
Renada
Cash flow statement for the year ended 31 October 2003
$
Cash flows from operating activities
Net profit before taxation
Adjustments for:
Depreciation
Loss on sale of office equipment
Operating profit before working
capital changes
Increase in inventory
Increase in receivables
Increase in payables
Cash used in operations
Income taxes paid
Net cash used in operating activities
Cash flows from investing activities
Purchase of non-current assets
Proceeds from sale of noncurrent assets
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of
share capital
Net cash from financing activities
$
200,000
120,000
50,000
–––––––––––
370,000
(1,000,000)
(530,000)
1,050,000
–––––––––––
(110,000)
(120,000)
–––––––––––
(230,000)
(700,000)
30,000
––––––––––
500,000
––––––––––
Net decrease in cash and cash equivalents
Cash and cash equivalents at 31 October 2002
Cash and cash equivalents at 31 October 2003
(670,000)
500,000
–––––––––
(400,000)
140,000
–––––––––
(260,000)
–––––––––
22
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Working
Non-current assets – net book value
$
1,000,000
300,000
Balance
Revaluation reserve
Assets purchased
(balancing figure)
$
80,000
120,000
Transfer disposal
Depreciation
700,000
Balance
1,800,000
––––––––––
2,000,000
––––––––––
––––––––––
2,000,000
––––––––––
4
(a)
31 October
2002
(i)
Inventory holding period
600,000/6,300,000
x 365
35 days
1,600,000/7,200,000 x 365
(ii)
2003
81 days
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
(b)
(i)
93 days
All three ratios show deterioration.
The large increase in the inventory holding period suggests that the company is having difficulty making sales in the
closing months of the period.
Customers are taking longer to pay, placing further strain on the company’s liquid position.
The company is attempting to finance the increased inventory and receivables by paying its suppliers more slowly, which
will probably have the effect of losing supplier goodwill.
(ii)
5
(a)
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.
Other contributing factors are:
– the new non-current assets ($700,000) were not acquired until near the end of the year, and thus may not be
fully operational
– the share issue also took place right at the end of the year, and so has not yet been deployed in profit-earning
assets.
Comparability means that users are able to draw conclusions about the performance 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
(i)
(ii)
(iii)
from:
by requiring the disclosure of accounting policies and the effect of changes in them
by reducing or eliminating the number of possible alternative treatments for similar items available to businesses
by requiring businesses to treat similar items in the same way within each period and from one period to the next, unless
a change is required to comply with accounting standards or to ensure that a more appropriate presentation of events
or transactions is provided.
23
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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream)
June 2004 Marking Scheme
Section B
Marks
1
1/
2
1/
2
1/
2
Sales revenue
Opening inventory
Purchases
Carriage inwards
Closing inventory
Gross profit correct
Sundry administrative expenses
Carriage outwards
Bad and doubtful debts
Depreciation
Profit on sale
1
1/
2
1
1
1/
2
11/2
2
1
Heading
1
––
11
1
––
12
––
Proposed dividend
2
For each journal entry
1/
2
1/
2
per entry
for narrative
1
1/
2
–––
11/2
11/2 x 6
3
9
Calculation of cash used in operations
1/
2
Profit
Depreciation
Loss on sale
Working capital movements 3 x 1/2
1
1
11/2
––––
4
1/
2
Taxation
Investing activities
Purchases
Proceeds of sale
5 x 1/2
21/2
1/
2
Share issue
1
Cash movement
4
5
2x
1/
2
1
Heading
1/
2
Layout
1
––
11
––
(a)
Ratios
3x1
3
(b)
(i)
Comments
3x1
3
(c)
(ii)
Reasons for decline
2x2
4
––
10
––
(a)
Explanation
Types of comparison
(b)
2x1
2x2
25
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2
2
––
4
4
––
8
––
(International Stream)
PART 1
THURSDAY 9 DECEMBER 2004
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
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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Paper 1.1(INT)
Preparing Financial
Statements
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 trader’s 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.
(2) Cash received from the sale of a non-current asset was correctly entered in the cash book but was debited to the
disposal account.
(3) The balance on the rent account was omitted from the trial balance.
(4) Goods taken from inventory by the proprietor had been recorded by crediting Drawings account and debiting
Purchases account.
2
A
All four items
B
2 and 3 only
C
2 and 4 only
D
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
that a doubtful debt allowance of $218,000 was required.
What figure should appear in the company’s income statement for the year ended 30 June 2004 for bad and
doubtful debts?
3
A
$155,000
B
$364,000
C
$281,000
D
$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
1 July Balance
2004
1 Jan Cash – purchase of plant
$
240,000
2003
30 Sept. Transfer disposal account
2004
30 Jun Balance
160,000
––––––––
400,000
––––––––
$
60,000
340,000
––––––––
400,000
––––––––
The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate
depreciation in the years of purchase and disposal.
What should be the depreciation charge for the year ended 30 June 2004?
A
$68,000
B
$64,000
C
$61,000
D
$55,000
2
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4
5
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.
The following receivables ledger control account prepared by a trainee accountant contains a number of errors:
Receivables ledger control account
2004
1 Jan Balance
31 Jan Cash from credit customers
Contras against amounts due to
suppliers in payables ledger.
$
614,000
311,000
2004
31 Jan Credit sales
Discounts allowed
Bad debts written off
Interest charged on overdue accounts
Balance
8,650
––––––––
933,650
––––––––
$
301,000
3,400
32,000
1,600
595,650
––––––––
933,650
––––––––
What should the closing balance on the control account be after the errors in it have been corrected?
6
A
$561,550
B
$578,850
C
$581,550
D
$568,350
Which of the following statements about bank reconciliations are correct?
1
A difference between the cash book and the bank statement must be corrected by means of a journal entry.
2
In preparing a bank reconciliation, lodgements recorded before date in the cash book but credited by the bank
after date should reduce an overdrawn balance in the bank statement.
3
Bank charges not yet entered in the cash book should be dealt with by an adjustment in the bank reconciliation.
4
If a cheque received from a customer is dishonoured after date, a credit entry in the cash book is required.
A
2 and 4
B
1 and 4
C
2 and 3
D
1 and 3
3
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[P.T.O.
7
8
9
If a company changes a material accounting policy, which of the following statements are correct?
1
The notes to the financial statements should disclose the reason for the change and its effect.
2
The effect of the change should be disclosed in the current year’s income statement as an extraordinary item.
3
The opening balance of retained earnings should be adjusted if practicable, as if the change had been in effect
for previous periods.
4
In the financial statements for the current period, comparative figures for the previous period should be adjusted
to reflect the change.
A
1, 3 and 4
B
2, 3 and 4
C
1, 2 and 3
D
1, 2 and 4
Which of the following most closely describes the meaning of prudence, as the term is defined in the IASB’s
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.
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
2 and 3 only
C
1 and 3 only
D
None of these statements is correct
4
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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 company’s 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
1 and 3 only
B
2 and 3 only
C
1 and 4 only
D
2 and 4 only
11 In finalising the financial statements of a company for the year ended 30 June 2004, which of the following
material matters should be adjusted for?
1
A customer who owed $180,000 at the balance sheet date went bankrupt in July 2004.
2
The sale in August 2004 for $400,000 of some inventory items valued in the balance sheet at $500,000.
3
A factory with a value of $3,000,000 was seriously damaged by a fire in July 2004. The factory was back 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
All four items
B
1 and 2 only
C
1 and 4 only
D
2 and 3 only
12 Which of the following statements about provisions, contingencies and events after the balance sheet date is/are
correct?
1
A 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 company’s 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
2 and 4 only
C
1 and 2 only
D
All four statements are correct
5
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[P.T.O.
13 A business compiling its financial statements for the year to 31 July each year pays rent quarterly in advance on
1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from $60,000 per year to
$72,000 per year as from 1 October 2003.
What figure should appear for rent expense in the business income statement for the year ended 31 July 2004?
A
$69,000
B
$62,000
C
$70,000
D
$63,000
14 Which of the following journal entries may be accepted as being correct according to their narratives?
1
2
3
Wages account
Purchases account
Buildings account
Labour and materials used in construction of extension to factory
Directors’ personal accounts:
A
B
Directors’ remuneration
Directors’ bonuses transferred to their accounts
Dr
$
38,000
49,000
Cr
$
87,000
30,000
40,000
70,000
Suspense account
Sales account
10,000
10,000
Correction of error in addition – total of credit side of sales account $10,000 understated
A
1 and 3
B
1 and 2
C
3 only
D
2 and 3
15 X and Y are in partnership, sharing profits in the ratio 2:1 and compiling their financial statements to 30 June each
year.
On 1 January 2004 Z joined the partnership, and it was agreed that the profit-sharing arrangement should become
X 50%, Y 30% and Z 20%.
The profit for the year ended 30 June 2004 was $540,000, after charging an expense of $30,000 which it was
agreed related to the period before 1 January 2004. The profit otherwise accrued evenly over the year.
What is X’s total profit share for the year ended 30 June 2004?
A
$305,000
B
$312,500
C
$315,000
D
$295,000
6
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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 for
H and I. On 1 January 2004 they agreed to change the profit-sharing ratio to 3:2:1 and to discontinue H’s salary. I’s
salary continued unchanged. The partnership profit for the year ended 30 June 2004 was $380,000, accruing evenly
over the year.
How should the $380,000 profit be divided among the partners?
A
G
$
192,000
H
$
104,000
I
$
84,000
B
192,500
103,333
84,167
C
209,000
101,333
69,667
D
209,000
111,333
89,667
17 An extract from a cash flow statement prepared by a trainee accountant is shown below.
Cash flows from operating activities
$m
28
Net profit before taxation
Adjustments for:
Depreciation
((9)
–––
19
13
((4)
((8)
––––
10
––––
Operating profit before working capital changes
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 and 4
18 Which of the following items could appear in a company’s cash flow statement?
1
Proposed dividends
2
Rights issue of shares
3
Bonus issue of shares
4
Repayment of loan
A
1 and 3
B
2 and 4
C
1 and 4
D
2 and 3
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[P.T.O.
19 Which of these statements about limited liability companies is/are correct?
(1) A company might make a bonus (capitalisation) issue to raise funds for expansion.
(2) The profit or loss on the disposal of part of a company’s operations must be
disclosed in the income statement as an extraordinary item if material.
(3) Both realised and unrealised gains and losses may be included in the statement of changes in equity required
by IAS 1 Presentation of Financial Statements.
A
1 and 3
B
2 and 3
C
1 and 2
D
3 only
20 Which of the following statements relating to parent companies and subsidiaries are correct?
(1) A parent company could consolidate a company in which it holds less than 50% of the ordinary share capital 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 company’s individual balance sheet.
(4) A subsidiary may be excluded from consolidation if it has not previously been consolidated and the parent’s
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 and 4
21 A trading company makes all its sales and purchases on credit.
How will the length of its working capital cycle normally be calculated?
A
Collection period for receivables plus inventory turnover period plus period of credit taken from suppliers.
B
Collection period for receivables plus inventory turnover period minus period of credit taken from suppliers.
C
Collection period for receivables plus period of credit taken from suppliers.
D
Average time from date of purchase of goods to the receipt of cash from the sale of those goods.
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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
high compared to the monthly average level during the year?
1
The company’s trade is seasonal
2
A downturn in the company’s credit sales in the last few months of its accounting period.
3
A large credit sale in the final month of its accounting period
A
1 and 2
B
1 and 3
C
2 and 3
D
All three factors
The following summarised financial statements for Q are relevant for questions 23 to 25.
(Income tax is ignored)
Operating profit
Interest payable
Dividends paid
Q
Income statement for the year ended 31 July 2004
$m
140
11(8)
––––
132
1(18)
––––
114
––––
Balance sheet as at 31 July 2004
$m
400
––––
200
130
120
150
––––
300
100
––––
400
––––
Non-current assets plus net current assets
Ordinary share capital
Share premium account
Revaluation reserve
Accumulated profits
Loans
23 What is the company’s return on total capital employed?
A
32/200 = 16%
B
32/400 = 8%
C
40/400 = 10%
D
14/300 = 42/3%
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[P.T.O.
24 What is the company’s return on owners’ equity?
A
32/200 = 16%
B
32/300 = 102/3%
C
18/300 = 6%
D
14/300 = 42/3%
25 What is the company’s gearing ratio?
A
300/400 = 75%
B
100/200 = 50%
C
100/400 = 25%
D
300/100 = 300%
(50 marks)
10
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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
$
$
38,000
46,000
119,200
125,000
2,400
2,600
68,100
77,100
3,900
4,600
Inventory
Trade receivables
Payments in advance for expenses
Payables – goods purchased
Creditors – expenses
(2)
Bank summary
2003
1 Oct Balance
2004
30 Sept Cash banked
30 Sept Receipts from credit
30 Sept sales banked
(3)
$
20,500
2004
30 Sept Purchases
$
408,100
12,900
30 Sept Expenses
30 Sept Drawings
30 Sept Balance
89,400
30,000
25,300
––––––––
552,800
––––––––
519,400
––––––––
552,800
––––––––
Cash summary
2003
1 Oct Balance
2004
30 Sept Cash sales
$
300
2004
30 Sept Cash banked
79,000
30
30
30
30
Sept
Sept
Sept
Sept
Purchases
Expenses
Drawings
Balance
––––––––
79,300
––––––––
$
12,900
14,200
4,100
47,900
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 these
goods, when calculated, is to be deducted from purchases in the income statement.
(5) Bob always fixes his selling prices by adding 50% to the buying price of goods. There is no wastage.
Required:
(a) Prepare Bob’s income statement for the year ended 30 September 2004 based on this information.
(8 marks)
(b) Calculate the cost of the goods taken from inventory by Bob during the year.
(4 marks)
(12 marks)
11
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[P.T.O.
2
At 1 July 2003 the balance sheet of Cougar, a limited liability company, contained the following items:
Issued share capital – ordinary shares of 50c
Share premium account
Revaluation reserve
Accumulated profits
$m
100
140
160
120
––––
420
––––
During the year ended 30 June 2004 the following events took place:
(i)
A fundamental error in calculating the inventory at 30 June 2003 was discovered. The effect of the error was a
reduction 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
and was revalued to $85m in 2002, giving rise to the revaluation reserve of $60m shown above.
(iv) The company’s draft pre-tax profit for the year ended 30 June 2004 was $40m. In calculating this figure 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 company’s statement of changes in equity for the year ended 30 June 2004.
(8 marks)
12
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3
On 1 July 1998, Leo, a limited liability company, acquired 70% of the ordinary share capital of Pard for $700,000.
The summarised balance sheet of Pard at that date was as follows:
$
Sundry net assets
800,000
––––––––
Share capital
200,000 ordinary shares of $1 each
200,000
Accumulated profits
600,000
––––––––
800,000
––––––––
The balance sheets of the two companies at 30 June 2004 are shown below.
Sundry net assets
Investment in Pard
Share capital
Ordinary shares of $1 each
Revaluation reserve
Accumulated profits
Leo
$
2,000,000
1,700,000
––––––––––
2,700,000
––––––––––
Pard
$
1,100,000
–
––––––––––
1,100,000
––––––––––
1,500,000
1,800,000
1,400,000
––––––––––
2,700,000
––––––––––
200,000
–
900,000
––––––––––
1,100,000
––––––––––
Required:
Prepare the consolidated balance sheet for the Leo Group as at 30 June 2004. Goodwill on consolidation was
fully written off by 30 June 2003.
(10 marks)
13
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[P.T.O.
4
Lion is a company producing medicinal drugs. At 1 October 2003 the following balances existed in the records:
Deferred development expenditure $1,200,000
Project Q.
$800,000. This is the balance remaining of expenditure totalling $1,000,000 on a 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 year’s depreciation is charged in the year of
acquisition.
Required:
(a) Calculate the figures to be included in Lion’s income statement for the year ended 30 September 2004 and
balance sheet as at that date, and state the headings under which they will appear.
(6 marks)
(b) Prepare the disclosure notes required by IAS 38 Intangible Assets. (The note detailing the accounting policy
for research and development expenditure is NOT required).
(6 marks)
(12 marks)
5
Explain FOUR ways in which the use of historical cost accounting may cause users of financial statements to be
misled when prices are rising.
(8 marks)
End of Question Paper
14
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Answers
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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream)
December 2004 Answers
Section A
1
2
3
4
5
B
C
D
B
A
146,000 + 218,000 – 83,000
(240,000 x 20%) + (160,000 x 20% x
Balance
Sales
Interest
6/
12)
– (60,000 x 20% x
614,000
301,000
1,600
A
A
A
D
D
B
A
C
C
B
A
D
B
D
A
B
B
C
B
C
A
B
C
D
7
8
5
5
–––
25
–––
12)
Cash
Discounts
Contras
Bad Debts
Balance
––––––––
916,600
––––––––
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
9/
311,000
3,400
8,650
32,000
561,550
––––––––
916,600
––––––––
(2 x 5,000) + ( 10 x 6,000)
[2/3 x
1/
2
x (540,000 + 30,000)] – 20,000 + (50% x 285,000)
17
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[P.T.O.
