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ACCOUNTING
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A
ACCOUNTING
Paper 3 (TOPICAL & YEARLY)
All Variants (2018-19 edition)
Article: 113
Muhammad Nauman Malik
FCMA, MS Accounting (Gold Medalist), MBA (Finance), PIPFA, DCMA, B.Com (Gold Medalist)
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A2-Level Accounting (Topical & Yearly)
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Muhammad Nauman Malik
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PREFACE
The current edition has been completely updated to comply with revised CIE – 9706 (A level Accounting
syllabus) 2016-18. From May 2016, there will be only one paper (Paper 3) for A2 qualification and it
replaces both P3 and P4 of the old syllabus followed up to November 2014. Topics like ‘Manufacturing
Accounts’ and ‘Non Profit Organisations’ have been moved to Paper 3 (A 2 level). On the other hand, topics
of ‘Partnership changes’ and ‘Dissolution of partnerships’ have been shifted to AS Level. Moreover, topics
of ‘Redemption and reduction of capitals’ and ‘process costing’ have been removed from the new syllabus.
The other book available in the market is based on Singaporean exams and does not include exams taken
in Pakistan for November session. Moreover, the available book categorises Questions only on yearly basis
whereas the book under review categorises them on topical as well as on yearly basis.
In the book under review, the varying topics of last ten years Cambridge International Examination (CIE)
papers have been categorised in such a way that one can attain optimum skills in each of these.
It is, however, advised that students must supplement their studies with the textbooks recommended by
their teachers, since it is by no means a replacement for a good book.
I am indeed grateful to the students and the teachers who motivated me to undertake this task. In
particular I would like to thank Sajid Munir, Sheraz Sidiq and Waseem Zia for making many helpful
suggestions. Any further suggestions for improvement and intimation of errors will be much appreciated
and acknowledged.
Muhammad Nauman Malik,
Email: nauman.kims@gmail.com
Mob: 0300-8414262
0321-8414262
4
Table of Contents (Topical)
CHAPTER 1
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
CHAPTER 2
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
CHAPTER 3
QUESTION 1
QUESTION 2
ACCOUNTS OF NON PROFIT ORGANISATIONS
14
MAY 2011 P21 Q2 .......................................................................................................................... 14
MAY 2011 P42 Q2 (A TO C) ............................................................................................................... 14
NOVEMBER 2011 P23 Q2 (B) ......................................................................................................... 15
NOVEMBER 2012 P21 Q2............................................................................................................... 16
MAY 2013 P21 Q1 .......................................................................................................................... 16
MAY 2014 P23 Q1 .......................................................................................................................... 17
MAY 2016 P31 Q1 .......................................................................................................................... 18
MAY 2016 P32 Q1 (A TO D) .............................................................................................................. 19
NOVEMBER 2016 P31 Q1............................................................................................................... 20
NOVEMBER 2016 P32 Q1............................................................................................................... 21
NOVEMBER 2016 P33 Q2............................................................................................................... 22
NOVEMBER 2017 P31 Q2............................................................................................................... 23
NOVEMBER 2017 P32 Q1............................................................................................................... 24
NOVEMBER 2017 P33 Q1............................................................................................................... 25
MAY 2018 P31 & P33 Q4 ................................................................................................................ 26
CHAPTER 1
27
MAY 2011 P21 Q2 .......................................................................................................................... 27
MAY 2011 P42 Q2 (A TO C) ............................................................................................................... 28
NOVEMBER 2011 P23 Q2 (B) ......................................................................................................... 29
NOVEMBER 2012 P21 Q2............................................................................................................... 29
MAY 2013 P21 Q1 .......................................................................................................................... 30
MAY 2014 P23 Q1 .......................................................................................................................... 31
MAY 2016 P31 Q1 .......................................................................................................................... 33
MAY 2016 P32 Q1 (A TO D) .............................................................................................................. 34
NOVEMBER 2016 P31 Q1............................................................................................................... 34
NOVEMBER 2016 P32 Q1............................................................................................................... 36
NOVEMBER 2016 P33 Q2............................................................................................................... 36
NOVEMBER 2017 P31 Q2............................................................................................................... 37
NOVEMBER 2017 P32 Q1............................................................................................................... 38
NOVEMBER 2017 P33 Q1............................................................................................................... 39
MAY 2018 P31 & P33 Q4 ................................................................................................................ 40
ACCOUNTING FOR CONSIGNMENT
42
SPECIMEN 2016 P3 Q2 ................................................................................................................... 42
NOVEMBER 2016 P33 Q4............................................................................................................... 42
NOVEMBER 2017 P33 Q3............................................................................................................... 43
MAY 2018 P32 Q3 .......................................................................................................................... 43
CHAPTER 2
45
SPECIMEN 2016 P3 Q2 ................................................................................................................... 45
NOVEMBER 2016 P33 Q4............................................................................................................... 45
NOVEMBER 2017 P33 Q3............................................................................................................... 46
MAY 2018 P32 Q3 .......................................................................................................................... 47
ACCOUNTING FOR JOINT VENTURES
49
MAY 2016 P31 Q2 .......................................................................................................................... 49
MAY 2017 P31 & P33 Q3 ................................................................................................................ 49
5
SOLUTION
QUESTION 1
QUESTION 2
CHAPTER 4
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
CHAPTER 5
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
CHAPTER 6
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
CHAPTER 3
51
MAY 2016 P31 Q2 .......................................................................................................................... 51
MAY 2017 P31 & P33 Q3 ................................................................................................................ 52
DISSOLUTION & SALE OF BUSINESS
53
NOVEMBER 2013 P41 Q2 (A TO D)................................................................................................... 53
NOVEMBER 2013 P42 Q1............................................................................................................... 53
NOVEMBER 2014 P41 Q1 (A TO C) ................................................................................................... 54
SPECIMEN 2016 P3 Q1 ................................................................................................................... 55
MAY 2016 P32 Q3 .......................................................................................................................... 56
NOVEMBER 2017 P33 Q2............................................................................................................... 57
NOVEMBER 2017 P31 Q4 (A TO D)................................................................................................... 58
CHAPTER 4
60
NOVEMBER 2013 P41 Q2 (A TO D)................................................................................................... 60
NOVEMBER 2013 P42 Q1............................................................................................................... 60
NOVEMBER 2014 P41 Q1 (A TO C) ................................................................................................... 61
SPECIMEN 2016 P3 Q1 ................................................................................................................... 62
MAY 2016 P32 Q3 .......................................................................................................................... 63
NOVEMBER 2017 P33 Q2............................................................................................................... 64
NOVEMBER 2017 P31 Q4 (A TO D)................................................................................................... 65
PURCHASE OF BUSINESS
67
NOVEMBER 2011 P43 Q1(A) .......................................................................................................... 67
MAY 2012 P43 Q2 (A & B) ............................................................................................................... 68
MAY 2014 P43 Q1 .......................................................................................................................... 69
MAY 2014 P43 Q1 (D TO F) .............................................................................................................. 71
NOVEMBER 2016 P32 Q3............................................................................................................... 71
MAY 2017 P32 Q4 .......................................................................................................................... 72
NOVEMBER 2017 P31 Q4 (E & F) .................................................................................................... 74
MAY 2018 P32 Q4 .......................................................................................................................... 74
CHAPTER 5
75
NOVEMBER 2011 P43 Q1(A) .......................................................................................................... 75
MAY 2012 P43 Q2 (A & B) ............................................................................................................... 75
MAY 2014 P43 Q1 .......................................................................................................................... 76
MAY 2014 P43 Q1 (D TO F) .............................................................................................................. 78
NOVEMBER 2016 P32 Q3............................................................................................................... 78
MAY 2017 P32 Q4 .......................................................................................................................... 79
NOVEMBER 2017 P31 Q4 (E & F) .................................................................................................... 80
MAY 2018 P32 Q4 .......................................................................................................................... 81
FINANCIAL STATEMENTS OF COMPANIES
83
MAY 2011 P42 Q2 (D) ..................................................................................................................... 83
MAY 2011 P43 Q1 .......................................................................................................................... 83
NOVEMBER 2011 P42 Q2 ............................................................................................................... 83
MAY 2012 P41 Q1 (C & D) ............................................................................................................... 84
MAY 2013 P41 Q2.......................................................................................................................... 84
NOVEMBER 2013 P41 Q1 (C) .......................................................................................................... 85
NOVEMBER 2013 P42 Q3 (E) .......................................................................................................... 86
MAY 2014 P41 Q2 (A TO C) .............................................................................................................. 86
NOVEMBER 2014 P43 Q1(A &B) ..................................................................................................... 87
6
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
QUESTION 18
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
QUESTION 18
CHAPTER 7
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
MAY 2015 P41 & P42 Q3(E & F) ...................................................................................................... 87
MAY 2015 P43 Q1 (A TO C) .............................................................................................................. 88
