FA: Financial Accounting:
The Context & Purposes of Financial Reporting:
The regulatory framework.
a. Understand the role of the regulatory system, including the roles of the IFRS Foundation (IFRSF), the
international Accounting Standard Board (IASB), the IFRS Advisory council (IFRS AC) and the IFRS
interpretations committee (IFRS IC).
b. Understand the role of the International Financial Reporting Standards.
The Regulatory System:
A Number of factors have shaped the development of financial accounting.
Introduction:
Although new to the subject, you will be aware from your reading of the press that there have been some
considerable upheavals in financial reporting, mainly in response to criticism. The details of the regulatory
framework of accounting, and the technical aspects of the changes made, will be covered later in this
chapter and in your more advance studies. The purpose of this section is to give a general picture of some
of the factors which have shaped financial accounting. We will concentrate on the accounts of limited
liability companies, as these are the accounts most closely regulated by statute or otherwise.
The following factors that have shaped financial accounting can be identified.
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National/local legislation
Accounting concepts and individual judgment
Accounting standards
Other international influences
Generally accepted accounting principles (GAAP)
Fair presentation.
National/local legislation:
In most countries, limited liability companies are required by law to prepare and publish accounts
annually. The form and content of the accounts is regulated primary by national legislation.
Accounting concepts and individual Judgment:
Many figures in financial statements are derived from the application of judgment in applying
fundamental accounting assumptions and conventions. This can lead to subjectivity; Accounting
standards were developed to try to address this subjectivity.
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FA: Financial Accounting:
Financial statements are prepared on the basis of a number of fundamental accounting assumptions and
conventions. Many figures in financial statements are divided from the application of judgment in putting
these assumptions into practice. It is clear that different people exercising their judgment on the same
facts can arrive at very different conclusions.
Case Study:
An accountancy training firm has an excellent reputation among students and employers. How would you
value this? The firm may have relatively little in the form of assets that you can touch, perhaps a building,
desk and chairs. If you simply drew up a statement of financial position showing the cost of the assets
owned, then the business would not seem to be worth much, yet its income earning potential might be
high. This is true of many service organizations where the people are among the most valuable assets.
Other examples of areas where the judgment of different people may very are as follows:
a. Valuation of buildings in times of rising property prices
b. Research and development, is it right to treat this only as an expense? In a sense, it is an
investment to generate future revenue.
c. Accounting for inflation
d. Brands such as ‘Dr. Pepper’ and Cadbury Dairy Mil. Are they assets in the same way that a fork lift
truck is an asset?
Working from the same data, different groups of people produce very different financial statements. If the
exercises of judgment are completely unfettered, there will be no comparability between the accounts of
different organizations. This will be all the more significant in cases where deliberate manipulation occur,
in order to present accounts in the most favorable light.
Accounting Standards:
In a attempt to deal with some of the subjectivity, and to achieve comparability between different
organizations, accounting standards were developed. These are developed at both a national level (in
most countries) and an international level. The FFA/FA Syllabus is concerned with International Financial
Reporting Standards (IFRSs).
IFRSs are produced by the International Accounting Standards Board (IASB).
THE INTERNATIONAL ACCOUTNING STANDARDS BOARD (IASB):
The IASB develops IFRSs. The main objectives of the IFRS Foundation are to raise the standard
of financial reporting and eventually bring about global harmonization of accounting standards.
The international Accounting Standards Board (IASB) is an independent, privately funded body that
develops and approves IFRSs.
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FA: Financial Accounting:
Prior to 2003, standards were issued as international Accounting Standards (IASs), in 2003 IFRS I was issued
and all new standards are now designated as IFRSs.
The members of the IASB come from several countries and have a variety of backgrounds, with a mix of
auditors, prepares of financial segments, users of financial statements and academics.
The IASB operates under the oversight of the IFRS Foundation.
The IFRS Foundation:
The IFRS Foundation (formally called the international Accounting Standards Committee Foundation
or (IASCF) is a not for profit, private sector body that oversees the IASB.
The Objectives of the IFRS Foundation are to:
 Develop a single set of high quality, understandable, enforceable and globally accepted IFRSs
through its standard setting body the IASB
 Promote the use and rigorous application of those standards.
 Take account of the financial reporting needs of emerging economies and small and medium sized
entities (SMEs)
 Bring about convergence of national accounting standards and IFRSs to high quality solutions.
The IFRS Foundation is currently made up of 22 trustees, who essentially monitor and fund the IASB,
variety of geographical and functional backgrounds.
The structure of the IFRS Foundation and related bodies is shown below:
Appoint
Reports to
Monitoring Board
Advice
IFRS Foundation
IFRS Advisory Council
IFRS
IFRS Presentation
Committee
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FA: Financial Accounting:
IFRS Advisory Council:
The IFRS Advisory council (formerly called the standards Advisory Council or SAC) is essentially a
forum used by the IASB to consult with the outside world. It consults with national standard setters,
academics, user groups and a host of other interested parties to advise the IASB on a range of Issues,
from the IASB’s work program for developing new IFRSs to giving practical advice on the
implementation of particular standards,
The IFRS advisory Council meets the IASB at least three times a year and puts forward the view of its
members on current standard setting projects.
IFRS Interpretations Committee:
The IFRS interpretations Committee (formerly called the international financial Reporting
Interpretations Committee or IFRS was set up in March 2002 and provides guidance on specific
practical issues in the interpretation of IFRSs. Note that despite the name change, interpretations
issued by the IFRS interpretations Committee are still known as IFRIC Interpretations. In your exam,
you may see the IFRS Interpretations Committee referred to as the IFRS IC.
The IFRS Interpretations Committee has two main responsibilities.
 To review, on a timely basis newly identified financial reporting issues not specifically addressed in
IFRSs.
 To clarify issues where unsatisfactory or confecting interpretations have developed or seem likely to
develop in the absence of authoritative guidance, with view to reaching a consensus on the
appropriate treatment.
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FA: Financial Accounting:
Introduction to the Conceptual Framework:
The Conceptual Framework for Financial Reporting (Conceptual Framework or Framework) is a set of
principles which underpin the foundations of financial accounting. It is a conceptual framework on which
all IFRSs are based and hence determines how financial statements are prepared and the information
they contain. The conceptual framework is not an accounting standard in itself.
Chapter 1:
Chapter 2:
Chapter 3:
Chapter 4:
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The objective of general purpose financial reporting
The reporting entity (to be issued)
Qualitative characteristics of useful financial information
Remaining text of the 1989 framework.
Underlying assumption
The elements of financial statements
Recognition of the elements of financial statements
Measurement of the elements of financial statements
Concepts of capital and capital maintenance.
We are only concerned with chapter 3 and parts of Chapter 4 for the FFA/FA syllabus.
Underlying assumption:
The conceptual framework sets out one important underlying assumption for financial statements,
the going concern concept.
Going concern:
The financial statements are normally prepared on the assumption that an entity is a going concern
and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has
neither the intention nor the need to liquidate or curtail materially the scale of it operations.
This concept assumes that, when preparing a normal set of accounts, the business will continue to operate
in approximately the same manner for the foreseeable future (at least the next 12 months). In particular,
the entity will not go into liquidation or scale down its operations in a material way.
The main significance of the going concern concept is that the assets should not be values at their breakup value (the amount they would sell for if they were sold off piecemeal and the business were broken up)
Question:
A retailer commences business on 1 January and buys inventory of 20 washing machines, each costing
$100. During the year they sell 17 machines at $150 each.
How should the remaining machines be valued at 31 December in the following circumstances?
A. They are forced to close down their business at the end of the year and the remaining machines
will realize only $60 each in a force sale.
B. They intend to continue their business into the next year.
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FA: Financial Accounting:
Answer:
A. If the business is to be closed down, the remaining three machines must be valued at the
amount they will realize in a forced sale, ie. 3 X $60 = $180
B. If the business is regarded as a going concern the inventory unsold at 31 December will be
carried forward into the following year, when the cost of the three machines will be matched
against the eventual sale proceeds in computing that year’s profits. The three machines will
therefore be valued at cost, 3 X $100 = $300.
If the going concern assumption is not followed. That fact must be discussed, together with the following
information.
a. The basic on which the financial statement have been prepared
b. The reasons why the entity is not considered to be a going concern
Accruals basis:
The effects of transactions and other events are recognized when they occur (and not as cash or its
equivalent is received or paid) and they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate.
The accruals basis is not an underlying assumption but chapter 1 of the conceptual framework makes it
clear that financial statements should be prepared on an accruals basis.
Entitles should prepare their financial statements on the basis that transactions are recorded in them, not
as the cash is paid or received, but as the revenue or expenses are earned or incurred in the accounting
period to which they relate.
According to the accruals assumption, in computing profit revenue earned must be matched against the
expenditure incurred in earning it. This is also known as the matching convention.
Example: accruals basis
Emma purchases 20-Shirts in her first month of trading (May) at a cost of $5 each. She then sells all of
them for $10 each. Emma has therefore made a profit of $100, by matching the revenue ($200) earned
against the cost ($100) of acquiring them.
If however, Emma only sells 18 T-shirts, it is incorrect to charge her statement of profit or loss with the
cost of 20 T-shirts, as she still she has two T-shirts in inventory. Therefore, only the purchase cost of 18
T-shirts (18 X $5 = #90) should be matched with her sales revenue (18 X $10 = $180), leaving her with a
profitof$90
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FA: Financial Accounting:
Her statement of financial position will look like this.
$
Assets
Inventory (at cost, i.e. 2 X $5)
Accounts receivable (18 X $10)
10
180
190
Capital and liabilities
Proprietor’s Capital (profit for the period)
Accounts payable (20 X $5)
90
100
190
However, if Emma had decided to give up selling T-shirts then the going concern assumption no longer
applies and the value of the two T-shirts in the statement of financial position is break-up valuation not
cost.
Similarly, If the two unsold T-shirts are unlikely to be sold at more than their cost of $5 each (say, because
of damage or a fall in demand) then they should be recorded on the statement of financial position, at
their net realizable value (i.e. the likely eventual sales price less any expenses incurred to make them
saleable rather than cost.
In this example, the concepts of going concern and accruals are linked. Since the business is assumed to
be a going concern, it is possible to carry forward the cost of the unsold T-shirt as a charge against profits
of the next period.
The qualitative characteristics of financial information:
 The conceptual framework states that qualitative characteristics are the attributes that make the
information proved in financial statements useful to users.
 The two fundamental qualitative characteristics are relevance and faithful representation.
 Enhancing qualitative characteristics are comparability, verifiability, timeliness and
understandability.
Relevance:
Only relevant information is capable of making a difference in the decisions made by users. Financial
information is capable of making a difference in decisions if it has predictive value, confirmatory value
or both.
The predictive and confirmation roles of information are interrelated, information on financial position
and performance is often used to predict future position and performance and other things of interest
to make prediction, eg by highlighting unusual items.
The relevance of information is effected by its nature and materiality.
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FA: Financial Accounting:
Materiality:
Materiality, information is material if omitting it or misstating it could influence decisions that users
make on the basis of financial information about a specific reporting entity. (Conceptual Framework)
Information may be judged relevant simply because of its nature. In other cases, both the nature and
materiality of the information are important.
An error which is too trivial to effect anyone’s understanding of the accounts is referred to as immaterial in
preparing accounts it is important to assets what is material and what is not, so that time and money are
not wasted in the pursuit of excessive detail.
Determining whether or not an item is material is a very subjective exercise. There is no absolute measure
of materiality. It is common to apply a convenient rule of thumb (for example, material items are those
with a value greater than 5% of net profits). However, some items disclosed in the accounts (are regarded
as particularly sensitive and even a very small misstatement of such an item is taken as a
Material error, an example, in the accounts of a limited liability company, is the amount of remuneration
(salaries and other rewards) paid to directors of the company)
This assessment of an item as material or immaterial may affect its treatment in the accounts. For
example the statement of profit or loss of a business shows the expenses incurred grouped under suitable
captions (administrative expenses, distribution expenses etc); but in the case of very small expenses it
may be appropriate to lump them together as Sundry expenses, because a more detailed breakdown is
inappropriate for such immaterial amounts.
In assessing whether or not an item is material, it is not only the value of the item which needs to be
considered. The context is also important.
a. If a statement of financial position shows not-current assets of $2m and inventories of $30,000, an
error of $20,000 in the depreciation calculations might not be regarded as material. However, an
error of $20,000 in the inventory valuation would be material. In other words, the total of which the
error forms part must be considered.
b. If a business has a bank loan of $50,000 and a $55,000 balance on bank deposit account, it will be a
material misstatement if these two amounts are noted off on the statement of financial position as
cash at bank $5,000. In other words, incorrect presentation may amount to material misstatement
even if there is no monetary error.
Question:
Would you treat the following items as assets in the accounts of a company?
A. A box file.
B. A computer
C. A plastic display stand.
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FA: Financial Accounting:
Answer:
A. No. You would write it off to the statement of profit or loss as an expense.
B. Yes. You would capitalize the computer and charge depreciation on it.
C. You answer depends on the size of the company and whether writing off the item has a material
effect on its profits. A larger organization might well write this item off under the heading of
advertising expenses, while a small one might capitalize it and depreciate it over time. This is because
the item is material to the small company, but not to the large company.
Faithful Representation:
Financial reports represent economic phenomena in word and number. To be useful financial
information must not only represent relevant phenomena but must faithfully represent the
phenomena that it purports to represent.
To be faithful representation information must be complete, natural and free from error.
A Complete depiction includes all information necessary for a user to understand the phenomenon being
depicted, including all necessary descriptions and explanations.
A neutral depiction is without bias in the selection or presentation of financial information. This means that
information must not be manipulated in any way in order to influence the decisions of users.
Free from error means there are no error or omissions in the description of the phenomenon and no
inaccuracies can arise, particularly where estimates have to be made.
Substance over form:
This is not a separate qualitative characteristic under the conceptual framework. The IASB says that to
so include it would be redundant because it is implied in faithful representation. Faithful
representation of a transaction is only possible if it is accounted for according to its substance and
economic reality.
For example, a business may have entered into a leasing agreement for some equipment. However, the
terms are such that the business is really buying the equipment. The equipment should therefore be
included in the statement of financial position as an asset of the business and the leasing agreement
should be treated as a financing arrangement.
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FA: Financial Accounting:
Enhancing qualitative characteristics:
Comparability.
Comparability is the qualitative characteristic that enables users to identify and understand similarities in,
and differences among, items information about a reporting entity is more useful if it can be compared
with similar information about other entities and with similar information about the same entity for
another period or date.
Consistency.
Although related to comparability, is not the same. It refers to the use of the same methods for
the same items (ie consistency of treatment) either from period to period within a reporting
entity or in a single period across entities.
The disclosure of accounting policies is particularly important here. Users must be able to distinguish
between different accounting policies in order to be able to make a valid comparison of similar items in the
accounts of different entities.
Comparability is not the same as uniformity. Entities should change accounting policies if those policies
become inappropriate.
Corresponding information for preceding periods should be shown to enable compares to be made over
time.
Verifiability:
Verifiability helps assure users that information faithfully represents the economic phenomena it
purports to represent. It means that different knowledgeable and independent observers could reach
consensus that a particular depiction is a faithful representation. (Conceptual Framework)
Information that can be independently verified is generally more decision useful than information that
cannot.
Timeliness:
Timeliness means having information available to decision makers in time to be capable of influencing their
decisions, generally, the older information’s is the less useful it is.
Information may become less useful if there is a delay in reporting it. There is a balance between
timeliness and the provision of reliable information.
If information is reported on a timely basis when not all aspects of the transaction are known, it may not
be complete or free from error.
Conversely, if every detail of a transaction is known, it may be too late to publish the information
because it has become irrelevant. The overriding consideration is how best to satisfy the economic
decision-making needs of the users.
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FA: Financial Accounting:
Understandability:
Classifying characterizing and presenting information clearly and concisely makes it understandable.
Financial reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyses the information diligently. Some phenomena are inherently
complex and cannot be made easy to understand. Excluding information on those phenomena might
make the information easier to understand, but without it those reports would be incomplete and
therefore misleading. Therefore, matters should not be left out of financial statements simply due to their
difficulty as even well-informed and diligent users may sometimes need the aid of an adviser to
understand information about complex economic phenomena.
Other Accounting Concepts:
There are other accounting concepts which are useful in the preparation of financial statements.
Fair Presentation:
Financial statements are required to give a fair presentation or present fairly in all material respects
the financial result of the entity. Compliance with IFRSs will almost always achieve this.
The following points made by IAS 1 Presentation of financial statements expand on this principle.
a. Compliance with IFRSs should be disclosed.
b. All relevant IFRSs must be followed if compliance with IFRSs is disclosed.
c. Use of an inappropriate accounting treatment cannot be rectified either by disclosure of accounting
policies or notes / explanatory material.
There may be (very rare) circumstances when management decides that compliance with a requirement of
an IFRS would be misleading. Departure from the IFRS is therefore required to achieve a fair presentation.
IAS 1 states what is required for a fair presentation.
a. Selection and application of accounting policies
b. Presentation of information in a manner which provides relevant reliable, comparable and
understandable information
c. Additional disclosures where required.
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FA: Financial Accounting:
Consistency:
To maintain consistency, the presentation and classification of items in the financial statements should
stay the same from one period to the next, except as follows.
a. There is a significant change in the nature of the operations or a review of the financial
statements indicates a more appropriate presentation.
b. A change in presentation is required by an IFRS.
The Business Entity Concept:
Financial statement always treats the business as a separate entity.
It is concept that you understand that the convention adopted in preparing accounts (the business entity
concept) is always to treat a business as a separate entity from its owner (s). this means the transaction
of the owner should never be mixed with the business transactions. This applies whether or not the
business is recognized in law as a separate legal entity.
Question:
See if you can write a short sentence explaining each of the following characteristics.
A.
B.
C.
D.
Relevance
Faithful representation
Comparability
Understandably
Answer:
A. Relevance, the information provided satisfies the needs of users, helping them to evaluate past,
present or future events and confirming or correcting their past evaluations.
B. Faithful representation. The information gives full details of its effects on the financial
statements and is only recognized if its financial effects are certain.
C. Comparability. The information should be produced on a consistent basis so that valid
comparisons can be made with previous periods and with other entities.
D. Understandability. Information may be difficult to understand if it is incomplete, but too
much detail can also confuse the issue.
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FA: Financial Accounting:
Question:
Which of the following statements best describes the consistency concept?
A. Only material items are disclosed.
B. The way an item is presented always remains the same.
C. Presentation and classification of items should remain the same unless a change is required by an
IFRS.
Answer:
The correct answer is C presentation and classification of items should remain the same unless a
change is required by an IFRS.
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FA: Financial Accounting:
Right and Bonus Issue:
Question 01
Balance at 1st Jan 2008 Issued O.S.C. $40, 0000 @ S1/Shares
Share Premium $150,000.
On 1st April 2008 co. Made a Right Issue of 1 for 5, at an Issue Price of 4/Share.
On 1st October 2008 co. Made a Bonus Issue of 1 for 10, Using Share Premium A/C for This Purpose.
Required:
Balance of Share Capital and Share Premium at 31" December 2008?
Question 02
Balance at 1st January 2008 Issued O.S.C. $300,000 @ S0.5/Share
Share Premium /$400,000.
On 1st March 2008 co. Made a Bonus Issue of 1 for 5, Using Share Premium A/C for This Purpose. On
1st August 2008, Co Made a Right Issue of 2 for s, at an Issue Price of $2/Share.
Required:
Balance of O.S.C and Share Premium at 31 December 2008?
Question 03
Balance at 1st January 2009 Issued O.S.C. $500,000 @ $0.5/Share. Premium = $450,000. On
1st July 2009 Co. Made a Bonus Issue of 1 for 10, at an Issue Price of $1/Share.
On 1st October 2009, Co Made a Bonus Issue of 2 for 5, Using Share Premium.
Required:
Balance of O.S.C and Share Premium at 31 December 2009?
Question 04
Balance at 1st January 2008 Issued O.S.C. $500,000 @ SI Share Premium: 70,000. Retained Earnings
$300,000.
On 1st April 2008 Co. Made a Bonus Issue of 2 for 5, Using Share Premium A/C First for This Purpose
Required:
Balance of O.S.C Share Premium and Retained Earnings.
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FA: Financial Accounting:
Question 05
Balance at 1st January 2007 Issued O.S.C. $400,000 @ $1 Share. Share Premium =$45000 R.E = 350,000. On
1" February 2007 Co. Made a Bonus of 1 for 5, Using Share Premium = A/C First.
Required:
Balance of O.S.C Share Premium and Retained Earnings.
Question 06
Issued O.S.C $200,000 @ $0.5/Share.
8% Issued Pref. Share Capital $400,000 @ $0.5/Share. Co.
Paid an Ordinary Dividend of 16 Cents/Share.
Required:
Total Ordinary Dividend.
Total Preference Dividend.
Question 07
Issued O.S.C S $300,000 @ S0.25/Share.
7% Issued Preference Share Capital $350,000 @ $0.5/Share. Co.
Paid an Ordinary Dividend of 25 Cents/Share.
Required:
Total Ordinary Dividend.
Total Preference Dividend
PAGE 15
FA: Financial Accounting:
IAS 16 Property Plant & Equipment:
 Whenever you buy Asset first decide one model cost model OR revolution Model. Then keep that
Asset on that model to improve consistency.
 If you apply one model to an Asset, then apply the same model to the whole class of Asset, to avoid
cherry picking.
 If an Asset is revalued, then complete class of Asset is revalued at the same time.
 According to IS -16 Asset should be revalued frequently, so that carrying value does not differ
materially from fair value.
Question 1: co. bought a building on 1st Jan 08 $100,000. Useful life: 10 years on 31 Dec 2009 Co. Revalued
building to $150,000.
Required: Fs Extract for the Y/E 31 Dec 09=?
Question 2: Co bought a building on 1st Jan 08 for $ 80,000.life= 20years on 1st Jan 2009, Co revalued
building to $ 95000.
Required: FS Extract y/e 31 Dec 2009?
Question 3: Co. bought a building on 1st Jan 2008 for $200,000.usefull life= 10 years on 1st July 2009, Co.
Revalued this building upward by 85000
Required: Fs extract Y/E 31 Dec 2009 =?
Question 4: Co. Bought land & building on 1st Jan 2008
Land =50,000.
Building=$ 150,000. Useful life = 15 years.
On 1st Jan 2009 Co. revalued Building to S 210,000 M.V Land at 1st Jan 2009+ 60,000.
Question 5: Co. Bought Land & building on 1st Jan 2008,
Land=30,000
Building: 90,000 Useful life = 9years
M.V of building at 1st Jan 2009= 120,000.
M.V of land at 1st Jan 2009= 50,000.
Required: Fs extract Y/e 31 Dec 2009 =?
PAGE 16
FA: Financial Accounting:
Depreciation:
Question 01: Machine purchased £100,000 & useful life of 5years
Required: P&L extract and SOFP extract for 2nd and 3rd year.
Question 02: Machine purchased £50,000, Estimated scrap value £2,000 & Useful life of 10 years
Required: P&L extract and SOFP extract for 5th year.
Question 03: Machine purchased £70,000, scrap value £5,000 & useful life of 4 years
Required: P&L extract and SOFP extract for 2nd year.
Question 04: Machine purchased $35,000 for 5 years. Depreciation Rate is 10% on Cost
Required: P&L extract and SOFP extract for 3rd year.
Question 05: Machine purchased $46,000. Life is 5 years and Depreciation is Rate 20% on NBV
Required: P&L extract and SOFP extract for 4th year.