Section B
1
(a)
Bob
Income statement for the year ended 30 September 2004
Sales
Less: Cost of sales
Less: Opening inventory
Less: Purchases
Reference
to workings
1
$
604,200
138,000
410,800
––––––––
448,800
146,000
––––––––
2
Less: less: Closing inventory
Gross profit
Expenses
$
402,800
––––––––
201,400
194,000
––––––––
107,400
––––––––
3
Net profit
(b)
Calculation of goods taken by Bob:
Purchases as above
Purchases per information in question:
408,100 – 68,100 + 77,100 + 14,200
410,800
431,300
––––––––
20,500
––––––––
Goods taken by Bob therefore total
Workings
1
Sales
Credit sales $519,400 – $119,200 + $125,000
Cash sales
Sales for income statement
2
Purchases and cost of sales
Cost of sales $604,200 x 2/3
Details
Opening inventory
Purchases (balancing figure)
less: closing stock
3
$
525,200
79,000
––––––––
604,200
––––––––
402,800
38,000
410,800
––––––––
448,800
46,000
––––––––
Expenses $89,400 + $4,100 – $3,900 + $4,600 + $2,400 – $2,600
Alternative workings for (b)
Purchases and cost of sales (before deducting goods taken by Bob)
Purchases
$408,100 – $68,100 + $77,100 + $14,200
Cost of sales
$431,300 + $38,000 – $46,000
Calculation of goods taken by Bob
Cost of sales allowing for 50% mark-up $604,200 x 2/3
Cost of sales as above
Goods taken by Bob therefore total
Purchases total becomes $431,300 – $20,500
18
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402,800
––––––––
94,000
––––––––
431,300
423,300
402,800
423,300
––––––––
20,500
––––––––
410,800
––––––––
2
(a)
At 1 July 2003
Prior year adjustment
Arising on issue of shares
Surplus on land
revaluation, now realised
Net profit for year (40 + 6)
Dividends paid
3
Cougar
Statement of changes in equity
Year ended 30 June 2004
Share
Share premium
Revaluation
capital
account
reserve
$m
$m
$m
100
140
60
11
–––
–––
–––
100
140
60
100
180
(60)
1
–––
200
–––
–––
320
–––
–––
–
–––
Accumulated
profits
$m
120
1((6)
–––
114
Total
160
146
1((8)
–––
212
–––
–
146
1((8)
––––
732
––––
$m
420
1(6)
–––
414
280
Leo Group
Consolidated balance sheet as at 30 June 2004
$
3,100,000
–––––––––––
$3,100,000
–––––––––––
500,000
800,000
1,470,000
–––––––––––
2,770,000
330,000
–––––––––––
$3,100,000
–––––––––––
Sundry net assets
Share capital
Revaluation reserve
Accumulated profits
Minority interest
Workings
Cost of control
Shares in Pard
$
700,000
Share capital 70%
Accumulated profits:
70% pre-acq
Accumulated profits:
goodwill written off
––––––––
700,000
––––––––
$
1,140,000
1,420,000
1,140,000
1,––––––––
1,700,000
1,––––––––
Minority interest
$
Balance for CBS
330,000
––––––––
330,000
––––––––
Share capital 30%
Accumulated profits 30%
$
1, 60,000
1,270,000
1,––––––––
1,330,000
1,––––––––
Accumulated profits
$
Cost of control
70% x 600,000
Minority interest
30% x 900,000
Cost of control
goodwill written off
Balance for CBS
Leo
Pard
$
1,400,000
1,900,000
1,420,000
1,270,000
1,140,000
1,470,000
–––––––––
2,300,000
–––––––––
–––––––––
2,300,000
–––––––––
19
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4
(a)
Research and development
Balance at
1 Oct 2003
$
Project Q
1,000,000
1)(200,000)
R
)))400,000
S
––––––––––
1,200,000
––––––––––
Equipment
Balance at
1 Oct 2003
$
1500,000
((200,000)
––––––––––
300,000
––––––––––
New
expenditure
$
Income statement
Amortisation
Research
$
$
Balance sheet
30 Sept 2004
$
(100,000)
1,700,000
1,650,000
250,000
(140,000)
–––––––––
(140,000)
–––––––––
––––––––
250,000
––––––––
–––––––––
(100,000)
–––––––––
New
expenditure
$
180,000
Depreciation
––––––––––
1,350,000
––––––––––
Balance sheet
30 Sept 2004
$
1,680,000
1,(336,000)
––––––––––
1,344,000
––––––––––
$
(136,000)
–––––––––
(136,000)
–––––––––
––––––––
180,000
––––––––
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 non-current
assets.
(b)
Disclosure notes
Income statement
The aggregate amount of research and development expenditure recognised as an expense during the period was $376,000,
all charged in cost of sales.
Balance sheet
Movements on deferred development expenditure during the year were:
Balance at 1 October 2003
Year ended 30 September 2004
Amortisation
New expenditure
5
Cost
$
1,400,000
250,000
––––––––––
1,650,000
––––––––––
Amortisation
$
(200,000)
Net book value
$
1,200,000
(100,000)
(100,000)
250,000
––––––––––
1,350,000
––––––––––
–––––––––
(300,000)
–––––––––
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
from the use of these assets. The result is that profit is overstated.
(ii)
Inventory is often valued at cost, using FIFO or average costs. If prices are rising, sales in current terms are matched 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
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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream)
December 2004 Marking Scheme
Section B
1
(a)
sales
4 x 1/2
cost of sales
purchases as balancing figure
expenses
6 x 1/2
2 x 1/2
Calculations
Heading and layout
(b)
2
3
Calculation of purchases
Correct method (subtraction of net purchases)
Opening balances
Prior year adjustment
Share issue
Surplus on revaluation transferred
Net profit for year
Dividends paid
Goodwill
Minority interest
Accumulated profits
Balance sheet
Share capital
Sundry net assets
Revaluation reserve
B/S layout
heading
4x
1/
2
2
2
–––
4
–––
12
–––
1
1
2
2
1
1
–––
8
–––
2x1
4x
2x
5x
Marks
2
1
1
3
1
–––
8
–––
1/
2
1/
2
1/
2
2
1
21/2
1
1
1
1
1/
2
–––
41/2
–––
10
–––
4
(a)
Project
Q
R
S
Equipment Cost
Depreciation
Headings
Accumulated profits
Balance sheet
1
1
1
1/
2
1
1
1/
2
–––
6
–––
(b)
(b)
5
Income statement Total
Income statement heading used
Balance sheet
2
1
3
–––
6
–––
12
–––
4x2
8
–––
50
–––
21
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(International Stream)
PART 1
THURSDAY 9 JUNE 2005
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
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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Paper 1.1(INT)
Preparing Financial
Statements
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:
Rent received in advance
Rent owing by tenants
31 December 2004
$
28,400
18,300
31 December 2003
$
24,600
16,900
All rent owing was subsequently received
What figure for rental income should be included in the income statement of B for 2004?
2
A
$341,000
B
$336,400
C
$300,800
D
$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
Inventories at 31 December 2004
Purchases
Gross profit percentage on sales
$
38,000
45,000
637,000
30%
Based on this information, what was the trader’s sales figure for the year?
A
$900,000
B
$819,000
C
$920,000
D
$837,200
2
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3
The following bank reconciliation statement has been prepared for a company:
$
39,800
64,100
––––––––
103,900
44,200
––––––––
59,700
––––––––
Overdraft per bank statement
add: Deposits credited after date
less: Outstanding cheques presented after date
Overdraft per cash book
Assuming the amount of the overdraft per the bank statement of $39,800 is correct, what should be the balance
in the cash book?
4
A
$158,100
overdrawn
B
$19,900
overdrawn
C
$68,500
overdrawn
D
$59,700
overdrawn as stated
Which, if any, of the following journal entries is correct according to their narratives?
Dr
$
450
(1) B receivables ledger account
Bad debts account
Irrecoverable balance written off
(2) Investments: Q ordinary shares
Share capital
80,000 shares of 50c each issued at
$1·25 in exchange for shares in Q.
(3) Suspense account
Motor vehicles account
Correction of error – debit side of
Motor vehicles account undercast by $1,000
5
A
None of them
B
1 only
C
2 only
D
3 only
Cr
$
450
100,000
100,000
1,000
1,000
An enterprise has made a material change to an accounting policy in preparing its current financial statements.
Which of the following disclosures are required by IAS 8 Accounting policies, changes in accounting estimates
and errors in these financial statements?
1
2
3
The reasons for the change.
The amount of the consequent adjustment in the current period and in comparative information for prior periods.
An estimate of the effect of the change on future periods, where possible.
A
1 and 2 only
B
1 and 3 only
C
2 and 3 only
D
All three items
3
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[P.T.O.
6
At 31 December 2003 Q, a limited liability company, owned a building that had cost $800,000 on 1 January 1994.
It was being depreciated at two per cent per year.
On 31 December 2003 a revaluation to $1,000,000 was recognised. At this date the building had a remaining useful
life of 40 years.
Which of the following pairs of figures correctly reflects the effects of the revaluation?
7
A
Depreciation charge
for year ended 31 December 2004
$
25,000
Revaluation reserve
as at 31 December 2003
$
200,000
B
25,000
360,000
C
20,000
200,000
D
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
Sales of goods (profit margin
30% on sales)
Goods returned by Q to supplier
$
8,600
14,000
700
What adjusted figure should be included in the financial statements for inventories at 31 December 2004?
8
A
$838,100
B
$853,900
C
$818,500
D
$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
guaranteed that R’s profit share would not be less than $25,000 for the six months to 31 December 2004. The profitsharing arrangements after R’s admission were P 50%, Q 30%, R 20%. The profit for the year ended 31 December
2004 is $240,000, accruing evenly over the year.
What should P’s final profit share be for the year ended 31 December 2004?
A
$140,000
B
$139,000
C
$114,000
D
$139,375
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9
Which of the following items must be disclosed in a company’s published financial statements (including notes)
if material, according to IAS1 Presentation of financial statements?
1
2
3
4
Finance costs.
Staff costs.
Depreciation and amortisation expense.
Movements on share capital.
A
1 and 3 only
B
1, 2 and 4 only
C
2, 3 and 4 only
D
All four items
10 Which of the following costs should be included in valuing inventories of finished goods held by a manufacturing
company, according to IAS2 Inventories?
1
2
3
4
Carriage inwards.
Carriage outwards.
Depreciation of factory plant.
Accounts department costs relating to wages for production employees.
A
All four items
B
2 and 3 only
C
1, 3 and 4 only
D
1 and 4 only
11 During 2004, B, a limited liability company, paid a total of $60,000 for rent, covering the period from 1 October
2003 to 31 March 2005.
What figures should appear in the company’s financial statements for the year ended 31 December 2004?
A
Income statement
$40,000
Balance sheet
Prepayment $10,000
B
$40,000
Prepayment $15,000
C
$50,000
Accrual $10,000
D
$50,000
Accrual $15,000
12 Wanda keeps no accounting records. The following information is available about her position and transactions for
the year ended 31 December 2004:
Net assets at 1 January 2004
Drawings during 2004
Capital introduced during 2004
Net assets at 31 December 2004
$
210,000
48,000
100,000
400,000
Based on this information, what was Wanda’s profit for 2004?
A
$42,000
B
$242,000
C
$138,000
D
$338,000
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[P.T.O.
13 The following receivables ledger control account has been prepared by a trainee accountant:
Receivables ledger control account
2005
1 Jan
$
318,650
161,770
Balance
Credit sales
Cash sales
Discounts allowed to
credit customers
84,260
1,240
––––––––
565,920
––––––––
2005
$
31 Jan Cash from credit customers
181,140
Interest charged on overdue accounts
280
Bad debts written off
1,390
Sales returns from credit
customers
3,990
Balance
379,120
––––––––
565,920
––––––––
What should the closing balance at 31 January 2005 be after correcting the errors in the account?
A
$292,380
B
$295,420
C
$292,940
D
$377,200
14 At 31 December 2004 a company’s trade receivables totalled $864,000 and the allowance for doubtful debts was
$48,000.
It was decided that debts totalling $13,000 were to be written off, and the allowance for doubtful debts adjusted to
five per cent of the 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?
A
Income statement
Bad and doubtful debts
$
8,200
Balance sheet
Net trade receivables
$
807,800
B
7,550
808,450
C
18,450
808,450
D
55,550
808,450
15 A trader who fixes her prices by adding 50% to cost actually achieved a mark-up of 45%.
Which of the following factors could account for the shortfall?
1
2
3
4
Sales were lower than expected.
The opening inventories had been overstated.
The closing inventories of the business were higher than the opening inventories.
Goods taken from inventories by the proprietor were recorded by debiting drawings and crediting purchases with
the cost of the goods.
A
All four factors
B
1, 2 and 4 only
C
2 only
D
3 and 4 only
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16 Which of the following statements about accounting concepts and conventions are correct?
(1) The entity concept requires that a business is treated as being separate from its owners.
(2) The use of historical cost accounting tends to understate assets and profit when prices are rising.
(3) The prudence concept means that the lowest possible values should be applied to income and assets and the
highest possible values to expenses and liabilities.
(4) The money measurement concept means that only assets capable of being reliably measured in monetary terms
can be included in the balance sheet of a business.
A
1 and 2
B
2 and 3
C
3 and 4
D
1 and 4
17 A business income statement for the year ended 31 December 2004 showed a net profit of $83,600. It was later
found that $18,000 paid for the purchase of a motor van had been debited to motor expenses account. It is the
company’s policy to depreciate motor vans at 25 per cent per year, with a full year’s charge in the year of acquisition.
What would the net profit be after adjusting for this error?
A
$106,100
B
$70,100
C
$97,100
D
$101,600
18 How should interest charged on partners’ drawings appear in partnership financial statements?
A
As income in the income statement
B
Added to net profit and charged to partners in the division of profit
C
Deducted from net profit and charged to partners in the division of profit
D
Deducted from net profit in the division of profit and credited to partners
19 Which of the following statements about intangible assets in company financial statements are correct according
to international accounting standards?
1
2
3
Internally generated goodwill should not be capitalised.
Purchased goodwill should normally be amortised through the income statement.
Development expenditure must be capitalised if certain conditions are met.
A
1 and 3 only
B
1 and 2 only
C
2 and 3 only
D
All three statements are correct
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[P.T.O.
20 Which of the following events occurring after the balance sheet date are classified as adjusting, if material?
1
2
3
4
The sale of inventories valued at cost at the balance sheet date for a figure in excess of cost.
A valuation of land and buildings providing evidence of an impairment in value at the year end.
The issue of shares and loan notes.
The insolvency of a customer with a balance outstanding at the year end.
A
1 and 3
B
2 and 4
C
2 and 3
D
1 and 4
21 Which of the following statements about contingent assets and contingent liabilities are correct?
1
2
3
4
A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
A contingent liability should be disclosed by note if it is probable that a transfer of economic benefits to settle it
will be required, with no provision being made.
No disclosure is required for a contingent liability if it is not probable that a transfer of economic benefits to settle
it will be required.
No disclosure is required for either a contingent liability or a contingent asset if the likelihood of a payment or
receipt is remote.
A
1 and 4 only
B
2 and 3 only
C
2, 3 and 4
D
1, 2 and 4
22 Which of the following statements about limited liability companies’ accounting is/are correct?
1
2
3
A revaluation reserve arises when a non-current asset is sold at a profit.
The authorised share capital of a company is the maximum nominal value of shares and loan notes the company
may issue.
The notes to the financial statements must contain details of all adjusting events as defined in IAS10 Events after
the balance sheet date.
A
All three statements
B
1 and 2 only
C
2 and 3 only
D
None of the statements
8
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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
liability company, for $160,000.
The balance sheets of the two companies at 31 December 2004 were as follows:
Net assets
Investment in K
Issued share capital
Retained earnings
At 31 December 2003
Profit for 2004
J
$
130,000
160,000
––––––––
290,000
––––––––
K
$
120,000
–
––––––––
120,000
––––––––
200,000
50,000
40,000
50,000
––––––––
290,000
––––––––
30,000
40,000
––––––––
120,000
––––––––
Goodwill as calculated at 1 January 2004 is to be reduced in value by $24,000 because of impairment during 2004.
23 What figure should appear in the consolidated balance sheet of the J group as at 31 December 2004 for goodwill?
A
$48,000
B
$96,000
C
$72,000
D
$64,000
24 What figure should appear in the consolidated balance sheet of the J group as at 31 December 2004 for minority
interest?