NOVEMBER 2015 P41 Q1 (A & B) ....................................................................................................... 89
NOVEMBER 2015 P43 Q1(A & B) .................................................................................................... 90
MAY 2016 P31 Q3 (A TO C) .............................................................................................................. 91
NOVEMBER 2016 P31 Q4 (A TO C) ................................................................................................... 91
MAY 2017 P31 & P33 Q1 ................................................................................................................ 92
MAY 2018 P31 & P33 Q2 ................................................................................................................ 93
MAY 2018 P32 Q2 (A & B) ............................................................................................................... 94
CHAPTER 6
96
MAY 2011 P42 Q2 (D) ..................................................................................................................... 96
MAY 2011 P43 Q1 .......................................................................................................................... 96
NOVEMBER 2011 P42 Q2............................................................................................................... 97
MAY 2012 P41 Q1 (C & D) ............................................................................................................... 98
MAY 2013 P41 Q2.......................................................................................................................... 98
NOVEMBER 2013 P41 Q1 (C) ........................................................................................................ 100
NOVEMBER 2013 P42 Q3(E) ......................................................................................................... 100
MAY 2014 P41 Q2 (A TO C) ............................................................................................................ 101
NOVEMBER 2014 P43 Q1(A &B) ................................................................................................... 102
MAY 2015 P41 & P42 Q3(E & F) .................................................................................................... 102
MAY 2015 P43 Q1 (A TO C) ............................................................................................................ 102
NOVEMBER 2015 P41 Q1 (A & B) .................................................................................................. 103
NOVEMBER 2015 P43 Q1 (A & B) .................................................................................................. 105
MAY 2016 P31 Q3(A TO C) ............................................................................................................. 106
NOVEMBER 2016 P31 Q4 (A TO C) ................................................................................................. 107
MAY 2017 P31 & P33 Q1 .............................................................................................................. 108
MAY 2018 P31 & P33 Q2 .............................................................................................................. 109
MAY 2018 P32 Q2 (A & B) ............................................................................................................. 110
ISSUE OF SHARES & DEBENTURES
111
MAY 2011 P42 Q1 (C) ................................................................................................................... 111
MAY 2012 P43 Q2 (C) ................................................................................................................... 111
NOVEMBER 2012 P43 Q2 (D)........................................................................................................ 111
MAY 2013 P43 1(D) ....................................................................................................................... 111
MAY 2013 P43 1 (A & F) ................................................................................................................ 111
MAY 2014 P41 Q2(D)/MAY 2014 P42 Q2(D) ................................................................................. 111
NOVEMBER 2014 P42 Q1 (A TO D)................................................................................................. 112
MAY 2015 P43 Q2 (C) ................................................................................................................... 112
SPECIMEN 2016 P3 Q3 (A TO C) ..................................................................................................... 112
NOVEMBER 2017 P32 Q2............................................................................................................. 113
NOVEMBER 2017 P33 Q4............................................................................................................. 114
CHAPTER 7
115
MAY 2011 P42 Q1 (C) ................................................................................................................... 115
MAY 2012 P43 Q2 (C) ................................................................................................................... 115
NOVEMBER 2012 P43 Q2 (D)........................................................................................................ 115
MAY 2013 P43 1(D) ....................................................................................................................... 115
MAY 2013 P43 1 (A & F) ................................................................................................................ 115
MAY 2014 P41 Q2(D)/MAY 2014 P42 Q2(D) ................................................................................. 116
NOVEMBER 2014 P42 Q1 (A TO D)................................................................................................. 116
MAY 2015 P43 Q2 (C) ................................................................................................................... 117
SPECIMEN 2016 P3 Q3 (A TO C) ..................................................................................................... 117
7
QUESTION 10
QUESTION 11
CHAPTER 8
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
QUESTION 18
QUESTION 19
QUESTION 20
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
QUESTION 18
QUESTION 19
QUESTION 20
CHAPTER 9
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
NOVEMBER 2017 P32 Q2............................................................................................................. 118
NOVEMBER 2017 P33 Q4............................................................................................................. 118
INTERNATIONAL ACCOUNTING STANDARDS
120
MAY 2012 P42 Q1 (C & D) ............................................................................................................. 120
NOVEMBER 2012 P41 Q1 (C TO G) ................................................................................................. 120
MAY 2013 P43 Q3(E) .................................................................................................................... 121
NOVEMBER 2013 P42 Q2(C) ........................................................................................................ 121
MAY 2014 P43 Q1 (F) ................................................................................................................... 121
NOVEMBER 2014 P41 Q1(D & E)................................................................................................... 121
NOVEMBER 2014 P42 Q1 (E) ........................................................................................................ 121
NOVEMBER 2014 P42 Q2 (G) ....................................................................................................... 122
NOVEMBER 2014 P43 Q3 (E) ........................................................................................................ 122
MAY 2015 P43 Q1 (D) ................................................................................................................... 122
NOVEMBER 2015 P41 Q1 (C) ........................................................................................................ 122
NOVEMBER 2015 P42 Q2 (B & C) .................................................................................................. 122
NOVEMBER 2015 P43 Q1(C TO E) .................................................................................................. 123
NOVEMBER 2016 P31 Q2 (E) ........................................................................................................ 123
NOVEMBER 2016 P31 Q4 (D & E) .................................................................................................. 123
NOVEMBER 2016 P33 Q3 (D)........................................................................................................ 123
MAY 2017 P31 & P33 Q2 (A, B & E) ................................................................................................ 124
MAY 2017 P32 Q3 (A, C & D).......................................................................................................... 125
MAY 2018 P31 & P33 Q3 (B TO D) .................................................................................................. 125
MAY 2018 P32 Q2 (C & D) ............................................................................................................. 126
CHAPTER 8
127
MAY 2012 P42 Q1 (C & D) ............................................................................................................. 127
NOVEMBER 2012 P41 Q1 (C TO G) ................................................................................................. 127
MAY 2013 P43 Q3(E) .................................................................................................................... 128
NOVEMBER 2013 P42 Q2(C) ........................................................................................................ 128
MAY 2014 P43 Q1 (F) .................................................................................................................... 128
NOVEMBER 2014 P41 Q1(D & E)................................................................................................... 128
NOVEMBER 2014 P42 Q1 (E) ........................................................................................................ 128
NOVEMBER 2014 P42 Q2 (G) ....................................................................................................... 129
NOVEMBER 2014 P43 Q3 (E) ........................................................................................................ 129
MAY 2015 P43 Q1 (D) ................................................................................................................... 129
NOVEMBER 2015 P41 Q1 (C) ........................................................................................................ 129
NOVEMBER 2015 P42 Q2 (B & C) .................................................................................................. 129
NOVEMBER 2015 P43 Q1(C TO E) .................................................................................................. 129
NOVEMBER 2016 P31 Q2 (E) ........................................................................................................ 130
NOVEMBER 2016 P31 Q4 (D & E) .................................................................................................. 130
NOVEMBER 2016 P33 Q3 (D)........................................................................................................ 130
MAY 2017 P31 & P33 Q2 (A, B & E) ................................................................................................ 131
MAY 2017 P32 Q3 (A, C & D).......................................................................................................... 131
MAY 2018 P31 & P33 Q3 (B TO D) .................................................................................................. 133
MAY 2018 P32 Q2 (C & D) ............................................................................................................. 133
AUDITING & STEWARDSHIP
134
SPECIMEN 2016 P3 Q3 (D & E) ...................................................................................................... 134
NOVEMBER 2016 P32 Q4............................................................................................................. 134
NOVEMBER 2016 P33 Q3 (A TO C & E) ........................................................................................... 134
MAY 2017 P31 & P33 Q2 (C & D) ................................................................................................... 135
MAY 2017 P32 Q3 (B & E) ............................................................................................................. 135
8
QUESTION 6
QUESTION 7
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
CHAPTER 10
QUESTION 1
QUESTION 2
QUESTION 3
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
CHAPTER 11
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
QUESTION 18
QUESTION 19
QUESTION 20
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
NOVEMBER 2017 P32 Q3............................................................................................................. 135
MAY 2018 P31 & P33 Q3 (A) ......................................................................................................... 136
CHAPTER 9
137
SPECIMEN 2016 P3 Q3 (D & E) ...................................................................................................... 137
NOVEMBER 2016 P32 Q4............................................................................................................. 137
NOVEMBER 2016 P33 Q3 (A TO C & E) ........................................................................................... 138
MAY 2017 P31 & P33 Q2 (C & D) ................................................................................................... 138
MAY 2017 P32 Q3 (B & E) ............................................................................................................. 139
NOVEMBER 2017 P32 Q3............................................................................................................. 139
MAY 2018 P31 & P33 Q3 (A) ......................................................................................................... 140
COMPUTERISED ACCOUNTING
141
MAY 2016 P32 Q1 (E) ................................................................................................................... 141