Question 06: Machine purchased $76,000. Life is 6 years, scrap value is 5,000 and Depreciation Rate is 30%
on NBV.
Required: P&L extract and SOFP extract for 4th year.
Question 07: Machine purchase $50,000 on 1 Sep 2007, Depreciation Rate is 10% on NBV and scrap value
is 5,000. Company policy is to charge full year Depreciation In the years of purchase and none in year of
sale.
Required: P&L and SOFP extract for 31 December 2009
Question 08: Machine purchased for $75,000 on 1 March 2002. Depreciation is charged on usage basis.
Scrap value is 5,000 and useful life is 5 years. Usage policy is followed
Required: P&L and SOFP for the years 30 November 2002 & 2003.
Question 09: Machine purchase Rs. 46,000 on 1 April 2002. Depreciation is charged 20% on cost.
Depreciation is charged on time proportionate basis.
Required: P&L and SOFP for 30 Sep 2002 & 2003.
Question 10: A Company purchased an asset for 300,000 with a scrap value of 5,000 and life of 5 year on
1st Oct 2002. It is company policy to depreciate asset on usage basis
Required: P&L and SOFP for 31 December 2003 & 2004
Question 11: A Company purchased an asset for 500,000 with a scrap value of 10,000 and life of 6 year on
1st Mar 2003. It is company’s policy to depreciate asset on reducing balance method @ 30% (usage basis)
Required: P&L and SOFP for 31 December 2004 & 2005
Question 12: A Company purchased an asset for 650,000 with a scrap value of 8,000 and life of 5 year on
1st Apr 2002. It is company’s policy to depreciate asset on reducing balance method @ 20% (usage basis)
Required: P&L and SOFP for 31 December 2003 & 2004
PAGE 17
FA: Financial Accounting:
Question 13: A Company bought an asset worth Rs 56,000 on 1 Aug 2001. The asset useful life was 5 years
at the date of purchase. On 31 December 2002 its life was revised and changed to 7 years. Company policy
is to charge depreciation on the basis of usage.
Required: P&L and SOFP for the year ended 31 December 2001, 2002, and 2003
Question 14: A Company bought an asset for 49,000 on 1 Sep 2003. Its useful life was estimated to be 4
years. On 31 December 2004 it was estimated that its remaining life was 6 year. Co charges depreciation
on proportionate basis.
Required: P&L and SOFP for 31 December 2003 & 2004
Question 15: A Company bought a machine for 500,000 with a life of 10 year on 1st Mar 2002. Company
charges depreciation on reducing balance basis on machine at 20%. Depreciation rate was revised to 25%
on 31st Dec 03
Required: P&L and SOFP for 31 December 2002, 2003 & 2004
Question 16: A Company bought a machine for 300,000 with a life of 10 year on 1st Mar 2002. Company
charges depreciation on reducing balance basis on machine at 10%. Dep rate for machine was too revised
to 15% on 31st Dec 03
Required: P&L and SOFP for 31 December 2002 & 2003
Question 17: A Company bought an asset for 70,000. Its useful life was 7 years. At the end of 4th year
Company disposed asset for 20,000.
Required: Entries, IS and SOFP for 4th year
Question 18: A Company purchased a car for 90,000. It depreciated car at 20% reducing balance basis. At
the end of 3rd year the asset was sold for 50,000
Required: Entries, IS and SOFP for 3rd year
Question 19: A Company purchased an asset for 200,000 with a scrap value of 2,000 and life of 4 year on
1st Jan 2003. It is company’s policy to depreciate asset on reducing balance method @30% (usage basis).
Asset was sold for 130,000 on 31 Aug. 2005
Required: P&L and SOFP for 31 December 2003, 2004 & 2005
Question 20: A Company purchased an asset for 500,000 on April 2002. Useful life of asset was 10 years.
On 31 March 2004 life of the asset was revised to 5 years. Later on 30 August 2006 asset was sold for
20,000. Company policy is to charge depreciation on proportionate basis.
Required: P&L and SOFP for year ended 31 March 2002, 2003, 2004, 2005 and 2006
Question 21: A Machine was purchased for 800,000 on 1 March 2005. Use full life of asset was 8 years. On
31 December 2006 life of the asset was revised to 5 years. Later in June 2007 asset was sold for 35,000. Co
policy is to charge depreciation on proportionate basis.
Required: P&L and SOFP for year ended 31 Dec 2005, 2006 and 2007.
Question 22: A Company purchased an asset for 230,000 with a scrap value of 2,000 and life of 7 year on
1st Jan 2003. It is company’s policy to depreciate asset on reducing balance method @25% (usage basis).
On 31 December 2004 rate was revised to 20%. Asset was sold for 130,000 on 31 August 2005
Required: P&L and SOFP for 31 December 2003, 2004 and 2005
PAGE 18
FA: Financial Accounting:
Question 23: A business has following balances at start of year:
Cost
140,000
Accumulated Depreciation
90,000
Company’s policy is to charge Depreciation on Straight line basis at 15%. During the year a machine was
sold for 22,000. Cost of machine was 36,000 and accumulated was 4000
Required:
a)
Gain/loss on disposal
b)
NBV at the end of year
Question 24: A Company disposed of machine for 7,000 on which gain on disposal was 2,200. Cost of this
machine was 13,000. Cost and accumulated balances were 90,000 and 36,000 respectively at start of year.
Additions during year were 19,000 and Dep rate is 30% on cost Required:
a)
Gain/loss on disposal
b)
NBV at the end of year
Question 25: Following transactions were made by a business during the year Additions of 37,000
Disposal of machine for 16,000 (cost was 40,000 and Accumulated Dep was 20,000)
Balance on cost and accumulated Dep was 250,000 and 170,000 at start of year respectively
Required:
a)
Gain/ loss on disposal
b)
NBV at the end of year if Dep rate is 15% on cost
Question 26: A Company has following data:
Cost
Accumulated Dep
Start of year
70,000 40,000
End of year
110,000 55,000
Disposal during year was of a machine having cost of 17,000, Accumulated Dep of 4,000. Gain on disposal
was 1,000
Required:
a)
Disposal proceed
b)
Addition during year
c)
Dep expense
Question 27: A Company purchased machine worth $250,000 having Dep rate of 25% reducing balance
method. At the end of 3rd year this asset was sold for $70,000
Required:
a) Disposal A/C
Question 28: A Company sold machine for $35,000 at end of year 4. Cost of machine was 90,000 and Dep
rate was 10% on cost
Required:
a) Disposal A/C
Question 29: A Company purchased an asset for 450,000 on 1 March 2004. Depreciation is charged on 20%
reducing balance basis. On 31 December 2006 rate was revised to 25% (RDB). Asset was exchanged for a
new asset worth 300,000 by paying cash of 50,000 plus old asset on 31 December 2007. Company policy is
to charge proportionate Depreciation.
PAGE 19
Required: Entries if year−end is 31 December
FA: Financial Accounting:
Question 30: A Company purchased an asset for 35,000 on 1st June 2004. Depreciation was charged at
10% on cost. Later on 31 October 2006 it was exchanged at an agree value of 26,000.
Required: Gain OR loss on disposal if year−end is 31 December
Question 31: A Company purchased a Car for 55,000 in 1st April 2006. Asset was depreciated at 15% RDB.
Later in June 2007 asset was exchanged for a new asset having market value of 37,000 along with a cash
payment of 4,000.
Required: Entries if year−end is 31 December
Question 32: A machine was purchased by a business in Jan 2001 for:
$
Cost
130,000
Freight charges
12,000
Installation cost
200
Total
142,200
Business year end is of 31 December. The machine was traded in for a replacement other machine in
August 2004 at an agreed value of $70,000. It has been depreciated at 15% on the reducing balance
method, charging a full year’s depreciation in the year of purchase and none in the year of sale.
Required: Gain /loss on disposal
MCQS - DEPRECIATION FOLLOWING INFORMATION RELATES TO MCQ 1-4
A machine which had cost of $20,000 and had accumulated depreciation of $17,200 was sold during 20X7
for $4,800. The total cost of machinery shown on the December 2006 balance sheet was $180,000 and the
related accumulated depreciation was $92,000. The company uses 10% straight line depreciation on
machinery and no depreciation is charged in the year in which asset is sold.
1. What is the balance of the accumulated depreciation account at 31/12/2007______?
2. What is the gain or loss on disposal of the machine?
A. A gain of $3,400
B. A loss of $3,400
C. A gain of $1,400
D. A gain of $2,000
3. What is the annual depreciation for 20X7______?
4. What entries are required to record the sale of the machine in 20X7?
A. Debit cash account with $4,800, debit of machinery account with $4,890 credit accumulated
depreciation accumulated depreciation account with $9,600
B. Debit cash with $4,800. Credit machinery with $3,400 and credit accumulated depreciation with
$22,000.
C. Debit cash with $4,800. Debit accumulated depreciation with $17,200 and credit machinery with
$22,000.
D. Debit accumulated depreciation with $17,200, debit cash with $4,800 credit machinery with $20,000
and gain on disposal with $2,000.
5. Which of the following best describes the gain or loss on the disposal of a non- current?
A. Amount by which management over or under charged depreciation for the asset.
B. The extent by which the asset’s underlying value changed during useful life
C. The correction of forecasting error’s when the asset’s life and resident values were estimated.
D. The adjustment for change in scrap value over the useful life
PAGE 20
FA: Financial Accounting:
6. A company bought a machine on 1 October 2002 for $52,000. The machine had an expected life of
eight year and an estimated residual value of $4,000.
On 31 March 2007, the machine was sold for $35,000. The company’s year ended 31 December. The
company use the straight−line method for depreciation it charges a full year’s depreciation in the year of
purchase and none in the year of sale.
What is the profit or loss on disposal of the machine?
A. loss $13,000
B profit $7,000
C profit $10,000
D profit $13,000
7. The net book values of a company’s non−current assets were $200,000 at 1 August 2002. During the
year ended 31 July 2003. The company sold fixed assets for $25,000 on which it made a loss of $5,000.
The depreciation charge for the year was $20,000.
What was the net book value of fixed assets as 31 July 2003______?
8. A non−current assets costing $12,500 was sold at a book loss of $4,500. Depreciation had been
provided using the reducing balance, at 20% per annum since it purchases.
Which of the following correctly describes the sales proceeds and length of time for which the asset has
been owned?
Sale proceeds
Length of ownership
A
Cannot be calculated
cannot be calculated
B
Cannot be calculated
Two years
C
$8,000
cannot be calculated
D
$8,000
Two years
9. A non−current was purchased at the beginning of year 1 for $2,400 and depreciated by 20% per annum
by the reducing balance method. At the beginning of year 4 it was sold for $1,200.
The result of this was:
A. A loss on disposal of $240.00
B A loss on disposal of $28.80
C A profit on disposal of $28.80
D A profit on disposal of $240.00
10. A machine cost $9,000. It has an expected useful life of 6 years. And an expected residual value of
$1,000. It is to be depreciated at 30% annum on the reducing balance basis.
A fully year’s depreciation is charged in the year of purchase, with none in the year of sale. During year 4, it
is sold for $3,000.
The profit on disposal on sold is:
A
loss$87
B
loss $2,000
C
Profit $256
D
profit $1,200
11. Don has sold a machine for $5,300. The machine had been bought 3 years previously at a cost of
$10,000. At the date of sale the machine had been depreciated by $4,800.
What is the profit on disposal_____?
PAGE 21
FA: Financial Accounting:
12. At 30 September 2002 the following balances existed in the records of Lambda:
Plant and equipment
Cost
$860,000
Accumulated depreciation
$397,000
During the year ended 30 September 2003, plant with a written down value of $37,000 was sold for
$19,000. The plan had originally 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 of10% on the
straight line basis.
What net amount should appear, in Lambda’s balances sheet as 30 September 2003 for plant and
Equipment_____?
13. A business with a financial year−end 31 October buys a non−current on 1 July 2003 for
$126,000.Depriciation is changed at the rate of 15% per annum on the reducing balance basis. On 30
September 2007 the asset was sold for $54,800. It is the policy of the business to charge a proportionate
amount of depreciation in both the year of acquisition and the year of disposal.
What was the loss on sale of the asset (to the nearest $)?
A. $19,792
B $8,603
C $7,674
D $1,106
14. A car was purchased by a business in May 2001 for:
$
Cost
10,000
Road tax
150 .
Total
10,150
The business adopts a date of 31 December as its year end.
The car was traded in for a replacement vehicle in August 2005 at an agreed value of $5,000
It has been depreciated at 25 per cent per annum on the reducing balance method, charging a full year’s
depreciation in the year of purchase and none in the year of sale.
What was the profit or loss on disposal of the vehicle during the year ended December 2005?
A
Profit $718
B
Profit $781
C
Profit $1,788
D
Profit $1,816
PAGE 22
FA: Financial Accounting:
Final Accounts:
Question#1:
The following is the trial balance of Pollard Co. as at 31 October 20x1.
Inventory, at 31 October 20x0
Land at cost
Payables
Receivables
Buildings at cost
Buildings: accumulated depreciation at 31 October 20X0
Plant at cost
Plant: accumulated depreciation at 31 October 20X0
7% preferred shares of $1
Ordinary shares of $1
Share premium account
Retained earnings at 31 October 20X0
Allowance for doubtful debts at 31 October 20x0
Wages
Sales revenue
Directors fees
Heating and lighting
Insurance
Other expenses
8% loan notes
Purchases
Discounts received
Discounts allowed
Carriage in
Non-current asset replacement reserve
Bank balance
Dr.
$000
600
400
Cr.
$000
450
900
800
120
1,400
200
300
700
200
80
50
325
4,370
100
85
45
30
800
2,600
60
50
170
7,505
100
75
7,505
Additional information for the year ended 31 October 20x1
(a)
Closing inventory is valued at $450,000.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
There are wages outstanding of $50,000.
The allowance for doubtful debts is to be made equal to 15% of outstanding receivables.
Interest on loan notes is to be accrued for the year.
Insurance of $10,000 has been prepaid.
Depreciation on buildings is provided at 5% per annum using the straight line method.
Plant is depreciated at 20% per annum using the reducing balance method.
Provision for tax of $40,000 for the year is to be made.
During October a bonus (or scrip) issue of one for live was made to ordinary shareholders. This
has not been entered into the books. The share premium account is to be used for this purpose.
A provision is to be made for the audit fee of $55,000.
Required: Prepare profit and loss and statement of financial position for the year ended 31 October20x1
PAGE 23
FA: Financial Accounting:
Question#2:
The following information has been extracted from the books of Tonson, a limited liability
company, as at 31 October 2006.
Dr.
Cr.
$000
$000
Cash
15
Insurance
75
Inventory at 1 November 2005
350
General expenses
60
Energy expenses
66
Marketing expenses
50
Wages and salaries
675
Discounts received
50
Share premium account
200
Retained earnings at 1 November 2005
315
Allowance for receivables at 1 November 2005
10
Sales revenue
5,780
Telephone expenses
80
Property expenses
100
Bank
94
Return inward
95
Trade payables
290
Loan note interest
33
Trade receivables
900
Purchases
3,750
7% Loan notes
470
Bad debts
150
$1 Ordinary Shares
1,800
Accumulated depreciation at 1 November 2005
Buildings
360
PAGE 24
FA: Financial Accounting:
Motor Vehicles
Furniture and equipment
Land at cost
Buildings at cost
Motor vehicles at cost
Furniture and equipment at cost
80
420
740
1,500
240
1,200
9,899
9,899
You have also been provided with the following information:
1.
Inventory at 31 October 2006 was valued at $275,000 based on its original cost. However,
$45,000 of this inventory has been in the warehouse for over two years and the directors have
agreed to sell it in November 2006 for a cash price of $20,000.
2.
The marketing expenses include $5,000 which relates to November 2006.
3.
Based on past experience the allowance for receivables is to be increased to 5% of trade
receivables.
4.
There are wages and salaries outstanding of $40,000 for the year ended 31 October 2006.
5.
Buildings are depreciated at 5% of cost. At 31 October the buildings were professionally valued
at $1,800,000 and the directors wish this valuation to be incorporated into the accounts.
6.
Depreciation is to be charged as follows:
(i)
Motor vehicles at 20% of written down value.
(ii)
Furniture and equipment at 20% of cost.
7.
No dividends have been paid or declared.
8.
Tax of $150,000 is to be provided for the year.
9.
During October 2006 a bonus (or scrip) issue of one for ten was made to ordinary shareholders.
This has not been entered into the books. The share premium account was used for this
purpose.
Required: Prepare profit and loss and statement of financial position for the year ended 31 October 20x6
PAGE 25
FA: Financial Accounting:
Question#3:
RP Atton has provided you with the following trial balance as at 31 May 20x3.
Dr.
$000
Cash in hand
10
Inventory at 1 June 20x2
650
General expenses
25
Insurance
45
Advertising
35
Wages and Salaries
800
Heating and Lighting
70
Non-current assets replacement reserve
Share premium account
Discounts received
Land at Cost
550
Buildings at cost
2,500
Motor vehicles at cost
160
Furniture and equipment at cost
1,500
Retained earnings at 1 June 20x2
Allowance for doubtful debts
Telephone
25
Business rates
75
Sales
Returns inward
85
Trade payables
Bank
Receivables
1,400
Purchases
3,300
Interest
40
Irrecoverable debts
500
8% Loan notes
9% $1 Preference shares
$1 Ordinary shares
Provision for depreciation at 1 June 20x2
buildings
Motor vehicles
Furniture and equipment
11,770
PAGE 26
Cr.
$000
50
120
100
142
35
8,500
310
123
500
200
1,000
330
60
300
11,770
FA: Financial Accounting:
You have also been provided with the following information:
1.
Inventory at 31 May 20x3 was valued at $500,000.
2.
The insurance expenditure includes $11,000 which relates to the period between June 20x3 to
August 20x3.
3.
There are wages and salaries outstanding of $65,000 for the year ended 31 May 20x3.
4.
The allowance for doubtful debts is to be increased to 5% of receivable.
5.
Buildings are depreciated at 5% of cost. At 31 May 20x3 the buildings were professionally valued
at $2,700,000 and the directors wish this valuation to be incorporated into the accounts.
6.
Depreciation is to be provided for as follows:
(i)
Motor vehicles at 20% of written down value.
(ii)
Furniture and equipment at 20% of cost.
7.
During May 20x3 a bonus (or scrip) issue of one for ten was made to ordinary shareholders. This
has not been entered into the books. The share premium account is to be used for this purpose.
8.
An additional $250,000 is to be transferred to the non-current asset replacement reserve.
9.
Income tax of $500,000 is to be provided for the year.
Required: Prepare profit and loss and statement of financial position for the year ended 31 May 20x3
PAGE 27
FA: Financial Accounting:
Question#4:
You have been provided with the following trial balance as at 31 May 20x4 for a limited liability
company called Sondaw.
Bank
Inventory at 1 June 20x3
General expenses
Heating and Lighting
Marketing and advertising expenses
Wages
Buildings at cost
Motor vehicles at cost
Plant and equipment at cost
Accumulated profits at 1 June 20x3
Trade receivables
Purchases
Loan-note interest paid
5% Loan note
Revenue
Discounts received
Trade payables
$1 Ordinary shares
Accumulated depreciation at 1 June 20x3
Buildings
Motor vehicles
Plant and equipment
Dr.
$000
50
1,200
600
90
248
490
5,000
160
700
Cr.
$000
280
438
2,200
30
600
5,876
150
500
1,500
2,000
60
240
11,206
11,206
The following notes are relevant:
1.
Inventory at 31 May 20x4 was valued at $800,000.
2.
Marketing and advertising expenses include $6,000 paid in advance for a marketing campaign
which will begin in June 20x4. Marketing and advertising expenses should be allocated to
administrative expenses.
3.
There are wages outstanding of $10,000 for the year ended 31 May 20x4.
4.
A customer ceased trading owing the company $38,000; the debt is not expected to be
recovered.
5.
An allowance for doubtful debts is to be established amounting to 5% of trade receivables.
6.
Depreciation is to be provided for as follows:
i.
ii.
iii.
Buildings at 5% per annum on their original cost, allocated 50% to cost of sales, 20% to
distribution costs and 30% to administrative expenses.
Motor vehicles at 25% per annum of their written down value, allocated to distribution costs.
Plant and equipment at 20% per annum of their written down value, allocated to cost of sales.
PAGE 28
FA: Financial Accounting:
7.
No dividends have been paid to declare.
8.
Income tax of $250,000 is to be provided for the year.
Required: Prepare profit and loss and statement of financial position for the year ended 31 May 20x4
PAGE 29
FA: Financial Accounting:
Question#5:
USB, a limited liability company, has the following trial balances at 31 December 20x9.
Cash at bank
Inventory at 1 January 20x9
Administrative expenses
Distribution costs
Non-current assets at cost:
Buildings
Plant and equipment
Motor vehicles
Suspense
Accumulated depreciation
Buildings
Plant and equipment
Motor vehicles
Retained earnings
Trade receivables
Purchases
Dividend paid
Debit
$’000
100
2,400
2,206
650
Credit
$’000
10,000
1,400
320
1,500
4,000
480
120
560
876
4,200
200
Debit
$’000
Sales revenue
Sales tax payable
Trade payables
Share premium
$1 ordinary shares
22,352
Credit
$’000
11,752
1,390
1,050
500
1,000
22,352
The following additional information is relevant.
(a)
(b)
(c)
(d)
Inventory at 31 December 20x9 was valued at $1,600,000. While doing the inventory
count, errors in the previous year’s Inventory count were discovered. The inventory
brought forward at the beginning of the year should have been $2.2m, not $2.4m as
above.
Depreciation is to be provided as follows.
i.
Buildings at 5% straight line, charged to administrative expenses
ii.
Plant and equipment at 20% on the reducing balance basis, charged to cost of
sales
iii.
Motor vehicles at 25% on the reducing balance basis charged to distribution
costs
No final dividend is being proposed.
A customer has gone bankrupt owing $76,000. The debt is not expected to be recovered
and an adjustment should be made. An allowance for receivables of 5% is to be set
up.
PAGE 30
FA: Financial Accounting:
(e)
1m new ordinary shares were issued at $1.50 on 1 December 20x9. The proceeds have
been left in a suspense account.
Required:
Prepare the following:
(a)
Statement of profit or loss for the year ended 31 December 20x9.
(b)
Statement of charges in equity for the ended 31 December 20x9.
(c)
Statement of financial position as at 31 December 20x9.
All statements are to be prepared in accordance with the requirements of IFRS. Ignore taxation
PAGE 31
FA: Financial Accounting:
Question#6:
The following trial balance has been extracted from the ledger of Mr. Yousef, a sole trader.
TRIAL BALANCE AS AT 31 MAY 20X6
Dr
$
Sales
Purchases
Carriage
Drawings
Rent and insurance
postage and stationery
Advertising
Salaries and wages
irrecoverable debts
Allowance for receivables
Receivables
Payables
Cash on hand
Cash at bank
Inventory as at 1 June 20x5
Equipment at cost
Accumulated depreciation
Capital
Cr
$
138,078
82,350
5,144
7,800
6,622
3,001
1,330
26,420
877
130
12,120
6,471
177
1,002
11,927
58,000
216,770
19,000
53,091
216,770
The following additional information as at 31 May 20x6 is available.
1.
Rent is accrued by $210.
2.
Insurance has been prepaid by $880.
3.
$2,211 of carriage represents carriage inwards on purchases.
4.
Equipment is to be depreciated at 15% per annum using the straight-line method.
5.
The allowance for receivables is to be increased by $40.
6.
Inventory at the close of business has been valued at $13,551.
Required:
(a)
Prepare a statement of profit or loss for the year ended 31 May 20x6.