A
$32,000
B
$16,000
C
$10,000
D
$24,000
9
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[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
company, representing 80% of Y’s $60,000 share capital. The retained earnings of Y at that date were $70,000.
At 31 March 2005 the retained earnings of the companies were:
$
180,000
100,000
X
Y
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
$208,000
B
$8,000
C
$204,000
D
$188,000
(50 marks)
10
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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
Assets
Non-current assets
Land and buildings
Plant and equipment
$000
9,000
21,000
–––––––
30,000
–––––––
Accumulated
depreciation
$000
1,000
9,000
–––––––
10,000
–––––––
Current assets
Inventories
Receivables
Cash at bank
Net book value
$000
8,000
12,000
–––––––
20,000
3,000
2,600
1,900
–––––––
27,500
–––––––
Total assets
Equity and liabilities
Capital and reserves
Issued share capital (ordinary shares of 50c each)
Retained earnings
Non-current liabilities
Loan notes (redeemable 2010)
Current liabilities
Trade payables
Suspense account
6,000
12,400
2,000
2,100
–––––––
22,500
5,000
–––––––
27,500
–––––––
The following further information is available:
1
2
3
4
5
It has been decided to revalue the land and buildings to $12,000,000 at 31 December 2004.
Trade receivables totalling $200,000 are to be written off.
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
set-off.
Some inventory items included in the draft balance sheet at cost $500,000 were sold after the balance sheet
date for $400,000, with selling expenses of $40,000.
The suspense account is made up of two items:
(a) The proceeds of issue of 4,000,000 50c shares at $1·10 per share, credited to the suspense account from
the cash book.
(b) The balance of the account is the proceeds of sale of some plant on 1 January 2004 with a net book value
at the date of sale of $700,000 and which had originally cost $1,400,000. No other accounting 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 company’s balance sheet as at 31 December 2004, complying as far as possible with
IAS1 Presentation of financial statements.
Details of non-current assets, adjusted appropriately, should appear as they are presented in the question.
(12 marks)
11
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[P.T.O.
2
The draft financial statements of Choctaw, a limited liability company, for the year ended 31 December 2004 showed
a profit of $86,400. The trial balance did not balance, and a suspense account with a credit balance of $3,310 was
included in the balance sheet.
In subsequent checking the following errors were found:
(a) Depreciation of motor vehicles at 25 per cent was calculated for the year ended 31 December 2004 on the
reducing balance basis, and should have been calculated on the straight-line basis at 25 per cent.
Relevant figures:
Cost of motor vehicles $120,000, net book value at 1 January 2004, $88,000
(b) Rent received from subletting part of the office accommodation $1,200 had been put into the petty cash box.
No receivable balance had been recognised when the rent fell due and no entries had been made in the petty
cash book or elsewhere for it. The petty cash float in the trial balance is the amount according to the records,
which is $1,200 less than the actual balance in the box.
(c) Bad debts totalling $8,400 are to be written off.
(d) The opening accrual on the motor repairs account of $3,400, representing repair bills due but not paid at
31 December 2003, had not been brought down at 1 January 2004.
(e) The cash discount totals for December 2004 had not been posted to the discount accounts in the nominal ledger.
The figures were:
Discount allowed
Discount received
$
380
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 the
necessary adjustments to the profit.
(10 marks)
12
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3
The following information is available for Sioux, a limited liability company:
Balance sheets
31 December
2004
$000
Non-current assets
Cost or valuation
Accumulated depreciation
3,400
3,800
400
–––––––
Equity and liabilities
Capital and reserves
Ordinary share capital
Revaluation reserve
Retained earnings
Non-current liabilities
10% Loan notes
Current liabilities
Trade payables
Income tax
$000
11,000
(5,600)
–––––––
5,400
Net book value
Current assets
Inventories
Receivables
Cash at bank
2003
$000
1,000
1,500
3,100
–––––––
7,600
–––––––
13,000
–––––––
5,600
8,000
(4,800)
–––––––
3,200
3,800
2,900
100
–––––––
1,000
1,000
2,200
–––––––
3,000
3,700
700
–––––––
4,400
–––––––
13,000
–––––––
$000
6,800
–––––––
10,000
–––––––
4,200
2,000
3,200
600
–––––––
3,800
–––––––
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 company’s cash flow statement for the year ended 31 December 2004, using the indirect method,
adopting the format in IAS7 Cash flow statements.
(11 marks)
13
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[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 investor’s point of view than a company
with low gearing.
(3 marks)
(b) Ratio analysis in general can be useful in comparing the performance of two companies, but it has its limitations.
Required:
State and briefly explain three factors which can cause accounting ratios to be misleading when used for
such comparison.
(6 marks)
(9 marks)
5
The directors of Quapaw, a limited liability company, are reviewing the company’s draft financial statements for the
year ended 31 December 2004.
The following material matters are under discussion:
(a) During the year the company has begun selling a product with a one-year warranty under which 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.
In February 2005 the damaged goods were sold for $85,000 by an agent who received a 10% commission out
of the sale proceeds.
(2 marks)
(c) In August 2004 it was discovered that the inventory at 31 December 2003 had been overstated by $100,000.
(4 marks)
Required:
Advise the directors on the correct treatment of these matters, stating the relevant accounting standard which
justifies your answer in each case.
NOTE: The mark allocation is shown against each of the three matters.
(8 marks)
End of Question Paper
14
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
June 2005 Answers
Section A
1
D
Rent received
Balance
Income statement
Balance
16,900
316,200
28,400
––––––––
361,500
––––––––
Balance
Cash
Balance
24,600
318,600
18,300
––––––––
361,500
––––––––
2
A
38,000 + 637,000 – 45,000 = 630,000 x 10/7 = 900,000
3
B
39,800 + 44,200 – 64,100 = 19,900 overdrawn
4
A
5
A
6
B
Depreciation 1/40 x 1,000,000
Revaluation 1,000,000 – 640,000
7
A
836,200 – 8,600 + 700 + (14,000 x 70%) = 838,100
8
B
80,000 + 60,000 – 1,000 = 139,000
9
D
10 C
11 A
Income statement 12/18 x 60,000 = 40,000
Prepayment 3/12 x 40,000 = 10,000
12 C
400,000 – 210,000 – 100,000 + 48,000 = 138,000
13 C
318,650
161,770
280
––––––––
480,700
––––––––
14 B
181,140
1,390
3,990
1,240
292,940
––––––––
480,700
––––––––
864,000 – 13,000 = 851,000 – 5% =
13,000 – (48,000 – 42,550)
808,450
7,550
15 C
17
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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
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Section B
1
Shuswap
Balance sheet as at 31 December 2004
Cost or
Accumulated
valuation
depreciation
$000
$000
Assets
Non-current assets
Land and buildings
Plant and equipment
12,000
19,600
–––––––
31,600
–––––––
Net book
value
$000
–
7,950
––––––
7,950
––––––
Current assets
Inventories (3,000 – 140)
Receivables (2,600 – 200 – 106)
Cash at bank
12,000
11,650
–––––––
23,650
2,860
2,294
1,900
––––––
Equity and liabilities
Capital and reserves
Called up share capital (6,000 + 2,000)
Share premium account
Revaluation reserve
Retained earnings (working)
7,054
–––––––
30,704
–––––––
8,000
2,400
4,000
12,310
––––––
26,710
Non-current liabilities
Loan notes
Current liabilities
Trade payables (2,100 – 106)
2,000
1,994
–––––––
30,704
–––––––
Working
Retained earnings balance
Per question
Bad debts written off
Loss on sale of plant
Depreciation adjustment
Inventory adjustment
2
(a)
(b)
(c)
(d)
(e)
$000
12,400
(200)
(100)
350
(140)
–––––––
12,310
–––––––
Income statement
Accumulated depreciation of motor vehicles
Adjustment to depreciation from reducing balance basis
to straight-line basis
$
8,000
$
8,000
Petty cash
Rent receivable
Rent received omitted from records
1,200
Bad debts
Sundry receivables ledger accounts
Bad debts written off
8,400
1,200
8,400
Suspense account
3,400
Motor vehicle repairs
Correction of error – opening balance not brought forward
Discounts allowed
Discounts received
Suspense account
December 2004 discount totals not posted
3,400
380
290
90
19
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Profit adjustments
Profit per draft financial statements
(a) Depreciation adjustment
(b) Rent receivable not recorded
(c) Bad debts written off
(d) Motor repairs adjustment
(e) Discounts not posted: 380 – 290
Adjusted profit
3
$
86,400
(8,000)
1,200
(8,400)
3,400
(90)
––––––––
74,510
––––––––
Sioux
Cash flow statement for the year ended 31 December 2004.
$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)
Increase in payables
500
––––––
Cash generated from operations
3,750
Interest paid
(300)
Income taxes paid
(600)
––––––
Cash flows from investing activities
Purchase of non-current assets
Proceeds of sale of non-current assets
Net cash used in investing activities
(3,300)
500
––––––
Cash flows from financing activities
Proceeds of issue of loan notes
Dividends paid
Net cash from financing activities
1,000
(750)
––––––
Net increase in cash
Cash at 1 January 2004
$000
2,850
(2,800)
250
––––––
300
100
––––––
400
––––––
Cash at 31 December 2004
Workings
Non-current assets – cost
Opening balance
Revaluation reserve
Cash (balancing figure)
$000
8,000
500
3,300
–––––––
11,800
–––––––
Disposal
Closing balance
$000
800
11,000
–––––––
11,800
–––––––
Non-current assets – depreciation
Disposal
Closing balance
$000
450
Opening balance
Income statement
5,600
–––––––
6,050
–––––––
$000
4,800
1,250
–––––––
6,050
–––––––
20
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Non-current assets – disposal
$000
800
150
––––
950
––––
Cost
Profit on sale
4
Depreciation
Cash
$000
450
500
––––
950
––––
(a)
A highly-geared company has an obligation to pay interest on its loans regardless of its profit level. It will show high profits if
its overall rate of return on capital is greater than the rate of interest being paid on its borrowings, but a low profit or a loss if
there is a down-turn in its profit such that the rate of interest to be paid exceeds the return on its assets.
(b)
(i)
One company may have revalued its assets while the other has not.
(ii)
Accounting policies and estimation techniques may differ. For example, one company may use higher depreciation 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 required by
IAS37 Provisions, contingent liabilities and contingent assets.
(b)
The inventories should be valued at the lower of cost and net realisable value. Cost is $80,000, net realisable value is
$85,000 less 10%, or $76,500. The net realisable value of $76,500 should therefore be taken (IAS2 Inventories)
(c)
The opening inventory should be included in the current year’s income statement at the corrected figure, and the opening
balance of retained profit reduced by $100,000. The $100,000 reduction will appear in the statement of changes in equity.
(IAS8 Accounting policies, changes in accounting estimates and errors)
21
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
1
2
Land and buildings
Plant and equipment
depreciation
adjustment for disposal
Inventory adjustment
Receivables-adjustment for write-off
Payables Contra
Payables Contra
Share capital
Share premium
Revaluation reserve
Retained earnings
bad debts
loss on plant
depreciation adjustment
Inventory adjustment
Heading
Journal entries
1/ mark per entry
2
1/ mark for narrative
2
June 2005 Marking Scheme
1
1
1
2
1
1/
2
1/
2
1/
2
1
1
1
1
1
1
1
1
–––––
131/2
max 12
1
1/
2
–––––
11/2 x 5
Profit adjustments 5 x 1/2
71/2
21/
–––––2
10
3
Workings:
Non-current assets:
cost
depreciation
disposal
3 x 1/2
2 x 1/2
3 x 1/2
11/2
1
11/2
Cash flow statement
1/ per item
2
13 x 1/2
61/2
Layout
Heading
4
1
1
–––––
1
12 /2
(a)
(b)
max 11
3
3x2
6
–––––
9
5
(a)
(b)
(c)
Provision
IAS 37
1
1
2
Correct treatment
IAS2
1
1
2
Prior year adjustment
Reconciliation
Comparative figures adjusted
IAS8
1
1
1
1
4
–––––
8
–––––
50
–––––
23
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(International Stream)
PART 1
THURSDAY 8 DECEMBER 2005
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
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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Paper 1.1(INT)
Preparing Financial
Statements
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:
$
186,000
274,000
Net business assets at 1 July 2004
Net business assets at 30 June 2005
During the year ended 30 June 2005:
Cash drawings by proprietor
Additional capital introduced by proprietor
Business cash used to buy a car for the proprietor’s wife,
who takes no part in the business
68,000
50,000
20,000
Using this information, what is the trader’s profit for the year ended 30 June 2005?
2
A
$126,000
B
$50,000
C
$86,000
D
$90,000
Evon, a limited liability company, issued 1,000,000 ordinary shares of 25c each at a price of $1·10 per share, all
received in cash.
What should be the accounting entries to record this issue?
A
Debit:
Credit:
Cash
Share capital
Share premium
$1,100,000
$250,000
$850,000
B
Debit:
Credit:
Share capital
Share premium
Cash
$250,000
$850,000
$1,100,000
C
Debit:
Credit:
Cash
Share capital
$1,100,000
$1,100,000
D
Debit:
Credit:
Cash
Share capital
Retained earnings
$1,100,000
$250,000
$850,000
2
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3
P and Q are in partnership, sharing profits equally.
On 1 January 2005, R joined the partnership and it was agreed that from that date all three partners should 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
bad debt of $30,000 which it was agreed should be borne equally by P and Q only.
What should be the partners’ total profit shares for the year ended 30 June 2005?
4
A
P
$
95,000
Q
$
95,000
R
$
110,000
B
122,500
122,500
55,000
C
125,000
125,000
50,000
D
110,000
110,000
50,000
At 1 July 2004 a limited liability company’s capital structure was as follows:
Share capital 1,000,000 shares of 50c each
Share premium account
$
500,000
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 $1·50 per share.
What will be the balances on the company’s share capital and share premium accounts at 30 June 2005 as a
result of these issues?
Share capital
$
A 687,500
5
Share premium account
$
650,000
B
675,000
375,000
C
687,500
150,000
D
687,500
400,000
Which of the following factors could cause a company’s gross profit percentage on sales to fall below the expected
level?
1
2
3
4
Understatement of closing inventories.
The incorrect inclusion in purchases of invoices relating to goods supplied in the following period.
The inclusion in sales of the proceeds of sale of non-current assets.
Increased cost of carriage charges borne by the company on goods sent to customers.
A
3 and 4
B
2 and 4
C
1 and 2
D
1 and 3
3
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[P.T.O.
6
Which of the following journal entries are correct, according to their narratives?
Dr
$
18,000
1
Suspense account
Rent received account
Correction of error in posting $24,000 cash
received for rent to the rent received account
as $42,000
––––––––––––––––––––––––––––––––––––––––––––
Cr
$
18,000
2
B receivables ledger account
A receivables ledger account
Correction of error: cash received
from A wrongly entered to B’s account
––––––––––––––––––––––––––––––––––––––––––––
22,000
22,000
3
Share premium account
Share capital account
1 for 3 bonus issue on share capital
of 1,200,000 50c shares
––––––––––––––––––––––––––––––––––––––––––––
400,000
4
750,000
400,000
Shares in X
Share capital account
Share premium account
250,000
500,000
500,000 50c shares issued at $1·50 per share
in exchange for shares in X
––––––––––––––––––––––––––––––––––––––––––––
7
A
1 and 3
B
2 and 3
C
1 and 4
D
2 and 4
The receivables ledger control account below contains several incorrect entries.
Receivables ledger control account
$
138,400
Opening balance
Cash received from credit customers
78,420
––––––––
216,820
––––––––
$
Credit sales
80,660
Contras against credit
balances in payables ledger
1,000
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
––––––––
What should the closing balance be when all the errors are corrected?
A
$133,840
B
$135,540
C
$137,740
D
$139,840
4
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8
A limited liability company’s trial balance does not balance. The totals are:
Debit
Credit
$384,030
$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?
9
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
in the rent account as $6,160.
C
Debit side of cash book undercast by $10,000; $1,610 paid for rent correctly entered in the cash book 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
in the rent account as $1,610.
A draft cash flow statement contains the following calculation of net cash inflow from operating activities:
$m
13
2
(3)
5
4
–––
21
Operating profit
Depreciation
Decrease in inventories
Decrease in trade and other receivables
Decrease in trade payables
Net cash inflow from operating activities
Which of the following corrections need to be made to the calculation?
1
2
3
4
Depreciation should be deducted, not added.
Decrease in inventories should be added, not deducted.
Decrease in receivables should be deducted, not added.
Decrease in payables should be deducted, not added.