NOVEMBER 2017 P32 Q6 (D)........................................................................................................ 141
MAY 2018 P31 & P33 Q3 (E) ......................................................................................................... 141
CHAPTER 10
142
MAY 2016 P32 Q1 (E) ................................................................................................................... 142
NOVEMBER 2017 P32 Q6 (D)........................................................................................................ 142
MAY 2018 P31 & P33 Q3 (E) ......................................................................................................... 142
RATIO ANALYSIS
143
NOVEMBER 2011 P41 Q2 ............................................................................................................. 143
NOVEMBER 2011 P43 Q1(B & C) ................................................................................................... 144
NOVEMBER 2011 P43 Q2 (C & D) .................................................................................................. 144
NOVEMBER 2012 P41 Q2 ............................................................................................................. 145
NOVEMBER 2012 P42 Q1 ............................................................................................................. 146
NOVEMBER 2012 P43 Q2 (C) ........................................................................................................ 147
MAY 2013 P43 Q2 (D & E).............................................................................................................. 148
NOVEMBER 2013 P43 Q3 (C & D) .................................................................................................. 148
NOVEMBER 2014 P41 Q2 ............................................................................................................. 149
MAY 2015 P43 Q2 (D & E) ............................................................................................................. 149
SPECIMEN 2016 P3 Q4 ................................................................................................................. 150
MAY 2016 P31 Q3(D) .................................................................................................................... 151
MAY 2016 P31 Q4 ........................................................................................................................ 152
MAY 2016 P32 Q4 ........................................................................................................................ 153
NOVEMBER 2016 P31 Q3............................................................................................................. 154
MAY 2017 P31 & P33 Q4 .............................................................................................................. 155
MAY 2017 P32 Q2 ........................................................................................................................ 156
NOVEMBER 2017 P31 Q3............................................................................................................. 156
NOVEMBER 2017 P32 Q4............................................................................................................. 157
MAY 2018 P32 Q1 ........................................................................................................................ 158
CHAPTER 11
159
NOVEMBER 2011 P41 Q2 ............................................................................................................. 159
NOVEMBER 2011 P43 Q1(B & C) ................................................................................................... 160
NOVEMBER 2011 P43 Q2 (C & D) .................................................................................................. 161
NOVEMBER 2012 P41 Q2 ............................................................................................................. 161
NOVEMBER 2012 P42 Q1 ............................................................................................................. 162
NOVEMBER 2012 P43 Q2 (C) ........................................................................................................ 164
MAY 2013 P43 Q2 (D & E) ............................................................................................................. 164
NOVEMBER 2013 P43 Q3 (C & D) .................................................................................................. 165
9
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
QUESTION 18
QUESTION 19
QUESTION 20
CHAPTER 12
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
CHAPTER 13
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
NOVEMBER 2014 P41 Q2 ............................................................................................................. 165
MAY 2015 P43 Q2 (D & E) ............................................................................................................. 166
SPECIMEN 2016 P3 Q4 ................................................................................................................. 167
MAY 2016 P31 Q3(D) .................................................................................................................... 168
MAY 2016 P31 Q4 ........................................................................................................................ 168
MAY 2016 P32 Q4 ........................................................................................................................ 169
NOVEMBER 2016 P31 Q3............................................................................................................. 170
MAY 2017 P31 & P33 Q4 .............................................................................................................. 171
MAY 2017 P32 Q2 ........................................................................................................................ 172
NOVEMBER 2017 P31 Q3............................................................................................................. 173
NOVEMBER 2017 P32 Q4............................................................................................................. 174
MAY 2018 P32 Q1 ........................................................................................................................ 176
STATEMENTS OF CASH FLOWS
177
MAY 2011 P42 Q1 (A, B & D) .......................................................................................................... 177
NOVEMBER 2011 P43 Q2 (A & B) .................................................................................................. 177
MAY 2012 P41 Q1 (A & B) ............................................................................................................. 179
MAY 2012 P43 Q1 (A & B) ............................................................................................................. 180
NOVEMBER 2012 P43 Q2 (A & B) .................................................................................................. 180
MAY 2013 P43 Q2 (A TO C) ............................................................................................................ 181
NOVEMBER 2013 P41 Q1 (A & B) .................................................................................................. 182
NOVEMBER 2013 P42 Q2 (A & B) .................................................................................................. 184
NOVEMBER 2014 P43 Q3 (C & D) .................................................................................................. 185
NOVEMBER 2016 P31 Q2 (A TO D)................................................................................................. 186
CHAPTER 12
188
MAY 2011 P42 Q1 (A & B) ............................................................................................................. 188
NOVEMBER 2011 P43 Q2 (A & B) .................................................................................................. 189
MAY 2012 P41 Q1 (A & B) ............................................................................................................. 189
MAY 2012 P43 Q1 (A & B) ............................................................................................................. 190
NOVEMBER 2012 P43 Q2 (A & B) .................................................................................................. 190
MAY 2013 P43 Q2 (A TO C) ............................................................................................................ 191
NOVEMBER 2013 P41 Q1 (A & B) .................................................................................................. 192
NOVEMBER 2013 P42 Q2 (A & B) .................................................................................................. 192
NOVEMBER 2014 P43 Q3 (C & D) .................................................................................................. 193
NOVEMBER 2016 P31 Q2 (A TO D)................................................................................................. 194
MANUFACTURING ACCOUNTS
196
MAY 2012 P22 Q1 ........................................................................................................................ 196
MAY 2012 P42 Q1 ........................................................................................................................ 197
NOVEMBER 2012 P23 Q1............................................................................................................. 197
NOVEMBER 2012 P43 Q1 ............................................................................................................. 198
MAY 2013 P23 Q1 ........................................................................................................................ 199
MAY 2014 P21 Q1 (B & C) ............................................................................................................. 200
NOVEMBER 2014 P22 Q1 ............................................................................................................. 201
MAY 2015 P23 Q1 ........................................................................................................................ 202
NOVEMBER 2015 P42 Q1............................................................................................................. 203
MAY 2016 P32 Q2 ........................................................................................................................ 204
NOVEMBER 2016 P32 Q2............................................................................................................. 205
NOVEMBER 2016 P33 Q1............................................................................................................. 206
MAY 2017 P32 Q1 ........................................................................................................................ 207
NOVEMBER 2017 P31 Q1............................................................................................................. 208
MAY 2018 P31 & P33 Q1 .............................................................................................................. 209
10
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
CHAPTER 14
QUESTION 1
SOLUTION
QUESTION 1
CHAPTER 15
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
CHAPTER 13
211
MAY 2012 P22 Q1 ........................................................................................................................ 211
MAY 2012 P42 Q1 ........................................................................................................................ 211
NOVEMBER 2012 P23 Q1............................................................................................................. 212
NOVEMBER 2012 P43 Q1 ............................................................................................................. 213
MAY 2013 P23 Q1 ........................................................................................................................ 215
MAY 2014 P21 Q1 (B & C) ............................................................................................................. 216
NOVEMBER 2014 P22 Q1 ............................................................................................................. 216
MAY 2015 P23 Q1 ........................................................................................................................ 217
NOVEMBER 2015 P42 Q1............................................................................................................. 218
MAY 2016 P32 Q2 ........................................................................................................................ 220
NOVEMBER 2016 P32 Q2............................................................................................................. 221
NOVEMBER 2016 P33 Q1............................................................................................................. 222
MAY 2017 P32 Q1 ....................................................................................................................... 223
NOVEMBER 2017 P31 Q1............................................................................................................. 224
MAY 2018 P31 & P33 Q1 .............................................................................................................. 225
ABSORPTION COSTING
227
NOVEMBER 2012 P43 Q3............................................................................................................. 227
CHAPTER 14
228
NOVEMBER 2012 P43 Q3............................................................................................................. 228
BUDGETING
230
MAY 2011 P41 Q3 ........................................................................................................................ 230
MAY 2011 P43 Q3 ........................................................................................................................ 231
NOVEMBER 2011 P42 Q3............................................................................................................. 231
MAY 2012 P42 Q3 (A, B, C, E & F).................................................................................................... 232
MAY 2013 P41 Q3 ........................................................................................................................ 233
MAY 2013 P42 Q3 ........................................................................................................................ 233