(b)
Prepare a statement of financial position as at that date.
PAGE 32
FA: Financial Accounting:
Question#7:
Markus has prepared a trial balance for his business at 30 April 20x3 which is presented below.
Dr
Cr
$
$
Capital account – 1 May 20x2
30,000
Finance costs
300
Bank
7,400
Administrative expenses
65,800
Distribution expenses
31,200
Plant and machinery – cost
72,000
Plant and machinery – accumulated depreciation at 1 May 20x2
25,000
Trade receivables
20,000
Allowance for receivables – 1 May 20x2
3,150
Revenue
230,000
Inventory – 1 May 20x2
18,750
Drawings
18,000
Trade payables
17,500
Purchases
90,000
6% Loan – repayable 31 July 20x5
3,000
316,050
316,050
The following notes are relevant to the preparation of the financial statements for the year ended 30
April 20x3.
i.
Markus took goods which cost $5,000 for personal use during the year, but this has not been
recorded.
ii.
It has been determined that trade receivables of $600 are irrecoverable. In addition, it was
decided that the allowance for receivables should be reduced by $500.
iii.
Depreciation on plant and machinery is charged at 15% per annum on a reducing balance basis.
Depreciation is charged to cost of sales.
iv.
The loan was taken out on 1 August 20x2 and interest has not yet been paid or accrued.
v.
Closing inventory has been valued at $17,500. It was subsequently discovered that some items of
inventory which had cost $5,000 had a net realizable value of $3,750.
vi.
At 30 April 20x3, a prepayment for insurance paid in advance of $400 had not yet been
accounted for. Insurance is classified as an administrative expense.
vii.
At 30 April 20x3, an accrual for freight and delivery expenses amounting to $350 had not yet
been accounted for. Freight and delivery expenses are classified as distribution expenses.
Required:
Prepare a statement of profit or loss of Markus the year ended 30 April 20x3 and a statement of financial
position as at 30 April 20x3.
PAGE 33
FA: Financial Accounting:
Question#8:
Carbon is a limited liability entity. A trial balance for the year ended 31 December 20x5 is
presented below.
Dr
$
Revenue
Purchases
180,000
Administrative expenses
140,000
Distribution expenses
56,000
Plant and machinery – cost
150,000
Plant and machinery – accumulated depreciation at 1 Jan 20x5
Trade receivables
36,000
Allowance for receivables – 1 January 20x5
Inventory – 1 January 20x5
33,000
Share capital
Trade payables
Retained earnings – 1 January 20x5
8% Loan – repayable 31 December 20x9
Cash
5,000
600,000
Cr
$
450,000
30,000
2,500
10,000
32,000
25,500
50,000
600,000
The following notes are relevant to the preparation of the financial statements for the year ended 31
December 20x5.
I.
The current year tax charge had been estimated at $5,000.
II.
It has been determined that trade receivables of $1,500 are irrecoverable. In addition, it was
decided that the allowance for receivables should be increased by $1,000.
III.
Depreciation on plant and machinery is charged at 20% per annum on a reducing balances basis.
Depreciation is charged to cost of sales.
IV.
The loan was taken out on 1 October 20x5. No interest has been accrued.
V.
Closing inventory has been correctly valued at $27,000.
VI.
A customer bought goods on credit from Carbon for $1,000 on 5 December 20x5.
VII.
The customer returned these goods on 28 December 20x5. No entries have been posted for
this return.
VIII.
Carbon is being sued by a customer regarding the sale of goods that the customer believes to be
defective. Legal advisers think that it is probable that Carbon will lose the case and that they will
have to pay damages of $20,000 in 20x6. Legal expenses are charged to administrative expenses.
Required:
Prepare a statement of profit or loss of Carbon the year ended 31 December 20x5 and a statement of
financial position as at 31 December 20x5.
PAGE 34
FA: Financial Accounting:
Question#9:
You are about to commence preparation of the financial statements of Clerc for the year ended 31
December 20x9. The entity’s trial balance as at 31 December 20x9 is shown below.
Debit
$
Share capital
Share premium
Revaluation reserve at 1 January 20x9
Trade and other payables
Land & buildings – value / cost
accumulated depreciation at 1 January 20x9
Plant and machinery – cost
accumulated depreciation at 1 January 20x9
Trade and other receivables
Accruals
5% bank loan repayable 20Y3
Cash and cash equivalents
Retained earnings at 1 January 20x9
Sales
Purchases
Distribution costs
Administrative expenses
Inventories at 1 January 20x9
Bank interest received
Credit
$
100,000
20,000
50,000
13,882
210,000
30,000
88,000
16,010
8,752
3,029
40,000
6,993
23,893
178,833
130,562
7,009
7,100
17,331
100
The following information is relevant
i.
ii.
iii.
iv.
The interest for the year on the bank loan has not yet been paid or accrued.
Land, which is non-depreciable, is included in the trial balance at a value of $110,000. At 31
December 20x9 it was revalued to $150,000 and this revaluation is to be included in the financial
statements.
Depreciation is to be provided for the year to 31 December 20x9 as follows:
Buildings
10% per annum
Straight line basis
Plant and machinery 20% per annum
Reducing balance basis
As part of the buildings contains the office accommodation and part of the buildings
contains the plant and machinery, the depreciation for the ‘Buildings’ should be
allocated between cost of sales and administrative expenses as follows.
%
Cost of sales
40
Administrative expenses
60
Included in trade receivables is a balance of $1,720 that is considered to be irrecoverable due
to the customer going into administration and the Directors of Clerc feel this should be
written off.
PAGE 35
FA: Financial Accounting:
v.
vi.
The inventories at the close of business on 31 December 20x9 were valued at cost of $19,871.
Included in this balance was an inventory line costing $4,000 that, due to change in
legislation, is now illegal. Clerc could rectify the items at a cost of $2,500 and plans to do so.
The items usually retail to customers at $6,000.
The tax charge for the year has been calculated as $7,162.
Required:
Prepare the statement of profit or loss and other comprehensive income of Clerc for the year ended 31
December 20x9 and the statement of financial position as at 31 December 20x9.
PAGE 36
FA: Financial Accounting:
Question#10:
You have been asked to help prepare the financial statements of Willow for the year ended 30 June
20x1. The entity’s trial balance as at 30 June 20x1 is shown below.
Debit
Credit
$000
$000
Share capital
50,000
Share premium
25,000
Revaluation reserve at 1 July 20x0
10,000
Land & buildings – value / cost
120,000
accumulated depreciation at 1 July 20x0
22,500
Plant and equipment – cost
32,000
accumulated depreciation at 1 July 20x0
18,000
Trade and other receivables
20,280
Trade and other payables
8,725
5% bank loan repayable 20x5
20,000
Cash and cash equivalents
2,213
Retained earnings at 1 July 20x0
12,920
Sales
100,926
Purchases
67,231
Distribution costs
8,326
Administrative expenses
7,741
Inventories at 1 July 20x0
7,280
Dividends paid
3,000
The following information is relevant to the preparation of the financial statements:
i.
The inventories at the close of business on 30 June 20x1 cost $9,420,000.
ii.
Depreciation is to be provided for the year to 30 June 20x1 as follows: Buildings
4% per annum Straight line basis
This should all be charged to administrative expenses.
Plant and equipment 20% per annum reducing balance basis This is to be
apportioned as follows:
%
Cost of sales
70
Distribution costs
20
Administrative expenses
10
Land, which is non-depreciable, is included in the trial balance at a value of $40,000,000. At 30 June 20x1,
a surveyor valued it at $54,000,000. This revaluation is to be included in the financial statements for the
year ended 30 June 20x1.
iii.
It has been decided to write off a debt of $540,000 which will be charged to
administrative expenses.
iv.
Included within distribution costs is $2,120,000 relating to an advertising campaign
that will run from 1 January 20x1 to 31 December 20x1.
v.
The loan interest has not yet been accounted for.
vi.
The tax charge for the year has been calculated as $2,700,000.
Required: Prepare the statement of profit or loss and other comprehensive Income of Willow for the year
ended 30 June 20x1 and the statement of financial position as at 30 June 20x1.
PAGE 37
FA: Financial Accounting:
Question#11:
The trial balance of Ice, an entity, as at 31 December 20x1 is presented below.
Dr
$
Revenue
Purchases
240,000
Administrative expenses
185,000
Distribution expenses
75,000
Plant and machinery – cost
120,000
Plant and machinery – accumulated depreciation at 1 Jan 20x1
Trade receivables
20,500
Allowance for receivables – 1 January 20x1
Inventory - 1 January 20x1
24,000
Share capital
Trade payables
Retained earnings – 1 January 20x1
6% Loan – repayable 31 December 20x4
Cash
130,000
Total of balances
794,500
Cr
$
600,000
15,000
2,000
5,000
29,000
43,000
100,000
794,500
The following notes are relevant to the preparation of the financial statements for the year ended 31
December 20x1:
i.
It has been determined that trade receivables of $1,000 are irrecoverable. No
adjustment is required to the allowance for receivables.
ii.
Depreciation on plant and machinery is charged at 20% per annum on a reducing balance
basis. Depreciation is charged to cost of sales.
iii.
The loan was taken out on 1 April 20x1. No interest has been accrued.
iv.
Closing inventory has been correctly valued at $30,000.
v.
A customer bought a good on credit from Ice for $500 on 10 December 20x1. They returned
this good on 30 December 20x1. No entries have been posted for this return.
vi.
Ice is being sued by an ex-employee for unfair dismissal. Legal advisers think it is probable that
Ice will lose the case and that they will have to pay damages of $50,000 in 20x2. Legal costs are
charged to administrative expenses.
vii.
The current year tax bill has been estimated at $6,000.
Required:
Prepare the statement of profit or loss for Ice for the year ended 31 December 20x1 and a statement of
financial position as at 31 December 20x1.
PAGE 38
FA: Financial Accounting:
Question#12:
You are presented with the following trial balance of Malright, a limited liability company, at 31
October 20x7.
Cr
$’000
Buildings at cost
Buildings, accumulated depreciation, 1 November 20x6
plant at cost
Plant, accumulated depreciation, 1 November 20x6
Land at cost
Bank balance
Revenue
Purchases
Discounts received
Returns inwards
Wages
Dr
1,105
$’000
740
35
180
22
0
23
5
Energy expenses
Inventory at 1 November 20x6
Trade payables
Trade receivables
Administrative expenses
Allowance for receivables, at 1 November 20x6
Directors remuneration
Retained earnings at 1 November 20x6
10% loan notes
Dividend paid
$1 ordinary shares
Share premium accounts
105
160
250
320
80
10
70
130
50
30
3,280
Additional information as at 31 October 20x7:
a.
Closing Inventory has been counted and is valued at $75,000.
b.
The items listed below should be apportioned as indicated.
PAGE 39
650
80
3,280
FA: Financial Accounting:
Discounts received
Energy expenses
Wages
Directors’ remuneration
c.
d.
e.
f.
g.
Cost of
sales
%
40
40
-
Distribution
Costs
%
20
25
-
Administrative
expenses
%
100
40
35
100
An invoice of $15,000 for energy expenses for October 20x7 has not been received.
Loan note interest has not been paid for the year.
The allowance for receivables is to be increased to 5% of trade receivables. Any expenses
connected with receivables should be charged to administrative expenses.
Plant is depreciated at 20% per annum using the reducing balance method. The entire charge is to
be allocated to cost of sales.
a.
Buildings are depreciated at 5% per annum on their original cost, allocated 30% to cost
of sales, 30% to distribution costs and 40% to administrative expenses.
Income tax has been calculated as $45,000 for the year.
Required:
Prepare the statement of profit or loss for Malright for the year ended 31 October 20x7 and a statement
of financial position as at 31 October 20x7.
PAGE 40
FA: Financial Accounting:
Bad & Doubtful Debts
Question 1:
Debtors
420,000
Bad debt
22,000
Bad debt recovery in same year
4,200
Required: Entries, Income Statement & Balance Sheet
Question 2:
Debtors
570,000
Bad debt to be written off
90,000
Bad debt recovery which was written off 1 year ago
15,500
Required: Entries, Income Statement & Balance Sheet
Question 3:
Debtor
400,000
Allowance for doubtful debt
10 %
Existing allowance
25,000
Required: Entries, Income Statement & Balance Sheet
Question 4:
Debtors
600,000
Allowance for doubtful debt
8%
Existing allowance
55,000
Required: Entries, Income Statement & Balance Sheet
Question 5:
Debtor
600,000
Allowance for doubtful debt
10 %
Bad debt
15,000
Existing allowance
20,000
Required: Entries, Income Statement & Balance Sheet
PAGE 41
FA: Financial Accounting:
Question 6:
Debtors
560,000
Allowance for doubtful debt
10%
Bad debt to be written off
60,000
Existing allowance
15,000
Required: Entries, Income Statement & Balance Sheet
Question 7:
Debtor
150,000
Bad Debt already written off
10,000
Allowance for doubtful debt
10 %
Last year Allowance
11,000
During the year bad debt recovered, which was written off 3 years back
4,000
Required: Entries, Income Statement & Balance Sheet
Question 8:
Debtors
800,000
Bad Debt to be written off
45,000
Allowance for doubtful debt
12 %
Last year Allowance
95,000
During the year bad debt recovered, which was written off 6 months ago
7,500
Required: Entries, Income Statement & Balance Sheet
Question 9:
Debtors
250,000
Bad debts to be written off
25,000
During the year Bad debts written off
6,000
Bad debts recovered which was written off 4 years back
3,500
Specific Allowance
1,500
General Allowance
10 %
Existing allowance
24,000
Required: Entries, Income Statement & Balance Sheet
PAGE 42
FA: Financial Accounting:
Question 10:
Debtor
750,000
Bad Debt already written off
30,000
Specific Allowance
2,500
General Allowance
8%
Last year Allowance
70,000
Bad debt recovered, which was written off within 1 year
7,000
Required: P&L and SOFP extract
Question 11:
Debtor
60,000
Allowance for doubtful debt
one third higher than before
Bad debt to be written off
700
Existing allowance
4,500
Required: Entries, Income Statement & Balance Sheet
Question 12:
Debtors
320,000
Allowance for doubtful debt
15% lower than before
Bad debt to be written off
10,000
Existing allowance
30,000
Required: Entries, Income Statement & Balance Sheet
Question 13:
Debtors
100,000
Bad Debt of a provisioned debtor
7,000
Specific Allowance
1000
General Allowance
5%
Last year Allowance
8,000
Bad debt recovered, which was written off in this year
7,000
Required: Entries
PAGE 43
FA: Financial Accounting:
Question 14:
Debtors
500,000
Bad Debt
10,000
General Allowance
7%
Last year Allowance
40,000
During the year recovery of a provisioned debtor
4,000
Required: Entries
MCQS – Bad and Doubtful debts
1. James has been advised that one of his customers has ceased trading and that it is almost
certain that he will not recover the balance of $720 owed by this customer.
What entry should James make in his general ledger?
A. Dr. Receivables ledger control
Cr. Bad debt
$720
$720
Being write off of bad debt
B. Dr. bad debts
Cr. Receivables ledger control
Being write off of bad debts
C. Dr. Receivables ledger control
Cr. Bank
$720
$720
$720
$720
Being write off of bad debts
D. Dr. Bank
Cr. Receivables ledger control
Being write off of bad debts
$720
$720
2. At 31 March sally was owed $47,744 by her customers. At the same date her doubtful debts
allowance was 3,500.
How should these balances be reported on sally’s balance sheet at 31 March?
A.
B.
C.
D.
$44,244 as a current asset,
$3,500 as a current asset and $47,744 as a current liability
$47,744 as a current asset and $3,500 as a current liability
$51,244 as a current asset
PAGE 44
FA: Financial Accounting:
The following information relates to question 3 and 4.
Derwent plc’s bad debt and allowance for bad debt account is as follows:
Debit
Receivables
Balance c/d
Credit
Balance b/d
Income Statement
2,400
900
3,300
Balance b/d
800
2,500
3300
900
The gross amount owed by Derwent plc’s receivables at 31 December 20XI is $40,000.
3. What is the value of bad debts that were actually discovered to be irrecoverable during the year?
A. $2,400
B. $2,500
9
C. $3,200
D. $3,300
4. What accounts Receivable figure should be shown in the balance sheet______?
5. A company has been notified that debtor has been declared bankrupt. The company had
previously made and allowance for this doubtful debt.
Which of the following is the correct double entry?
A.
B.
C.
D.
Debit
Bad and doubtful debts account
Receivable
Allowance for doubtful debts
Receivable
Credit
Receivables
Bad and doubtful debts account
Receivable
Allowance for doubtful debts
6.The turnover in a company was $2 million and its accounts receivable were 5% of turnover. The
company wishes to have an allowance for doubtful debts equal to 4% of receivables, which would
make the allowance one third higher than the current allowance.
How will the profit for the period be affected by the change in allowance?
A. Profit will be reduced by $1,000
B. Profit will be increased by $1,000
C. Profit will be reduced by $1,333
D. Profit will be increased by $1,333
PAGE 45
FA: Financial Accounting:
7.The allowance for doubtful debts in the ledger of B Ltd. At 31 October 20XI was $9,000.
During the ended 31 October 20X2, bad debts of $5,000 were written off.
Accounts receivable balances at 31 October 20X2 were $120,000 and the company. Policy is to
have a general allowance of 5%.
What is the charge for bad and doubtful debts in the income statement for the year ended
31 October 20X2?
A. $2,000
B. $3,000
C. $5,000
D. $8,000
8.During the year ended 31 December 20X9 Follands’ turnover totaled $3,000,000, its account
receivable amounting to 4% of turnover for the year. Follands, wishes to maintain its bad debt
allowance at 3% of account receivable, and discovers that the allowance, as a result is 25% higher
than it was a year before. During the year specific bad of $3,200 were written off and bad debts
(written off three years previously) of $150 were recovered.
What is the net charge for bad and doubtful debts for the year ended 31 December 20X9?
9.At the beginning of its accounting period a business has account receivable of $13,720 after
deducting a specific allowance of $350 and a general allowance against 2% of the remainder.
At the year ends. Accounts receivable before any allowance amount to $17,500. No specific allowance is to
be made, but the general allowance is to be increased to 3% of accounts receivable.
What is the charge or credit or credit in the income statement in relation to bad debts for the year?
A. $525 Dr.
B. $175 Dr.
C. $105 Cr.
D. $99 Cr.
10.A bad debt written off two years ago is unexpectedly recovered and entered in the trade
receivable ledger column in the cash book.
What adjustment, if any, will be necessary – assuming that the receipt was treated as sales ledger
cash?
Debit
Credit
(i)
Bad debts account
Trade receivable ledger control a/c
(ii)
Trade receivable ledger control a/c
Bad debts account
(iii)
Suspense account
Bad debts account
(iv)
No adjustment will be necessary
PAGE 46
FA: Financial Accounting:
11.At 30 September 20X4, Z Ltd. Had an allowance for doubtful debts of $37,000 during the year
ended 30 September 20X5 the company wrote off debts totaling $18,000 and the end of the year
it is decided that the allowance for doubtful debts should be $20,000.
What should be included in the income statement for bad and doubtful debts?
A. $35,000 Dr.
B. $1,000 Dr.
C. $38,000 Dr.
D. $1,000 Cr.
12.When a provision is created for the first time, one should.
A. Debit Income Statement a/c, credit sale a/c
B. Debit bank a/c, credit purchases a/c
C. Debit debtors a/c, credit bank a/c
D. Debit profit & loss a/c credit provision a/c
13.At the end of a certain year, the debtors of a firm amounted to $5,000 and the actual bad
debts written off were $500.
Knowing this, what would be an appropriate percentage by which provision for bad debts should
be made?
A. 2%
B. 4%
C. 5%
D. 10%
14.To reduce a provision amount made for bad debts. One should.
A. Debit profit & loss a/c, credit bad debits provision a/c
B. Debit profit & loss a/c, credit debtors a/c
C. Debit sale a/c, credit debtors a/c
D. Debit, bad debts provision a/c credit profit & loss a/c
For question 15 and 16 refer to the information below:
15. A cheese is in business as a wholesaler.
The following are the figures for total debtors at the year end.
December 31 year 1
$3,900
December 31 year 2
$4,200
December 31 year 3
$4,000
He decides to maintain a provision for bad debt equal to 5% of debtors standing in his books at the end of
the year 1.
What is the provision amount deducted from debtors on his balance sheet in year 1.
A. $195
B. $200
C. $210
D. $295
PAGE 47
FA: Financial Accounting:
16. What is the amount of bad debts provision in year 2 to be shown in P & L a/c
A. $10
B. $195
C. $15
D. $220
17. Comb limited uses the percentage of sales method to determine the amount of doubtful
debts.
The following information is extracted from the provision for doubtful debts account.
Balance at the beginning of the month was
$1,350 (Cr.)
Bad debts written off during month
$1,980
Balance at the end of the month is
$1,195 (Cr.)
18. If the estimated amount of doubtful debts is 0.5% of sales, the company’s sales for that month
should be:
A.
B.
C.
D.
$239,000
$396,000
$427,000
$905,000
18. The written off a bad debts is an example of the.
a. Going concern concept.
b. Matching concept.
c. Prudence concept.
d. Substance over from concept.
19.At the beginning of the year a company has a provision for doubtful debts of $1,000 at the end
of the year required provision is $2,500. During the year debts of $1,500 are written off and $ 100
is received in respect of a debt written off many years ago.
What is the net amount charged to the profit and loss account for bad and doubtful debts?
A. $1,500
B. $2,500
C. $2,900
D. $3,000
20. Debtors at year end were $80,000. Bad debts written off during the year were $1,500 and bad
debts to be written off $1,000. Provision for doubtful debts is required @ 3% of debtors with an
existing provision of $1,800.
Compute the amount to be charged in current year Profit & Loss a/c.
A.
B.
C.
D.
$2,500
$3,025
$3,070
$3,100
PAGE 48
FA: Financial Accounting:
21 Creation of provision for bad debts is most closely related to which of the following concept.
A. Accrual
B. Matching
C. Prudence
D. Substance over from
22 A company increases its provision for bad debts by $1,600 from $3,000.
What will be the effect of this adjustment on the year-end balance sheet?
Net Profit
Net Debtors
a. Decrease by $1,600
Decrease by $1,600
b. Decrease by $1,600
Decrease by $4,600
c. Increase by $1,600
Decrease by $1,600
d. Increase by $1,600
Decrease by $4,600
23 A Company increases its provision for bad debts by $400 from $1,200 to $1,600.
What will be the effect of this adjustment on the year-end balance sheet?
Net Profit
Net Debtors
a. Decrease by $1,600
Decrease by $1,600
b. Decrease by $400
Decrease by $1,600
c. Decrease by $400
Decrease by $400
d. Decrease by $1,600
Decrease by $400
24.Nut owes you $5,000 and Gut owes you $8,000. Both debtors become insolvent, however, a
part payment of $0.25 & $0.40 for $1 is received from them.
The bad debts total.
A. $4,000
B. $4,450
C. $4,800
D. $8,550
25.Hardly Ltd. Make a provision for doubtful debts @ 4% of its debtors at the year end. Debtors
at 31 December 1999 were amounted to $39,000. Debtors at 31 December 2000 were
amounted to $42,620 of which $1,570 were known to be bad.
What is the amount to be charged to the profit & Loss a/c on account of provision for doubtful
debts?
A. $82.00
B. $144.80
C. $1,652.00
D. $1,704.80
PAGE 49
FA: Financial Accounting:
26.Which of the following statement concerning a provision for doubtful debts is correct?
A. All businesses should create a provision in case credit customer does not pay.
B. Setting up a provision for doubtful debts account enables a business to prudently apply
the accrual concept by matching the estimated future bad debts against revenue
recognized in a period.