A
1 and 3
B
2 and 3
C
1 and 4
D
2 and 4
10 Which of the following factors would cause a company’s gearing ratio to fall?
1
2
3
4
A bonus issue of ordinary shares.
A rights issue of ordinary shares.
An issue of loan notes.
An upward revaluation of non-current assets.
A
1 and 3
B
2 and 3
C
1 and 4
D
2 and 4
5
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[P.T.O.
11 The following information is available for Orset, a sole trader who does not keep full accounting records:
Inventory 1 July 2004
30 June 2005
Purchases for year ended 30 June 2005
$
138,600
149,100
716,100
Orset makes a standard gross profit of 30 per cent on sales.
Based on these figures, what is Orset’s sales figure for the year ended 30 June 2005?
A
$2,352,000
B
$1,038,000
C
$917,280
D
$1,008,000
12 At 1 July 2004 a company had prepaid insurance of $8,200. On 1 January 2005 the company paid $38,000 for
insurance for the year to 30 September 2005.
What figures should appear for insurance in the company’s financial statements for the year ended 30 June
2005?
A
Income statement
$27,200
Balance sheet
Prepayment $19,000
B
$39,300
Prepayment $9,500
C
$36,700
Prepayment $9,500
D
$55,700
Prepayment $9,500
13 Which of the following correctly describes the imprest system for operating petty cash?
A
All expenditure out of petty cash must be supported by a properly authorised voucher.
B
A regular equal amount of cash is transferred into petty cash.
C
The exact amount of expenditure out of petty cash is reimbursed at intervals.
D
A budget is fixed for a period which petty cash expenditure must not exceed.
14 Alpha buys goods from Beta. At 30 June 2005 Beta’s account in Alpha’s records showed $5,700 owing to Beta.
Beta submitted a statement to Alpha as at the same date showing a balance due of $5,200.
Which of the following could account fully for the difference?
A
Alpha has sent a cheque to Beta for $500 which has not yet been received by Beta.
B
The credit side of Beta’s account in Alpha’s records has been undercast by $500.
C
An invoice for $250 from Beta has been treated in Alpha’s records as if it had been a credit note.
D
Beta has issued a credit note for $500 to Alpha which Alpha has not yet received.
6
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15 Which of the following statements about intangible assets are correct?
1
2
3
If certain criteria are met, research expenditure must be recognised as an intangible asset.
Goodwill may not be revalued upwards.
Internally generated goodwill should not be capitalised.
A
2 and 3 only
B
1 and 3 only
C
1 and 2 only
D
All three statements are correct
16 Which of the following events between the balance sheet date and the date the financial statements are
authorised for issue must be adjusted in the financial statements?
1
2
3
4
Declaration of equity dividends.
Decline in market value of investments.
The announcement of changes in tax rates.
The announcement of a major restructuring.
A
1 only
B
2 and 4
C
3 only
D
None of them
17 A company sublets part of its office accommodation. In the year ended 30 June 2005 cash received from tenants
was $83,700.
Details of rent in arrears and in advance at the beginning and end of the year were:
30 June 2004
30 June 2005
In arrears
$
3,800
4,700
In advance
$
2,400
3,000
All arrears of rent were subsequently received.
What figure for rental income should be included in the company’s income statement for the year ended 30 June
2005?
A
$84,000
B
$83,400
C
$80,600
D
$85,800
18 Which of the following statements about accounting ratios and their interpretation are correct?
1
2
3
A low-geared company is more able to survive a downturn in profit than a highly-geared company.
If a company has a high price earnings ratio, this will often indicate that the market expects its profits to rise.
All companies should try to achieve a current ratio (current assets/current liabilities) of 2:1.
A
2 and 3 only
B
1 and 3 only
C
1 and 2 only
D
All three statements are correct
7
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[P.T.O.
19 At 30 June 2004 a company’s allowance for receivables was $39,000. At 30 June 2005 trade receivables totalled
$517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to 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
$22,000
C
$24,000
D
$23,850
20 IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories of finished goods.
Which of the following statements about the IAS 2 requirements in this area are correct?
1
3
Finished goods inventories may be valued on the basis of labour and materials cost only, without including
overheads.
Carriage inwards, but not carriage outwards, should be included in overheads when valuing inventories of
finished goods.
Factory management costs should be included in fixed overheads allocated to inventories of finished goods.
A
All three statements are correct
B
1 and 2 only
C
1 and 3 only
D
2 and 3 only
2
21 A limited liability company sold a building at a profit.
How will this transaction be treated in the company’s cash flow statement?
Proceeds of sale
Cash inflow under
Financing activities
Profit on sale
Added to profit in
calculating cash flow
from operating activities
B
Cash inflow under
Investing activities
Deducted from profit in
calculating cash flow
from operating activities
C
Cash inflow under
Investing activities
Added to profit in
calculating cash flow from
operating activities
D
Cash inflow under
Financing activities
Deducted from profit in
calculating cash flow
from operating activities
A
8
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22 Which of the following items may appear in a company’s statement of changes in equity, according to IAS 1
Presentation of financial statements?
1
2
3
4
Unrealised revaluation gains.
Dividends paid.
Proceeds of equity share issue.
Profit for the period.
A
2, 3 and 4 only
B
1, 3 and 4 only
C
All four items
D
1, 2 and 4 only
23 The capital structure of a company at 30 June 2005 is as follows:
$m
100
40
60
40
Ordinary share capital
Share premium account
Retained earnings
10% Loan notes
The company’s income statement for the year ended 30 June 2005 showed:
$m
44
(4)
–––
40
–––
Operating profit
Loan note interest
Profit for year
What is the company’s return on capital employed?
A
40/240
=
162/3 per cent
B
40/100
=
40 per cent
C
44/240
=
181/3 per cent
D
44/200
=
22 per cent
24 Sigma’s bank statement shows an overdrawn balance of $38,600 at 30 June 2005. A check against the company’s
cash book revealed the following differences:
1
2
3
4
Bank charges of $200 have not been entered in the cash book.
Lodgements recorded on 30 June 2005 but credited by the bank on 2 July $14,700.
Cheque payments entered in cash book but not presented for payment at 30 June 2005 $27,800.
A cheque payment to a supplier of $4,200 charged to the account in June 2005 recorded in the cash book as
a receipt.
Based on this information, what was the cash book balance BEFORE any adjustments?
A
$43,100 overdrawn
B
$16,900 overdrawn
C
$60,300 overdrawn
D
$34,100 overdrawn
9
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[P.T.O.
25 The following is an extract from the income statement of a business:
$000
Sales revenue
Opening inventories
Purchases
$000
22,000
5,000
15,000
–––––––
20,000
3,000
–––––––
less: Closing inventories
17,000
–––––––
5,000
–––––––
Gross profit
To the nearest day, how many days’ sales are held in the closing inventories?
A
3,000/22,000 x 365
= 50 days
B
3,000/17,000 x 365
= 64 days
C
3,000/15,000 x 365
= 73 days
D
3,000/20,000 x 365
= 55 days
(50 marks)
10
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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
to notes
Receipts
$
Overdraft, 1 July 2004
Cash banked
1
Proceeds of sale of old motor van
2,3
Payments for purchases
New motor van (purchased 1 January 2005) 3
Rent and general expenses
Drawings
Overdraft, 30 June 2005
Payments
$
32,400
418,200
4,500
316,300
22,000
49,200
80,400
77,600
––––––––
500,300
––––––––
–––––––––
500,300
–––––––––
Airn’s other assets and liabilities at the beginning and end of the year ended 30 June 2005 were:
Reference
to notes
Shop fittings (cost $45,000)
Motor van (cost $18,000)
New motor van
Trade receivables
Trade payables
Inventories
Owing for rent and general expenses
30 June
2005
$
to be calculated
sold
22,000
48,600
24,200
63,200
13,000
2,3
3
2004
$
35,000
4,000
–
44,700
19,600
58,900
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) Airn’s depreciation policy is to charge depreciation on the straight line basis as follows, assuming no residual
value:
Motor van
Shop fittings
20% per year
10% per year
No depreciation is charged in the year of sale of assets, but there is a full year’s depreciation in the year of
purchase.
Required:
Prepare Airn’s income statement for the year ended 30 June 2005.
(11 marks)
11
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[P.T.O.
2
The following land and buildings account for the year ended 31 December 2004 has been written up by a bookkeeper
who has since been dismissed. The notes under the account explain each entry.
Land and buildings
2004
1 Jan
Balance
30 June Cash
31 Dec
Revaluation reserve
Notes
1
2
$000
1,000
700
5
2,200
2004
Notes
$000
3
4
500
20
3,380
––––––
3,900
––––––
30 Sep Cash proceeds of sale
31 Dec Income statement
31 Dec Balance
––––––
3,900
––––––
Notes
1 This is the net balance appearing in the company’s balance sheet at 1 January 2004. It is made up as follows:
$000
Land-cost
Buildings-cost
Buildings-accumulated depreciation
2
Cash paid for new land and building:
Land
Building
3
Cash received on sale of land and buildings:
Details of the transaction were:
800
(200)
––––
$000
400
600
––––––
1,000
––––––
$000
200
500
––––
700
––––
$000
Proceeds of sale
Cost: Land
Building
Accumulated depreciation at 1 January 2004
$000
$000
500
(100)
(100)
20
––––
(80)
––––
Profit
(180)
––––
320
––––
4
This is the depreciation charge for the year, calculated as 2 per cent of the opening balance $1,000,000.
It is the company’s policy to charge depreciation on buildings only, at 2 per cent per year on the straight line
basis, with a full year’s depreciation in the year of purchase and none in the year of sale.
5
This entry was made to reflect a revaluation of the land and buildings held at 31 December 2004.
The valuer placed the following values on the property:
$000
800
1,400
––––––
2,200
––––––
Land
Buildings
The revaluation is not to be reflected in the depreciation charge for the year to 31 December 2004.
12
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Required:
Prepare the following ledger accounts for the year ended 31 December 2004 correctly recording the above
transactions:
– Land, cost or valuation;
– Buildings, cost or valuation;
– Buildings, accumulated depreciation;
– Disposal of land and buildings.
(11 marks)
3
On 1 October 1999 Kye, a limited liability company, purchased 80 per cent of the share capital of Rye for $260,000.
The retained earnings balance of Rye at this date was $180,000.
At 30 September 2005 the balance sheets of the two companies were:
Investment in Rye
Sundry net assets
Ordinary share capital
Retained earnings
Kye
$
260,000
420,000
–––––––––
680,000
–––––––––
200,000
480,000
–––––––––
680,000
–––––––––
Rye
$
–
360,000
–––––––––
360,000
–––––––––
100,000
260,000
–––––––––
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 workings
for the retained earnings figure in the consolidated balance sheet.
(8 marks)
4
The directors of Umbria, a limited liability company, are reviewing the company’s draft financial statements for the
year ended 30 June 2005. The following material matters are under discussion:
(1) After the balance sheet date one of the company’s factories was seriously damaged by fire. Insurance will only
cover part of the loss suffered. The company’s going concern status is not affected.
(2) Umbria guaranteed the overdraft of another company in 2003. No disclosure has been made in previous
financial statements, but events in the latter part of the year ended 30 June 2005 suggest that it is probable that
a liability will fall on Umbria in 2006.
(3) One of the company’s 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
probable that substantial damages will be awarded.
(4) One of the company’s buildings was revalued during the year. The directors are uncertain as to how the
revaluation surplus should be included in the financial statements. The surplus has been separately disclosed as
an item in the draft income statement.
Required:
Explain how each of these four matters should be dealt with in the financial statements for the year ended
30 June 2005, stating in each case the relevant accounting standard.
(10 marks)
13
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[P.T.O.
5
State four accounting concepts, and explain how each one contributes to fair presentation in the financial
statements.
(10 marks)
End of Question Paper
14
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
December 2005 Answers
Section A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
A
A
B
D
C
D
B
A
D
D
D
C
C
D
A
D
A
C
B
D
B
C
C
A
B
17
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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)
$
517,200
58,900
334,600
––––––––
393,500
63,200
less: Closing inventories
––––––––
Gross profit
Wages
Rent and general expenses (49,200 + 7,400 – 12,500 + 13,000)
Depreciation: shop fittings (45,000 x 10%)
motor van (22,000 x 20%)
Profit on sale of van (4,500 – 4,000)
74,000
57,100
4,500
4,400
(500)
––––––––
Net profit
330,300
––––––––
186,900
139,500
––––––––
$47,400
––––––––
Workings
(1) Calculation of sales
Receivables ledger total account
$
44,700
Opening balance
Sales
Cash banked
Payments out of takings
$
418,200
95,100
517,200
––––––––
561,900
––––––––
Closing balance
48,600
––––––––
561,900
––––––––
(2) Calculation of purchases
Payables ledger total account
$
Cash paid for purchases
Closing balance
316,300
24,200
––––––––
340,500
––––––––
Credit purchases
Cash purchases
320,900
13,700
––––––––
334,600
––––––––
Total purchases
Opening balance
Purchases
$
19,600
320,900
––––––––
340,500
––––––––
18
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2
Land – cost/valuation
2004
1 Jan
Balance
30 June Cash
31 Dec Revaluation reserve
$000
400
200
300
–––––
900
–––––
2004
30 Sept
Disposal
31 Dec
Balance
$000
100
800
–––––
900
–––––
Buildings – cost/valuation
2004
1 Jan
Balance
30 June Cash
31 Dec Revaluation reserve
$000
800
500
200
–––––
1,500
–––––
2004
30 Sept
Disposal
31 Dec
Balance
$000
100
1,400
–––––
1,500
–––––
Buildings – accumulated depreciation
2004
30 Sept Disposal
$000
20
31 Dec Revaluation reserve
204
–––––
224
–––––
2004
1 Jan
31 Dec
Balance
Income statement depreciation
2% x 1,200
$000
200
24
–––––
224
–––––
Land and Buildings – disposal
2004
30 Sept Land
Buildings
Income statement – profit
$000
100
100
320
–––––
520
–––––
3
2004
30 Sept
Depreciation
Cash
$000
20
500
–––––
520
–––––
Goodwill
Investment in Rye
$
260,000
––––––––
260,000
––––––––
Share capital 80%
Retained earnings 80%
Goodwill-retained earnings
$
80,000
144,000
36,000
––––––––
260,000
––––––––
Minority interest
Balance to CBS
$
72,000
––––––––
72,000
––––––––
Share capital 20%
Retained earnings 20%
$
20,000
52,000
––––––––
72,000
––––––––
Retained earnings
$
Cost of control
80% x $180,000
Goodwill
Minority interest 20%
Balance to CBS
144,000
36,000
52,000
508,000
––––––––
740,000
––––––––
Balances Kye
Rye
$
480,000
260,000
––––––––
740,000
––––––––
19
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Kye group
Balance sheet as at 30 September 2005
$
780,000
––––––––
200,000
508,000
––––––––
708,000
72,000
––––––––
780,000
––––––––
Sundry net assets (420, 000 + 360,000)
Share capital
Retained earnings
Minority interest
4
(1) The factory was in good condition at 30 June 2005, and thus the fire is a non-adjusting event according to IAS 10 Events
after the balance sheet date. Details of the fire and an estimate of the loss suffered should be disclosed by note.
(2) According to IAS 37 Provisions, contingent liabilities and contingent assets, contingencies such as this are to be provided for
as soon as it becomes probable that a liability will arise. A provision should therefore be made for the best estimate of the
loss that will arise.
(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
to revaluation reserve and shown in the balance sheet. The gain should also be shown in the statement of changes in equity
(IAS 16 Property, Plant and Equipment and IAS 1 Presentation of Financial Statements).
5
Four accounting concepts needed for full marks.
Examples:
(i)
Accruals concept
The accruals concept is that transactions are reflected in the accounting period in which they occur, rather than the period in
which any cash involved is received or paid. If this concept is not followed, expenses, income, assets and liabilities are all
liable to be misstated and fair presentation will not be achieved.
(ii)
Going concern concept
The going concern concept is that financial statements should be prepared on the basis that the business will continue for
the foreseeable future. If this concept is not followed, assets and liabilities, and hence income and expenses, will be distorted,
except, of course, in the rare case that the business is in fact no longer a going concern.
(iii) Prudence concept
Prudence means that a degree of caution should be exercised in making estimates of figures for the financial statements, so
that assets are not overstated and liabilities are not understated. If the prudence concept is not followed, fair presentation 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 is
that, whenever legally possible, the substance or reality of a transaction should be accounted for rather than its legal form.
Other concepts considered on their merits.