NOVEMBER 2013 P43 Q3 (A & B) .................................................................................................. 234
MAY 2014 P43 Q3 ........................................................................................................................ 235
NOVEMBER 2014 P42 Q3............................................................................................................. 236
NOVEMBER 2014 P43 Q2............................................................................................................. 237
MAY 2015 P41 & P42 Q1 .............................................................................................................. 238
NOVEMBER 2015 P42 Q2(A) ........................................................................................................ 240
NOVEMBER 2016 P32 Q6............................................................................................................. 240
NOVEMBER 2016 P33 Q6............................................................................................................. 241
NOVEMBER 2017 P32 Q6 (A TO C) ................................................................................................. 242
NOVEMBER 2017 P33 Q6............................................................................................................. 242
MAY 2018 P31 & P33 Q5 .............................................................................................................. 243
CHAPTER 15
245
MAY 2011 P41 Q3 ........................................................................................................................ 245
MAY 2011 P43 Q3 ........................................................................................................................ 245
NOVEMBER 2011 P42 Q3............................................................................................................. 246
MAY 2012 P42 Q3 (A, B, C , E & F) ................................................................................................... 247
MAY 2013 P41 Q3 ........................................................................................................................ 248
MAY 2013 P42 Q3 ........................................................................................................................ 249
NOVEMBER 2013 P43 Q3 (A & B) .................................................................................................. 250
MAY 2014 P43 Q3 ........................................................................................................................ 252
NOVEMBER 2014 P42 Q3............................................................................................................. 253
11
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
QUESTION 16
QUESTION 17
CHAPTER 16
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
QUESTION 14
QUESTION 15
CHAPTER 17
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
NOVEMBER 2014 P43 Q2............................................................................................................. 254
MAY 2015 P41 & P42 Q1 .............................................................................................................. 256
NOVEMBER 2015 P42 Q2 (A) ........................................................................................................ 258
NOVEMBER 2016 P32 Q6............................................................................................................. 258
NOVEMBER 2016 P33 Q6............................................................................................................. 259
NOVEMBER 2017 P32 Q6 (A TO C) ................................................................................................. 260
NOVEMBER 2017 P33 Q6............................................................................................................. 261
MAY 2018 P31 & P33 Q5 .............................................................................................................. 263
STANDARD COSTING
265
MAY 2012 P41 Q3 (A TO D) ............................................................................................................ 265
NOVEMBER 2012 P42 Q3............................................................................................................. 265
MAY 2013 P42 Q1 ........................................................................................................................ 266
MAY 2013 P43 Q3(A TO D) ............................................................................................................. 267
NOVEMBER 2015 P41 Q3 ............................................................................................................. 267
NOVEMBER 2015 P42 Q3............................................................................................................. 268
NOVEMBER 2015 P43 Q3............................................................................................................. 269
SPECIMEN 2016 P3 Q6 ................................................................................................................. 269
MAY 2016 P32 Q6 ........................................................................................................................ 270
NOVEMBER 2016 P31 Q5............................................................................................................. 270
MAY 2017 P31 & P33 Q5 .............................................................................................................. 271
MAY 2017 P32 Q5 ........................................................................................................................ 272
NOVEMBER 2017 P31 Q5............................................................................................................. 273
NOVEMBER 2017 P33 Q5 (A TO D)................................................................................................. 273
MAY 2018 P32 Q6 ........................................................................................................................ 274
CHAPTER 16
275
MAY 2012 P41 Q3 (A TO D) ............................................................................................................ 275
NOVEMBER 2012 P42 Q3) ........................................................................................................... 276
MAY 2013 P42 Q1 ........................................................................................................................ 277
MAY 2013 P43 Q3 (A TO D) ............................................................................................................ 278
NOVEMBER 2015 P41 Q3 ............................................................................................................. 280
NOVEMBER 2015 P42 Q3 ................................................................................................................ 281
NOVEMBER 2015 P43 Q3............................................................................................................. 283
SPECIMEN 2016 P3 Q6 ................................................................................................................. 284
MAY 2016 P32 Q6 ........................................................................................................................ 285
NOVEMBER 2016 P31 Q5............................................................................................................. 286
MAY 2017 P31 & P33 Q5 .............................................................................................................. 287
MAY 2017 P32 Q5 ........................................................................................................................ 288
NOVEMBER 2017 P31 Q5............................................................................................................. 290
NOVEMBER 2017 P33 Q5 (A TO D)................................................................................................. 291
MAY 2018 P32 Q6 ........................................................................................................................ 292
CAPITAL INVESTMENT APPRAISAL
295
NOVEMBER 2011 P43 Q3............................................................................................................. 295
MAY 2012 P43 Q3 ........................................................................................................................ 295
MAY 2014 P41 Q3, MAY 2014 P42 Q3 .......................................................................................... 295
NOVEMBER 2014 P42 Q2(A TO F) .................................................................................................. 296
NOVEMBER 2014 P43 Q3(C TO F) .................................................................................................. 297
MAY 2015 P41 & P42 Q3(A TO D)................................................................................................... 298
SPECIMEN 2016 P3 Q5 ................................................................................................................. 299
MAY 2016 P31 Q6 ........................................................................................................................ 299
NOVEMBER 2016 P31 Q6............................................................................................................. 300
12
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
QUESTION 8
QUESTION 9
QUESTION 10
QUESTION 11
QUESTION 12
QUESTION 13
CHAPTER 18
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
SOLUTION
QUESTION 1
QUESTION 2
QUESTION 3
QUESTION 4
QUESTION 5
QUESTION 6
QUESTION 7
SPECIMEN 2016
NOVEMBER 2016 P33 Q5............................................................................................................. 301
MAY 2017 P32 Q6 ........................................................................................................................ 301
NOVEMBER 2017 P32 Q5............................................................................................................. 302
MAY 2018 P32 Q5 ........................................................................................................................ 303
CHAPTER 17
304
NOVEMBER 2011 P43 Q3............................................................................................................. 304
MAY 2012 P43 Q3 ........................................................................................................................ 305
MAY 2014 P41 Q3, MAY 2014 P42 Q3 .......................................................................................... 305
NOVEMBER 2014 P42 Q2(A TO F) .................................................................................................. 306
NOVEMBER 2014 P43 Q3(C TO F) .................................................................................................. 307
MAY 2015 P41 & P42 Q3 (A TO D) .................................................................................................. 308
SPECIMEN 2016 P3 Q5 ................................................................................................................. 309
MAY 2016 P31 Q6 ........................................................................................................................ 310
NOVEMBER 2016 P31 Q6............................................................................................................. 311
NOVEMBER 2016 P33 Q5............................................................................................................. 312
MAY 2017 P32 Q6 ........................................................................................................................ 312
NOVEMBER 2017 P32 Q5............................................................................................................. 313
MAY 2018 P32 Q5 ........................................................................................................................ 314
ACTIVITY BASED COSTING
316
MAY 2016 P31 Q5 ........................................................................................................................ 316
MAY 2016 P32 Q5 ........................................................................................................................ 316
NOVEMBER 2016 P32 Q5............................................................................................................. 317
MAY 2017 P31 & P33 Q6 .............................................................................................................. 318
NOVEMBER 2017 P31 Q6............................................................................................................. 319
NOVEMBER 2017 P33 Q5 (E) ........................................................................................................ 319
MAY 2018 P31 & P33 Q6 .............................................................................................................. 319
CHAPTER 18
321
MAY 2016 P31 Q5 ........................................................................................................................ 321
MAY 2016 P32 Q5 ........................................................................................................................ 322
NOVEMBER 2016 P32 Q5............................................................................................................. 323
MAY 2017 P31 & P33 Q6 .............................................................................................................. 324
NOVEMBER 2017 P31 Q6............................................................................................................. 325
NOVEMBER 2017 P33 Q5 (E) ........................................................................................................ 326
MAY 2018 P31 & P33 Q6 .............................................................................................................. 326
PAPER 03
329
2016 MAY PAPER 31 & 33
334
2016 MAY PAPER 32
340
NOVEMBER 2016 - PAPER 31
346
NOVEMBER 2016 - PAPER 32
351
NOVEMBER 2016 - PAPER 33
357
MAY 2017 - PAPER 31 & 33
362
MAY 2017 - PAPER 32
367
NOVEMBER 2017 - PAPER 31
373
NOVEMBER 2017 - PAPER 32
378
13
NOVEMBER 2017 - PAPER 33
383
MAY 2018 - PAPER 31 & 33
388
MAY 2018 - PAPER 32
393
INDEX (YEARLY)
398
Chapter 1
CHAPTER 1
14
Accounts of Non Profit Organisations
ACCOUNTS OF NON PROFIT ORGANISATIONS
QUESTION 1
The Welcome Cricket Club has the following assets and liabilities.