C. The provision will always increase as the value of sales revenue recognized increases as
a firm expands.
D. The debtors’ aƒc is written off when a specific provision for that customer is created.
27. A company has been notified that a customer has been declared bankrupt. The
company had previously made an allowance for this receivable.
Which of the following is the correct doubts entry?
a.
b.
c.
d.
Debit
Bad Debts Account
The Account Receivables
Allowance for Receivables
The Account Receivable
Credit
The Account Receivable
Bad Debts Accounts
The Account Receivable
Allowance for Receivables
28.At 31 December 20X4 a company’s trade receivables totaled $864,000 and the allowance for
receivable was $48,000. It was decided that debts totaling $13,000 were to be written off and based
on past experience, the allowance for receivables adjusted to the equivalent of five percent 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 debts and allowance for receivables?
Income statement
Balance sheet
$
$
A. 8,200
807,800
B. 7,550
808,450
C. 18,450
808,450
D. 55,550
808,450
29.At 1 July 20X3 a limited liability company bad an allowance for receivable of $83,000. During
the year ended 30 June 20X4 debts totaling $146,000 were written off. At 30 June 20X4 it was
decided that an allowance for receivables of $218,000 was required.
What figure should appear in the company’s income statement for the year ended 30 June 20X4 for
the total of bad debts and the allowance for receivables?
A. $155,000
B. $364,000
C. $281,000
D. $11,000
PAGE 50
FA: Financial Accounting:
30.The opening balance on J’s allowance for receivable account was $1,000. J wrote off
$4,000 of bad debts during the year. The closing balance on the allowance for receivable
account was $1,200
What is the total charge to J’s income statement in respect of bad debts and the allowance for
receivable for the year______?
31.At 1 July 20X2 the allowance for receivables of Q was $18,000. During the year ended 30
June 20X3 debts totaling $14,600 were written off. It was decided that the allowance for
receivables should be $16,000 as at 30 June 20X3
What amount should appear in Q’s income statement for the total bad debts and the allowance
for receivables for the year ended 30June 20X3
A. $12,600
B. $16,600
C. $48,600
D. $30,600
32.An enterprise started the year with total receivables of $87,600 and an allowance for
receivables of $2,500. During the year, two specific debts were written off, one for $800 and the
other for $550. A debt of $350 that had been written off as bad in the previous year was paid
during the year. At the year−end, total receivables were $90,000 and the allowance for
receivables was $2,300.
What is the charge in the income statement for the year in respect of the total of bad debts and the
allowance for receivables?
A. $800
B. $1,000
C. $1,150
D. $1,550
PAGE 51
F3 - FINANCIAL ACCOUNTING
PAGE 52
F3 - FINANCIAL ACCOUNTING
PAGE 53
F3 - FINANCIAL ACCOUNTING
PAGE 54
F3 - FINANCIAL ACCOUNTING
STATEMENT OF CASH FLOW
Question#1:
The statement of financial position of Hadrian, a limited liability company, as at 31 May 2006 is provided below
together with comparative figure for the previous year.
Hadrian – Statement of financial position as at 31 May
2006
2005
$000
$000
$000
$000
Asset
Non-current assets
2,000
1,500
Current assets
Inventory
340
230
Trade receivables
270
150
Bank
4
614
70
450
2,614
1,950
Equity and liabilities
Capital and reserves
Ordinary share capital (shares of $1)
2,000
1,500
Share premium
100
50
Retained earnings
314
130
2,414
1,680
Non-current liabilities
10% Loan note
60
Current liabilities
Trade payables
120
150
Taxation
80
200
60
210
Total equity and liabilities
2,614
1,950
Additional information:
i.
Interest paid was $6,000 during the year ended 31 May 2006.
ii.
There was no over or under provision of tax for the year ended 31 May 2005.
iii.
Dividends paid were $100,000 during the year ended 31 May 2006.
iv.
Depreciation of $300,000 was charged for the year ended 31 May 2006.
v.
Non-current asset with a net book value of $80,000 were sold at a profit of $20,000 during the year
ended 31 May 2006.
Required:
Prepare a statement of cash flows for the year to 31 May 20x6 using the format laid out in IAS 7.
PAGE 55
F3 - FINANCIAL ACCOUNTING
Question#2:
The following information has been extracted from the draft financial statement of Snowdrop a limited
liability company.
Snowdrop – Statement of financial position as at 31 May
2005
2004
$000
$000
$000
$000
Assets
Non-current assets
4,600
2,700
Current assets
Inventory
Trade receivables
Bank
Total assets
580
360
0
940
5,540
Equity and liabilities
Capital and reserves
Ordinary share capital
Share premium
Retained earnings
500
230
170
3,500
300
1,052
4,852
Non-current liabilities
10% Loan note (redeemable 31 May 20x5)
Current liabilities
Trade payables
450
Taxation
180
Bank overdraft
58
Total equity and liabilities
2,370
150
470
2,990
0
688
5,540
900
3,600
100
365
145
0
510
3,600
Additional information:
i.
The income statement for the year ended 31 May 20x5 shows the following:
$000
Operating profit
1,042
Interest payables
(10)
Profit before taxation
1,032
Taxation
(180)
Profit for financial year
852
ii.
During the year dividend paid were $270,000.
iii.
Profit before taxation had been arrived at after charging $100,000 for depreciation on noncurrent assets.
iv.
During the year non-current assets with a net book value of $200,000 were sold for $180,000.
PAGE 56
F3 - FINANCIAL ACCOUNTING
Required:
a.
Prepare a statement of each flows for Snowdrop for the year ended 31 May 20x5 in
accordance with IAS 7 Statement of cash flows, using the indirect method.
b.
Comment on the financial position of Snowdrop as shown by the statement of cash flow you
have prepared.
c.
Briefly state some of the ways in which companies could manipulate their year-end cash
position.
Question#3:
You have been given the following information relating to a limited liability company called Nobrie.
This company is preparing its financial statements for the year ended 31 May 20x4.
Income Statement for the year ended 31 May 20x4
$000
66,600
(13,785)
52,815
(7,530)
(2,516)
42,769
146
(1,177)
41,738
(9,857)
31,881
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit from operation
Investment income
Finance cost
Profit before tax
Tax
Net profit for the period
Statement of financial position as at 31 May
2006
$000
$000
$000
Asset
Non-current assets
Cost
Accumulated depreciation
Current assets
Inventory
Trade receivables
Cash
144,844
(27,433)
117,411
24,931
18,922
3,689
2005
$000
114,785
(26,319)
88,466
24,065
13,238
2,224
47,542
164,953
PAGE 57
39,527
127,993
F3 - FINANCIAL ACCOUNTING
Equity and liabilities
Capital and reserves
Ordinary share capital
Share premium
Revaluation reserve
Accumulated profits
Non-current liabilities
6% loan note
Current liabilities
Bank overdraft
Trade payables
Taxation
Total equity and liabilities
27,000
14,569
15,395
59,944
23,331
10,788
7,123
28,063
116,908
69,305
17,824
24,068
5,533
16,699
7,989
6,973
20,324
7,323
30,221
164,953
34,620
127,993
Additional information:
i.
During the year ended 31 May 20x4, the company sold a piece of equipment for $3,053,000
realizing a profit of $1,540,000. There were no other disposals of non-current assets during the
year.
ii.
Profit from operating is stated after charging depreciation of $5,862,000.
iii.
There were no amounts outstanding in respect of interest payable or receivable as at 31 May
20x3 or 20x4.
iv.
There were no dividends paid or declared during the year.
Required:
Prepare a statement of cash flows for Nobrie for the year ended 31 May 20x4 in according with IAS 7
Statement of cash flow.
PAGE 58
F3 - FINANCIAL ACCOUNTING
Question#4:
You are presented with the statement of financial position of a company called Sargant as at 31 May
20x3, together with comparative figure for the previous year.
Sargant plc statements of financial position as at 31 May
20x3
20x2
$’000
$’000
$’000
$’000
Non-current assets
Tangible assets
2,900
2,000
Less depreciation
700
470
2,200
1,530
Current Assets
Inventory
1,000
800
Trade receivables
550
440
Bank
100
1,650
1,240
3,850
2,770
Equity and liabilities
Equity
Ordinary share capital
2,000
1,500
Share premium
250
Retained earnings
405
460
2,655
1,960
Non-current liabilities
Loan notes
Current liabilities
Trade payables
Bank overdraft
Taxation
350
500
100
430
30
220
345
845
680
3850
2770
Additional information:
i.
Equipment with a net book value of $130,000 was sold for a profit of $55,000 during the year
ended 31 May 20x3.
ii.
Depreciation charged for the year ended 31 May 20x3 was $230,000.
iii.
Interest paid was $33,000 during the year ended 31 May 20x3.
iv.
There were no dividends paid during 20x3.
Required:
(a)
Calculate the operating profit of Sargant for the year ended 31 May 20x3.
(b)
Prepare a statement of cash flows for Sargant for the year ended 31 May 20x3 in accordance
with IAS 7.
PAGE 59
F3 - FINANCIAL ACCOUNTING
Question#5:
Colby co. income statement for the year ended 31 December 20x2 and statement of financial position at
31 December 20x1 and 31 December 20x2 were as follows.
COLBY CO
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X2
$000
$000
Sales
720
Raw materials consumed
70
Stall costs
94
Depreciation
118
Loss on disposal of non-current asset
18
300
Operating profit
420
Interest expense
28
Profit before tax
392
Taxation
124
Profit for the year
268
COLBY CO
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
20x2
$’000
Assets
Non-current assets
Cost
1,596
Depreciation
318
20x1
$’000
$’000
1,560
224
1,278
Current assets
Inventory
Trade receivables
Bank
Total assets
Equity and liabilities
Capital and reserves
Share capital
Retained earnings
Share premium
24
76
48
1,336
20
58
56
148
1,426
360
716
36
134
1,470
340
514
24
1,112
PAGE 60
$’000
878
F3 - FINANCIAL ACCOUNTING
Non-current liabilities
Non-current loans
Current liabilities
Trade payables
Taxation
i.
ii.
200
12
102
500
6
86
114
1,426
During the year the company paid $90,000 for a new piece of machinery.
Dividends paid in the year were $66,000.
Required:
a.
Prepare a statement of cash flows for Colby for the year ended 31 December 20x2.
b.
Briefly explain why statements of cash flows are useful to external users.
PAGE 61
92
1,470
F3 - FINANCIAL ACCOUNTING
STATEMENT OF CASH FLOW (MCQS)
Q1. Extracts from the accounts of deuce showed balances as follows:
20X9
20X8
$1Share Capital
300,000
120,000
Share premium
260,000
100,000
A bonus of 1 share for every 12 held at the 20X8 year end occurred during the year and loan notes of
$300,000 were issues at par. Interest of $12,000 was paid during the year.
What is the net cash inflow from financing activity?
A
$480,000
B
$605,000
C
$617,000
D
$640,000
Q2. Nobus is producing its statement ofcash flows for the year ended 31 December 20X5. The
accountant has identified the following balances in the financial statements:
Interest accrual b/f
Interest accrual c/f
Interest payable
Interest receivable
Preference dividend payable b/f
Preference dividends payable c/f
Dividends (statement of change in
Equity)
A
B
C
D
$
4,900
1,200
20,000
13,000
120,000
140,000
600,000
What is the net cash flow from investing activity?
($10,700)
$13,000
($603,000)
($590,000)
PAGE 62
F3 - FINANCIAL ACCOUNTING
Q3. Which of the following items could appear as items in the company’s statement of cash flows?
1
2
3
4
B
C
a bonus issue of shares
a rights issues of shares
the revaluation of non-current assets
dividends paid A
all four items
1, 3 and 4 only
2 and 4 only
Q4. A draft statement of cash flows contains the following?
$m
Profit before tax
22
Depreciation
8
Increase in inventories
(4)
Decrease in receivables
(3)
Increase in payables
(2)
Net cash inflow from operating activities
21
Which of the following corrections needs to be made to the calculations?
1
depreciation should be deducted not added
2
increase in inventories should be added, not deducted
3
decrease in receivable should be added, not deducted
4 increase in payables should be added, not deducted
A
B
C
D
1 and 2
1 and 3
2 and 4
3 and 4
PAGE 63
F3 - FINANCIAL ACCOUNTING
Q5. 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
B
C
D
Statement of cash flows and statement of financial position
statement of changes in equity and statement of financial position
Statement of comprehensive income and cash flow statement
Statement of cash flows only
Q6. The figures below have been prepared for inclusion in the statement of cash flows of bamboo.
$
Tax and dividends paid
87,566
Increase in payable
13.899
Decrease in inventory
8,900
Redemption of loans
300,000
Increase in receivable
6,555
Reduction in cash and cash equivalent
3,211
Depreciation charge
10,600
Payments to acquire non-current assets
47,999
Payment from sale of non-current assets
13,100
What is the cash generated from operations?
A
$331,688
B
$338,110
C
$425,676
D
$419,254
Q7. A business’s bank balance increased by $750,000 during its last financial year. During the same
period it issued shares, raising $1 million and repaid a loan of $750,000. It purchased non-current
assets for $200,000 and charged depreciation of $100,000. Receivable and inventory increased by
$575,000.
Its profit for the year was:
A
$1,175,000
B
$1,275,000
C
$1,325,000
D
$1,375,000
PAGE 64
F3 - FINANCIAL ACCOUNTING
Q8. A business had non-current asset with a book value of $50,000 at the start of the financial year.
During the year the business sold assets that had cost $4,000 and had been depreciated by $1,500.
Depreciation for the year was $9,000. The book value of the assets at the end of the financial year was
$46,000. How much cash has been invested in non-current assets during the year?
A
B
C
D
$4,000
$7,500
$9,000
$10,000
Q9. A business had mad e a profit of $8,000 but its bank balance has fallen by $5,000. This could be
due to:
A
B
C
D
depreciation of $3,000 and an increase in inventories of $10,000
depreciation of $6,000 and the repayment of a loan of $7,000
depreciation of $12,000 and the purchase of new non-current assets for $25,000
the disposal of a non-current asset for $13,000 less than its book value
Q10. A company made a profit for the year of $18,750, after accounting for depreciation of $1,250,
During the year, non-current assets were purchased for $8,000, receivable increased by $1,000,
inventories decreased by $1,800 and payables increased by $350.
The increase in cash and bank balance during the year was:
A
B
C
D
$10,650
$10,850
$12,450
$13,150
Q11. A statement of cash flows prepared in accordance with the indirect method reconciles profit
before tax to cash generated from operations.
Which of the following lists of items consists only of items that would be ADDED to profit before tax?
A
Decrease in inventory, depreciation, profit on sale of non-current assets
B
Increase in payable, decrease in receivable, profit on sale of non-current assets
C
loss on sale of non-current asset, depreciation, increase in receivable
D
Decrease in receivable, increase in payable, loss on sale of non-current asset
PAGE 65
F3 - FINANCIAL ACCOUNTING
Q12. In relation to the statement of cash flows, which, if any, of the following are correct?
Statement:
1. 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 statement of
cash flows.
2. A company making high profits must necessarily have a net cash inflows from operating
activities.
3. Profits and losses on disposals of non-current assets appear as items under investing activities in
the statement of the cash flows.
A
Statement 1 only
B
Statement 2 only
C
Statement 3 only
D
None of the statements
Q13. The movement on the plant and machinery account for X is shown below:
$
Cost b/f
10,000
Additions
2,000
Disposals
(3,000)
Cost c/f
9,000
Depreciation b/f
2,000
Charge for the year
1,000
Disposals
(1,500)
Depreciation c/f
1,500
Carrying value b/f
8,000
Carrying value c/f
7,500
The profit on the sale of the machine was $500. What figures would appear in the statement of cash
flows of X under the heading of ‘Investing activities’?
A
Movement on plant account $500 and profit on disposal of $500
B
Movement on plant account $500 and proceeds on sales of plant $2,000
C
Purchase of plant $2,000 and profit on disposal of $500
D
Purchase of plant $2,000 and proceeds on sale of plant $2,000
Q14. Which of the following is not an advantage of the statement of cash flows?
A
B
C
D
It highlights the effects of non-cash transactions
It helps an assessment of the liquidity off a business
The numbers within it cannot be manipulated through the adoption of beneficial accounting
policies.
it helps users to estimate future cash flows
PAGE 66
F3 - FINANCIAL ACCOUNTING
Q15. Grainger is calculating its cash flow using the direct method and has found the following
information:
$
Cash
212,500
Cash purchases
4,600
Cash expenses
11,200
Payables at start of year
12,300
Payables at end of year
14,300
Credit purchases
123,780
Wages and salaries due at start of year
1,500
Wages and salaries expenses
2,300
Inventory at start of year
23,000
Inventory at end of year
17,800
All sales are made for cash, what is the cash generated from operations by Grainger?
A
$35,520
B
$46,320
C
$74,920
D
$41,120
PAGE 67
F3 - FINANCIAL ACCOUNTING
GROUP FINAL ACCOUNTS
Question#1:
P.Co acquired 100% shares of S.Co on 1.1.06 for £800,000. When the retained earnings of S.Co was
£200,000.
P.Co SOFP at 31th Dec 08
S.Co’s SOFP as at 31th dec 08
ASSETS
NCA
Investment In
200,000 shares of S.Co
ASSETS
NCA
Current Assets
Current Assets
Equites & liabilities
O.S.C
R.E
Liabilities
500,000
800,000
300,000
800,000
200,000
1500,000
1100,000
Equities & Liabilities
O.S.C
R.E
Liabilities
800,000
300,000
400,000
1500,000
200,000
500,000
400,000
1100,000
Req. consolidate SOFP as at 31st December 2008.
Question#2:
A.Co acquired 100% of B.Co for $60,000 on 1.1.07. At that time R.E of S.Co was $20,000.
A.Co’s SOFP at 31th Dec 09
ASSETS
NCA
Investment in S.Co
Current Assets
B.Co’s SOFP at 31th Dec 09
ASSETS
NCA
Current Asset
50,000
60,000
10,000
120,000
Equities & Liabilities
O.S.C
R.E
Liabilities
30,000
30,000
60,000
Equities & Liabilities
O.S.C
R.E
Liabilities
50,000
20,000
50,000
120,000
20,000
30,000
10,000
60,000
Req. consolidate SOFP as at 31st December 2008.
PAGE 68
F3 - FINANCIAL ACCOUNTING
Question#3:
X.Co Acquired 70% of Y.Co on 1st OCT 08 Y.Co’s R.E at 1st Jan 08 was $20,000. F.V of NCI at
acquisition was 35000.
X.Co’s SOFP as at 31st Dec 08
ASSETS
NCA
Investment in S.Co
Current Assets
Y.Co’s SOFP as at 31st Dec 08
ASSETS
NCA
Current Assets
50,000
80,000
20,000
150,000
Equities Liabilities
O.S.C
R.E
Liabilities
40,000
50,000
90,000
Equities Liabilities
O.S.C
R.E
Liabilities
40,000
60,000
50,000
150,000
20,000
60,000
10,000
90,000
REQ:
Consolidation SOFP as at 31st Dec 08=?
Q4.
P.Co sold goods to S.Co Costing $15,000 for 40,000 at the Year-end one fourth of the golds still
in the inventory of S.Co Reg: URP=?
Q5.
P.Co Sold goods to S.Co costing $20,000 at a markup of 30%. At the year-end half of the goods
still unsold by S.Co Reg. URP=?
Q6.
P.Co sold goods of S.Co for $50,000 at a margin of 20% on Salon. At the Year-end 1/3 of the
goods still unsold by S.Co. Reg: URP=?
Q7.
P.Co sold goods to S.Co for $80,000 earning a margin of 30% on Sale. At the year-end 30,000
(cost to S.Co) of these goods still unsold by S.Co. Reg: URP=?
Q8.
P.Co sold goods to S.Co for $150,000 earning a margin of 40% on sales. At the year-end
$60,000 (Cort to S.Co) of these goods still unsold by S.Co. Reg: URP=?
Q9.
P.Co sold goods costing $30,000 to S.Co for $50,000. At the year-end $10,000 (cost to S.Co) of
these goods remain unsold by S.Co. Reg: URP=?
Q10.
S.Co sold goods costing $20,000 to P.Co for $30,000. At the year-end $5,000 of these goods
remain unsold by P.Co. Reg: URP=?
PAGE 69
F3 - FINANCIAL ACCOUNTING
Question#11:
Assets
Prop & Plant Equipment
Investment in S Co. 100% Shares
Current Asset
Equity & Liability
Share capital
Retained earnings
Liability
P. CO.
S. Co.
400,000
50,000
50,000
500,000
100,000
200,000
100,000
200,000
500,000
50,000
50,000
100,000
200,000
100,000
200,000
Required:
SOFP is at 31 December 2003.
P Co. acquired S Co. on 1 Jan 2002 was its incorporation Date.
Question#12:
Assets
Prop & Plant Equipment
Investment in S Co. 100% Shares
Current Asset
Equity & Liability
Share capital
Liability
P. Co.
S. Co.
300,000
70,000
20,000
390,000
200,000
150,000
240,000
390,000
70,000
160,000
230,000
30,000
230,000
Required:
This SOFP is at 31 December 2001 and acquisition date is also 31 Dec 2001.
Question#13:
Assets
Prop & Plant Equipment
Investment in S Co. 100% Shares
Current Asset
Equity & Liability
Share capital
Retained earnings
Liability
P. Co.
S. Co.
300,000
100,000
100,000
500,000
100,000
200,000
200,000
100,000
500,000
50,000
100,000
150,000
300,000
200,000
300,000
Required:
SOFP as at 31 December 2003. At the date of acquisition i.e. 1 Jan01 S Co. RE was 50,000.
PAGE 70
F3 - FINANCIAL ACCOUNTING
Question#14:
.
Assets
Prop & Plant Equipment
Investment in S Co. 100% Shares
Current Asset
Equity & Liability
Share capital
Retained earnings
Liability
P. CO.
S. Co.
100,000
200,000
100,000
400,000
50,000
100,000
200,000
100,000
400,000
100,000
50,000
200,000
350,000
300,000
350,000
Required:
This SOFP is at 31 December 20x5.
Date of acquisition was 1 Jan 20x3 when RE was 25,000.
Question#15:
Assets
Prop & Plant Equipment
Investment in S Co. 100% Shares
Current Asset
Equity & Liability
Share capital
Retained earnings
Liability
P. CO.
S. Co.
400,000
100,000
200,000
700,000
300,000
400,000
200,000
100,000
700,000
50,000
30,000
300,000
380,000
Required:
This SOFP is as at 31 December 20x3 Which is
the acquisition date.
F.V of NCI = 20,000 at the date of.
PAGE 71
80,000
380,000
F3 - FINANCIAL ACCOUNTING
Q16.
Assets
Non Current Asset
Prop & Plant Equipment
Investment in S Co. Share
Loan Notes of S Co.
Current Asset
Inventory
Receivable
Current Account with S Co.
Cash
Equity & Liability
Share capital $1 each
Retained earnings
Liability
NCL
10% Loan Stock
8% Loan Stock
Current Liability
Payable
Tax
P. CO.
S. Co.
120,000
80,000
20,000
220,000
100,000
50,000
40,000
18,000
4,000
112,000
332,000
66,000
30,000
202,000
100,000
95,000
195,000
80,000
28,000
108,000
6,000
75,000
50,000
47,000
15,000
16,000
10,000
18,000 Current A/c with P.Co.
202,000
332,000
Required:
P Co. acquired S Co. since its incorporation and this SOFP is at 31 December 20x5.