20
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
December 2005 Marking Scheme
Section B
1
2
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
1/
2
2
1/
2
1/
2
2
1
1
1
–––––
1
11 /2
max 11
21/2
21/2
31/2
21/
–––––2
Land – cost/valuation
Buildings – cost/valuation
Buildings – accumulated depreciation
Land and buildings – disposal
11
3
11/2
1
21/2
1
1
1/
2
1/
–––––2
Goodwill
Minority interest
Retained earnings
Heading
Sundry net assets
Share capital
Minority interest in B/S
8
4
5
(1) IAS 10
Non-adjusting
Details in note 2 x 1/2
1
1
1
–––––
3
(2) IAS 37
Provide for
1
1
–––––
2
(3) IAS 37
Disclose by note 2 x 1/2
1
1
–––––
2
(4) IASs 16/1
Must not be in income statement
Include as revaluation reserve in balance sheet
Include in statement of changes in equity
1
1
1
1
–––––
4
–––––
11
max 10
4
8
–––––
12
max 10
Concepts stated
explained
4x1
4x1
21
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(International Stream)
PART 1
THURSDAY 8 JUNE 2006
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
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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Paper 1.1(INT)
Preparing Financial
Statements
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 company’s policy is to charge depreciation
at 20% on the straight line basis, with proportionate depreciation in years of acquisition and disposal.
Plant and machinery - cost
2005
1 Jan Balance
1 Apr Cash
1 Sept Cash
$
280,000
48,000
36,000
––––––––
364,000
––––––––
2005
30 June
Transfer disposal
31 Dec
Balance
$
14,000
350,000
––––––––
364,000
––––––––
What should be the depreciation charge for the year ended 31 December 2005?
2
3
A
$67,000
B
$70,000
C
$64,200
D
$68,600
Which of the following are correct?
1.
The balance sheet value of inventory should be as close as possible to net realisable value.
2.
The valuation of finished goods inventory must include production overheads.
3.
Production overheads included in valuing inventory should be calculated by reference to the company’s 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,
not by taking the inventory value as a whole.
A
1 and 2 only
B
3 and 4 only
C
1 and 3 only
D
2, 3 and 4
A business sublets part of its office accommodation.
The rent is received quarterly in advance on 1 January, 1 April, 1 July and 1 October. The annual rent has been
$24,000 for some years, but it was increased to $30,000 from 1 July 2005.
What amounts for this rent should appear in the company’s financial statements for the year ended 31 January
2006?
Income statement
Balance sheet
A
$27,500
$5,000 in sundry receivables
B
$27,000
$2,500 in sundry receivables
C
$27,000
$2,500 in sundry payables
D
$27,500
$5,000 in sundry payables
2
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4
A trainee accountant has prepared the following receivables ledger total account to calculate the credit sales of a
business which does not keep proper accounting records (all sales are on credit):
Receivables ledger total account
$
Opening receivables
148,200
Cash received from customers
819,300
Discounts allowed to credit customers
16,200
Irrecoverable debts written off
1,500
Returns from customers
38,700
––––––––––
1,023,900
––––––––––
Credit sales
Closing receivables
$
870,800
153,100
––––––––––
1,023,900
––––––––––
The account contains several errors.
What is the sales figure when all the errors have been corrected?
5
6
A
$848,200
B
$877,600
C
$835,400
D
$880,600
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
1 and 2 only
C
2 and 3 only
D
1 and 4 only
Ordan received a statement from one of its suppliers, Alta, showing a balance due of $3,980. The amount due
according to the payables ledger account of Alta in Ordan’s records was only $230.
Comparison of the statement and the ledger account revealed the following differences:
1
A cheque sent by Ordan for $270 has not been allowed for in Alta’s statement.
2
Alta has not allowed for goods returned by Ordan $180.
3
Ordan made a contra entry, reducing the amount due to Alta by $3,200, for a balance due from Alta in Ordan’s
receivables ledger. No such entry has been made in Alta’s records.
What difference remains between the two companies’ records after adjusting for these items?
A
$460
B
$640
C
$6,500
D
$100
3
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[P.T.O.
7
A company’s trial balance failed to agree, and a suspense account was opened for the difference.
Subsequent checking revealed that discounts allowed $13,000 had been credited to discounts received account and
an entry on the credit side of the cash book for the purchase of some machinery $18,000 had not been posted to
the plant and machinery account.
Which two of the following journal entries would correct the errors?
(1) Discounts allowed
Discounts received
8
Debit
$
13,000
13,000
(2) Discounts allowed
Discounts received
Suspense account
13,000
13,000
(3) Suspense account
Discounts allowed
Discounts received
26,000
(4) Plant and machinery
Suspense account
18,000
(5) Suspense account
Plant and machinery
18,000
A
1 and 4
B
2 and 5
C
2 and 4
D
3 and 5
Credit
$
26,000
13,000
13,000
18,000
18,000
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 in
the financial statements, not necessarily its legal 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
in preparing financial statements.
A
1 and 3
B
2 and 3
C
2 and 4
D
1 and 4.
4
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The following information is relevant for questions 9 and 10
A company’s draft financial statements for 2005 showed a profit of $630,000. However, the trial balance did not agree,
and a suspense account appeared in the company’s draft balance sheet.
Subsequent checking revealed the following errors:
(1) The cost of an item of plant $48,000 had been entered in the cash book and in the plant account as $4,800.
Depreciation at the rate of 10% per year ($480) had been charged.
(2) Bank charges of $440 appeared in the bank statement in December 2005 but had not been entered in the
company’s records.
(3) One of the directors of the company paid $800 due to a supplier in the company’s payables ledger by a personal
cheque. The bookkeeper recorded a debit in the supplier’s 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 company’s profit become after the correction of the above errors?
A
$634,760
B
$624,760
C
$624,440
D
$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
1 and 3
C
2 and 3
D
2 and 4
5
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[P.T.O.
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
2 and 4
C
3 and 4
D
1 and 3
13 At 1 January 2005 a company had an allowance for receivables of $18,000
At 31 December 2005 the company’s trade receivables were $458,000.
It was decided:
(a) To write off debts totalling $28,000 as irrecoverable;
(b) To adjust the allowance for receivables to the equivalent of 5% of the remaining receivables based on past
experience.
What figure should appear in the company’s 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
$31,500
C
$32,900
D
$50,900
14 The following payables ledger control account contains some errors.
All goods are purchased on credit
Payables ledger control account
$
963,200
Purchases
Discounts received
Contras with amounts
receivable in receivables ledger
Closing balance
12,600
Opening balance
Cash paid to suppliers
Purchases returns
4,200
410,400
––––––––––
1,390,400
––––––––––
––––––––––
1,390,400
––––––––––
What should the closing balance be when the errors have been corrected?
A
$325,200
B
$350,400
C
$358,800
D
$376,800
$
384,600
988,400
17,400
6
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15 What journal entry is required to record goods taken from inventory by the owner of a business?
A
Debit Drawings
Credit Purchases
B
Debit Sales
Credit Drawings
C
Debit Drawings
Credit Inventory
D
Debit Purchases
Credit Drawings
16 The following information is available about the transactions of Razil, a sole trader who does not keep 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 Razil’s sales revenue for the year?
A
$982,800
B
$1,090,000
C
$2,520,000
D
$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 company’s published balance sheet, tangible assets and intangible assets must be shown separately.
A
1 and 2
B
2 and 3
C
3 and 4
D
1 and 4
7
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[P.T.O.
The following information is relevant for questions 18 and 19
Extracts from a company’s financial statements for 2005 are given below:
Balance sheet
as at 31 December 2005
$m
Non-current assets
Current assets
90
80
––––
170
––––
Ordinary share capital
Share premium account
Retained earnings
40
25
35
––––
100
50
20
––––
170
––––
10% Loan notes
Current liabilities
Income statement
for the year ended 31 December 2005
$m
20
(5)
––––
15
––––
Profit before finance costs
Finance costs
Profit before tax
18 What is the company’s return on total capital employed?
A
20/150
=
13·3%
B
15/150
=
10%
C
20/100
=
20%
D
15/100
=
15%
19 What is the company’s return on shareholders’ equity?
A
15/40
=
37·5%
B
20/100
=
20%
C
15/100
=
15%
D
20/150
=
13·3%
8
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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)
Add: lodgements not credited
Less: unpresented cheques
Balance per cash book
$
38,640
19,270
–––––––
57,910
14,260
–––––––
43,650
–––––––
What should the final cash book balance be when all the above items have been properly dealt with?
A
$43,650
overdrawn
B
$33,630
overdrawn
C
$5,110
overdrawn
D
$72,170
overdrawn
21 Which of the following items must be disclosed in a company’s published financial statements?
1
Authorised share capital
2
Movements in reserves
3
Finance costs
4
Movements in non-current assets
A
1, 2 and 3 only
B
1, 2 and 4 only
C
2, 3 and 4 only
D
All four items
22 On 1 January 2005 a company purchased some plant.
The invoice showed
Cost of plant
Delivery to factory
One year warranty covering breakdown during 2005
$
48,000
400
800
–––––––
49,200
–––––––
Modifications to the factory building costing $2,200 were necessary to enable the plant to be installed.
What amount should be capitalised for the plant in the company’s records?
A
$51,400
B
$48,000
C
$50,600
D
$48,400
9
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[P.T.O.
23 A business had an opening inventory of $180,000 and a closing inventory of $220,000 in its financial statements
for the year ended 31 December 2005.
Which of the following entries for these opening and closing inventory figures are made when completing the
financial records of the business?
A
B
C
D
Debit
$
180,000
Inventory account
Income statement
Credit
$
180,000
Income statement
Inventory account
220,000
Income statement
Inventory account
180,000
Inventory account
Income statement
220,000
Inventory account
Purchases account
40,000
Purchases account
Inventory account
40,000
220,000
180,000
220,000
40,000
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:
Share capital
Retained earnings
At 1 January
2001
$000
At 31 December
2005
$000
H
1,000
1,200
S
400
400
H
800
1,300
S
500
800
What was the goodwill arising on H’s acquisition of S?
A
$200,000
B
$780,000
C
$380,000
D
$880,000
25 What should the minority interest figure be in the group’s consolidated balance sheet at 31 December 2005?
A
$240,000
B
$80,000
C
$180,000
D
$140,000
(50 marks)
10
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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
Drawings
Leon, as at 1 January 2005
$
400,000
Mark, introduced 1 July 2005
200,000
Leon
160,000
Mark
80,000
Notes
(1) Until 30 June 2005, Leon had run the business as a sole trader. Mark joined him on 1 July 2005 introducing
capital of $200,000.
(2) The
(i)
(ii)
(iii)
following profit-sharing arrangements were agreed from that date:
Both partners to receive interest on their capital account balances at 5% per year
Mark to receive a salary of $20,000 per year
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
for an irrecoverable debt of $20,000 charged in arriving at the profit which was to be regarded as occurring in
the six months ended 30 June 2005.
Required:
Prepare a statement showing the division of the profit and prepare the partners’ current accounts for the year
ended 31 December 2005.
(9 marks)
11
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[P.T.O.
2
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 company’s inventory count was carried out on 3 January 2006 leading to the figure shown above. Sales
between 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.
The $36,000 sales were included in the sales records in January 2006.
(2) $10,000 of goods supplied on sale or return terms in December 2005 have been included as sales 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 company’s net profit for the year ended
31 December 2005.
(5 marks)
(b) Show how the adjustments affect:
(i)
Closing inventory;
(ii) Receivables, showing separately the deduction of the allowance for receivables.
(6 marks)
(11 marks)
12
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3
The summarised financial statements of Ganda for 2004 and 2005 are given below:
Balance sheets as at
Reference
31 December
31 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 capital
900
600
Share premium account
500
320
Retained earnings
2
920
1,420
500
820
––––––
––––––
––––––
––––––
2,320
1,420
Net current liabilities
10% loan notes
1,200
1,000
Current liabilities
Bank overdraft
Trade payables
Current tax payable
140
900
300
––––––
1,340
––––––
4,860
––––––
280
800
200
––––––
1,280
––––––
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:
$000
Opening balance
Operating profit
less: Finance costs paid
1,090
(120)
––––––
970
(300)
(250)
––––––
Profit before taxation
Income tax expense
Dividends paid
Retained profit for year
Closing balance
$000
500
420
––––––
920
––––––
Required:
Prepare a cash flow statement for Ganda for the year ended 31 December 2005, using the format in
IAS 7 Cash flow statements.
(12 marks)
13
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[P.T.O.
4
(a) Explain the meaning of the term ‘working capital cycle’ for a trading company.
(4 marks)
(b) Calculate the working capital cycle in days from the information below.
$000
Sales (all on credit)
less: Cost of goods sold
Opening inventory
Purchases (all on credit)
less: Closing inventory
$000
1,000
100
800
––––
900
(200)
––––
700
––––
300
––––
250
150
Gross profit
Closing receivables
Closing payables
(4 marks)
(c) State one advantage to a business of keeping its working capital cycle as short as possible.
(2 Marks)
(10 marks)
5
At 31 December 2005 the capital structure of Ambia, a limited liability company, was as follows:
$
1,000,000
200,000
100,000
50,000
1,000,000 ordinary shares of $1 each
Share premium account
Revaluation reserve
Retained 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)
(b) Paying a dividend of 10c per share
(1 mark)
(c) Increasing the revaluation reserve to $300,000 by revaluing goodwill from $800,000 to $1,000,000.
(1 mark)
(d) Combining all reserves into a single figure.
(2 marks)
Required:
Comment on the validity of these proposals. (The mark allocation is shown against each of the four proposals).
(8 marks)
End of Question Paper
14
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
June 2006 Answers
Section A
1
C
2
D
3
D
4
D
(280,000 x 20%) + (48,000 x 20% x 9/12 ) + (36,000 x 20% x 4/12 ) – (14,000 x 20% x 6/12 )
5/
12
x 24,000 + 7/12 x 30,000 = 27,500; 2/3 x 7,500 = 5,000
Receivables ledger control account
Opening receivables
Sales
148,200
880,600
Cash received from customers
Discounts allowed
Irrecoverable debts written off
Returns from customers
Closing receivables
––––––––––
1,028,800
––––––––––
5
D
6
D
7
C
8
B
9
B
10
D
11
A
12
B
13
B
14
A
819,300
16,200
1,500
38,700
153,100
––––––––––
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
Discounts received
Contras with amounts
receivable in receivables ledger
Purchases returns
Closing balance
988,400
12,600
4,200
17,400
325,200
––––––––––
1,347,800
––––––––––
15
A
16
D
17
C
18
A
19
C
20
B
21
D
22
C
23
B
24
C
1,100,000 – 4/5 (400,000 + 500,000)
25
A
20% x (400,000 + 800,000)
756,000 x
Opening balance
Purchases
384,600
963,200
––––––––––
1,347,800
––––––––––
10/
7
38,640 + 14,260 – 19,270 = 33,630
48,000 + 400 + 2,200
17
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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
Leon 5% x 400,000 x 6/12
Mark 5% x 200,000 x 6/12
$
70,000
––––––––
180,000
10,000
5,000
––––––––
Salary
Mark 20,000 x 6/12
(15,000)
––––––––
165,000
(10,000)
––––––––
155,000
Balance of profit
Leon 60%
Mark 40%
93,000
62,000
––––––––
Working
Profit for year
Add: irrecoverable debt
155,000
––––––––
0
––––––––
$
250,000
20,000
––––––––
270,000
––––––––
Profit for division
Six months ended 30 June 2005
less: irrecoverable debt
90,000
20,000
––––––––
Six months ended 31 December 2005
70,000
180,000
––––––––
250,000
––––––––
Current accounts
Drawings
Balance
Leon
$
160,000
13,000
173,000
Mark
$
80,000
30 June Profit
31 Dec Interest on capital
Salary
Share of balance 60:40
Balance
80,000
Leon
$
70,000
10,000
93,000
173,000
18
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Mark
$
5,000
10,000
62,000
3,000
80,000
Alternative format
Leon and Mark
Statement of division of profit for the year ended 31 December 2006
Leon
$
Six months ended 30 June 2005
Leon: (90,000 – 20,000)(see working)
Mark
$
70,000
–––––––
Six months ended 31 December 2005
Interest on capital
Leon 5% x 400,000 x 6/12
Mark 5% x 200,000 x 6/12
Total
$
70,000
–––––––
10,000
Salary
Mark 20,000 x 6/12
Balance of profit 60:40
93,000
–––––––
103,000
–––––––
5,000
15,000
10,000
10,000
62,000
–––––––
77,000
–––––––
155,000
–––––––
180,000
–––––––
Current accounts
Drawings
Balance
2
Leon
$
160,000
13,000
Mark
$
80,000
173,000
80,000
2005
30 June Profit
31 Dec Share of profit
Balance
Leon
$
70,000
103,000
173,000
Mark
$
77,000
3,000
80,000
(a) Net profit adjustments
$
684,000
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)
21,600
(4,000)
(5,000)
(8,000)
(1,500)
–––––––––
$687,100
–––––––––
Revised net profit
(b) Adjustments to inventory and receivables
(i) Inventory
Inventories per draft financial statements
(1) Inventory movement – as (a) above
(2) Goods on sale or return
cost introduced into inventory
(3) Reduction in inventory (a) above
$
116,800
21,600
6,000
(5,000)
–––––––––
$139,400
–––––––––
Revised closing inventory
$
(ii) Receivables
per draft financial statements
(2) Deduction of goods on sale or return
(4) Debts written off
248,000
(10,000)
(8,000)
–––––––––
230,000
(11,500)
–––––––––
$218,500
–––––––––
(5) less: allowance for receivables
19
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Ganda
Cash flow statement for the year ended 31 December 2005
$000
3
Cash flows from operating activities
Profit before taxation
Adjustment for:
Depreciation (W2)
Profit on sale of non-current asset (W3)
Interest expense
$000
970
310
(20)
120
–––––
1,380
Increase in inventory
Decrease in receivables
Increase in payables
(200)
200
100
–––––
1,480
(120)
(200)
–––––
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
1,160
Cash flows from investing activities
Purchase of non-current assets (W1)
Proceeds of sale of non-current assets (W3)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital (300 + 180)
Proceeds from issue of loan notes
Dividends paid
(1,500)
80
–––––
480
200
(250)
–––––
Net cash from financing activities
Cash at beginning of period
Cash at end of period
(1,420)
430
–––––
170
(230)
–––––
(60)
–––––
Workings
(1)
Non-current assets – cost
Opening balance
Purchases (balancing figure)
$000
2,100
1,500
Transfer disposal
Closing balance
––––––
3,600
––––––
(2)
$000
200
3,400
––––––
3,600
––––––
Non-current assets - accumulated depreciation
Transfer disposal
Closing balance
(3)
$000
140
Opening balance
Income statement – depreciation
(balancing figure)
720
––––––
860
––––––
$000
550
310
––––––
860
––––––
Non-current assets - disposal
Transfer – cost
Income statement
$000
200
20
––––––
220
––––––
Transfer – depreciation
Cash
20
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$000
140
80
––––––
220
––––––
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 period for receivables
250
––––– x 365
1,000
91 days
Inventory turnover
200
––––– x 365
700
104 days
–––––––– (see Note below)
195 days
Payment period for payables
150
––––– x 365
800
68 days
––––––––
127 days
Length of working capital cycle
Note. If average inventory is used the inventory turnover becomes:
100 + 200
––––––––––– ÷ 2 x 365
700
78 days
The length of the cycle becomes 101 days.