Equipment (at cost)
Equipment – depreciation provision
Café inventory
Cash at bank
Subscriptions outstanding
Subscriptions paid in advance
Café staff wages accrued
Loan from cricket association
Loan interest
The receipts and payments for the year ended 30 April 2011 are:
MAY 2011 P21 Q2
30 April 2011
$
104 000
14 400
4 800
?
3 600
3 500
4 000
20 000
?
1 May 2010
$
40 000
4 000
6 500
12 800
2 200
5 000
500
–
–
Receipts
Café revenue (sales)
Subscriptions
Loan from cricket association
Donations
Ticket sales
$
90 000
34 000
20 000
450
14 560
Payments
Equipment
Rent
Heating and lighting
Wages of café staff
Café purchases for resale
$
64 000
21 000
18 000
28 800
36 000
Additional information:
1
Wages are a direct cost of the café and are charged to the trading account.
2
The rent and heating and lighting are apportioned 40% to the café and 60% to the rest of the club.
3
The loan from the cricket association was received on 1 November 2010. Interest is payable at 10% per year.
4
Depreciation is charged to the income and expenditure account.
REQUIRED
(a)
Prepare the café income statement to show the gross profit and the profit for the year (net profit) made by
the café during the year ended 30 April 2011.
[8]
(b)
Prepare the income and expenditure account of Welcome Cricket Club for the year ended 30 April 2011.[14]
(c)
Prepare the balance sheet of the Welcome Cricket Club at 30 April 2011.
[8]
QUESTION 2
MAY 2011 P42 Q2 (a to c)
The Top Hat Sports Club is a not-for-profit organisation which runs a gym and operates a café.
The treasurer is experienced and for many years has prepared a receipts and payments account.
The club president read a book about the importance of accruals and prepayments. He decided to take the receipts
and payments account prepared by the treasurer and to adjust the figures. He produced the following:
Income and expenditure account at 31 December 2010
$
$
$
Opening bank balance
4 320
Café takings
12 260
Depreciation
4 610
Chapter 1
Annual subscriptions
received during the year
arrears at 1 January 2010
prepaid at 1 January 2010
arrears at 31 December 2010
prepaid at 31 December 2010
15
Accounts of Non Profit Organisations
$
39 300
450
300
750
150
$
40 950
62 140
Rent
12 000
General expenses
4 620
Heat, light and power
8 240
Wages
18 600
Purchase of equipment
5 300
Cost of refreshments
payments during the year
8 140
owing at 1 January 2010
700
owing at 31 December 2010
760
9 600
58 360
Closing bank balance
3 780
Further information is as follows:
1
The club president made depreciation the balancing figure. The treasurer was surprised to see it appear
with income.
2
The club president was unaware that there was an unpaid invoice for $910 for heat, light and power at the
year end.
3
Asset valuations were:
1 January 2010 ($)
31 December 2010 ($)
Café inventory
420
800
Equipment
17 200
19 500
4
The club has two members of staff. One was paid $10 600 for the year and worked in the gym and
the other earned $8000 and worked in the café.
5
The club has 265 members who each pay an annual subscription of $150.
On 1 January 2010 the managing committee decided to allow the admission of life members, each paying $1 600.
This would be transferred to income over 20 years. Three people took up life membership during 2010. The club
president omitted life subscriptions from his statement.
REQUIRED
(a)
Prepare the corrected income and expenditure account.
[9]
(b)
Prepare a balance sheet at 31 December 2010.
[15]
(c)
Explain three differences between the financial statements of a not-for-profit organisation and the financial
statements of a public limited company.
[6]
QUESTION 3
NOVEMBER 2011 P23 Q2 (B)
The treasurer of Hamilton Social Club has provided the following information for the year ended 31 March 2011.
31 March 2010
31 March 2011
$
$
Café inventory at cost
3 400
3 950
Café trade payables
1 570
880
Subscriptions in arrears
240
120
Equipment (net book value)
5 400
9 360
Stock of stationery at cost
110
85
Cash at bank
1 800
340
5% loan (repayable 2015)
–
5 000
Equipment costing $5000 was purchased on 1 April 2010. It was financed by the 5% loan. At the year-end 31 March
2011, no payment of interest had been made.
Chapter 1
16
Accounts of Non Profit Organisations
Included in the café inventory at 31 March 2011 were items costing $120 that were out of date. They had a net
realisable value of $30.
REQUIRED
Prepare a statement of financial position for Hamilton Social Club at 31 March 2011. Show clearly the surplus or
deficit for the year. An income and expenditure account is not required.
[10]
QUESTION 4
NOVEMBER 2012 P21 Q2
The PPE Rowing Club prepares its accounts annually on 31 March.
The summary of the Receipts and Payments Account for the year ended 31 March 2012 is shown below.
Receipts
$
Payments
$
Balance b/d
3 000 Competition prizes
3 100
Subscriptions received
84 400 Dinner dance – hire of band
2 400
Competition receipts
12 200 Dinner dance – catering
5 200
Dinner dance ticket sales
14 000 Insurance
9 800
Donations
1 500 Clubhouse maintenance
10 300
Sale of equipment
24 000 Equipment
46 000
General expenses
30 200
Electricity
1 600
Transfer to deposit account
20 000
Additional information
1
The remaining assets and liabilities of the club at the beginning and end of the year were:
1 April 2011
31 March 2012
$
$
Clubhouse
150 000
150 000
Equipment
160 000
140 000
General expenses owing
800
400
Subscriptions due and unpaid
2 600
3 100
Subscriptions paid in advance
6 300
4 500
Inventory of competition prizes
800
300
Deposit account
20 000
2
During the year equipment with a book value of $26 000 was sold for $24 000.
3
Of the subscriptions due on 1 April 2011, $280 remains unpaid. This is to be treated as a bad debt.
4
On 1 October 2011, $20 000 was transferred from the Receipts and Payments Account to a short-term
deposit account. This transfer is shown in the summarised Receipts and Payments Account above. Interest
of 5% per annum is earned on the deposit account. This interest has not yet been recorded.
REQUIRED
(a)
Prepare the subscriptions account for PPE Rowing Club for the year ended 31 March 2012.
[7]
(b)
Prepare the income and expenditure account for PPE Rowing Club for the year ended 31 March 2012. Clearly
identify the profit or loss on the dinner dance and competitions.
[13]
(c)
Prepare the statement of financial position for PPE Rowing Club at 31 March 2012.
[10]
QUESTION 5
MAY 2013 P21 Q1
The Klassik Music Society produced the following receipts and payments summary for the year ended 31 March 2013.
Receipts
Subscriptions
Sales of food and drink
Bank loan
Income from concerts
Sale of surplus equipment
$
30 000
50 000
30 000
116 800
30 000
Chapter 1
17
Accounts of Non Profit Organisations
Payments
Balance, 1 April 2012
Purchase of new equipment
Hire of hall for concerts
Printing
Equipment maintenance and repairs
Purchases of food and drink
Salaries
Cost of concerts
Sundry expenses
Sponsorship
Balance, 31 March 2013
$
12 000
10 000
27 000
14 000
8 000
23 000
45 000
83 500
760
1 000
?
Additional information:
1
31 March 2012
2 800
1 600
1 000
2 600
160 000
15 400
Salaries in arrears
Subscriptions owing
Subscriptions prepaid
Printing accrued
Equipment (cost $200 000), at NBV
Food and drink inventory
31 March 2013
1 600
2 600
400
2 800
?
13 200
2
The bank loan was received on 1 July 2012. Interest is charged at 12% per annum. No interest had
been paid by the year end.
3
The equipment sold was purchased on 1 June 2011 and had a NBV of $32 000.
4
Depreciation is provided at 20% on cost for equipment in use at the year end.