PAGE 72
F3 - FINANCIAL ACCOUNTING
Question#17:
The draft statements of financial position of Oak and its subsidiary Chestnut at 30 September 2008 are as
follows:
OAK
Chestnut
$
$
$
$
Assets
Non-current assets
Tangible assets, net book value
Land and buildings
Plant
Investments
Shares in Chestnut
Current assets
Inventory
Receivables
Bank
225,000
202,500
427,500
562,500
255,000
375,000
112,500
Total assets
Equity and liabilities
Equity
$1 ordinary shares fully paid
Reserves
Current liabilities
Total equity and liabilities
i.
ii.
iii.
iv.
270,000
157,500
427,500
180,000
90,000
22,500
742,500
1,732,500
292,500
720,000
1,125,000
450,000
1,575,000
157,500
1,732,500
450,000
202,500
625,500
67,500
720,000
The following information is also available:
Oak purchased 360,000 shares in Chestnut some years ago when that company had a credit
balance of $105,000 in reserves.
For the purpose of the takeover, the land of Chestnut was revalued at $120,000 in excess of its
book value. This was not reflected in the accounts of Chestnut. Land is not depreciated.
At 30 September 2008 Chestnut owed Oak $15,000 for goods purchased.
The inventory of Chestnut includes goods purchased from Oak at a price which includes a profit
to Oak of $10,500.
Required:
a.
Prepare the consolidated statement of financial position for Oak as at 30 September 2008.
b.
Explain the accounting treatment of inter-company trading transactions and balances when
consolidating accounts. Use the data for the companies in this question to illustrate your
answer.
PAGE 73
F3 - FINANCIAL ACCOUNTING
Question#17:
P Co. has owned 75% of the shares of S Co. since the incorporation of that company. During the year to 31
December 20x2. S Co. sold goods costing $10,000. P Co. at a price of $20,000 and these goods were still
unsold by P Co. at the end of the year. Draft balance sheets of each company at 31 December 20x2 were as
follows:
P Co.
S Co.
$
$
$
$
Assets
Non-current assets
Property, plant and equipment
125,000
120,000
Investment: 75,000 shares in S Co at cost 75,000
200,000
120,000
Current assets
Inventories
50,000
48,000
Trade receivables
20,000
16,000
70,000
64,000
Total assets
270,000
184,000
Equity and liabilities
Equity
Ordinary shares of $1 each fully paid
80,000
100,000
Retained earnings
150,000
60,000
230,000
160,000
Current liabilities
40,000
24,000
Total equity and liabilities
270,000
184,000
Required:
Prepare the consolidated balance sheet of P Co. at 31 December 20x2.
PAGE 74
F3 - FINANCIAL ACCOUNTING
Question#18:
P Co. acquired all the shares in S Co. on year ago when the reserves of S Co. stood at $10,000 Draft
balance sheets for each company are as follows.
P Co.
S Co.
$
$
$
$
Assets
Non-current assets
Property, plant and equipment
80,000
40,000
Investment in S Co at cost
46,000
126,000
Current assets
40,000
30,000
Total assets
166,000
70,000
Equity and liabilities
Equity
Ordinary shares of $1 each
100,000
30,000
Retained earnings
45,000
22,000
145,000
52,000
Current liabilities
21,000
18,000
Total equity and liabilities
166,000
70,000
During the year S Co. sold goods to P Co. for $50,000, the profit to S Co. being 20% of selling
price. At the balance sheets date. $15,000 of these goods remained unsold in the inventories of P Co. At
the same date P Co. Owed S Co $12,000 for goods bought and this debt is included in the trade
payables of P Co and the receivables of S Co.
Required:
Prepare a draft consolidated balance sheet of P Co.
PAGE 75
F3 - FINANCIAL ACCOUNTING
Question#19:
You are provided with the following statements of financial position for Shark and Minnow. Statements
of financial position as at 31 October 20x0.
Shark
$000
Assets
Non-current assets
Plant at net book value
Fixtures at net book value
Shares in Minnow at cost
Current assets
Inventory at cost
Receivables
Bank
220
145
100
Equity and liabilities
Equity
$1 ordinary Shares
Reserves
ii.
iii.
iv.
$000
70
50
150
70
105
0
465
1,190
175
295
700
215
915
170
50
220
275
0
55
20
275
1,190
Total equity and liabilities
i.
$000
325
200
200
Total assets
Current liabilities
Payables
Bank overdraft
Minnow
$000
75
295
The following information is also available:
Shark purchased 70% of the issued ordinary shares of Minnow on 1 November 20w6 when the
reserves of Minnow were $20,000.
For the purposes of the acquisition, plant in Minnow with a book value of $50,000 was revalued
to its fair value of $60,000. The revaluation was not recorded in the accounts of Minnow.
Shark sells goods to Minnow at a markup of 25%. At 31 October 20x0, the inventories of
Minnow include $45,000 of goods purchased from Shark.
Minnow owes Shark $35,000 for goods purchased and Shark owes Minnow $15,000.
Required:
a.
Prepare the consolidated statement of financial position of Shark as at 31 October 20x0.
b.
Explain briefly why adjustments need to be made in group accounts for:
i.
Inter-company trading
ii.
Inter-company transfer of non-current assets.
PAGE 76
F3 - FINANCIAL ACCOUNTING
Question#20:
P Co. acquired 75% of the shares in S Co on 1 January 20x2 when the retained earnings of S Co stood at
$10,000. The fair value of the non-controlling interest at the date of acquisition was
$15,000. During the year to 31 December 20x0, S Co sold goods to P Co for $20,000 at a mark-up of 25%. 50%
of these goods were still unsold by P Co at the end of the year. At the same date, P Co owed S co $12,000 for
goods bought and this debt is included in the trade payables of P Co and the trade receivables of S Co.
Draft statements of financial position of each company at 31 December 20x2 were as follows.
P Co
S Co
$
$
$
$
Assets
Non-current assets
Tangible assets
80,000
40,000
Investment in S Co at cost
46,000
126,000
Current assets
Trade receivables
30,000
25,000
Inventories
10,000
5,000
40,000
30,000
Total assets
166,000
70,000
Equity and liabilities
Equity
Ordinary shares of $1 each
100,000
30,000
Retained earnings
45,000
22,000
145,000
52,000
Current liabilities
Trade payables
21,000
18,000
Total equity and liabilities
166,000
70,000
Required:
Prepare a draft consolidated statement of financial position for P Co.
PAGE 77
F3 - FINANCIAL ACCOUNTING
Question#21:
Hinge Co acquired 80% of the ordinary shares of Singe Co on 1 April 20x5. On 31 December 20x4 Singe Co’s
accounts showed a revaluation surplus of $4,000 and retained earnings of $15,000. The fair value of the noncontrolling interest at acquisition was $7,000. The statements of financial position of the two companies at
31 December 20x5 are set out below.
HINGE CO STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
$
$
Assets
Non-current assets
Property, plant and equipment
32,000
16,000 ordinary shares of 50c each in Singe Co
50,000
80,000
Current assets
85,000
Total assets
167,000
Equity and liabilities
Equity
100,000
Ordinary shares of $1 each
Revaluation surplus
7,000
Retained earnings
40,000
147,000
Current liabilities
20,000
Total equity and liabilities
167,000
SINGE CO
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20x5
$
Assets
Property, plant and equipment
Current assets
Total assets
$
30,000
43,000
73,000
Equity and liabilities
Equity
20,000 ordinary shares of 50c each
Revaluation surplus
Retained earnings
10,000
4,000
39,000
53,000
20,000
73,000
Current liabilities
Total equity and liabilities
Required:
Prepare the consolidated statement of financial position of Hinge Co at 31 December 20x5. You
should assume that profits have accrued evenly over the year to 31 December 20x5.
PAGE 78
F3 - FINANCIAL ACCOUNTING
Question#22:
P Co acquired 100% of the ordinary shares of S Co on 1 September 20x5. At that date the fair value of S
Co’s land and buildings was $23,000 greater than their carrying value and retained earnings were $21,000.
The statements of financial position of both companies at 31 August 20x6 are given below.
P Co
STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6
$
$
Assets
Non-current assets
Land and buildings
63,000
Investment in S Co at cost
67,000
130,000
82,000
212,000
Current assets
Total assets
Equity and liabilities
Equity
Ordinary shares of $1 each
Retained earnings
80,000
112,000
192,000
20,000
212,000
Current liabilities
Total equity and liabilities
S Co
STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6
Assets
Land and buildings
Current assets
Total assets
Equity and liabilities
Equity
Ordinary shares of $1 each
Retained earnings
$
$
28,000
43,000
71,000
20,000
41,000
61,000
10,000
71,000
Current liabilities
Total equity and liabilities
Required:
Prepare P Co’s consolidated statement of financial position as at 31 August 20x6.
PAGE 79
F3 - FINANCIAL ACCOUNTING
Q23.
P Co regularly sells goods to its one subsidiary company, S Co. The statements of financial
position of the two companies on 31 December 20x6 are given below.
P Co.
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X6
$
$
$
Assets
Non-current assets
Tangible assets
35,000
Investment in 40,000 $1 shares in S Co at cost
40,000
75,000
Current assets
Inventories
16,000
Receivables: S Co
2,000
Other
6,000
8,000
1,000
Cash at bank
25,000
100,000
Total assets
Equity and liabilities
Equity
70,000 $1 ordinary shares
Retained earnings
70,000
16,000
86,000
Current liabilities
Payables
Total equity and liabilities
14,000
100,000
S Co
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X6
$
Assets
Non-current assets
Tangible assets
Current assets
Inventories
Receivable
$
45,000
12,000
9,000
21,000
65,000
Total assets
PAGE 80
F3 - FINANCIAL ACCOUNTING
Equity and liabilities
Equity
40,000 $1 ordinary shares
Retained earnings
40,000
19,000
59,000
Current liabilities
Bank overdraft
Payables: P Co
Payables: other
3,000
2,000
2,000
7,000
65,000
Total equity and liabilities
Required:
Prepare P Co’s consolidated statement of financial position as at 31 December 20x6.
Q24.
P Co acquired 75% of the ordinary shares of S Co on that company’s incorporation in 20x3. The
summarized income statements of the two companies for the year ending 31 December 20x6
are set out.
Revenue
Cost of sales
Gross profit
Administrative expenses
Profit before taxation
Income taxes
Profit for the year
Note: Movement on retained earnings
Retained earnings brought forward
Profit for the year
Retained earnings carried forward
P Co
$
75,000
30,000
45,000
14,000
31,000
10,000
21,000
S Co
$
38,000
20,000
18,000
8,000
10,000
2,000
8,000
87,000
21,000
108,000
17,000
8,000
25,000
Required:
Prepare the consolidated income statement and movement on retained earnings for the
group.
PAGE 81
F3 - FINANCIAL ACCOUNTING
Q25.
The following information relates to the Wheeler group for the year to 30 April 20x7:
Wheeler Co
Brookes Co
$’000
$’000
Revenue
1,100
500
Cost of sales
630
300
Gross profit
470
200
Administrative expenses
105
150
Profit before tax
365
50
Income taxes
65
10
Profit for the year
300
40
Note:
Retained earnings brought forward
460
106
Retained earnings carried forward
760
146
Additional information:
a.
The issued share capital of the group was as follows.
Wheeler Co: 5,000,000 ordinary shares of $1 each.
Brookes Co:
1,000,000 ordinary shares of $1 each.
b.
Wheeler Co purchased 80% of the issued share capital of Brookes Co in 20x0. At that time, the
retained earnings of Brookes amounted to $56,000.
Required:
Prepare the consolidated income statement and the movement on retained earnings for the
Wheeler group for the year to 30 April 20x7.
PAGE 82
F3 - FINANCIAL ACCOUNTING
Q26.
Percy has held 75% of the equity share capital of Mercy for many years.
A draft summarized Income statements for Percy and Mercy for the year ended 31 December
20x3 below.
INCOME STATEMENTS AT 31 DECEMBER 20X3
PERCY
MERCY
$
$
Revenue
500,000
300,000
Cost of sales
300,000
200,000
Gross profit
200,000
100,000
Administrative expenses
90,000
45,000
Profit before taxation
110,000
55,000
Income taxes
10,000
5,000
Profit for the year
100,000
50,000
During the year, Percy sold goods which cost Percy $20,000 to Mercy at a margin of 20%. At the
year end, all of these goods remained in inventory.
Required:
Prepare the consolidated income statement for the Percy group as at 31 December 20x3.
Q27.
P Co acquired 60% of the equity of S Co on 1 April 20x5. The income statements of the two
companies for the year ended 31 December 20x5 are set out below.
P Co.
S Co.
S Co
$
$
$
Revenue
170,000
80,000
60,000
Cost of sales
65,000
36,000
27,000
Gross profit
105,000
44,000
33,000
Administrative expenses
43,000
12,000
9,000
Profit before tax
62,000
32,000
24,000
Income taxes
23,000
8,000
6,000
Profit for the year
39,000
24,000
18,000
Note
Retained earnings brought forward
81,000
40,000
Retained earnings carried forward
120,000
58,000
Required:
Prepare the consolidated income statement and movements on retained earnings.
PAGE 83
F3 - FINANCIAL ACCOUNTING
Q28.
The consolidated income statement of Wheeler Co and its 80% owned subsidiary. Brookes Co,
has been prepared for the year ended 30 April 20x7 and is shown below. During the year,
Wheeler Co made a $30,000 revaluation gain on one of its properties and Brookes Co made a
revaluation gain of $10,000 on a piece of land. The accountant at Wheeler Co has yet to prepare
the consolidated statement of comprehensive income.
WHEELER GROUP
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 20X7
$’000
Sales revenue (1,100 + 500)
Cost of sales (630 + 300)
Gross profit
Administrative expenses (105 + 150)
Profit before taxation
Income taxes (65 + 10)
Profit for the year
Profit attributable to:
Owners of the parent (bal. fig)
Non-controlling interest (20% x 40)
1,600
930
670
255
415
75
340
332
8
340
Required:
Prepare the consolidated statement of comprehensive income for the Wheeler Group as at 30
April 20x7.
PAGE 84
F3 - FINANCIAL ACCOUNTING
Q29.
During the year P.Co sold goods for $10,000 to S.Co at a margin 20% ¼ of the goods still unsold
at the year end.
P.Co’s P&L year end Dec 08
Sales
Cost of Sales
Gross Profit
PAT
15,000
(2,000)
13,000
S.Co’s P&L year end Dec 08
Sales
Cost of Sales
Gross Profit
30,000
(10,000)
20,000
5,000
PAT
10,000
Req:
i. Consolidated Sales Revenue.
ii. Consolidated Cost of Sales.
iii. NCI
Q30.
During the year S.Co sold goods to P.Co for $400 at a markup of 20%. At the year-end half of
the goods still unsold by P.Co
P.Co’s P&L year end Dec 08
Sales
Cost of Sales
Gross Profit
15,000
(2,000)
13,000
S.Co’s P&L year end Dec 08
Sales
Cost of Sales
Gross Profit
30,000
(10,000)
20,000
PAT
10,000
PAT
Req:
5,000
i. Consolidated Sales Revenue.
ii. Consolidated Cost of Sales.
iii. NCI
Q31.
Accounting period 1st April 08 till 31st March 09. P.Co Acquired 60% shares of S.Co on 1st
October 08.
S.Co P&L (year-end 31st March 09)
P. Co P&L
Sales
Cost of Sales
Gross Profit
Operating Exp.
PBT
Tax
PAT
30,000
(10,000)
20,000
(5,000)
15,000
(5,000)
10,000
Sales
Cost of sales
Gross Profit
Operating Exp.
PBT
Tax
PAT
Req: Consolidated Income Statement.
PAGE 85
50,000
(20,000)
30,000
(10,000)
20,000
(2,000)
18,000
F3 - FINANCIAL ACCOUNTING
Q.32
P.Co acquired 80% shares of S.Co on 1.1.06 for 650,000. When the retained earnings of S.Co was
150,000.
P.Co SOFP at 31th Dec 08
ASSETS
NCA
Investment In 160,000
shares of S.Co
Current Assets
S.Co’s SOFP as at 31th dec 08
ASSETS
NCA
Current Assets
500,000
650,000
35,000
1500,000
Equites & liabilities
O.S.C
R.E
Liabilities
800,000
300,000
1100,000
Equities & Liabilities
O.S.C
R.E
Liabilities
800,000
300,000
400,000
1500,000
200,000
500,000
400,000
1100,000
Fair Value of NCI at acquisition was $100,000.
Req. consolidate SOFP as at 31st December 2008.
Q.33 A.Co acquired 70% of B.Co for $45,000 on 1.1.07. At that time R.E of S.Co was $10,000.
A.Co SOFP at 31th Dec 08
ASSETS
NCA
Investment In S.Co
Current Assets
B.Co’s SOFP as at 31th Dec 08
ASSETS
NCA
30,000
Current Assets
30,000
50,000
45,000
25,000
120,000
Equites & liabilities
O.S.C
R.E
Liabilities
60,000
Equities & Liabilities
O.S.C
R.E
Liabilities
50,000
20,000
50,000
120,000
20,000
30,000
30,000
60,000
Fair Value of NCI at acquisition was $20,000
Req. Consolidate SOFP as at 31st December 2009.
PAGE 86
F3 - FINANCIAL ACCOUNTING
Q.
Assets
P.Co
S.Co
Property, Plant & Equipment
400,000
300,000
Investment in S.Co 80 %
100,000
C.A
200,000
80,000
Total
700,000
380,000
Share Capital
400,000
50,000
Retain earn
200,000
30,000
Liability
100,00
300,00
Total
700,000
380,000
Equity & Liability
Required:
 This SOFP is as at 31 Dec 20X3.
 Which is the acquisition data.
 F.V of NCI = 20,000 at the date.
Q1.
P. Co acquired 70% of share capital of S. Company at 31st Dec 2007. When the retained
earnings of S. Company stood at 5000. Balance of shareholder equity of both company’s 31st Dec,
2009.
Retain earning
Share Capital
P. Company
25,000
100,000
S. Company
35,000
500,000
Required: Consolidated reserve?
P. Co acquired 80% of the share capital of S. Co at 1st Jan, 08 for £150,000 S. Company’s share
holder equity at 31st Dec. 2008.
Ordinary share capital
= 80,000
Share premium
= 20,000
Retained earnings
= 100,000
st
S Company’s profit for the year ended 31 Dec, 2008 was 70,000.
F.V of NCI at 1st Jan, 2008 was 40,000.
Required: Goodwill?
Q2.
PAGE 87
F3 - FINANCIAL ACCOUNTING
Q3.
P. Company acquired 60% of shares of S. Company at 1st Jan 2007. Balances of S. Company R.E.
Fair value of NCI at acquisition = 120,000
1st Jan, 2007
R.E.
Required:
Q4.
31st Dec, 2008
50,000
80,000
NCI to be reported in consolidated S.O.F.P at 31st Dec, 2008?
P. Company acquired 70% of share capital of S. Company and 30% of share capital of B.
Company on 1st Jan, 2006.
Balances of equity of this company’s.
st
1 Jan, 2006
31st Dec, 2009
P. Company R.E. 300,000
700,000
S. Company R.E. 120,000
180,000
B. Company R.E. 30,000
70,000
Required:
Consolidated reserve to be reported in the S.O.F.P at 31st Dec, 2009?
Q5.
P. Company acquired 60% of share capital of S. Company for £180,000 and 25% of the share
capital of B. Company for £60,000 on 1st Jan, 2007. Balances of retained earnings.
st
1 Jan, 2007
31st Dec, 2009
P. Company R.E. 300,000
600,000
S. Company R.E.
50,000
180,000
B. Company R.E. 30,000
90,000
st
F.V of NCI at 1 Jan 2007 = £60,000.
Required:
i.
Carrying value of investment in associate at 31st Dec, 2009?
ii.
Consolidated reserve to report in S.O.F.P at 31st Dec 2009?
iii.
NCI 31st Dec, 2009?
Q6.
P. Company acquired 80% of ordinary shares S. Company on 1st July, 2007 for £250,000. F.V of
NCI at that date was £50,000. Balances of shareholder equity of S. Company at 31st Dec. 2007.
Ordinary share capital
Share premium
Retained earnings
S. Company’s PAT for the year ending 31st Dec, 2007
P. Company’s Retained earning at 31st Dec, 2007
Required:
i.
Goodwill?
ii.
NCI at 31st Dec, 2007?
iii.
Consolidated reserve?
PAGE 88
= 120,000
= 30,000
= 100,000
= 80,000
= 300,000
F3 - FINANCIAL ACCOUNTING
Q7.P. Company acquired 75% of S. Company on 1st Oct, 2008 for £190,000. F.V. of NCI at the date of
acquisition was £70,000. S. Company shareholder equity at 1 st Oct, 2008.
Ordinary share capital
= 80,000
Premium
= 30,000
Retained earnings
= 80,000
st
S. Company’s PAT for the year ending 31 Dec, 2008
= 60,000
st
P. Company’s retained earning at 31 Dec, 2008
= 150,000
Required:
i.
Goodwill?
ii.
Consolidated reserve at 31st Dec, 2008
iii.
NCI at 31st Dec, 2008
Q8.
P. Company 60% of ordinary shares of S. Company through a share exchange of 2 shares of P. Company for 3
shares in S. Company. Share price of P. Company share at the date of acquisition is $ 2/share.
S. Company total share capital
= $40,000 @ $1/share
P. Company’s Total issued ordinary share capital
= $40,000 @ $1/share
Required: Cost of investment?
Q9.
P. Company acquired 70% of share of S. Company through a share exchange of 3 Shares of P. Company for
every 5 share in S. Company.
M.P share of P. Company at the date of acquisition $4/share.
S. Company’s issued ordinary share capital.
= $50,000 @ $1 / share.
Required: Cost of investment?
PAGE 89
F3 - FINANCIAL ACCOUNTING
Q1.
The statements of profit or loss for two companies, Patty and Selma, for the year ended 31
December 20x1 are presented below:
Patty
Selma
$000
$000
Revenue
987
567
Cost of sales
(564)
(335)
Gross profit
423
232
Administrative expenses
(223)
(122)
Operating profit
200
110
Finance costs
(50)
(30)
Profit before tax
150
80
Taxation
(40)
(25)
Profit for the year
110
55
The following notes are relevant to the preparation of the consolidated financial statements:
Patty bought 70% of the ordinary shares in Selma several years ago.
i.
During the year ended 31 December 20x1, Selma sold goods to Patty for $120,000
making a cost mark up of 20%. One quarter of these goods remained in the inventory of
Patty at the year end.
Required:
Using the individual company financial statements, calculate the following ratios for Patty and
Selma for the year ended 31 December 20x1:
i.
ii.
iii.
Gross profit margin
Operating profit margin
Interest cover
Prepare a consolidated statement of profit or loss for the year ended 31 December 20x1.
PAGE 90
F3 - FINANCIAL ACCOUNTING
Q2.
The statements of financial position for Cube and Prism as at 31 December 20x1 are presented
below:
Assets
Non-current assets
Property, plant and equipment
Investments
Current Assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total Assets
Equity and liabilities
Equity
Share capital
Retained earnings
Non-current liabilities
Loans
Current liabilities
Trade and other payables
Total equity and liabilities
Cube
$
Prism
$
270,000
300,000
179,000
-
95,000
110,000
8,000
783,000
50,000
99,000
51,000
379,000
100,000
435,000
50,000
209,000
200,000
70,000
48,000
783,000
50,000
379,000
The following notes are relevant to the preparation of the consolidated financial statements:
i.
Cube acquired 75% of the ordinary shares of Prism for $300,000 several years ago. At
the acquisition date, the retained earnings of Prism were $120,000. The fair value of the
non-controlling interest at the date of acquisition was $55,000.
ii.