Either answer is acceptable.
(c) The advantage to a company of keeping its working capital cycle short is that fewer resources are tied up in working capital,
thus freeing them for other purposes.
(Other answers considered on their merits)
5
To the directors of Ambia
8 June 2006
Comments on proposals under consideration
(a) Proposed bonus issue.
There are several problems in connection with the proposed bonus issue:
(i)
A bonus issue would not raise any capital for the company. To raise capital a rights issue (or an issue at full 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 reserves to make a bonus issue of $500,000 worth of shares.
(b) Paying a dividend of 10c per share.
There are insufficient retained earnings to pay a dividend of more than 5c per share.
(c) IFRS 3 Business combinations does not allow goodwill to be revalued upwards.
(d) It is not possible to combine the reserves as suggested. IAS1 Presentation of financial statements requires retained earnings
to be shown seperately from other reserves.
21
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
June 2006 Marking Scheme
Marks
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
2
1
1
1/
2
1
––––
51/2
Current accounts
Drawings 2 x 1/2
Leon profit 70,000
Interest on capital 2 x 1/2
Salary
Share of balance
1
1/
2
1
1/
2
1/
2
––––
9
––––
Alternative marking scheme (if statement of division of profit shows partners’ total shares)
Leon : profit for first six months
Profit for second six months (as total)
Interest on capital
Salary
Balance of profit
Total shares
2
1
1
1/
2
1
1
––––
61/2
Current accounts
Drawings 2 x 1/2
Leon profit 70,000
Total profit shares
2
1
1/
2
1
––––
9
––––
(a) Profit adjustments
1 mark per item 5 x 1
5
(b) Adjustments to inventory and receivables
Inventory
Movements
Goods on sale or return
Reduction to net realisable value
1
1
1
––––
3
Receivables
Goods on sale or return
Debts written off
Allowance for receivables
1
1
1
––––
3
––––
23
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6
––––
11
Marks
3
Cash flows from operating activities
1/ mark per item other than interest
2
Interest added and deducted
Cash flows from investing activities
1/ mark per item
2
Cash flows from financing activities
1/ mark per item
2
Cash movement
31/2
1/
2
2 x 1/2
1
3 x 1/2
2 x 1/2
11/2
1
11/2
11/2
11/2
1/
2
1
––––
131/2
––––
Workings: non-current assets – cost
– depreciation
– disposal
Heading
Layout
4
(a) Purchases into inventory
Inventory into recievables
Receivables into cash
Cash to pay suppliers
1
1
1
1
––––
(b) per ratio 1
3x1
correct calculation
3
1
––––
(c) Up to
5
max12
4
4
2
––––
10
(a) (i)
(ii)
(iii)
2
1
1
(b)
1
(c)
1
(d) 2 x 1
2
––––
24
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8
––––
50
––––
5D–GBRAA
Paper T3GBR
Workings for MCQ answers
1
4
6
10
13
14
16
C
280,000 x 20% + 48,000 x 20% x 9/12 + 36,000 x 20% x 4/12 – 14,000 x
20% x 6/12
A
as C, but plus 1,400
B
350,000 x 20%
D
as B, but – 1,400
A
as D, but discounts on wrong side
B
as D, but irrecoverable debts on wrong side
C
as in Q, but with discounts and irrecoverable debts on credit side
D
all items on debit side except opening balance moved to credit side
A
as D, but 180 adjusted in wrong direction
B
as D, but 270 adjusted in wrong direction
C
as D, but 3,200 adjusted in wrong direction
D
3,920 – 270 – 180 – 3,200 = 330 : 100 difference
A
630,000 – 4,320 + 440
B
630,000 – 4,800 – 440
C
630,000 – 4,320 – 440 – 800
D
630,000 – 4,320 – 440
B
430,000 x 5% = 21,500 – 18,000 + 28,000
A
as B but 18,000 not deducted
C
as B but provision based on 458,000
D
as B but provision based on 458,000 and 18,000 not deducted
A
Purchase returns
Cash
Discounts
Contras
c/bal
17,400
988,400
12,600
4,200
325,200
–––––––––
1,347,800
–––––––––
O/Bal
Purchases
384,600
963,200
–––––––––
1,347,800
–––––––––
B
as A but discounts on wrong side
C
as A but contras and discounts on wrong side
D
as in Q but contras and discounts on credit side (410,000 – 33,600)
A
(77 + 763 – 84) = 756 + 30%
B
763 x
10/
7
C
756 x
10/
3
D
756 x
10/
7
25
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5D–GBRAA
Paper T3GBR
20
22
24
A
as in question
B
(38,640 – 19,270 + 14,260)
C
as B but plus 140
D
as B but minus 140
A
48,000 + 400 + 800 + 2,200
C
48,000 + 400 + 2,200
D
48,000 + 400
A
(1,100,000 – (400,000 + 500,000))
B
(1,100,000 – 4/5 x 400,000)
C
(1,100,000 – 4/5 (400,000 + 500,000))
D
4/
5
x 1,100,000
26
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(International Stream)
PART 1
THURSDAY 7 DECEMBER 2006
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
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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Paper 1.1(INT)
Preparing Financial
Statements
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?
2
A
$185,000
B
$140,000
C
$405,000
D
$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 company’s total working capital (current assets
less current liabilities)?
3
A
Increase of $1,000
B
Working capital remains unchanged
C
Increase of $2,000
D
Increase of $3,000
On 30 June 2006, H acquired 75% of the ordinary share capital of S for $500,000. At that date the balance sheet
of S showed the following:
Ordinary share capital
Share premium account
Retained earnings
$
200,000
150,000
100,000
What was the goodwill arising on the acquisition?
A
$50,000
B
$162,500
C
$350,000
D
$300,000
2
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4
5
Which of the following should appear as items in a company’s statement of changes in equity?
1
Profit for the financial year
2
Income from investments
3
Gain on revaluation of non-current assets
4
Dividends paid
A
1, 3 and 4
B
1 and 4 only
C
2 and 3 only
D
1, 2 and 3
The following information is available about a company’s dividends:
$
2005
Sept.
2006
March
Sept.
Final dividend for the year ended
30 June 2005 paid (declared August 2005)
Interim dividend for the year ended
30 June 2006 paid
Final dividend for the year ended
30 June 2006 paid (declared August 2006)
100,000
40,000
120,000
What figures, if any, should be disclosed in the company’s income statement for the year ended 30 June 2006
and its balance sheet as at that date?
A
Income statement
for the period
$160,000 deduction
Balance sheet
liability
$120,000
B
$140,000 deduction
C
nil
$120,000
D
nil
nil
nil
3
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[P.T.O.
6
A and B are in partnership, sharing profits in the ratio 3:2 and preparing their accounts to 30 June each year. On
1 January 2006, C joined the partnership and the profit sharing ratio became A 40%, B 30%, and C 30%.
Profits for the year ended 30 June 2006 were:
6 months ended 31 December 2005
6 months ended 30 June 2006
$
300,000
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
that this expense should be borne by A and B only, in their original profit-sharing ratios.
What is A’s total profit share for the year ended 30 June 2006?
7
A
$
330,000
B
310,000
C
340,000
D
350,000
At 1 July 2005 a company’s allowance for receivables was $48,000.
At 30 June 2006, trade receivables amounted to $838,000. It was decided to write off $72,000 of these debts and
adjust the allowance for receivables to $60,000.
What are the final amounts for inclusion in the company’s balance sheet at 30 June 2006?
Trade
receivables
$
A 838,000
8
Allowance for
receivables
$
60,000
Net
balance
$
778,000
B
766,000
60,000
706,000
C
766,000
108,000
658,000
D
838,000
108,000
730,000
Which of the following statements about inventory valuation for balance sheet purposes are correct?
1
According to IAS 2 Inventories, average cost and FIFO (first in and first out) are both acceptable methods of
arriving at the cost of inventories.
2
Inventories of finished goods may be valued at labour and materials cost only, without including overheads.
3
Inventories should be valued at the lowest of cost, net realisable value and replacement cost.
4
It may be acceptable for inventories to be valued at selling price less estimated profit margin.
A
1 and 3
B
2 and 3
C
1 and 4
D
2 and 4
4
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9
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 will this have on the business?
1
Profit for the year ended 30 June 2006 will be overstated.
2
Inventory at 30 June 2006 will be understated.
3
Profit for the year ending 30 June 2007 will be overstated.
4
Inventory at 30 June 2006 will be overstated.
A
1 and 2
B
2 and 3
C
1 only
D
1 and 4
10 The capital and reserves of Lamb, a limited liability company, are as follows:
10% Loan notes
Ordinary share capital
Share premium account
Retained earnings
$m
80
100
60
80
What is the company’s gearing ratio?
A
80/100 = 80%
B
80/180 = 44·4%
C
240/80 = 300%
D
80/320 = 25%
11 Which of the following statements are correct?
1
A company’s authorised share capital must be included in its published balance sheet as part of shareholders’
funds.
2
If a company makes a bonus issue of ordinary shares, the total shareholders’ interest (share capital plus reserves)
remains unchanged.
3
A company’s statement of changes in equity must include the proceeds of any share issue during the period.
4
A company must disclose its significant accounting policies by note to its financial statements.
A
1 and 2 only
B
1 and 3 only
C
3 and 4 only
D
2, 3 and 4
5
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[P.T.O.
12 Which, if any, of the following statements about intangible assets are correct?
1
Goodwill arising on the acquisition of a subsidiary will appear as an intangible asset in the balance sheet of the
acquiring company and in the consolidated balance sheet.
2
Deferred development expenditure must be amortised over a period not exceeding five years.
3
If the conditions specified in IAS 38 Intangible assets are met, development expenditure may be capitalised, if
the directors decide to do so.
4
Trade investments must appear in a company’s balance sheet under the heading of intangible assets.
A
1 and 3
B
1 and 4
C
2 and 4
D
None of the statements is correct
13 Which of the following characteristics of financial information contribute to reliability, according to the IASB’s
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
1, 2 and 4 only
D
2, 3 and 4 only
14 Details of a company’s insurance policy are shown below:
Premium for year ended 31 March 2006 paid April 2005
Premium for year ending 31 March 2007 paid April 2006
$10,800
$12,000
What figures should be included in the company’s financial statements for the year ended 30 June 2006?
A
Income statement
$
11,100
Balance sheet
$
9,000 prepayment (Dr)
B
11,700
9,000 prepayment (Dr)
C
11,100
9,000 accrual (Cr)
D
11,700
9,000 accrual (Cr)
6
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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 shown
in the bank statement.
2
A cheque from a customer paid into the bank but dishonoured must be corrected by making a debit entry in the
cash book.
3
An error by the bank must be corrected by an entry in the cash book.
4
An overdraft is a debit balance in the bank statement.
A
1 and 3
B
2 and 3
C
1 and 4
D
2 and 4
16 Extracts from the financial statements of Kafka, a limited liability company, are given below:
Balance sheet
as at 30 June 2006
Non-current assets
Current assets
Ordinary share capital
Share premium account
Retained earnings
10% Loan notes
Current liabilities
$m
15
14
–––
29
–––
10
Income statement
for the year ended 30 June 2006
$m
Operating profit
Finance costs
Profit for year
8
(2)
–––
6
–––
3
7
–––
20
5
4
–––
29
–––
Using these figures, which of the following are correct calculations of return on total capital employed (ROCE)
and return on owners’ equity (ROOE)? (Tax ignored)
A
ROCE
8/25 = 32%
ROOE
6/10 = 60%
B
8/25 = 32%
6/20 = 30%
C
6/25 = 24%
8/20 = 40%
D
8/20 = 40%
6/20 = 30%
7
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[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
$
$
1,000,000
1,000,000
400,000
400,000
4,700,000
5,600,000
Ordinary share capital
Share premium account
Retained earnings
What figure for minority interest should appear in the consolidated balance sheet as at 30 June 2006?
A
$460,000
B
$200,000
C
$1,120,000
D
$1,400,000
18 At 30 June 2005 the capital and reserves of Meredith, a limited liability company, were:
$m
Share capital
Ordinary shares of $1 each
Share premium account
100
80
During the year ended 30 June 2006, the following transactions took place:
1 September 2005
1 January 2006
A bonus issue of one ordinary share for every two held, using the share premium account.
A fully subscribed rights issue of two ordinary shares for every five held at that date, at
$1·50 per share.
What would the balances on each account be at 30 June 2006?
A
Share
capital
$m
210
Share premium
account
$m
110
B
210
60
C
240
30
D
240
80
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19 The following items have to be considered in finalising the financial statements of Q, a limited liability company:
1
The company gives warranties on its products. The company’s statistics show that about 5% of sales give rise
to a warranty claim.
2
The company has guaranteed the overdraft of another company. The likelihood of a liability arising under the
guarantee is assessed as possible.
What is the correct action to be taken in the financial statements for these items?
Create a provision
Disclose by note only
1, 2
2, 2
A
B
No action
1, 2
C
2
1, 2
D
1, 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
1 and 2 only
C
3 and 4 only
D
All four items
21 How should interest charged on partners’ drawings be dealt with in partnership financial statements?
A
Credited as income in the income statement
B
Deducted from profit in allocating the profit among the partners
C
Added to profit in allocating the profit among the partners
D
Debited as an expense in the income statement.
9
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[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.
30 Sept.
Inventories
Purchases for month
Cash banked for sales for month
Inventories
$
40,000
60,000
95,000
50,000
Which two of the following conclusions could separately be drawn from this information?
1
$5,000 cash has been stolen from the sales revenue prior to banking
2
Goods costing $5,000 have been stolen
3
Goods costing $2,500 have been stolen
4
Some goods costing $2,500 had been sold at cost price
A
1 and 2
B
1 and 3
C
2 and 4
D
3 and 4
23 A company owns a number of properties which are rented to tenants. The following information is available for the
year ended 30 June 2006:
30 June 2005
30 June 2006
Rent
in advance
$
134,600
144,400
Rent
in arrears
$
4,800
8,700
Cash received from tenants in the year ended 30 June 2006 was $834,600.
All rent in arrears was subsequently received.
What figure should appear in the company’s income statement for rent receivable in the year ended 30 June
2006?