REQUIRED
(a)
Prepare the trading section of the income statement for the year ended 31 March 2013.
[2]
(b)
Calculate the gross profit percentage, to one decimal place, made on sales of food and drink.
[2]
(c)
The prices of food and drink sold had been planned to obtain a gross margin of 70%. Compare this figure
with the figure calculated in (b) and state two reasons why these figures may differ.
[4]
(d)
Prepare the income and expenditure account of the Klassik Music Society for the year ended 31 March 2013.
[12]
(e)
Prepare the statement of financial position of the Klassik Music Society at 31 March 2013.
[10]
QUESTION 6
MAY 2014 P23 Q1
The treasurer of the Ocean Fishing Club has prepared the following receipts and payments account for the year
ended 31 March 2014.
Receipts
Balance at 1 April 2013
Subscriptions received
Donations
Receipts from annual family day
Shop takings
$
6 570
7 400
1 450
2 300
7 690
_____
25 410
Payments
Payments to trade payables
Shop wages
Administration expenses
New equipment
Repairs to equipment
Transfer to deposit account
Balance c/d
$
2 974
3 670
2 790
5 600
2 500
7 000
876
25 410
Chapter 1
18
Accounts of Non Profit Organisations
1 April 2013
$
975
560
6 000
9 800
2 940
420
250
750
Shop inventory
Trade payables for shop
Deposit account
Equipment at cost
Provision for depreciation
Repairs to equipment owing
Shop wages due
Shop fittings at net book value
31 March 2014
$
859
784
13 000
?
?
370
195
640
Additional information
1
The donations are to be capitalised.
2
There are 350 members who pay an annual subscription of $20.
At 1 April 2013, 30 members had paid in advance for the coming year but 24 members had not yet paid for
the year ended 31 March 2013.
At 31 March 2014, 10 members had yet to pay and some members had paid in advance but the treasurer
has not yet calculated how many.
3
Interest of 5% per annum is credited to the deposit account by the bank on 31 March each year. This has
not yet been entered in the books.
The transfer of $7 000 to the deposit account was made on the 31 March 2014.
4
Equipment is depreciated at 15% per annum using the reducing (diminishing) balance method. A full year’s
depreciation is charged in the year of purchase.
REQUIRED
(a)
Prepare the shop trading account for the year ended 31 March 2014.
(b)
Prepare the income and expenditure account for the year ended 31 March 2014.
(c)
Prepare the statement of financial position at 31 March 2014.
[4]
[6]
[11]
Additional information
The club wishes to buy a new boat for use by members. It will cost $12 500.
REQUIRED
(d)
Suggest three ways the club could raise the finance to purchase the new boat.
(e)
State one advantage and one disadvantage of each method you have suggested.
[3]
[6]
QUESTION 7
MAY 2016 P31 Q1
The Pavey Sports and Social Club is a not for profit organisation. Accounts are prepared annually to 31 March. The
membership has been constant for some years at
350 members paying an annual subscription of $100.
A life membership scheme was introduced to try to boost membership. On 1 April 2015, there were 25 new members
who joined under this scheme, each paying $750. It was agreed that the life membership fund would be transferred
to the income and expenditure account over 15 years.
The following receipts and payments account was prepared for the year ended 31 March 2016.
Receipts
Balance b/d
Annual subscriptions
Life membership
Donations
Restaurant takings
Balance b/d
$
12 120
34 000
18 750
8 500
17 450
90 820
Payments
Purchase of fixtures and fittings
Payments to restaurant suppliers
Restaurant wages
Administrative expenses
Balance c/d
$
34 500
6 950
5 450
4 750
39 170
90 820
Chapter 1
19
Accounts of Non Profit Organisations
The following information is available for the year ended 31 March 2016.
1
2
3
4
5
6
1 April 2015
Number of members
4
10
845
–
–
–
31 March 2016
Number of members
3
?
955
280
350
200
Subscriptions in advance
Subscriptions in arrears
Restaurant suppliers owing
Restaurant wages owing
Administrative expenses owing
Administrative expenses prepaid
No inventories of restaurant supplies were held.
Fixtures and fittings acquired on 1 April 2013 had cost $20 000. Depreciation is charged at 20% per annum
using the reducing balance method. A full year’s depreciation is charged in the year of acquisition.
All donations are capitalised.
The opening balance on the accumulated fund at 1 April 2016 was $24 675.
REQUIRED
(a)
Distinguish between the terms ‘capital’ and ‘accumulated fund’.
[2]
(b)
Prepare the income and expenditure account for the year ended 31 March 2016, clearly identifying the
profit or loss from the restaurant within the account.
[14]
(c)
Explain why a club may capitalise donations received from its members.
[2]
Additional information
The club is considering modernising the pavilion which will cost $75 000.
REQUIRED
(d)
(i)
(ii)
Compare and contrast two sources of finance which the club could use.
[4]
Advise the club members which source of finance would be most appropriate. Justify your answer.
[3]
QUESTION 8
MAY 2016 P32 Q1 (a to d)
The Seagulls Boating Club is a small not for profit organisation which generates income from members’ subscriptions
and a café.
REQUIRED
(a)
State two differences between the financial statements of a not for profit organisation and those of a limited
company.
[2]
Additional information
The following information is available for the café for the year ended 31 March 2016.
1
The café takings were $25 750 and $8 850 was paid to suppliers.
2
An assistant received monthly wages of $600. On 31 March 2016, the assistant also received a bonus of 10%
of the annual café takings.
3
The following balances were available:
Café inventory
Café trade payables
1 April 2015
$
3 875
2 831
31 March 2016
$
3 423
2 952
REQUIRED
(b)
Prepare the café trading account for the year ended 31 March 2016.
Additional information
The club has 310 members who pay an annual subscription of $80.
[5]
Chapter 1
20
Accounts of Non Profit Organisations
The following information was available for members’ subscriptions.
1 April 2015
31 March 2016
Number of members Number of members
Subscriptions in advance
4
3
Subscriptions in arrears
9
12
REQUIRED
(c)
Prepare the subscriptions account for the year ended 31 March 2016.
[4]
Additional information
The following information is also available for the year ended 31 March 2016.
1
General expenses of $2 500 were incurred which included a paid insurance invoice for the period from 1
March 2016 to 31 May 2016 for $180.
2
Fixtures and fittings were acquired on 1 April 2013 at a cost of $16 000 and are depreciated at 25% using
the reducing balance method.
REQUIRED
(d)
Prepare the income and expenditure account for the year ended 31 March 2016.
[5]
QUESTION 9
NOVEMBER 2016 P31 Q1
International Dancing is a dance club charging an annual subscription of $500 per member.
A summary of its subscriptions account for the year ended 31 December 2015 was as follows:
Subscriptions account
2015
$
2015
$
Jan 1
Balance b/d
2 000 Jan 1
Balance b/d
1 500
Dec 31
Income and expenditure a/c
106 500 Dec 31
Bank
105 500
Balance c/d
2 500
Balance c/d
4 000
111 000
111 000
Additional information
1
The club’s only other receipts came from the sale of music CDs to members. These receipts amounted to
$5 800 for the year.
2
Payments for the year were as follows:
Rent
Staff costs
Insurance and administration
Purchase of music CDs for resale
Purchase of equipment
Purchase of CDs for club use
3
4
5
6
7
$
15 000
61 000
4 200
2 600
11 700
4 000
The bank balance at 1 January 2015 was $13 500 debit. All receipts and payments are made through the
bank.
CDs purchased for club use are not considered to have a useful life of more than 12 months.
The club maintains an inventory of CDs for resale. This amounted to $180 at 1 January 2015 and $280 at 31
December 2015.
Equipment was valued at $17 200 at 1 January 2015 and $21 300 at the end of the year.
At 31 December 2015 prepaid insurance was $300 and accrued administration costs were $50.
REQUIRED
(a)
Prepare the club’s income and expenditure account for the year ended 31 December 2015.
[9]
Additional information
In 2016 the club is given the opportunity to buy its premises for $142 000. If it is agreed that this purchase should go
ahead, three sources of finance would be used.
1
Half the balance at bank on 31 December 2015 would be used.
Chapter 1
2
3
21
Accounts of Non Profit Organisations
Life membership of the club would be introduced. The life membership fee would be $5 000 per person
and this would be credited to the income and expenditure account in equal instalments over a 10-year
period. It is expected that 10 existing members of the club would take up life membership, and the funds
raised would be used in the purchase.