The fair value of the net assets of Prism at the acquisition date approximated their
carrying values, with the exception of some land. This land was held in the accounts of
Prism at its cost of $100,000 but was estimated to have a fair value of $170,000. This
land is still held at 31 December 20x1.
iii.
During the year, Cube sold goods to Prism for $30,000 making a gross profit margin on
the sale of 30%. One third of these goods are still included in the inventories of Prism.
Required:
a.
Using the individual financial statements, calculate the following ratios for Cube and Prism for
the year ended 31 December 20x1:
i.
The quick ratio (x:1)
ii.
Gearing (in terms of the percentage of capital employed represented by borrowings)
All ratios should be calculated to one decimal place.
Prepare the consolidated statement of financial position for the Cube group as at 31December
20x1.
PAGE 91
F3 - FINANCIAL ACCOUNTING
Q3.
Bryson acquired 75% of the issued share capital of Stoppard on 1 April 20x0 for $8,720,000. At
that date Stoppard had issued share capital of $4,800,000 and retained earnings of $670,000.
Extracts of the statements of financial position for the two companies one year later at 31
March 20x1 are as follows:
Bryson
Stoppard
$000
$000
ASSETS
Investment in Stoppard
8,720
Non-current assets
11,280
3,670
Current assets
5,760
5,010
Total assets
25,760
8,680
EQUITY AND LIABILITIES
Equity
Share capital
Retained earnings
Total equity
9,200
12,480
21,680
4,800
1,290
6,090
Non-current liabilities
Current liabilities
Total liabilities
Total equity and liabilities
1,440
2,640
4,080
25,760
1,180
1,410
2,590
8,680
The following information is relevant is to the preparation of the consolidated financial
statements:
i.
At acquisition, the fair value of land owned by Stoppard exceeded its cost by
$1,000,000. This land is still owned at 31 March 20x1.
ii.
During the year Bryson sold goods to Stoppard for $960,000 making a profit of
$400,000. Three quarters of the goods remained in Stoppard’s inventory at the year
end. Stoppard still owes half the amount payable to Bryson
iii.
At 1 April 20x0, the fair value of the non-controlling interest at the date of acquisition
was $2,200,000.
Required:
(a)
Calculate the current ratio for Bryson and Stoppard as at 31 March 20x1.
(b)
Prepare the consolidated statement of financial position for Bryson plc and its subsidiary
undertaking as at 31 March 20x1.
PAGE 92
F3 - FINANCIAL ACCOUNTING
Q4.
The statements of profit or loss for two companies, Pen and Staple, for the year ended 31
December 20x4 are presented below:
Pen
Staple
$000
$000
Revenue
1,500
700
Cost of sales
(775)
(370)
Gross profit
725
330
Administrative expenses
(317)
(135)
Operating profit
408
195
Finance costs
(60)
(35)
Profit before tax
348
160
Taxation
(96)
(45)
Profit for the year
252
115
The following notes are relevant to the preparation of the consolidated financial statements:
i.
ii.
Pen bought 70% of the ordinary shares in Staple on 1 January 20x1.
During the year ended 31 December 20x4, Staple sold goods to Pen for $150,000 making
a mark up on cost of 20%. One fifth of these goods remained in the inventory of Pen at
the year end.
Required:
a.
Using the individual company financial statements, calculate the following ratios for
Pen and Staple for the year ended 31 December 20x4:
i.
Gross profit margin
ii.
Operating profit margin
iii.
Interest cover
b.
Prepare a consolidated statement of profit or loss for the Pen group for the year ended 31
December 20x4.
PAGE 93
F3 - FINANCIAL ACCOUNTING
Q5.
The statement of financial position for Pebble and Stone as at 31 December 20x6 are
presented
below:
Assets
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total Assets
Equity and liabilities
Equity
Share capital
Share premium
Retained earnings
Non-current liabilities
Loans
Current liabilities
Trade and other payables
Total equity and liabilities
Pebble
$
Stone
$
300,000
400,000
225,000
---
80,000
60,000
10,000
850,000
75,000
140,000
25,000
465,000
80,000
20,000
295,000
60,000
10,000
250,000
300,000
85,000
155,000
850,000
60,000
465,000
The following notes are relevant to the preparation of the consolidated financial statements:
i.
Pebble acquired 80% of the ordinary shares of Stone for $300,000 on 1 January 20x2. At
the acquisition date, the retained earnings of Stone were $150,000. The fair value of the
non-controlling interest in Stone at the date of acquisition was $80,000.
ii.
At the date of acquisition, the fair values of the net assets of Stone approximated their
carrying values, with the exception of some land. This land was held in the accounts of
Stone at its cost of $150,000 but was estimated to have a fair value of $180,000. This
land is still owned by Stone at 31 December 20x6.
iii.
During the year, Pebble sold goods to Stone for $50,000 making a gross profit margin on
the sale of 25%. Two fifths of these goods are still included in the inventories of Stone at
31 December 20x6.
Required:
a.
Prepare the consolidated statement of financial position for the Pebble group as at 31
December 20x6.
PAGE 94
F3 - FINANCIAL ACCOUNTING
BANK RECONCILIATION
Question 1: Steve’s business bank statement showed an overdraft balance of $3080 on 31 October
20X3. When this was reconciled to the cash book, the following differences were noted.
Unpresented Cheques
$1,220
Unrecorded lodgments
$1,240
Standing order for insurance premium not entered in the cash book
$890
Overdraft interest not recorded in the cash book
$80
Credited in error to Steve’s accounts by the bank
$300
Required: what was the original balance on Steve’s cash book at 31 October 20X3?
Question 2: Kieran’s bank account in his cashbook has a balance on 31 March of $875. Kieran is awaiting
a bank statement for March. In the meantime, he ascertains from correspondence that bank charges
imposed in March will amount to $27, interest credited will be $4, and direct debits and standing order
drawn upon his business account will total $390. Kieran made some payments by cheque amounting to
$420 on 30 March, but also deposited some cheques from customers totaling $510 on 29 March. These
were entered in his cashbook, but will be too late for the March bank statement.
Required: prepare cash book and predict the balance that will appear in his bank statement
Question 3: Britannia is trying to reconcile her cash book to her bank statement at 31 December X5. On
investigation, she finds.
1. The cash book omits a standing order for $50 paid on 31 December for rates for the current year
2. Cheques totaling $195 have been credited to the cash book on 31 December but not appeared
on the bank statement until 5 January X6
3. Cheques from customers totaling $230 on 23 December were entered in the cash book but
Britannia had only just managed to get to the bank as it shut for Christmas and so the bank had
not dealt with them until January
4. A cheque received for $569 had appeared on the bank statement in error as $596
Before and adjustments are made, her cash book had a debit balance of $1,350
Required: find out the adjusted balance of the cash book
Question 4: the cash book of Knight Ltd showed a balance of $15,243 (debit) at 28 January 20X6. A
subsequent reconciliation to the bank statement revealed the differences shown in the tale
Unpresented Cheques
$14,239
Un-cleared lodgments
$2,032
Amount credited in error Knights Ltd’s account by the bank
$850
Receipt of $1,330 recorded incorrectly in the cash book as $1,303
Required: what was the balance on the bank statement at 28 February 20X6?
PAGE 95
F3 - FINANCIAL ACCOUNTING
Question 5: At the end of the financial year on 31 March, Martin’s business is sent a bank statement
showing a balance 0f $1,250, the balance in the cashbook at the yearend is however, only $928. Martin
goes through the entries in both for the same period and discovers the following discrepancies
1. Bank charges of $25 appear only on the bank statement
2. Interest credited of $5 appears only on the bank statement
3. The bank has deducted $86 in respect of a cheque Martin has recorded as $68. Martin has a
copy of the cheque and is certain that his figure is correct
4. Two cheques recently written by Martin for $210 and $550 appear only in the cash book
5. A deposit made by Martin on 20 march of $400 also appears only in the cash book
Required: Use the reconciliation statement format given to derive the balance martin should have after
adjusting his cashbook. Then adjust the balance to arrive at the unadjusted balance
Question 6: Kenny Ltd’s bank control account shows a balance overdrawn on $6,530 as at 31 December
20X3.on comparing the bank statement with the cash book it is discovered that the following items have
not been recorded in the cash book
1. Bank charges of $100 and overdraft interest of $50
2. A credit transfer from a customer of $2,000
3. A direct debit to a supplier of $1000
The following items have been recorded in the cash book but not in the bank statement
1. Cheques received from customers $1900
2. Cheques drawn in favor of suppliers $2300
Required: what figure will be shown in the balance sheet as at 31 December 203 for bank overdraft?
Question 7: When preparing a bank reconciliation for a client, you have noted that:
1. The balance on the bank account in the nominal ledger is $2,983 debit
2. The balance on the bank statement is $9,820 overdrawn
3. Cheques totaling $2,187 have not yet been presented to the bank
4. Lodgments totaling $15,200 have not been credited by the bank
5. A cheque for $400, drawn on your client’s personal account, has been debited by the bank to
business account
6. A cheque which was recorded in the cheque journal with a value of $2,870 has been correctly
debited the bank statement as $2,780
7. A customer has paid $1,500 directly to the bank account (this payment has not been recorded in
your clients books)
8. Standing orders to a total value of $780 have been paid by the bank, but have not been
recorded in your client’s books
9. The bank has charged $200 for bank fees (this has not been recorded in your client’s day book
Required: Reconcile the statement with cash book
PAGE 96
F3 - FINANCIAL ACCOUNTING
Question 8: You are preparing accounts for Sylvia Avery for the year to 30 November 20X2. At that date,
the bank current account in Sylvia’s nominal ledger had a credit balance of $15,503, while the bank
statement shows cash at bank of $3,628
You have obtained the following information from an examination of Sylvia’s records:
1. A cheque paid to a supplier for $4,595 has been recorded in the nominal ledger as $5,495.
2. Cheques written by Sylvia in November totaling $22,865 were presented at the bank in
December
3. A lodgment for $5,634 made on 29 November was credited on the bank statement on 2
December
4. A customer’s cheque for $400 which had been lodged on 18 November was not honoured by
drawer’s bank. Sylvia’s bank had debited the cheque on her statement on 25 November
5. Standing orders with a total value of $3,600 had been debited on the bank statement during the
year but had not been included in Sylvia’s records
6. Included on the current account statement is a lodgment for $5,000. This should have been
credited to Sylvia’s deposit account
Required: Reconcile the statement with cash book
Question 9: Wilson is preparing his bank reconciliation at 31 May 20X5.His Bank statement shows a
balance of $228 cash at the bank. The balance on the bank account in his general ledger is $113 (credit)
He has noted the following reasons for the difference:
1. Cheque number 958602 was incorrectly recorded in Wilson’s cash book as $760.The cheque was
correctly debited on the bank statement on 2 May as $670
2. Bank charges of $428 were debited by the bank on 4 May
3. A customer’s cheque for $320 was returned by Wilson’s bank in May as the customer had
insufficient funds in his account. Wilson has not recorded the return of the cheque in his records
4. The bank has incorrectly credited Wilson’s account with interest of $220.This is interest on a
deposit account held by Wilson personally. The bank had not corrected the error by 31 May
5. A lodgment of $850 entered in Wilson’s cash book on 31 May was credited on the bank
statement on 3 June
6. Five cheques have not yet been presented at the bank These are:
Cheque No
$
956784
625 (see note 7)
956892
326
958452
469
958541
122
958668
87
Cheque number 956784 was lost in the post and was cancelled. Wilson has not recorded the
cancellation of the cheque
Required: Reconcile the statement with general ledger
PAGE 97
F3 - FINANCIAL ACCOUNTING
Question 10
Sarah prepares a bank reconciliation statement for her business bank account at the end of each month.
At 31 May 2007 her ledger balance was $2,759 (credit) and her bank statement showed that she had
funds of $131 at the bank. She has the following information:
1. The bank debited Sarah’s account with charges of $129 during May. Sarah has not recorded the
charges
2. Sarah arranged for $2,500 to be transferred from her personal bank account into the business
bank account. The bank made the transfer on 30 May, but Sarah has not made any entry for it in
her records
3. On 22 May Sarah withdrew $100 cash which she did not record
4. Cheque number 543987 which Sarah issued to a supplier appears on the bank statement as
$650. Sarah incorrectly recorded the cheque as $560
5. On 31 May, Sarah lodged $457. This amount appears on the bank statement dated 3 June
6. Sarah was advised by the bank that she earned $52 interest for the period in May that her
account was in credit. Sarah recorded this in May, but the bank did not credit her account until
June
7. Three of the cheques issued in May, with a total value of $942, were not debited on the bank
statement until after 31 May
8. A cheque for $276, issued to a supplier was cancelled, but Sarah has not recorded the
cancellation of the cheque
Required: Reconcile the statement with general ledger
Question 11
A company’s bank statement shows an overdraft of $3,204 at 31 March 20X7. The statement includes
bank charges of $46 which have not yet been recorded in the company’s cash book. The statement does
not include cheques for $780 paid to suppliers, nor an amount of $370 received from a debtor; both of
these amounts appear in the bank statement for April 20X7.
Required: If the company prepares a balance sheet at 31 March 20X7, the figure for the bank overdraft
should be?
PAGE 98
F3 - FINANCIAL ACCOUNTING
CONTROL ACCOUNT
Question 1: You are required to prepare a sale ledger control account from the following information
for the month of November:
Sales ledger balances
23,220
Totals for November:
Sales journal
14,194
Returns inward journal
826
Cheque and cash received from customers
17,918
Discounts allowed
312
Required: Prepare the sales ledger control account
Question 2: Nathan’s books show the following details for the month of June 2000:
Sales ledger Control account balances b/f
15,000 Dr
Purchases ledger control account balances b/f
12,000 Cr
1. Purchases for month
18,000
2. Sales for month
24,000
3. Returns inwards
1,500
4. Payments to creditors
16,500
5. Receipts from debtors
23,250
6. Customer’s cheque returned unpaid by bank
750
7. Bad debts written off
450
8. Discount received
750
9. Discount allowed
800
10. Transfer of debit balances from sales ledger to purchases ledger during month 500
Required: Prepare the sales ledger control account and purchases ledger control account for the month
of June 2000
Question 3: The books of Mary Rose gave the following information for the month ended 31st May 2003.
All sales and purchases were on credit
1. Sales ledger balance at 1 May 2003
5,627
2. Purchases ledger balance at 1 May 2003
4,388
3. Sales for the year
100,384
4. Purchases for the year
64,987
5. Sales returns
1,997
6. Purchases returns
8,64
7. Payment received from debtors (all balanced)
92,760
8. Payments made to creditors
63,520
9. Debtors dishonored cheques
109
10. Discount allowed
4,082
11. Discount received
3,241
12. Bad debts written off
1,884
13. Debit balances transferred to purchases ledger control account
208
Required: Extract the relevant information from above and prepare the sales ledger control account for
the month ended 31 May 2003
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F3 - FINANCIAL ACCOUNTING
Question 4: The following information relating to sales and debtors was extracted from the books of a
firm for the month of October 1993:
1. Total debtors at 1 October 1993
1,750
2. Sales for cash
15,200
3. Sales on credit
10,800
4. Total receipt from all customers
21,450
5. Discount allowed to credit customers
450
6. Sales returns from credit customers
400
7. Bad debts written off
200
8. Increase in the provision for bad debts
300
9. Debit balance in the sales ledger set off against purchases ledger balances
80
10. Sales ledger credit balance balances at 31 October 1993
120
Required: Using the appropriate balances and information above, prepare the sales ledger control
account in the General ledger for October 1993
Question 5: The following information was obtained from the books of vale:
1 March 2002
Debtors
Creditors
9,506
2,580
20,345
7,200
200
120
19,580
250
5,170
190
210
70
155
350
60
40
64
1. Credit Sales
2. Credit purchases at list price
3. Purchases returns at list price
4. Sales returns
5. Cash and cheques received from debtors
6. Customers cheques dishonored
7. Cash and cheques paid to suppliers
8. Discount received
9. Discount allowed
10. Interest charged to customers on overdue accounts
11. Bad debts written off
12. Balance in the sales ledger set off against balance in the purchases ledger
13. Cash refunds from suppliers for overpayments
14. Debit balances in purchases ledger
15. Credit balances in sales ledger
All purchases and purchase returns were subject to a trade discount of 10% on the list price
Required: Select the appropriate balances and prepare the Purchases Ledger control account for the
month of March
PAGE 100
F3 - FINANCIAL ACCOUNTING
Question 6: The following details are available from Winston’s books for the month of May 1996:
1 May 1996
Sales ledger control account balance b/f
10,000
Purchases ledger control account balance b/f
8,000
31 May 1996
1. Purchases for month
12,000
2. Sales for month
16,000
3. Return Inwards
1,000
4. Return Outwards
400
5. Payments to creditors
11,000
6. Receipts from debtors
15,500
7. Customer’s cheque returned unpaid by bank
500
8. Bad debts written off
800
9. Discount received
550
10. Discount allowed
750
11. Transfer of debit balances from sales ledger to purchases ledger during month
400
12. Credit balances in sales ledger 31 May 1996
600
13. Debit balances in purchases ledger 31 May 1996
200
Required: prepare the Sales ledger control account and the purchases ledger control account for the
month of May 1996
Question 7: The sales ledger control account does not agree with its debtor’s ledger balance of $39,150.
The following errors were discovered:
1. A credit balance of $70 on one’s debtor account in the sales ledger has been listed as a debit
balance
2. A debit balance of $40 on another’s debtor’s account in the sales ledger had been listed as a
credit balance
3. The list of balances had been over casted by $60
The current debit balance brought down on the Debtor’s ledger account is:
a) $39,030
b) $39,060
c) $39,150
d) $39,130
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F3 - FINANCIAL ACCOUNTING
Question 8: The sales ledger balance of $29,175 did not agree with the sales ledger control account
balance. The following errors were discovered:
1. A credit balance of $80 on a debtor’s account, in the sales ledger had been listed as a debit
balance
2. A debit balance of S67 on a debtor’s account, in the sales ledger had been listed as a credit
balance
3. $220 received from a debtor had been entered in the purchases ledger, instead of the Sales
ledger
4. The list of balance had been overcast by $72
The Correct (debit) balance on the sales ledger control account is:
a) $28,857
b) $28,870
c) $29,001
d) $29,297
Question 9: Purchases ledger control account had a balance of $37,564 but this did not agree with the
purchases ledger balance listed on the same date. The following errors were discovered
1. A refund of $140 received from a credit supplier because of an over payment that had been
posted to the wrong side of the Control account
2. Returns outwards $310 had also been posted to the wrong side of the control account
3. The list of balances had been under casted by $200
4. Discounts received of $275 were not recorded in the control account
The correct credit balance on the Purchases Ledger control account is:
a) 36,948
b) 37,118
c) 37,500
d) 37,678
Question 10: Jean balanced he Purchases ledger control account on 31st May 1994 and is showed a
credit balance of $19,950. She then listed the individuals suppliers balances in the Purchases ledger and
the total came to $18,960 at the same date.
When she examined the records, the following errors were found, and corrected:
1. Goods costing $850 had been bought from North on credit, but no entries had been past in any
of the books.
2. West had allowed cash discount $20 to Jean. This had been entered on the wrong side of West’s
account but entered correctly in the cash book
3. The Purchases return day book showed that a credit note for $60 had been received from East
but it had not been posted to East’s account
4. The Purchases day book had been over cast by $1,000
5. South’s credit balance of $90 had been omitted when the Purchases ledger balances had been
listed
Required: You are required to complete the following creditor’s ledger control account balance and
to reconcile this corrected balance with the amended total of individual creditor
PAGE 102
F3 - FINANCIAL ACCOUNTING
Question 11: At 30 November 20X5 the balance on the debtors ledger control account of Andrew’s Ltd
totaled $25,390.27. Unfortunately when the individual debtor account in the sales ledger were balanced
and totaled this total came to $24,993.57. The accounts were investigated and the following errors were
discovered:
1. The account balance for P. Hull totaling $227.40 was omitted from the total of individual
debtors balances
2. An invoice for $372.19 to M Skinner was posted to the account of B Skinner in error
3. An invoice to M. Catt for $58.64 has been entered in the sales day book as $85.64
4. A debt due from J Keller of $169.30 has been written off as a bad debt in J Keller’s individual
sales ledger accounts but not in the nominal ledger
Required: You are required to complete the following debtor’s ledger control account balance and
to reconcile this corrected balance with the amended total of individual debtor
Question 12: Judith Kelly has extracted and listed the balances on her customer’s personal accounts, but
the total of the list does not agree with the balance on the receivables ledger control account in her
general ledger.
You have obtained the following information from an examination of her records:
1. The total of the list of balance is $122,409
2. The balance on the receivables ledger control account in the general ledger is $120,539
3. An account balance of $7,540 (debit) has been included in the list as $5,740 (debit)
4. Goods with value of $2,648 were returned by a customer, and a credit note was issued. The
credit note was posted to the personal account, but no other entries were made
5. A credit balance of $3,289 has been included in the list as a debit balance
6. Judith agreed to accept a payment of $9,000 in full settlement of a balance of $9,010 due by a
customer. The balance on the personal account was cleared, but the discount has not been
recorded in the nominal ledger
7. A credit balance of $500 has been omitted from the list
8. During the year, one of the Judith’s customers went into liquidation. The balance due ($ 750)
was written off as irrecoverable in the personal ledger but no entries were made in the general
ledger
Required: Reconcile the individual balances with balance of control account.
Question 13: You have been completing the year end accounts of a client and have the following data:
Total creditors balances
Per control account $42,578
Per list of balances
$44,833
1. A credit note for $372 has been received from a supplier but has not been recorded in the
Purchases Returns book
2. A credit balance of $ 2,597 has been included in the list of balances as $2,579
3. Standing order payments to a supplier totaling $3,000 have not been recorded in the cash book
4. An account with a debit balance of $700 has been included in the list of balances s a credit
balance.
5. A supplier has agreed to write off a balance of $27 as discount. The necessary entry has been
made in the suppliers account but no other entry has been made
6. An error was made in totaling the invoices in the purchases day book. Total was under cast by
$900
Required: You are required to complete the following creditor’s ledger control account balance and
to reconcile this corrected balance with the amended total of individual creditor
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F3 - FINANCIAL ACCOUNTING
Question 14: The balance on the Purchases ledger control account in Tina’s nominal ledger is $48,395.
The total of the listing of the balances in the personal ledgers is $46,644.
On checking, Tina found the following reasons for the difference:
1. A cheque for $4,300 was paid to a supplier in full settlement of an invoice for $4,320. The
discount was recorded in the personal account, but was not recorded in the nominal ledge.
2. The purchase day book total for June was over cast by $90
3. The total of cheques issued to suppliers was $78,056, but was posted to the control account as
$78,065
4. An invoice of $459 was entirely omitted from the books
5. A credit balance of $870 on a suppliers account was included to the listing as a debit balance of
$780
Required: You are required to complete the following creditor’s ledger control account balance and
to reconcile this corrected balance with the amended total of individual creditor
Question 15: Glenda balanced her purchases ledger control account on 30 September 1999 and it
showed a credit balance of $21,600. The individual suppliers balances were then listed and the totaled
$21,310
The records were examined and the following errors were found and corrected:
1. Tracey allowed prompt payment discount $30 to Glenda. This was treated as a credit entry in
Tracey’s account. It was entered correctly in the Cash Book
2. The Purchases day book was over added by $200
3. Goods costing $1150 were bought from Cullen on credit but no entries were made in any of the
books
4. Stamford’s credit balance of $150 was omitted when the suppliers balances were listed
Required: Draw up an adjusted Purchases ledger control account and reconcile the original total of
the supplier’s balances with the adjusted Purchases ledger control account balance
Question 16: The balance on the sales ledger control account at 31 December is $61,752.Ths does not
agree with the list of Debtors ledger balances on that date, which amount as $61,500.