A
$840,500
B
$1,100,100
C
$569,100
D
$828,700
24 In October 2006 Utland sold some goods on sale or return terms for $2,500. Their cost to Utland was $1,500. The
transaction has been treated as a credit sale in Utland’s financial statements for the year ended 31 October 2006. In
November 2006 the customer accepted half of the goods and returned the other half in good condition.
What adjustments, if any, should be made to the financial statements?
A
Sales and receivables should be reduced by $2,500, and closing inventory increased by $1,500.
B
Sales and receivables should be reduced by $1,250, and closing inventory increased by $750
C
Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory
D
No adjustment is necessary
10
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25 The payables ledger control account below contains a number of errors:
Payables ledger control account
Opening balance (amounts
owed to suppliers)
Cash paid to suppliers
Purchases returns
Refunds received from suppliers
$
318,600
1,364,300
41,200
2,700
–––––––––––
$1,726,800
–––––––––––
Purchases
Contras against debit
balances in receivables ledger
Discounts received
Closing balance
$
1,268,600
48,000
8,200
402,000
–––––––––––
$1,726,800
–––––––––––
All items relate to credit purchases.
What should the closing balance be when all the errors are corrected?
A
$128,200
B
$509,000
C
$224,200
D
$144,600
(50 marks)
11
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[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
accumulated depreciation at 1 July 2005
Plant and equipment:
cost
accumulated depreciation at 1 July 2005
Receivables
Cash at bank
Payables
Accruals
8% Loan notes
Ordinary share capital
Share premium account
Retained earnings 1 July 2005
10,000
3,600
6,000
3,200
3,600
1,200
2,500
500
1,000
5,000
2,200
4,600
The following further information is available:
(1) Inventory at 30 June 2006 was $4,700,000
(2) The company’s land and buildings were revalued at 1 July 2005. The revaluation has not yet been reflected in
the balances given above.
Details:
Cost
Land
Buildings
$000
4,000
6,000
Accumulated
depreciation
$000
–
3,600
Net book
value
$000
4,000
2,400
Revalued
amount
$000
5,000
4,000
(3) The draft profit for the year was $2,900,000. However, three adjustments are required:
(a) Receivables totalling $280,000 are to be written off
(b) Provision is to be made for bonuses to the directors totalling $250,000
(c) Depreciation charges for the year, based on revalued amounts:
Buildings
Plant and equipment
$200,000
$1,200,000
Required:
Prepare the company’s balance sheet as at 30 June 2006, using the format and headings in IAS 1 Presentation
of Financial Statements.
(11 marks)
12
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2
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 book
but 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
account had been transferred to the credit of purchases account.
(4) A payment of $4,000 for rent had been correctly recorded in the cash book but debited to the rent account as
$40,000.
Required:
(a) Prepare journal entries to correct the errors. Narratives are NOT required.
(7 marks)
(b) Calculate the revised profit after adjusting for the errors.
(4 marks)
(11 marks)
13
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[P.T.O.
3
The balance sheets of Joyce, a limited liability company, at 30 June 2005 and 2006 are as follows
Balance sheets
Reference
to notes
Non-current assets (net book value) 1
Current assets
Inventories
Receivables
Cash at bank
Ordinary share capital
Share premium account
Revaluation reserve
Retained earnings
30 June 2006
$000
$000
148,000
14,000
21,400
–
–––––––
1
Total equity
Non-current liabilities
8% Loan notes
Current liabilities
Payables
Current tax payable
Bank overdraft
9,100
12,500
4,600
–––––––
35,400
––––––––
183,400
––––––––
26,200
––––––––
156,200
––––––––
110,000
5,000
14,000
28,000
––––––––
157,000
109,000
4,000
2,000
18,000
––––––––
133,000
10,000
8,000
3
2
30 June 2005
$000
$000
130,000
7,100
8,000
1,300
–––––––
9,200
6,000
–
–––––––
16,400
––––––––
183,400
––––––––
15,200
––––––––
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 Cash
flow statements.
(12 marks)
14
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4
The directors of a recently formed company are unsure as to the policies they should adopt as regards depreciation.
Required:
Advise the directors on the following points:
(a) The fundamental objective of depreciation;
(1 mark)
(b) The extent to which land and buildings should be depreciated;
(3 marks)
(c) Two possible methods of calculating depreciation, with explanations.
(4 marks)
(8 marks)
5
IAS 10 Events after the balance sheet date defines the accounting treatment of material events occurring after the
balance 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 assets;
(2 marks)
(ii) Inventory;
(2 marks)
(iii) Loan notes.
(1 mark)
(8 marks)
End of Question Paper
15
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Answers
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
December 2006 Answers
Section A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
A
A
B
A
D
D
B
C
C
D
D
D
A
A
C
B
D
B
A
A
C
B
D
A
A
Workings for computational MCQs
1
A
0/inventory
Purchases
380
480
––––
860
455
––––
405
220
––––
185
––––
COGS 650 – 195
Inventory
Remaining inventory
Inventory lost
2
A
1
2
3
+ 500
+ 500
no change
–––––
1,000
–––––
3
B
500 – (75% x 450)
6
D
180 + (40% x 500) – 30
7
B
838,000 – 72,000 = 766,000; allowance 60,000
14 A
3/
4
x 10,800 + 1/4 x 12,000 = 11,100; prepayment 3/4 x 12,000
17 D
20% x (1,000,000 + 400,000 + 5,600,000)
19
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18 B
100 + 50 + 60; 80 – 50 + 30
22 B
1: (40,000 + 60,000 – 50,000) x 2 = 100,000 – 95,000 = 5,000 cash lost
3: (40,000 + 60,000 – 50,000 – 2,500 inventory loss) x 2 = 95,000
23 D
834,600 + 134,600 – 4,800 + 8,700 – 144,400
25 A
Payables ledger control account
Cash paid to suppliers
1,364,300
Purchase returns
41,200
Contras against debit
balances in receivables ledger
48,000
Discounts
8,200
Closing balance
128,200
––––––––––
1,589,900
––––––––––
Opening balance
Purchases
Refunds received from
suppliers
318,600
1,268,600
2,700
––––––––––
1,589,900
––––––––––
20
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Section B
1
Golding
Balance sheet as at 30 June 2006
Non-current assets
Land and buildings
Plant and equipment
Cost or
valuation
$000
Accumulated
depreciation
$000
Net book
value
$000
9,000
6,000
–––––––
15,000
–––––––
200
4,400
––––––
4,600
––––––
8,800
1,600
–––––––
10,400
Current assets
Inventories
Receivables (3,600 – 280)
Cash
4,700
3,320
1,200
––––––
9,220
–––––––
19,620
–––––––
Capital and reserves
Called up share capital
Share premium account
Revaluation reserve (5,000 + 4,000 – 4,000 – 2,400)
Retained earnings (see working)
Non-current liabilities
8% Loan notes
Current liabilities
Payables
Accruals (500 + 250)
Working
Retained earnings balance
1 July 2005
Draft profit
less: irrecoverable debts
bonuses
depreciation
5,000
2,200
2,600
5,570
–––––––
15,370
1,000
2,500
750
–––––––
$000
$000
3,250
––––––
19,620
–––––––
$000
4,600
2,900
280
250
1,400
–––––––
1,930
––––––
21
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970
–––––––
5,570
–––––––
2
(a)
Dr
$
70,000
(1) Sales
Share capital
Share premium
Cr
$
50,000
20,000
(2) Suspense
Interest payable
Interest receivable
16,000
(3) Sales
Purchases
Suspense
16,000
16,000
8,000
8,000
32,000
OR
Suspense
Sales
48,000
Purchases
Suspense
64,000
Sales
64,000
48,000
64,000
Suspense
64,000
Suspense
Purchases
48,000
48,000
(4) Suspense
Rent
36,000
36,000
(b)
–
$
Profit per draft accounts
Adjustments
(1) Sales
(2) Interest
(3) Sales/Purchases
(4) Rent
+
$
830,000
70,000
16,000
32,000
––––––––
102,000
Revised profit
36,000
––––––––
882,000
102,000
––––––––
780,000
––––––––
22
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3
Joyce
Cash flow statement for the year ended 30 June 2006
$000
Cash flows from operating activities
Profit before taxation (working 1)
Adjustments for
Depreciation
Interest expense
$000
22,200
13,000
720
–––––––
35,920
(4,900)
(8,900)
(2,100)
–––––––
20,020
(720)
(6,200)
–––––––
Increase in inventories
Increase in receivables
Decrease in payables
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
Cash flows from investing activities
Purchase of property plant and equipment (Working 3)
13,100
(19,000)
–––––––
Net cash used in investing activities
Cash flows from financing activities
Proceeds of issue of share capital
Proceeds of issue of loan notes
Dividends paid
(19,000)
2,000
2,000
(4,000 )
–––––––
Net cash from financing activities
–
–––––––
(5,900)
4,600
–––––––
(1,300)
–––––––
Net decrease in cash
Cash at 1 July 2005
Cash at 30 June 2006
WORKINGS
1
Calculation of profit for year
Dividends
Tax
Closing balance
$000
4,000
8,200
28,000
–––––––
40,200
–––––––
2
$000
18,000
22,200
–––––––
40,200
–––––––
Income taxes
Cash
Closing balance
3
$000
6,200
8,000
–––––––
14,200
–––––––
Opening balance
Income statement
$000
6,000
8,200
–––––––
14,200
–––––––
Non-current assets
Opening balance
Revaluation reserve
Purchases
$000
130,000
12,000
19,000
––––––––
161,000
––––––––
4
0pening balance
Profit for year
$000
Depreciation
13,000
Closing balance
148,000
––––––––
161,000
––––––––
(a)
Following the matching concept, to reflect in operating profit the cost of use of tangible non-current assets (the amount of
economic benefits consumed).
(b)
It is not normally necessary to depreciate land, unless it is subject to depletion in some way – a quarry for example. Buildings
should be depreciated like any other non-current asset so as to allocate their depreciable amount (cost or valuation) over their
useful economic life.
23
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(c)
(i)
Straight line. The depreciable amount of an asset, less any residual value, is written off in equal instalments over its
estimated useful economic life.
(ii)
Reducing balance. Depreciation is calculated as a percentage of the net book value of the asset at the end of each period.
Other answers to (c) considered on their merits.
5
(a)
If the event provides evidence of conditions that existed at the balance sheet date, adjustment must be made, if material.
Adjustment is also required if an event after the balance sheet date indicates that the going concern basis of accounting is
no longer 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
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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
1
December 2006 Marking Scheme
Heading
Land and building
valuation
accumulated depreciation
1
1
1/
2
––––
Plant and equipment
cost
accumulated depreciation
Inventory
Receivables
Cash
Share capital
Share premium account
Revaluation reserve
Retained earnings
Loan notes
Accruals
Payables
Format
2
(a)
1
2
3
4
(b)
3
1/
2
1/
2
––––
1/
2
+ 1/2
1
1
2
1/
2
1
1/
2
2
–––––
131/
–––––2
4 x 1/2
1/
2
1
1/
2
1/
2
1/
2
1/
2
+ 1/2
3 x 1 (or 4 x 1 max 3)
4x1
4
––––
11
––––
1/ + 1/
Heading
2
2
Operating profit
4 x 1/2 + tax 1
Depreciation
Interest expense
Increase in inventory
Increase in receivables
Decrease in payables
Net cash inflow from operating activities
All other items in statement
6 x 1/2
Calculation of non-current asset payment
1/ + 1/
Balances
2
2
Revaluation reserve
Depreciation
(c)
11
1
3
1/
2
1/
2
1/
2
1/
2
1/
2
1/
2
3
1
1
1/
––––2
21/2
1
1
–––––
1
14 /
–––––2
(a)
(b)
max 11
11/2
11/2
3
1
Cash movement
Layout
4
11/2
max 12
1
1/
2
1/
2
Land – not depreciated
Land – mention of depletion
Buildings – cost or valuation
Spread over useful economic life
1
1
––––
2x2
3
4
––––
8
––––
25
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8
5
(a)
(b)
11/2
1
1/
––––2
Conditions at b/s date
Materiality
Going concern
2+2+1
3
5
––––
8
––––
26
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8
(International Stream)
PART 1
THURSDAY 7 JUNE 2007
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
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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Paper 1.1(INT)
Preparing Financial
Statements
7J–INTPA
Paper 1.1INT
7J–INTAA
Paper 1.1INT
Section A – ALL 25 questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice
question. Each question within this section is worth 2 marks.
1
A company issued one million ordinary $1 shares at a premium of 50c per share. The proceeds were correctly
recorded in the cash book, but were incorrectly credited to the sales account.
Which of the following journal entries will correct the error?
A
B
C
Debit
$
1,500,000
Sales
Share capital
Share premium
1,000,000
500,000
Share capital
Share premium
Sales
1,000,000
500,000
Sales
1,500,000
1, 500,000
Share capital
7J–INTAC
Paper 1.1INT
7J–INTAB
Paper 1.1INT
D
2
3
Credit
$
1,500,000
Share capital
Sales
1,500,000
1,500,000
Which one of the following would cause a company’s gross profit percentage on sales to fall?
A
A reduction in the total value of goods returned to suppliers.
B
An increase in the costs of delivery of goods to customers.
C
A decline in average inventory levels.
D
An increase in theft of inventory by customers and staff
Where, in a company’s 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
2 and 3
C
1 and 4
D
3 and 4
2
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7J–INTAD
Paper 1.1INT
4
A property company received cash for rent totalling $838,600 in the year ended 31 December 2006.
Figures for rent in advance and in arrears at the beginning and end of the year were:
Rent received in advance
Rent in arrears
31 December 2005
$
102,600
31 December 2006
$
88,700
42,300
48,400
(all subsequently received)
7J–INTAE
Paper 1.1INT
What amount should appear in the company’s income statement for the year ended 31 December 2006 for rental
income?
5
A
$818,600
B
$738,000
C
$939,200
D
$858,600
Which one of the following journal entries is correct according to its narrative?
A
B
Debit
$
100,000
Mr Smith personal account
Directors’ remuneration
Bonus allocated to account of
managing director (Mr Smith)
Credit
$
100,000
Purchases
Wages
Repairs to buildings
14,000
24,000
38,000
Transferring cost of repairs to buildings
carried out by company’s own
employees, using materials
from inventory.
C
D
Discounts allowed
Discounts received
Correction of error: discounts
allowed total incorrectly
debited to discounts received
account
2,800
2,800
Suspense account
Rent receivable
Rent payable
Correction of error: rent received
credited in error to rent
payable account.
20,000
10,000
10,000
3
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[P.T.O.
7J–INTAF
Paper 1.1INT
7J–INTAG
Paper 1.1INT
7J–INTAH
Paper 1.1INT
6
A company’s gross profit as a percentage of sales increased from 28% in the year ended 31 December 2005 to 33%
in the year ended 31 December 2006.
Which one of the following could have caused the increase?
7
8
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.
Which of the following items could appear as items in a company’s cash flow statement?
1
A bonus issue of shares
2
A rights issue of shares
3
Revaluation of non-current assets
4
Dividends paid
A
All four items
B
1, 3 and 4 only
C
2 and 4 only
D
2 and 3 only
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 company’s financial statements for the year ended 30 November
2006?
Income statement
$
Balance sheet
$
A
136,000
Prepayment
12,000
B
136,000
Prepayment
24,000
C
138,000
Nil
D
136,000
Accrual
12,000
4
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7J–INTAH
Paper 1.1INT
9
At 1 January 2006 a company had an allowance for receivables of $49,000.
At 31 December 2006 the company’s trade receivables were $863,000 and it was decided to write off balances
totalling $23,000 and to adjust the allowance for receivables to the equivalent of 5% of the remaining receivables
based on past experience.
7J–INTAJ
Paper 1.1INT
What total figure should appear in the company’s income statement for bad debts and allowance for receivables?
A
$16,000
B
$65,000
C
$30,000
D
$16,150
10 At 1 January 2006, a company’s capital structure was as follows:
$
Ordinary share capital
2,000,000 shares of 50c each
1,000,000
Share premium account
1,400,000
In January 2006 the company issued 1,000,000 shares at $1·40 each.
In September 2006 the company made a bonus issue of 1 share for every 3 held using the share premium account.
7J–INTAK
Paper 1.1INT
What were the balances on the company’s share capital and share premium accounts after these transactions?
A
Share capital
$
4,000,000
Share premium
$
800,000
B
3,200,000
600,000
C
2,000,000
1,800,000
D
2,000,000
1,300,000
11 Which of the following statements about the treatment of inventory and work in progress in financial 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
included.
3
Inventory items can be valued using either first in, first out (FIFO) or weighted average cost.
4
A company’s financial statements must disclose the accounting policies used in measuring inventories.
A
All four statements are correct.
B
1, 2 and 3 only
C
2, 3 and 4 only
D
1 and 4 only
5
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[P.T.O.