A 5-year bank loan, at 10% interest per annum, would finance the balance of the purchase price.
REQUIRED
(b)
(i)
Calculate the bank balance at 31 December 2015.
[2]
(ii)
Calculate the amount of the loan which would be taken out.
[3]
(c)
Assess the effect the purchase of the premises would have on annual cash flows in future years.
[4]
(d)
Recommend to the managing committee of the club whether or not they should proceed with the purchase
of the premises. Justify your answer by discussing both advantages and disadvantages of the purchase. [7]
QUESTION 10
NOVEMBER 2016 P32 Q1
Sunshine Social Club runs a gift shop. Goods are sold only to members at a discount. Selected balances relating to
the gift shop at 31 December are as follows:
2015
$
Net book value of shop equipment
Shop inventory
Shop trade payables
Insurance prepaid
Shopkeeper wages prepaid
Accrued expenses – water and electricity
– shopkeeper wages
?
18 600
64 300
1 660
3 200
2 000
–
2014
$
55 000
24 000
54 500
1 400
–
2 700
3 450
Summarised receipts and payments account of the club for the year ended 31 December 2015 is as follows:
Balance b/d
Annual subscriptions
Life membership subscriptions
Annual ball tickets
Shop takings
$
124 000
345 000
60 000
68 000
124 200
Shop suppliers
Purchases of shop equipment
Shopkeeper wages
Insurance
Water and electricity
Club administration
Hire of ballroom & band for annual ball
Food for annual ball
_______ Balance c/d
721 200
$
74 500
4 000
30 400
9 460
14 800
361 400
48 000
36 000
142 640
721 200
Additional information
1
Expenses are allocated to the shop as follows:
Water and electricity
Insurance
2
40%
25%
Shop equipment is depreciated at 20% per annum using the reducing balance method. Equipment is
depreciated in the year of purchase but not in the year of sale.
REQUIRED
(a)
State three differences between a donation and a member subscription received by a not-for-profit
organisation.
[3]
(b)
Prepare the club’s shop trading account for the year ended 31 December 2015.
[15]
Additional information
After reviewing the trading account of the gift shop, the chairman is not satisfied with the performance.
Chapter 1
22
Accounts of Non Profit Organisations
REQUIRED
(c)
Discuss two ways to improve the performance of the gift shop.
Additional information
The chairman of the club undertook to cover 50% of the deficit arising from the 2015 annual ball.
The demand for payment was issued to the chairman on 31 December 2015.
REQUIRED
(d)
Calculate the amount the chairman had to contribute to the club to cover the deficit.
[4]
[3]
QUESTION 11
NOVEMBER 2016 P33 Q2
AB Cricket Club is a not-for-profit organisation.
REQUIRED
(a)
State two reasons why the members of a not profit organisation do not receive a dividend.
[2]
Additional information
The treasurer of AB Cricket Club provided the following financial information:
1
At 1 September 2015 the assets and liabilities were:
$
7 800
490
270
1 500
265
420
7 825
Equipment at net book value
Subscriptions in advance
Subscriptions in arrears
Life membership fund
Trade payables for refreshments
Inventory of refreshments
Accumulated fund
2
The receipts and payments account for the year ended 31 August 2016 was as follows:
Bank balance b/d
Subscriptions
Sale of equipment
Match ticket sales
Refreshments
Life membership
Donation
3
4
5
6
7
8
Receipts and payments account
$
1 590 Groundsman’s wages
11 200 Repairs to clubhouse
4 000 Purchase of equipment
6 400 Cost of refreshments
2 500 Awards to players
800 Administration expenses
3 500 Bank balance c/d
_____ Savings account c/d
29 990
$
7 500
700
2 500
1 700
1 450
760
11 880
3 500
29 990
At 31 August 2016, the balances were:
$
Subscriptions in advance
295
Subscriptions in arrears
165
Trade payables for refreshments
315
Inventory of refreshments
390
The donation of $3 500 is to be used for the purchase of a new clubhouse. It had been invested in a new
savings account and is to be capitalised.
The club depreciates its equipment at 10% on the net book value. A full year’s depreciation is charged in
the year of purchase. No depreciation is charged in the year of sale.
Equipment sold had a net book value of $3 640.
The life membership fund is transferred to the income and expenditure account over 10 years in equal
instalments.
For the year ended 31 August 2016 the club made a profit of $720 on the sale of refreshments.
Chapter 1
23
Accounts of Non Profit Organisations
REQUIRED
(b)
Prepare the income and expenditure account for the year ended 31 August 2016.
[11]
(c)
Prepare the statement of financial position at 31 August 2016.
[8]
(d)
Explain why the club transfers life membership fund to the income and expenditure accounts over 10 years.
[4]
QUESTION 12
NOVEMBER 2017 P31 Q2
The EF Tennis Club generates revenue from member subscriptions by selling tickets for matches and operating a
club shop. It also receives income from renting out their catering facility.
The treasurer has provided the following figures for the year ended 31 December 2016:
2016
Jan 01
Dec 31
2017
Jan 1
Balance b/d
Shop sales
Match tickets
Sale of old equipment
Rent of catering facilities
Subscriptions
Donation
Balance b/d
Receipts and Payments Account
$
2016
1 546 Dec 31 New equipment
8 960 Dec 31 Shop purchases
2 740 Dec 31 Printing & advertising for matches
1 760 Dec 31 Ground staff wages
2 600 Dec 31 Shop staff wages
3 600 Dec 31 Balance c/d
5 000
26 206
$
1 400
5 720
3 765
4 210
2 200
8 911
_____
26 206
8 911
Other balances are:
Shop inventory
Equipment at net book value
Shop trade payables
1 January 2016
$
975
14 760
1 210
31 December 2016
$
826
?
1 450
REQUIRED
(a)
Distinguish between the capital of a sole trader and the accumulated fund of a non-profit-making club or
society.
[2]
(b)
Prepare the shop income statement for the year ended 31 December 2016.
[4]
Additional information
1
Equipment is depreciated at 10% of net book value at the year end. Equipment which was sold had a net
book value of $1 900.
2
The rent received for the catering facility is $200 per month and commenced on 1 January 2016.
3
The annual subscription for the year ended 31 December 2016 was $9 per member. On 1 January 2017 it
was increased to $10 per member.
At 1 January 2016:
20 members had paid their subscription in advance for 2016.
There were 6 members in arrears for 2015. Their membership has been withdrawn and the amount
they owed is to be written off as a bad debt.
At 31 December 2016:
26 members paid their subscription in advance for 2017.
10 members were in arrears for 2016 and they had until 30 June 2017 to pay.
4
The donation of $5 000 was received specifically to start a new fund for a club-house. The treasurer would
like to invest this in a separate long-term savings account.
REQUIRED
(c)
Prepare the income and expenditure account for the year ended 31 December 2016.
[10]
Chapter 1
(d)
(e)
24
Accounts of Non Profit Organisations
Prepare an extract from statement of financial position at 31 December 2016 to show the current assets
and current liabilities of the club.
[4]
Discuss whether or not the treasurer should invest the fund for the club-house in a separate long-term
savings account. Justify your answer.
[5]
QUESTION 13
NOVEMBER 2017 P32 Q1
The GT Boating Club is a not-for-profit organisation which collects funds by subscriptions paid annually.
At 1 January 2016 the following assets and liabilities were held by the club:
$
Boathouse
240 000
Fixtures and fittings
Cost
15 000
Accumulated depreciation
10 000
Trade payables
1 750
Total inventory
1 100
Bank
6 150 debit
Insurance paid in advance
1 100
Electricity owing
450
Subscriptions in arrears
600
Subscriptions in advance
400
Additional information
1
The club runs a restaurant for the exclusive use of members and their guests. During the year ended 31
December 2016 the revenue of the restaurant was $45 000.
2
The opening restaurant inventory was 75% of the total club inventory. The closing restaurant inventory had
doubled at 31 December 2016.
3
During the year ended 31 December 2016 the club paid $28 350 for restaurant purchases.
All the club’s trade payables at 1 January 2016 related to the restaurant suppliers. This had risen by 20% at
31 December 2016.
4
The club paid insurance for the year of $4 800 and electricity of $2 000. Half of these costs are charged to
the restaurant.
At 31 December 2016 the club still owed $950 for insurance.
REQUIRED
(a)
Prepare a statement to calculate the restaurant profit for the year ended 31 December 2016.
The statement should also clearly show the gross profit.
[10]
Additional information
Another local boating club runs a similar restaurant. Its latest accounts showed that the restaurant had achieved a
gross margin of 45%.