On checking the accounts, you discover the following errors:
1. A balance of $198 has been omitted from the list of debtors ledger balances a 31 December
2. A debtor’s account has been under cast by $325
3. A sales invoice for $2,520 has been completely omitted from the books
4. Sales figure for the month should have been listed as $230,256, not 230,265
5. A debtor who owed the business $280 has been declared bankrupt. This has been correctly
entered in the control account, but no entry has been made to cancel the debt in the debtor’s
personal account
Required: Draw up an adjusted Sales ledger control account and reconcile the original total of the
customer’s balances with the adjusted Sales ledger control account balance
PAGE 104
F3 - FINANCIAL ACCOUNTING
Question 17: The total of the balances in Noel’s purchases ledger amounts to $67,660, which does not
agree with the closing balance in the control Account. The following errors were then discovered:
1. Discount received had been overstated by $1,000
2. A credit purchases invoices for $2,040 had been completely omitted from the books
3. A purchases ledger account had been understated by $100
4. A credit balance of $850 in the purchases ledger had been set off against a contra entry in
the sales ledger but no entry had been made in the control accounts
5. A payment of $1,450 had been debited to the creditor’s account but was omitted from the
bank account
6. A credit balance of $3,210 had been omitted from the list of creditors
Required: Draw up an adjusted Purchases ledger control account and reconcile the original total of
the supplier’s balances with the adjusted Purchases ledger control account balance
PAGE 105
F3 - FINANCIAL ACCOUNTING
INCOMPLETE RECORDS
Question 1:
Whackit is a sole trader. The information shown in the table is available in respect of his
accounting year ended 31 December 19X6. Whackit’s bank statements for the year show
payments to creditors of £49,100 and receipts from debtors of £78,000
What is Whackit gross profit percentage?
Opening Balance
Closing Balance
£
£
Debtors
4,350
5,300
Creditors
2,500
5,100
Stock
6,100
2,500
Question 2:
Happy’s Stock on 1 January 2015 cost £14,000 and his creditors were £3750. During the year his
sales mounted to £174,000 earning an average mark-up of 33.33% on cost. He paid £133,650 to
suppliers during the year and creditors balance at 31 December 20X5 totaled £4,900. On the
same date his shop was burgled and all his stock was stolen.
What was the cost of the stolen stock?
Question 3:
A sweet shop makes purchases of £10,124 and sales of 13,260. The proprietor’s children takes
goods costing £243 without paying for them. Closing stock was valued at its cost of £1,120 and
the gross margin achieved was a constant 30% on sales
What is the cost of the opening stock?
Question 4:
Cornucopia Ltd has a standard mark-up of 25% on cost. During 20X0, its sales were £125,000
and its purchases were £80,000. Opening stock was £35,000
The Company did not carry out a stock take at 31.12X0 and has no records of a stock figure at
that date.
Using the information above the closing stock is
PAGE 106
F3 - FINANCIAL ACCOUNTING
Question 5:
The following information relates to Sober Co
Opening trade debtors
Closing trade debtors
Cash received
Bad debts written off
£4,555
£3,835
£33,435
£985
What were credit sales of the year?
Question 6:
Opening stock is £8400 and closing stock is £3230. Purchases of the year are £20290 and the
gross profit margin is 25%
What are sales of the year?
Question 7:
Jethro sold goods for £157,470 during the year ended 31st October 20X0. Stock at that date was
valued at £8,920 more than at the previous year end. Jethro prices his goods to give a markup
of 45%. What was the total value of purchases in the year ended 31 October 20X7?
Question 8:
Emma does not keep proper accounting records. The following information relates to her
business
Cash in till at the beginning of the year £ 265
Cash in till at the end of the year
£ 345
Cash banked for the year
£ 47050
Cash takings for the year
£ 50200
What were drawings of the year?
Question 9:
Opening stock is £3100 and closing stock is £5000. Sales for the year are £35700 and these have
been achieved at a markup of 20% on cost.
What are purchases for the year to the nearest pound?
PAGE 107
F3 - FINANCIAL ACCOUNTING
Question 10:
Opening cost is £7290 and closing stock is £3380. Purchases for the year are £29065 and the
gross profit margin is 40%.
What are sales of the year?
Question 11:
The bookkeeper of Epic Ltd has disappeared. There is no cash in the till and theft is suspected. It
is known that the cash balance at the beginning of the year was £240. Since then, total sales
have amounted to £41,250. Credit customers owed £2,100 at the beginning of the year and
owe £875 now, Cheques banked from credit customers have totaled £24,290. Expenses paid
from the till receipts amount to £1,850 and cash receipts of £9,300 have been lodged in the
bank. Cash stolen will be.
Question 12:
Huxdey is a retailer whose sales are all in cash terms. During 20X6 his bank account shows cash
banked of £47,650. Which included £220 from his own private funds. Huxdey estimates that he
drew about £150 per month from the till to cover private living expenses, and he also paid
casual wages of £20 per week in cash to himself.
If the cash in the till amounted to £310 on 1 January 20X6 and £260 on 31 December 20X6,
what is Huxley’s sales figure for the year?
Question 13:
The following information relates to Walsh Ltd.
Opening trade debtors
4970
Closing trade debtors
3765
Cash received
33645
Bad debt written off
925
Cash sales for the year are
Question 14:
Which of the following formulae are correct?
o Cost of goods sold + closing stocks – opening stocks = purchases.
o Closing capital = opening capital + capital introduced + net profit of the year – drawings.
o Payments to trade creditors + opening creditors – closing creditors = credit purchases.
o Credit sales = closing debtors + payments from trade debtors – opening debtors.
o Cost goods of sold = closing stocks + purchases – opening stocks.
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F3 - FINANCIAL ACCOUNTING
Question 15:
Chloe does not keep proper accounting records. The following information relates to her
business:
Cash in till in the beginning of the year
£205
Cash in till in the end of year
£430
Cash banked for the year
£45500
Cash takings for the year
£58400
What were drawings for the year?
Question 16: How should a loss of stock by theft be recorded?
(A)
(B)
(C)
(D)
Debit
Inventory account
Profit and loss account
Suspense account
Stock account
Credit
Profit and loss account
Inventory account
Stock account
Suspense account
Question 17: At 1 April 2000 Tonkin’s business assets were Motor van valued at $5,000 (cost
$8,000), tools $1,600, stock $700, debtors $168, cash $400 and his creditors totaled $1,120.
At 31 March 2001 his assets were: Workshop which had cost $20,000 and on which a
mortgage of $16,000 was still outstanding, motor van $4,000, tools $1,900, stock
$1,000, debtors $240 (of which $70 were known to be bad), cash $500. His creditors
amounted to $800. During the year Tonkin’s drawings amounted to $5,200.
His profit for the year was
A.
$6,222
B.
$6,292
C.
$9,222
D.
$9,292
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Question 18: At 1 March 2000 Allen’s debtors amounted to $12,100. In the year to 28 February
2001 he received $63,500 from debtors and allowed them settlements discounts of $3,426.
At 28 February 2001 his debtors totaled $14,625.
Allen’s sales for the year were
A.
$62,599
B.
$64,401
C.
$66,125
D.
$69,451
Question 19: Orange limited had an opening capital of $11,260 in the year 20X0. Profit after all
expenses had been paid was $64 for the year. During the year, an amount of $20 was
withdrawn.
The company’s closing capital for 20X0 was
A.
$11,280
B.
$11,304
C.
$11,324
D.
$11,344
Question 20: The XYZ Company has taken out a fire policy for $10,000 covering its stock-intrade. A fire occurs on 30 September and stock was destroyed with the exception of $2,000
worth. No records could be saved but the following is known.
Opening Stock 1 July 1990
Purchases to-date of fire
Sales to-date of fire
Average Gross Profit on sales
$
12,000
14,000
24,000
25%
The amount of claim XYZ Company can make to the insurance company is
A.
$2,000
B.
$6,000
C.
$8,000
D.
$10,000
Question 21: Given opening debtors $1,628, cash from debtors $8,162, discount allowed $315,
bad debts $420, closing debtors $1,860
Credit sales would be
A.
$1,860
B.
$8,162
C.
$9,129
D.
$10,757
PAGE 110
F3 - FINANCIAL ACCOUNTING
Question 22: Jackson commenced business with $10,000 he had received as a gift from his aunt
and $8,000 he had received as a loan from his father. He used some of this money to purchase
a machine for $15,000. He obtained a mortgage for $20,000 to purchase a workshop.
Jackson’s capital was
A.
$3,000
B.
$10,000
C.
$18,000
D.
$38,000
Question 23: If the mark up were 25%, the margin as a percentage of sales prices would be
A.
17%
B.
20%
C.
25%
D.
33%
Question 24: A business sells good earning a constant 25% mark up. Sales in the period
amounted to $500,000. Opening stock was $10,000, closing stock was valued at $20,000.
Purchases were $450,000. The owner suspects theft.
Calculate the amount of the stock losses.
A.
$40,000
B.
$50,000
C.
$60,000
D.
$65,000
Question 25: At 1 January 2001 Robert’s business assets were valued at $36,000 and his
liabilities amounted to $2,400. At 31 December 2001, Robert’s assets amounted to $57,000 and
included his private car which he had brought into the business on 1 November when it was
valued at $9,000. His creditors at 31 December totaled $17,000 and his drawings during the
year were $27,000.
Robert’s profit for the year to 31 December 2001 was
A.
$6,400
B.
$24,400
C.
$33,400
D.
$58,000
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F3 - FINANCIAL ACCOUNTING
Stock Valuation
Question 1: A company has following data
Opening stock
=
$20,000
Purchases
=
$12,000
Sales
=
$15,000
Purchase return
=
$500
Sales Return
=
$200
Stock Drawings
=
$600
Markup
=
30%
Required: Closing Stock
Question 2: A company has following data
Opening stock
=
$15,000
Purchases
=
$7,000
Sales
=
$9,000
Sales Return
=
$400
Stock Damage
=
$1200
Markup
=
17%
Required: Closing Stock
Question 3: A company has following data
Stock on 1st April 2015
=
Purchases during 15/16
=
Sales during 15/16
=
Purchase Return during 15/16
=
Stock Stolen
=
Markup
=
Required: Closing Stock & Profit
$70,000
$15,000
$9,000
$300
$600
20%
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F3 - FINANCIAL ACCOUNTING
Question 4: A company has following data
Sales
=
Purchases
=
Opening Stock
=
Purchase Return
=
Stock Destroyed
=
Electricity Expense
=
Insurance income against stock
=
Margin
=
Required: Net profit
$70,000
$150,000
$6,000
$900
$700
$300
$700
18%
Question 5: A company has following data
Sales
=
Purchases
=
Closing Stock
=
Sales Return
=
Stock Damage
=
Markup
=
Required: Opening Stock Net profit
$200,000
$60,000
$25,000
$1,500
$2,000
25%
Question 6: A company has following data
Sales
=
Purchases
=
Closing Stock
=
Purchase Return
=
Stock Drawing
=
Margin
=
Required: Opening Stock Net profit
$90,000
$28,000
$17,000
$2,400
$2,000
15%
Question 7: At 30 June 20X2 Dilip’s inventory was valued at its cost of 45,000. This include
items costing $2,600 which have since been superseded by an updated design. Dilip will be able
to sell these items through an agent for $1,400. The agent’s commission will be 10% of selling
price
Required: what was the correct value of closing inventory at 30 June 20X2?
Question 8: Lavinia valued her inventory at 31 December 20X2 at its cost of $11,480. This
includes some items which cost $975 which have been hard to sell. Lavinia intends to have
these items repacked at a cost of $225. This will allow her to sell them for $450.
Required: What was the correct value of closing inventory at 31 December 20X2?
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F3 - FINANCIAL ACCOUNTING
Question 9: Mr. Alpha inventory includes an item which cost $3,500. This item is getting
difficult to sell and Mr. Alpha think he will be able to sell it for $5,000 through agent who will
charge 10% commission. Value of inventory at year end is $27,000.
Required: Calculate revised value of closing stock
Question 10: During May 20X7, Sarah’s purchases were $126,500 and her sales were $150,000.
Sarah’s gross profit was 20% of sales. The value of her inventory at 1 May 20X7 was $12,500.
Required: what was the value of Sarah’s inventory at 31 May 20X7?
Question 11: Jaya started trading a year ago, selling knitwear she makes with her team of three
other knitters. She sells her sweaters at a markup of 35%. In the first year of trading, she bought
wool for her sweaters costing $4,875. Sales in the year were $5,670.
Required: what was the value of Jaya’s closing inventory of wool for sweaters.
Question 12: Scarlett is preparing the final accounts for a business. The cost of the items in
closing inventory is $41,875. This includes some items which cost $1,960 and which were
damaged in-transit. She has estimated that it will cost $360 to repair the items, and that they
can then be sold for $1,200.
Required: What is the correct inventory valuation for inclusion in the final accounts?
Question 13: Harminder’s shoe business had opening inventory of $2,050 at 1 January 20X5.His
closing inventory at 31 December 20X5 was valued at $1,570. Sales for the year totaled
$25,730. Harminder makes a markup of 25% on cost of all shoes he sells
Required: What was the cost of Harminder’s purchases during the year?
Question 14: Jay opened a bike shop last year. He sells his products at a markup of 35%. In the
first year of trading, he bought goods for $73,700. His sales in the year were $85,900
Required: What is the value of Jay’s closing inventory?
Question 15: During the year to 30 November 20 X5, Amanda bought goods for resale at a cost
of $75,550. Her inventory at 1 December 20X4 was valued at $15,740. She did not count her
inventory at 30 November 20X5, but she knows that her sales for the year to 30 November
20X5 were $91,800. All sales were made at a markup of 20%
Required: Based on the information above, what was the value of Amanda’s inventory at 30
November 200X5?
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F3 - FINANCIAL ACCOUNTING
VALUE ADDED TAX
Question 1: Transaction during the year:
Sales
500,000 (Exclusive VAT)
Purchases
300,000 (Inclusive VAT)
VAT
20%
st
VAT Liability at 1 Jan 08
20,000
During the year Mr.X paid 25,000 to tax authority
Required: VAT Liability at 31Dec 08
Question 2: Transaction during the year:
Sales
400,000 (Inclusive VAT)
Purchases
250,000 (Exclusive VAT)
VAT
20%
st
VAT Liability at 1 Jan 08
20,000
During the year Mr. X paid 30,000 to tax authority
Required: VAT Liability at 31 Dec 08
Question 3: Transaction during the year:
Sales
400,000 (Exclusive VAT)
Purchases
320,000 (Inclusive VAT)
VAT
20%
st
VAT Liability at 1 Jan 08
30,000
During the year Mr.X paid 15,000 to tax authority
Required: VAT Liability at 31Dec 08
Question 4: Transaction during the year:
Sales
480,000 (Inclusive VAT)
Purchases
400,000 (Exclusive VAT)
VAT
20%
st
VAT Liability at 1 Jan 08
60,000
During the year Mr.X paid 20,000 to tax authority
Required: VAT Liability at 31Dec 08
Question 5: A Co. has following data:
Opening balance
1000 (Dr)
Sales
50,000 (Exclusive VAT)
Purchases
70,000 (Inclusive VAT)
A car was purchased worth
50,000 (Exclusive VAT)
Another car was purchased
10,000 (Inclusive VAT)
During the year VAT refund of 700 was received
Required: VAT Payable/ Receivable?
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F3 - FINANCIAL ACCOUNTING
Question 6: A Co. has following data:
Opening balance
500 (Cr)
Sales
70,000 (Inclusive VAT)
Purchases
30,000 (Inclusive VAT)
A car was purchased worth 6,000 (Exclusive VAT)
Another car was purchased 7,000 (Exclusive VAT)
During the year VAT was paid 500
Required: VAT Payable/ Receivable?
Question 7: Transaction during the year:
Sales
500,000 (Exclusive)
Sales Return
30,000 (Inclusive)
Purchases
380,000 (Exclusive)
Purchase Return
15,000 (Inclusive)
VAT
20%
st
VAT Liability at 1 Jan 08
40,000
During the year Mr. X paid 30,000 to tax authority
Required: VAT Liability at 31Dec 08
Question 8: Transaction during the year:
Sales
20,000 (Inclusive)
Sales Return
1,000 (Exclusive)
Purchases
24,000 (Inclusive)
Purchase Return
3,200 (Inclusive)
VAT
20%
st
VAT Liability at 1 Jan 08
12,000
During the year Mr. X paid 6,000 to tax authority
Required: VAT Liability at 31Dec 08
Question 9
Selling price
Trade Discount
Cash Discount
VAT %
Required: VAT?
=
=
=
=
1000
20%
5%
20%
Question 10
Selling price
Trade Discount
Cash Discount
VAT %
Required: VAT?
=
=
=
=
2500
10%
3%
20%
PAGE 116
F3 - FINANCIAL ACCOUNTING
Question 11
Selling price
=
2500
Trade Discount =
10%
Cash Discount =
3%
VAT %
=
20%
Required: VAT?
PAGE 117
F3 - FINANCIAL ACCOUNTING
ACCRUALS & PREPAYMENTS:
Question 1: Company hired an employee on 1st July 2014 at an annual salary of 36,000 payable yearly in
accruals.
Required: If Company year−end is 30th September then calculate amount of expense for the year ended
30th September 2014.
Question 2: Company hired an employee on 1st May 2014 at an annual salary of 36,000 payable yearly in
accruals.
Required: If Company year−end is 30th November then calculate amount of expense for the year ended
30th November 2014.
Question 3: Company hired an employee on 1st February 2012 at an annual salary of 36,000. Salary of
Employee was increased to 45,000 per year from 1st June 2015.
Required: If Company year−end is 30th September then calculate amount of expense for the year ended
30th September 2015.
Question 4: Company signed an insurance policy on 1st July 2015 at a premium of 25,000 per year. This
premium will increase by 10% each year.
Required: Calculate Insurance Expense for the year ended 31st December 2016
Question 5: Company signed a rental agreement on 1st February 2014 for rent of 42,000 per year
payable in advance.
Required: Calculate Rent payable ƒ receivable and Rent Expense for the year ended 30th June 2014.
Question 6: Company signed an Insurance agreement on 1st March 2015 at a premium of 23,000
payables in advance each year. Insurance premium will increase each year by 15%.
Required: Calculate Insurance payable ƒ receivable and Insurance Expense for the year ended 30th June
2016.
Question 7: Company signed a Rent agreement on 1st May 2015 at a rent of 35,000 payables in accrual each
year. Rent will increase each year by 20%.
Required: Calculate Rent payable ƒ receivable and Rent Expense for the year ended 30th September
2016.
Question 8: Company pays its rent quarterly in advance starting from 1st July. Rent Expense for the year
is 76,000.
Required: What will be the rent receivable ƒ payable for the year ended 31st May 2015?
Question 9: Company signed an Insurance agreement on 1st June 2014 for a premium of 22,000 per year.
Premium will increase by 10% year. Premium will be paid quarterly in accruals.
Required: What will be Insurance Expense and Receivable ƒ Payable for the year ended 30th September
2015.
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F3 - FINANCIAL ACCOUNTING
Question 10: Company signed a Rent agreement on 1st April 2013 for 42,000 per half year. Rent will
increase by 8% year. Rent will be paid quarterly in accruals.
Required: What will be Rent Expense and Receivable ƒ Payable for the year ended 31st July 2014.
Question 11: Company hired an employee on 1st April 2014 for 12,000 per month. Salary will increase by
17% year. Salary will be paid on 30th of every month.
Required: What will be Salary Expense and Receivable ƒ Payable for the year ended 31st May 2015.
Question 12: Company hired an employee on 1st August 2012 for 46,000 per quarter. Salary will increase
by 30% half year. Salary will be paid on 30th of every month.
Required: What will be Salary Expense and Receivable ƒ Payable for the year ended 31st April 2014.
Question 13: Company hired an employee on 1st November 2014 for 3,000 per month. Salary will
increase by 5% year. Salary will be paid on 1st of next month.
Required: What will be Salary Expense and Receivable ƒ Payable for the year ended 31st May 2016.
Question 14: Company hired an employee on 1st December 2012 for 25,000 per quarter. Salary will
increase by 15% year. Salary will be paid on 1st of next month.
Required: What will be Salary Expense and Receivable ƒ Payable for the year ended 31st January 2014.
Question 15: Business started on 1 Jan 20X0. Rental agreement started on 1 March 20X0. Annual rent is
$50,000. Rent is received quarterly in arrears i.e. on 1 June, 1 Sep, 1 Dec and on 1 Mar.
Required: What will be Rental income and Accrual ƒ Prepayment for the year ended 31st December 20X0?
Question 16: Business let a property on 1st March 2004 at annual rent of 47,000. Rent is received
quarterly in advance.
Required: What will be Rent Income and receivable ƒ payable at year ended 31 December 2004.
MCQS – Accruals and Prepayment
1.
Sybil’s financial year ended on 30 November 20X2. The last invoice paid for telephone
calls was for 1800 this invoice covered the three months to 31 October 20X2.
What adjustment is required when preparing the accounts for the year to 30 November 20X2?
A.
B.
C.
D.
A prepayment of $600
A prepayment of $1,200
An accrual of $600
An accrual of $1,200
The following information relates to questions 2 and 3.
A company pays an annual insurance premium. On 1 September 20X7 it paid $6,000 for the 12 months
ended 31 August 20X8. On 1 September 20X8 it paid $7,200 for the 12 months ended 31 August 20X9.
2.
What is the cost of insurance for the year ended 31 December 20x8?
PAGE 119
F3 - FINANCIAL ACCOUNTING
3.
A.
B.
C.
D.
What will appear in the company’s balance sheet as at 31 December 20x8 in respect of
insurance?
Accrual $2,400
Accrual $4,800
Prepayment $2,400
Prepayment $4,800
4.
The rent account for a business is as follows:
$
$
1ƒ1X5
1ƒ2ƒX5
1ƒ5ƒX5
Bal bƒd
Bank
Bank
1,000
3,000
3,000
1ƒ11ƒX5
ƒ11ƒX5
Bank
Bank
1ƒ11ƒX5
Bal bƒd
3,600
3,600
14,200
1,200
31ƒ12ƒx5
Income
13,000
Statement 31ƒ12ƒX5
Bal cƒd
1,200
14,200
A.
B.
C.
D.
Cash paid $13,000 charge for year $13,200
Cash paid $13,000 charge for year $13,000
Cash paid $13,200 charge for year $13,000
Cash paid $13,200 charge for year $13,200
5.
A business compiling its accounts for the year to 31 January each year. Pays rent
quarterly in advance on 1January, 1 April, 1 July and 1October each year. After
remaining unchanged for some years, the rent was increased from $24,000 per year to
$30,000 per year as from 1 July 20X3.
What is the rent expense that should appear in the income statement for the year ended 31 January
20X4_______?
6.
A.
B.
C.
D.
On 1 may 20X3. Blister Ltd. pays a rent bill of $1,800 for the period to 30 April 20X4.
What are the charge to the income statement and the entry in the balance sheet for
the year ended 30 November 20X3?
$1,050 charge to income statement and prepayment of $750 in the balance sheet.
$1,050 charge to income statement and accrual of $750 in the balance sheet
$1,800 charge to income statement and no entry in the balance sheet
$750 charge to income statement and prepayment of $1,050 in the balance sheet
PAGE 120
F3 - FINANCIAL ACCOUNTING
7.