7J–INTAL
Paper 1.1INT
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
1 Jan Balance
1 July Cash
$
960,000
48,000
2006
30 Sept
31 Dec
––––—––––
1,008,000
––––––––––
$
Transfer disposal account 84,000
Balance
924,000
––––—––––
1,008,000
––––––––––
The company’s policy is to charge depreciation on the straight line basis at 20% per year, with proportionate
depreciation in the years of purchase and sale.
7J–INTAM
Paper 1.1INT
What should be the charge for depreciation in the company’s income statement for the year ended
31 December 2006?
A
$184,800
B
$192,600
C
$191,400
D
$184,200
13 X has a 40% shareholding in each of the following three companies:
P: X has the right to appoint or remove a majority of the directors of P.
Q: X has significant influence over the affairs of Q.
R: X has the power to govern the financial and operating policies of R.
7J–INTAN
Paper 1.1INT
Which of these companies are subsidiaries of X for financial reporting purposes?
A
Q and R only
B
P and R only
C
P and Q only
D
P, Q and R
14 The trial balance of a company did not balance, and a suspense account was opened for the difference.
Which of the following errors would require an entry to the suspense account in correcting them?
(1) A cash payment to purchase a motor van had been correctly entered in the cash book but had been debited 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 customer’s account.
A
1 and 2
B
2 and 3
C
3 and 4
D
2 and 4
6
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7J–INTAO
Paper 1.1INT
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?
A
B
C
Drawings
Inventory
Debit
$
2,000
2,000
Purchases
Drawings
2,000
Sales
2,000
2,000
Drawings
7J–INTAQ
Paper 1.1INT
7J–INTAP
Paper 1.1INT
D
Drawings
Purchases
Credit
$
2,000
2,000
2,000
16 Which of the following statements about the requirements of IAS 37 Provisions, contingent liabilities and
contingent assets are correct?
1
A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
2
No disclosure of a contingent liability is required if the possibility of a transfer of economic benefits arising 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
1 and 3 only
D
2 and 3 only
17 Which of the following statements are correct, according to IAS 10 Events after the balance sheet date?
1
Details of all adjusting events must be disclosed by note to the financial statements.
2
A material loss arising from the sale, after the balance sheet date, of inventory valued at cost at the balance 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 when the
financial statements are authorised for issue.
A
1 and 2 only
B
1, 3 and 4
C
2 and 3 only
D
2, 3 and 4
7
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[P.T.O.
7J–INTAR
Paper 1.1INT
7J–INTAS
Paper 1.1INT
7J–INTAT
Paper 1.1INT
18 Where in the financial statements should tax on profit for the current period, and unrealised surplus on
revaluation of properties, be separately disclosed?
Tax on profit for
current period
Unrealised surplus
on revaluation of
properties
Income statement
A
Income statement
B
Statement of changes
in equity
Income statement
C
Income statement
Statement of changes
in equity
D
Statement of changes
in equity
Statement of changes
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:
Profit before tax
Depreciation
Increase in inventories
Decrease in receivables
Increase in payables
Net cash inflow from operating activities
$m
22
8
(4)
(3)
(2)
–––
21
Which of the following corrections need to be made to the calculation?
1
Depreciation should be deducted, not added
2
Increase in inventories should be added, not deducted
3
Decrease in receivables should be added, not deducted
4
Increase in payables should be added, not deducted
A
1 and 2
B
1 and 3
C
2 and 4
D
3 and 4
8
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7J–INTAU
Paper 1.1INT
7J–INTAV
Paper 1.1INT
21 What is the correct treatment of interest charged on partners’ drawings in preparing a partnership’s financial
statements?
A
Credited as income in the income statement
B
Debited as an expense in the income statement
C
Added to total profit in calculating partners’ profit shares
D
Deducted from total profit in calculating partners’ profit shares.
22 X and Y are in partnership. They share profits equally after charging a salary $40,000 per year for X and interest on
capital at 5% per year.
At 1 January 2006 their capital balances were:
X
Y
$
200,000
100,000
On 1 July 2006 Y introduced a further $100,000 capital, and X’s salary was discontinued.
The partnership profit for the year ended 31 December 2006 was $337,500.
7J–INTAW
Paper 1.1INT
What was X’s total profit share for the year ended 31 December 2006?
A
$
182,500
B
178,750
C
180,000
D
190,000
23 Where, in a company’s financial statements complying with International accounting standards, should you find
the proceeds of non-current assets sold during the period?
A
Cash flow statement and balance sheet
B
Statement of changes in equity and balance sheet
C
Income statement and cash flow statement
D
Cash flow statement only
7J–INTAX
Paper 1.1INT
24 Which of the following events would reduce a company’s gearing?
1
An issue of loan notes
2
A rights issue of equity shares
3
A bonus issue of equity shares
A
1 and 2
B
1 and 3
C
3 only
D
2 only
9
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[P.T.O.
7J–INTAY
Paper 1.1INT
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
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.
C
$12,780 cash paid to a supplier was entered on the credit side of the supplier’s account in the payables ledger.
D
The total of discount received $6,390 has been entered on the credit side of the payables ledger control account.
(50 marks)
10
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7J–INTPB
Paper 1.1INT
7J–INTBA
Paper 1.1INT
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
purchases are for cash, except for some sales to other dealers which are made on credit.
The following information is available to prepare his income statement for the year ended 31 December 2006.
Assets and liabilities
As at 31 December
2005
2006
$
$
1,200
2,000
85,000
88,500
4,800
6,400
1,100
1,400
Equipment
Inventory
Trade receivables
Payable for expenses
Cash summary
2006
1 Jan
31 Dec
Balance – float
Cash from sales
Proceeds of sale of equipment
$
100
2006
31 Dec
191,400
700
––––––––
192,200
––––––––
Wages for assistant
Sundry expenses
Purchases of new equipment
Purchases
Drawings
Balance – float
$
15,600
8,300
2,000
?
?
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
has been made of payments for purchases of goods for sale. He fixes his selling price for all items by doubling their
cost. He allowed a trade discount of $9,000, representing 30% on selling price, for sales to dealers with a normal
price of $30,000. ($30,000 less $9,000 discount = $21,000).
All the equipment held at the beginning of the year was sold for $700, and new equipment purchased for $2,000.
A full year’s depreciation is to be charged on the new equipment at 20%, with no depreciation on the items sold.
Required:
(a) Prepare Hasta’s income statement for the year ended 31 December 2006.
Your answer should include a detailed calculation of cost of sales.
(b) Calculate Hasta’s drawings for the year ended 31 December 2006
(10 marks)
(2 marks)
(12 marks)
11
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[P.T.O.
7J–INTBB
Paper 1.1INT
2
The receivables ledger control account of Atanga at 31 December 2006 shows a debit balance of $487,600. The
list of receivables ledger balances at the same date totalled $455,800 debit. There were no credit balances.
On investigation the following errors and revisions were found:
(1) The sales day book had been overcast by $2,000
(2) A debt of $8,400 is to be written off
(3) A credit note for $1,200 was entered on the debit side of the customer’s account.
(4) Contras against amounts owing to Atanga in the payables ledger totalling $16,100 were entered on the 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.
(5 marks)
(b) Prepare a statement showing the necessary adjustments to the total of the list of receivables ledger balances.
(4 marks)
7J–INTBC
Paper 1.1INT
(9 marks)
3
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. Erica’s share capital has remained unchanged since the acquisition.
The following draft balance sheets for the two companies have been prepared at 31 December 2006.
Investment in Erica
Sundry net assets
Ordinary share capital
Retained earnings
Gasta
$
1,380,000
2,660,000
––––––––––
4,040,000
––––––––––
2,000,000
2,040,000
––––––––––
4,040,000
––––––––––
Erica
$
–
1,660,000
––––––––––
1,660,000
––––––––––
1,000,000
660,000
––––––––––
1,660,000
––––––––––
Goodwill arising on the acquisition has been fully written off.
Before consolidation, it was found that the inventories of both companies at 31 December 2006 had been overstated,
Gasta’s by $400,000 and Erica’s by $150,000.
Required:
Prepare the consolidated balance sheet of Gasta and the subsidiary Erica as at 31 December 2006, after
adjusting for the inventory errors.
Note: Your workings for all figures in the consolidated balance sheet must be shown.
(9 marks)
12
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7J–INTBD
Paper 1.1INT
4
Hathan has just concluded a ratio analysis comparing its performance and position at 31 December 2006 with those
at 31 December 2005. The directors are concerned to see that the current ratio and quick ratio show a 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.
7J–INTBE
Paper 1.1INT
(8 marks)
5
A company manufacturing aircraft engages in a number of research and development projects.
At 1 January 2006 the company’s records showed total capitalised development costs of $18,000,000 made up 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
qualifying for capitalisation to 31 December 2005
Project J9 is due to be completed in 2009
$
14,000,000
4,000,000
–––––––––––
18,000,000
–––––––––––
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 company’s income statement and
balance sheet for the year ended 31 December 2006.
(6 marks)
(b) Discuss the accounting concepts applicable to the accounting treatment of development expenditure.
Note: You are NOT required to provide the criteria for capitalisation of development expenditure in IAS 38
Intangible assets.
(6 marks)
(12 marks)
End of Question Paper
13
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Answers
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7J–INTIX
Paper 1.1INT
7J–INTAA
Paper 1.1INT
Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
June 2007 Answers
Section A
1
A
2
D
3
D
4
D
5
C
6
B
7
C
8
A
(4 x 10,000) + (8 x 12,000) = 136,000; 1/12 x 144,000 = 12,000
9
A
23,000 – (49,000 – 42,000)
10 C
838,600 + (102,600 – 42,300) – (88,700 – 48,400)
Share capital
1,000,000
Issue
500,000
––––––––––
1,500,000
Bonus
500,000
––––––––––
2,000,000
––––––––––
Share premium
1,400,000
900,000
––––––––––
2,300,000
(500,000)
––––––––––
1,800,000
––––––––––
11 C
12 B
(960,000 x 20%) + (48,000 x 20% x 1/2) – (84,000 x 20% x 1/4)
13 B
14 B
15 D
16 A
17 D
18 C
19 D
20 D
21 C
22 C
X salary 20,000 + interest 10,000 + share 150,000 = 180,000
23 D
24 D
25 B
17
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7J–INTBA
Paper 1.1INT
1
(a)
Hasta
Income statement for the year ended 31 December 2006
$
Sales
less: Cost of sales
Opening inventory
Purchases (balancing figure)
85,000
104,500
————
189,500
88,500
————
less: Closing inventory
Gross profit
less: Expenses
Wages
Sundry expenses (8,300 – 1,100 + 1,400)
Loss on sale of equipment (1,200 – 700)
Depreciation (2,000 x 20%)
15,600
8,600
500
400
———
Net profit
$
193,000
101,000
————
92,000
25,100
————
$66,900
————
Workings
$
Calculation of sales
$191,400 – $4,800 + $6,400
$
193,000
Calculation of gross profit
(193,000 – $21,000)/2
$21,000 – ($30,000/2)
86,000
6,000
———
Cost of goods sold is therefore
92,000
————
101,000
————
Alternative calculation of gross profit
$
193,000
9,000
————
202,000
————
Sales
Add: trade discount
Gross profit if all sales at full price
less: trade discount
(b)
Cash not accounted for:
less: purchases
101,000
9,000
————
92,000
————
$192,200 – $15,600 – $8,300 – $2,000 – $150
Drawings
18
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166,150
104,500
————
61,650
————
7J–INTBB
Paper 1.1INT
2
(a)
Receivables ledger control account balance
(1)
(2)
(4)
(5)
(6)
+
$
487,600
Original balance
Sales day book overcast
Bad debt written off
Contras incorrectly entered
Credit note adjustment
Discount not recorded
2,000
8,400
32,200
1,100
Receivables ledger balances
(2)
(3)
(5)
(6)
+
$
455,800
Original balance
Bad debt written off
Credit note incorrectly entered
Credit note adjustment
Discount not recorded
–
$
8,400
2,400
1,100
150
———–
10,950
————–
456,900
10,950
————–
$445,950
————–
Revised balance
7J–INTBC
Paper 1.1INT
150
———–
42,750
————–
488,700
42,750
————–
$445,950
————–
Revised balance
(b)
–
$
3
Gasta Group
Consolidated balance sheet as at 31 December 2006
Sundry net assets (2,660,000 + 1,660,000 – 550,000)
$
3,770,000
—————
Share capital
2,000,000
Retained earnings
1,392,500
—————
3,392,500
377,500
—————
3,770,000
—————
Minority interest
Goodwill
Investment in Erica
$
1,380,000
$
750,000
360,000
Share capital 75%
Retained earnings 75%
Retained earnings –
goodwill written off
270,000
—————
1,380,000
—————
—————
1,380,000
—————
Minority interest
Balance to CBS
$
377,500
Share capital 25%
Retained earnings 25%
(WI)
—————
377,500
—————
19
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$
250,000
127,500
—————
377,500
—————
7J–INTBC
Paper
Retained earnings
$
Goodwill
75% × $480,000
Minority interest
Goodwill impairment
written off
Balance to CBS
Working 1
Retained profits:
Balances:
Gasta
Erica
360,000
127,500
(W1)
(W1)
270,000
1,392,500
—————
2,150,000
—————
$
1,640,000
510,000
—————
2,150,000
—————
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
Retained profit
$
1,000,000
480,000
—————
1,480,000
—————
Group share
75%
Goodwill
Minority interest
Share capital
Retained earnings
1,000,000
510,000
—————
1,510,000
—————
25%
Minority share
Retained earnings
Gasta
Erica
Less: preacquisition
7J–INTBD
Paper 1.1INT
377,500
—————
1,640,000
22,500
—————
1,662,500
270,000
—————
1,392,500
—————
less: goodwill written off
(a)
1,110,000
—————
270,000
510,000
480,000
————
30,000
Group share 75%
4
$
1,380,000
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.
(iii) Repayment of long-term loans
(iv) Payment of high dividends
(v) Reduction in receivables as a result of bad debts
20
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7J–INTBD
Paper 1.1INT
(b)
Two from:
(i)
(ii)
(iii)
(iv)
Raise new long-term capital (equity shares or loan notes)
Sell non-trading assets such as investments
Reduce inventory levels to improve quick ratio
Defer capital expenditure
These steps increase current assets or quick assets without increasing current liabilities, thus improving the ratios.
7J–INTBE
Paper 1.1INT
Other points considered on their merits for both (a) and (b)
5
(a)
Income statement
$
Project
A17
A20
2,000,000
3,000,000
—————
5,000,000
—————
Balance sheet
A17
J9
(b)
Cost
$
16,000,000
5,500,000
–––––––––––
21,500,000
–––––––––––
Amortisation
$
4,000,000
––––––––––
4,000,000
––––––––––
Net book value
$
12,000,000
5,500,000
–––––––––––
17,500,000
–––––––––––
The main applicable accounting concepts are accruals and prudence. The accruals concept favours capitalisation of
development expenditure to match the expenditure against the future income to be generated from it. The prudence concept
argues for caution, having regard to the inevitable doubt as to the successful outcome of the development project. The going
concern concept is also relevant, because doubt as to the going concern status of the company would clearly mean that the
capitalisation of development costs could not be justified.
Other concepts considered on their merits.
21
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7J–INTMS
Paper 1.1INT
Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream)
1
(a)
June 2007 Marking Scheme
Marks
1
1
Heading 2 x 1/2
Sales
Gross profit
172,000/2
$21,000 – (30,000/2)
Cost of goods sold
Opening / Closing inventory 2 x 1/2
Purchases (balancing figure)
1
2
1
1
—
7
1/
2
11/2
Wages
Sundry expenses
Loss on sale
Depreciation
(b)
3
1
1
Calculation of cash not accounted for
Deduction of cash for purchases
4
—
11 max
1
1
—
2
—
12
—
Alternative calculation of gross profit
193,000 + 9,000
Gross profit 101,000
Deduction of trade discount
2
3
4
1
1
1
—
3
—
(a)
Correction of errors
5x1
5
(b)
Correction of errors
4x1
4
—
9
1
1
1
31/2
11/2
1
—
9
Heading 2 x 1/2
Sundry net assets
Share capital
Retained earnings 21/2 + 1 for inventory adjustments
Goodwill
Minority interest
(a)
2x2
4
(b)
2x2
4
—
23
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10
8
7J–INTMS
Paper 1.1INT
Marks
5
(a)
Income statement
A17
A20
2
1
—
Balance sheet
A17
J9
(b)
2
1
—
Accruals concept
Stated
Explained
Prudence concept
Stated
Explained
Going concern concept
Stated
Explained
3
3
—
1
1
—
2
1
1
—
2
1
1
—
Other valid concepts considered on their merits.
24
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2
––
6
6
—
12