On 1 June 20x2, H paid an invoice of $2,400 for the year to 31 May 20x3.
What is the charge to the income statement and the entry in the balance sheet for the year ended 31 Dec 20x2?
A.
B.
C.
D.
$1,000 income statement and prepayment of $1,400
$1,400 income statement and accrual of $1,000
$1,400 income statement and prepayment of $1,000
$2,400 income statement and no entry in the balance sheet
8.
The electricity account for the year ended 30 June 20x3 was as follows.
$
Opening balance for electricity accrued 1 July 20X2
Payments made during the year:
1 August 20X2 for three month to 31 July 20X2
1 November 20X2 for three month to 31 October 20X2
1 February 20X3 for three months to 31 January 20X3
30 June 20X3 for three months to 30 April 20X3
300
600
720
900
840
Which of the following is the appropriate entry for electricity?
Accrued at
charged for P&L for year
June 20x3
Ended 30 June 20X3
A.
B.
C.
D.
$Nil
$460
$560
$460
$3,060
$3,320
$3,320
$3,320
9.
At 31 March 20X3 accrued rent payable was $300. During the ended 31 March 20X4,
rent paid was $4000, including an invoice for $1,200 for the quarter ended 30 April
20X4.
What is the income statement charge for rent payable for the year ended 31 March 20X4?
A.
$3,300
B.
$3,900
C.
$4,100
D.
$4,700
10.
The annual insurance premium for S Ltd. For the period 1 July 20x3 to 30 June 20X4 is
$13,200,
This is 10% more than the previous year. Insurance premiums are paid on 1 July.
What is the income statement charge for insurance for the year ended 31 December 20x3_______?
PAGE 121
F3 - FINANCIAL ACCOUNTING
11.
Arlene has paid $5,520 for rent the six-month period to 31 August 20X1.
What accrual or prepayment is required when preparing account for the year ended 30 June 20X1?
A.
B.
C.
D.
A prepayment of $920
A prepayment of $1,840
An accrual of $920
An accrual of $1,840
12.
The last invoice Arlene received for electricity was for $1,950 and covered the threemonth period to 31 May 20x1.
What accrual or prepayment is required when preparing accounts for the year ended 30 June 20x1?
A.
B.
C.
D.
13.
A prepayment of$1,950
A prepayment of $650
An accrual of $1,950
An accrual of $650
The last electricity bill received by Graham was for the three-month period to 30
September 20X1. This bill was for $2,100
What accrual or prepayment is required when preparing the accounts for the year to 30 November 20X1?
A.
B.
C.
D.
A prepayment of $700
A prepayment of $1,400
An accrual of $700
An accrual of $1,400
14.
Jennifer is preparing year end account and she has to deal with a prepayment for rent.
Which of the following statement is correct?
A.
B.
C.
D.
The prepayment will increase the charge to the income statement
The prepayment will reduce the charge to the income statement
The prepayment has no effect on the income statement
The prepayment will only affect the income statement
15.
When preparing his draft accounts, Ralph included $1,400 as an accrual for rent for two
months. However, he should have provided for only one month’s rent.
How will Ralph’s current liabilities be affected when he adjusts the accrual?
A.
B.
C.
D.
Reduced by $1,400
Increased by $1,400
Reduced by $700
Increased by $700
PAGE 122
F3 - FINANCIAL ACCOUNTING
16.
Un−expired insurance brought forward from the last year is $60, insurance paid for
current year is $500, whereas insurance paid in advance for next year $80.
What is the amount of insurance to be shown in Profit and Loss account of current year?
A.
B.
C.
D.
17.
$480
$500
$520
$560
Rent expense for a year was $4 000, $200 was prepaid at the year start and $400 owed
at the year−end.
What was the cash book figure for rent paid?
A.
B.
C.
D.
$3 400
$3 800
$4 000
$4 600
18.
Rent is paid by a business in advance on the last day of each month for the coming
month. The payments during the financial year have been as follows:
Up to and including 31 August $500 per month. From 30 September $600 per month.
What amount will appear in the accounts for the year ended 30 November?
A.
B.
C.
D.
19.
P&L account expenses
$6 200
$6 200
$6 300
$6 300
Balance Sheet
$600 prepaid
No effect
$600 prepaid
No effect
Rent is paid by a business monthly in advance on the first day of each month. The
payments during this financial year have been as follows:
Up to and including 1 June
$500 per month
from 1 July thereafter
$600 per month
What amount(s) will appear in the accounts for the year ended 31 October?
A.
B.
C.
D.
P & L account expenses
$6 400
$6 400
$6 400
$7 000
Balance Sheet
$600 prepayment
$600 accrual
−−
−−
PAGE 123
F3 - FINANCIAL ACCOUNTING
20.
A sole trader’s year−end is 31 December. Rent is paid in arrears. Until 30 April 1998, the
rent was $240 per month.
This was increased to $270 per month from 1 May 1998.
What is the sole trader’s rent payable for the year ending 31 December 1998?
A.
B.
C.
D.
$2 880
$3 120
$3 150
$3 240
21.
The table shows opening and closing Rent Receivable Account balances.
Start of year
End of year
$
$
Rent received in advance
4 200
1 600
Rent due in arears
2 000
2 400
During the year, $111 000 rental income was received.
What is the total rent receivable for the year?
A.
B.
C.
D.
$110 600
$111 000
$112 800
$114 000
22.
A business paid $15 000 for electricity in the year. The closing accrual was $2 000 and
the opening prepayment was $1 000.
What is the charge for electricity for that year?
A.
B.
C.
D.
$15 000
$16 000
$17 000
$18 000
23.
X Ltd rents its building to Y Ltd,
At 31 December 1998, Y Ltd owed $4 500 for rent, but at 31 December 1999 he paid $3 200 in
advance. During the year X Ltd had received $17 100 in rental from Y Ltd.
What is the rental income to be shown in X LTD’s Profit and Loss account for the year ended 31
December 1999?
A.
B.
C.
D.
$9 400
$15 800
$18 400
$24 800
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F3 - FINANCIAL ACCOUNTING
24.
A tenant pays annual rent of $6 000. Payment is made quarterly in advance on 1
January, 1 April, 1 July and 1 October.
Which of the following should be included in his accounts for the year ended 31 October 2001?
A.
B.
C.
D.
$500 accrual
$500 prepayment
$1 000 accrual
$1 000 prepayment
25.
A company’s accounting year−end is 31 December. It always pays its insurance
premiums annually, in advance, on the due date 1 September.
1.
2.
3.
During the last few years the following premiums have been paid:
$2 400
$2 760
$3 840
What will be the charge for insurance in the company’s Profit and Loss Account for Year 3?
A.
B.
C.
D.
$2 760
$3 120
$3 480
$3 840
26.
At the end of year 1 a company had a debit balance of $760 on its Rent Payable account.
Payments for rent in year 2 totaled $10 600 and at the end of the year rent prepaid was
$1 290.
How much rent was charged against profit in year 2?
A.
B.
C.
D.
$8 550
$10 070
$10 600
$11 130
27.
The table gives data about rental income for the year ended 31 March 2003.
$
1 400
Rents owing 31 March 2002
Rents received in advance 31 March 2002
1 300
Cash received
13 700
Rents written off
560
Rents owing at 31 March 2003
1 750
Rents paid in advance at 31 March 2003
1 600
What figure for rental income will appear in the Profit and Loss Account for the year ended 31 March 2003?
A.
B.
C.
D.
$14 010
$14 210
$14 310
$14 510
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F3 - FINANCIAL ACCOUNTING
Question#28:
Barley Print Shop:
The Barley Print Shop rents a photocopying machine from a supplier for which it makes a quarterly
payment as follows:
(a) Three months’ rental in advance
(b) A further charge of 2 cents per copy made during the quarter just ended
The rental agreement began on 1 August 20X1 and the first six quarterly bills were as follows.
Bills dated and received
Rental
Costs of copies taken
Total
$
$
$
1 August 20X1
2,100
0
2,100
1 November 20X1
2,100
1,500
3,600
1 February 20X2
2,100
1,400
3,500
1 May 20X2
2,100
1,800
3,900
1 August 20X2
2,700
1,650
4,350
1 November 20X2
2,700
1,950
4,650
The bills are paid promptly, as soon as they are received.
(a) Calculate the charge for photocopying expenses for the year to 31 August 20X1 and the amount of
prepayments and/or accrued charges as at that date.
(b) Calculate the charge for photocopying expenses for the following year to 31 August 20X2, and the
amount of prepayments and/or accrued charges as at that date.
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F3 - FINANCIAL ACCOUNTING
Errors & Suspense Account:
Question#1:
The sale of a machine $300 is entered in Sales account instead of a Machinery disposal account.
This is an example of
A.
Complete reversal of entry
B.
Error of principle
C.
Error of original entry
D.
Error of commission
Question#2:
Error which affects one account, can be
A.
Error of commission
B.
Error of posting
C.
Error of principle
D.
Error of original entry
Question#3:
$5 has been taken to the debit of the account of T. Lim instead of to the debit of L. Ong
The trail Balance as a result would:
A.
B.
C.
D.
Still agree
Disagree
Be overstated
Be understated
Question#4:
Mr. Lim’s closing Stock had been undervalued by $200. Which of the following would be the journal entry
to correct the mistake?
$
A.
B.
C.
D.
Stock
Suspense account
Suspense account
Stock
Stock
Income Statement
Income Statement
Stock
$
200
200
200
200
200
200
200
200
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F3 - FINANCIAL ACCOUNTING
Question#5:
Given net profit as per draft accounts $1700, sales understated $170 profit on machine disposal
$600 not recorded rent received treated as an expense $1900 and rates expense understated
$150
The adjusted net profit will be:
A. $5550
B.$6 000
C.$6 120
D.$7 120
Question#6:
After preparing the trail balance, it was found that debtors totaling $2 000 were overstated and Rent
received was understated by $500. A suspense account is opened to complete the trail balance.
What is the balance on suspense account?
A.$ 1 500 DR
B.$ 1 500 CR
C.$ 2 500 DR
D.$ 2 500 CR
Question#7:
If sales return of $1 000 were incorrectly included in sales.
Gross profit would be
A.
B.
C.
D.
Overstated by $1 000
Understated by $1 000
Overstated by $2 000
Understated by $2 000
Question#8:
Which of the following error would not cause a trial balance difference?
A.
B.
C.
D.
Cash sales $100 recorded as debit sales account $100, credit cash amount $100
An expense account incorrectly balanced off
Purchase of goods from K. khan $730 recorded in the purchase ledger account only
Debtor balance of $500 omitted from trail balance
Question#9:
A trial balance will not disclose an error, which involves
A.
B.
C.
D.
Debiting an expense item to a prepaid expense account
Posting a credit entry in the general journal to the debit side of the account in the ledger
Extracting an account balance wrongly from the ledger
Omitting an item when casting the debit column of the trail balance
Question#10:
A trail balance fails to agree. The debit exceeds the credits Which single error in the nominal ledger would
cause the difference?
A. A contra between the debtors and creditors ledgers has been entered on the credit side of
both control accounts
B. A rental receipt has been entered twice in the rent receivable account
C. The closing stock for the previous period has not been entered in the stock account
D. The opening electricity accrual has been brought forward on the wrong side of the ledger
account
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F3 - FINANCIAL ACCOUNTING
Question#11:
Sales returns of $400 have been credited to the debtors account as $40. A suspense account is created to
complete the trail balance.
What is the balance on the Suspense Account?
A.
B.
C.
D.
$40 DR
$40 CR
$360 DR
$360 CR
Question#12:
The directors of a company are finishing the accounts for the year ended 30 June 1997. They discover that the
stock at 1 July 1996 was over−valued by $50 000.
What is the effect of correcting this error in the accounts?
A.
B.
C.
D.
Net profit for 30 June 1997
Decrease
Decrease
Increase
Increase
Net profit of June 1996
Decrease
Increase
Decrease
Increase
Question#13:
A company discovers that its opening stock was over−valued by $30 000. This amount is considered to be
significant.
Which effects will the correction of this error have on the financial statements for the year?
A.
B.
C.
D.
Net Profit
− $30 000
Nil
+ $30 000
+ $30 000
Retained profit brought forward
− $30 000
− $30 000
− $30 000
− $30 000
Closing Stock
Nil
− $30 000
Nil
− $30 000
Question#14:
A Company’s trail balance shows debit balances in excess of credit balances by $1 000.4
What could explain this?
A.
Cash overstated by $540
Omission of the telephone account totaling $460
B.
C.
D.
Creditors control account overstated by $450 Debtors
control account understated by $550
Omission of accumulated depreciation of $500 Sales
understated by $500
Purchases understated by $500 in the nominal ledger Omission
of sales invoices totaling $500
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F3 - FINANCIAL ACCOUNTING
Question#15:
When preparing the final accounts for the year; the following errors are discovered.
1.
2.
3.
4.
Sales day book was understated by $300
No provision had been made for accrued overtime costs, $200
No account had been taken of prepaid rent, $400
The draft net figure is $8 050.
What will be the net profit when the errors are connected?
A.
$8 150
B.
C.
D.
$8 550
$8 750
$8 950
Question#16:
An electricity accrual of $375 was treated as a prepayment in preparing a trader’s Profit & Loss account.
What was the effect on Profit?
A.
B.
C.
D.
Overstated by $375
Overstated by $750
Understated by $375
Understated by $750
Question#17:
Motor vehicles purchased for $530 000 at the start of the year have been incorrectly depreciated for the
whole year using the straight line method at 10% instead of 25%
Ledger balances after the entries have been posted:
Motor vehicles
Provision for depreciation
$530 000
$53 000
Which entries will correct the error?
A.
B.
C.
D.
Debit profit & loss $79 500; credit provision for depreciation of motor vehicles $79 500
Debit profit & loss $132 500; credit provision for depreciation of motor vehicles$132 500
Debit provision for depreciation of motor vehicles $79 500; credit profit & loss $79 500
Debit provision for depreciation of motor vehicles $132 500; credit profit & loss $132 500
Question#18:
A trail balance failed to agree and the difference was entered in a Suspense Account. A credit balance of $1
530 in the Sales Ledger had been wrongly extracted as a debit balance.
Which journal entry will correct this error?
A.
B.
C.
D.
Debit
Suspense
Suspense
Suspense
Sales
Credit
$3 060
$1 530
$3 060
$3 060
Sales
Sales
Suspense
PAGE 130
S1 530
$3 060
$3 060
F3 - FINANCIAL ACCOUNTING
Question#19:
An extract from a trail balance is shown.
Trade debtors
Provision for doubtful debts
Finished goods stock
Debit ($)
2,700 000
Credit ($)
135 000
3 500 000
The following adjustments are needed:
The provision for doubtful debts is to be 4% of book value of debtors. Finished goods stock
costing $50 000 is found to be un−saleable.
What is the effect of these changes on the net profit?
A.
B.
C.
D.
Decrease by $23 000
Increase by $23 000
Decrease by $77 000
Increase by $77 000
Question#20:
The difference on a trail balance is entered in a suspense account. It is discovered that a discount received
has been debited to the discount allowed account.
Which journal entry corrects the error?
A.
B.
C.
D.
DR
CR
DR
Discount received Amount
suspense account
Suspense account
CR
Discount allowed account
DR
Discount allowed account
DR
CR
Discount received account
Suspense account
DR
Suspense account
CR
CR
Question#21:
Discount allowed account
Discount Received account
A company’s account showed a gross profit of $84 200. It was found that the opening stock had been
overstated by $4 200 and that the closing stock had been understated by $3 700.
What is the corrected gross profit?
A.
$78 300
B.
$83 800
C.
$84 700
D.
$92 100
Question#22:
The difference on a trial balance has been entered in a suspense account. A receipt of $2 500 from a debtor
has been debited to the sales account and credited to the bank account.
Which journal entry is necessary to correct the error?
A.
B.
C.
D.
Debit
Bank account
Sales account
Suspense account
Suspense account
$5 000
$5 000
$10 000
$5 000
Credit
Sales account $5 000
Debtors account
$5 000
Bank account
$10 000
Bank account
$5 000
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Question#23:
After draft account had been prepared, the following errors were discovered.
Opening stock was overvalued by $2 000
Closing stock was undervalued by $3 000
If the original gross profit was $90 000, what was the gross profit after the errors were corrected?
A.$85 000
B.$89 000
C.$91 000
D.$95 000
Question#24:
The draft account of a business shows a net profit of $64 000 before taking account of the following.
1. The reduction of the provision for doubtful debts by $300
2. The purchase of office stationary costing $2 400 which has not been entered in the records;
only one sixth of this stationary was used by the year−end.
What is the corrected net profit?
A.$64 300
B.$64 100
C.$63 900
D.$61 900
Question#25:
The final account of John Gates contains two errors. The closing stock in trade has been overvalued by
$6 000 and an uninsured theft of stock costing $9 000 has not been taken into account.
What effects will correction of these errors have on John Gates accounts?
A.
B.
C.
D.
Gross Profit
Reduced by $6 000
Reduced by $3 000
Increased by $3 000
Increased by $6 000
Net Profit
Increased by $3 000
Reduced by $3 000
Reduced by $6 000
Increased by $6 000
Question#26:
A trail balance has been prepared. It does not balance so suspense is opened. Later several errors are found.
One involves the Rent Payable Account when $234 paid in advance from the previous year has been brought
forward at the start of the current year on the wrong side of the account and as $324.
Which journal entry will correct the situation?
A.
B.
C.
D.
Debit
Rent payable
Suspense
Suspense
Rent payable
$90
$90
$558
$558
Credit
Suspense
Rent payable
Rent payable
Suspense
PAGE 132
$90
$90
$558
$558
F3 - FINANCIAL ACCOUNTING
Question#27:
The trail balance of a business does not agree. The difference has been entered in a suspense account. The
error was caused by a cheque for $400 from Omar being debited to Omar’s account.
What is the journal entry to correct this?
A.
B.
C.
D.
Debit
Bank account
Suspense account
Suspense account
Suspense account
Credit
Suspense account
Omar’s account
Omar’s account
Bank account
with
$400
$400
$800
$800
Question#28:
A transport business owned by a sole proprietor purchases a motor vehicle. This is charged to the motor
vehicles Running cost account.
What are the effects of this on the end-of-year Balance Sheet?
A.
B.
C.
D.
Fixed assets understated
Fixed assets overstated
Fixed assets overstated
Fixed assets understated
Current assets understated
Current assets overstated
Capital account overstated
Capital account understated
Question#29:
A company’s account showed a gross profit for the year of $32 500. After the accounts were prepared it was
found that the opening stock had been overstated by $2400 and the closing stock had been understated by
$3 400.
What is the corrected gross profit of the year?
A.$26 700
B.$31 500
C.$33 500
D.$38 300
Question#30:
A trial balance does not balance and suspense account is opened.
Subsequently the following errors are found and the suspense account is cleared
1. A sales invoice for $1 240 had been omitted from the books.
2. Rent paid of $2 600 was entered correctly in the cash book but incorrectly as $6 200 in the
Rent account.
3. The purchases journal was under cast by $1 980
What was the original balance on the suspense account?
A.
$1 620 credit
B.
$4 340 debit
C.
$5 580 credit
D.
$5 580 debit
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F3 - FINANCIAL ACCOUNTING
Question#31:
Which of the following would prevent a trial balance from balancing?
A.
A credit notes from a supplier entered in the sales journal
B.
A discount allowed posted to the discount received account
C.
An invoice entered twice in the sales journal
D.
A refund to a customer wrongly posted to discounts allowed account.
Question#32:
A business omitted discounts allowed of $700 from its trial balance. During the year a machine had been
sold for cash of $500 but the only accounting entry made was a debit in the Bank account.
What is the balance on the Suspense account?
A.
B.
C.
D.
$200 debit
$1 200 debit
$200 credit
$1 200 credit
Question#33:
A business has a draft net profit of $84 000. It is discovered that the closing stock was overvalued by $4 000
and that discounts received of $1 500 were treated as an expense.
What is the corrected net profit?
A.$81 500
B.$83 000
C.$89 500
D.$91 000
Question#34:
A trial balance does not balance. The difference has been entered in a Suspense account. The following
errors are found.
1. The purchase ledger control account balance $48 300 has been included as a debit
balance.
2. Provision for depreciation has been overcast by $960
3. A cash payment of $630 for rent has been credited in the Cash book and debited to
the Bad Debts account
What is the correcting entry to the Suspense account?
A.$47 340
B.$95 010
C.$95 640
D.$97 560
PAGE 134
F3 - FINANCIAL ACCOUNTING
Question#35:
A company’s trial balance includes a suspense account. It was found that the only errors were discounts
received of $240 and discounts allowed of $312, which had both been entered on the incorrect sides of the
respective ledger accounts.
What is the double entry required to clear the Suspense account balance?
(A)
(B)
(C)
(D)
Account
Discounts Allowed
Discounts Received
Suspense
Discounts Received
Suspense
Discounts Allowed
Discounts Allowed
Discounts Received
Suspense
Discounts Received
Suspense
Discounts Allowed
DR ($)
312
CR ($)
240
72
240
72
312
624
480
144
480
144
624
Question#36:
A suspense account has a balance of $450 debit.
What has caused this balance in the Suspense account?
A. Motor expenses of $225, correctly entered in the cash book, and posted to motor expenses as a
credit.
B. Motor expenses of $225, entered in the cash book as a receipt and posted to motor expenses as
a credit.
C. Motor expenses of $450 correctly entered in the cash book, and posted to motor vehicles as a
debit.
D. Motor expenses of $675, entered in the cash book as a credit of $225 and posted to motor
expenses as $225 debit
PAGE 135
F3 - FINANCIAL ACCOUNTING
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PAGE 140
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F3 - FINANCIAL ACCOUNTING
Mock Answers
Question#1:
1 and 3 only
Question#2:
The international financial reporting standards interpretation committee
Question#3:
Substance over form
Question#4:
Dr Decrease in liability Cr increase in capital
Question#5:
$124,256
Question#6:
Share capital $66,000
Share premium $29,000
Question#7:
Control accounts can be used to check that the underlying accounts are correct
Question#8:
A possible asset arising from past events whose existence will be confirmed by the occurrence or not
of uncertain future events
Question#9:
Noncurrent asset: overstated
Profit: overstated
Question#10:
$106,250
Question#11:
$80,000 should be accrued in the financial statements
Question#12:
$23,080
Question#13:
$15,000
Question#14:
$121,620
PAGE 145
F3 - FINANCIAL ACCOUNTING
Question#15:
A right issue of shares offers new shares to existing shareholders in proportion to their shareholding
Question#16:
$2,000
Question#17:
$11,200
Question#18:
$64,400 credit
Question#19:
Dr irrecoverable debts $14,250 Cr Receivables $14,250
Question#20:
$167,000
Question#21:
An item of plant and machinery that is currently not in use
A new office building that has been acquired but is not yet occupied
Question#22:
Dr Bank $1995
Cr Receivables control $1,480
Cr Revenue $515
Question#23:
$1,290
Question#24:
Purchases from the purchase daybook have been credited to sales and dealt with correctly in the
payables control account
Question#25:
$65,000
Question#26:
$1,023 Cr
Question#27:
To record non- routine transactions
To record the depreciation charge for the year
PAGE 146
F3 - FINANCIAL ACCOUNTING
Question#28:
Reduction of $295
Question#29:
$1,944 Cr
Question#30:
A memorandum record that lists the ledger account balances
Question#31:
Statement of cash flows
Statement of financial position
Question#32:
24%
Question#33:
Mint is suffering a worsening liquidity position in 20X2
Question#34:
1 and 2 only
Question#35:
$10,546
PAGE 147