REQUIRED
(b)
(i)
(ii)
Calculate the difference between the gross margins of both restaurants.
Discuss three actions which the club could take to improve the gross margin.
[2]
[6]
Additional information
The club is now considering the introduction of a life membership subscription.
The annual subscription is $100 and the proposed life subscription would be $1 000.
Gurmukh, a retired gentleman, is considering joining the club and seeks your advice on whether or not he should
pay an annual subscription or the life membership.
REQUIRED
(c)
Explain the accounting treatment of the life subscriptions.
(d)
Advise Gurmukh whether or not he should become a life member. Justify your advice.
[2]
[5]
Chapter 1
25
Accounts of Non Profit Organisations
QUESTION 14
NOVEMBER 2017 P33 Q1
The RS Rowing Club is a not-for-profit organisation.
A summary of the club’s receipts and payments account for the year ended 31 March 2017 is as follows:
Receipts and payments account
$
$
Balance b/d
4 370 Purchases of sports equipment
1 624
Members’ subscriptions
10 300 Rent of boathouse
2 800
Sales of sports equipment
1 850 General expenses
1 379
Entry fees for annual boat race
4 200 Wages
3 500
Prizes for annual boat race
325
Expenses of annual boat race
2 456
_____ Balance c/d
8 636
20 720
20 720
Additional information
1
The club owns boats which had originally cost $24 000. Accumulated depreciation at 1 April 2016 was $11
200. The depreciation policy is to charge 10% per annum using the reducing balance method.
2
The club also sells sports equipment to its members. Inventory of sports equipment was as follows:
3
1 April 2016
31 March 2017
Members’ subscriptions in arrears and paid in advance were as follows:
Members’ subscriptions in arrears
Members’ subscriptions in advance
4
$
364
429
1 April 2016
$
700
350
31 March 2017
$
650
450
The balance on the accumulated fund on 1 April 2016 was $40 614.
REQUIRED
(a)
Identify four terms used only in the financial statements of a not-for-profit organisation with the
corresponding terms used in the financial statements of a profit-making business.
[4]
(b)
Prepare the income and expenditure account for the year ended 31 March 2017.
[8]
(c)
Prepare an extract from the statement of financial position at 31 March 2017 showing the accumulated
fund of the club at that date.
[2]
Additional information
The club has decided to introduce a scheme offering life membership for payment of $400. Annual subscription fees
are currently $50. The club members think that the life membership fees should be credited in full to the income
and expenditure account when received. The treasurer has suggested that the life membership payments should be
credited to income and expenditure account over a number of years.
REQUIRED
(d)
Discuss the correct accounting treatment for the life membership.
[4]
Additional information
A former member has donated $35 000 to the club. The funds are to be invested and the investment income used
to encourage young people to train for national competitions. The club is considering two investment options.
1
Invest for 3 years at an annual fixed interest rate of 7.5%.
2
Use the funds to build its own boathouse. Part of the new boathouse could be rented to another local group
at an annual rent of $1250.
REQUIRED
(e)
Recommend which option the club should select. Support your answer with reasons and relevant
calculations.
[7]
Chapter 1
26
Accounts of Non Profit Organisations
QUESTION 15
MAY 2018 P31 & P33 Q4
A Social Club provides activities for the elderly. It also provides them with meals and organises coach trips.
The ledger accounts of the club for the year ended 31 December 2017 included the following:
Subscription account
Details
$
Details
$
Balance b/d
400 Balance b/d
100
Income and expenditure account
26 300 Bank
25 800
Balance c/d
50 Irrecoverable debts
250
_____ Balance c/d
600
26 750
26 750
Details
Balance b/d
Bank
Details
Balance c/d
Fixtures and fittings account
$
12 000 Balance c/d
3 300
15 300
Details
Provision for depreciation of fixtures and fittings account
$
Details
3 930 Balance b/d
____ Income and expenditure
3 930
$
15 300
_____
15 300
$
2 400
1 530
3 930
The following information was also available.
1
The club owned its own premises which had an original cost of $100 000. These were not depreciated.
2
On 1 January 2017 the bank account had a debit balance of $4 700 and the accumulated fund amounted to
$114 850.
3
The sale of meals to members during the year amounted to $21 500 and made a profit of $2 600. Inventory
of food remained constant at $250. No purchases of food were made on a credit basis. All receipts and
payments for meals were made through the bank account.
4
The club organised two coach trips every month. For each trip it hired a 50-seater coach (with driver) at a
cost of $1 000. During 2017 the club sold 620 coach trip tickets for $25 each.
All receipts and payments for trips were made through the bank account.
5
Other running costs paid during the year totalled $18 100. These included staff costs.
6
Staff costs of $200 were accrued at the end of the year.
REQUIRED
(a)
State two differences between a club and a limited company.
(b)
Prepare the income and expenditure account for the year ended 31 December 2017.
(c)
Prepare the statement of financial position at 31 December 2017.
[4]
[7]
[10]
Additional information
The management committee of the club is considering increasing the price of the coach trip tickets to members.
(d)
Advise the management committee whether or not it should increase the price of the coach trip tickets.
Justify your answer.
[4]
Chapter 1
27
Accounts of Non Profit Organisations
SOLUTION
QUESTION 1
(a)
CHAPTER 1
MAY 2011 P21 Q2
Café income statement for the year ended 30 April 2011
$
Revenue (sales)
Cost of sales
Inventory at 1 May 2010
Purchases
Inventory at 30 April 2011
6 500
36 000
4 800
37 700
32 300
Add
Direct wages ($28 800 + $4 000 – $500)
Gross profit
Overheads
Heating and lighting ($18 000 × 40%)
Rent ($21 000 × 40%)
Profit for the year (net profit)
(b)
Incomes
7 200
8 400
$
90 000
70 000
20 000
15 600
4 400
Income and Expenditure account for the year ended 30 April 2011
$
4 400
36 900
450
14 560
Profit on café
Subscriptions ($34 000 – $2 200 + $3 600 + $5 000 – $3 500)
Donations
Ticket sales
Expenses
Rent ($21 000 × 60%)
Heating and lighting ($18 000 × 60%)
Depreciation of equipment ($14 400 – $4 000)
Interest on loan ($20 000 × 10% × 6/12)
Surplus of incomes over expenditures
(c)
Non-current assets
Equipment
Current Assets
Inventory
Subscriptions in arrears
Bank (balancing figure)
Current liabilities
Subscriptions prepaid
Loan interest
Wages accrued
12 600
10 800
10 400
1 000
56 310
(34 800)
21 510
Balance Sheet at 30 April 2011
$
Cost
104 000
$
Depreciation
14 400
$
NBV
89 600
4 800
3 600
4 010
12 410
3 500
1 000
4 000
(8 500)
Non-current liabilities
Loan
Represented By
Accumulated fund
Add
Surplus
$
3 910
93 510
20 000
73 510
52 000
21 510
73 510
Chapter 1
28
Accounts of Non Profit Organisations
WORKINGS
Calculation of Accumulated Fund
Assets
Equipment ($40 000 – $4 000)
Inventory
Bank
Subscriptions due
Less liabilities
Subscriptions paid in advance
Accrued wages
Accumulated fund
$
36 000
6 500
12 800
2 200
5 000
500
$
57 500
(5 500)
52 000
QUESTION 2
(a)
MAY 2011 P42 Q2 (a to c)
Top Hat Sports Club
Income and expenditure account for the year ended 31 December 2010
INCOMES
$
$
Annual subscriptions (265 × $150)
39 750
Life subscriptions ($1 600 × 3 /20)
240
39 990
EXPENSES
Café loss (See Workings)
3 560
Wages
10 600
Rent
12 000
General expenses
4 620
Heat, light and power ($8 240 + $910)
9 150
Depreciation ($17 200 + $5 300 – $19 500)
3 000
42 930
Deficit
2 940
(b)
Balance sheet as at 31 December 2010
NON-CURRENT ASSETS
$
$
$
Equipment
19 500
CURRENT ASSETS
Inventory
800
Subscriptions in arrears
750
Bank
3 780
5 330
CURRENT LIABILITIES
Café payables
760
Accrued heat, light and power
910
Subscriptions in advance
150
1 820
3 510
23 010
Accumulated Fund ($4 320 + $420 + $450 + $17 200 – $700 – $300)
21 390
Less
Deficit
(2 940)
18 450
Life members' fund [(3 × $1 600) – $240]
4 560
23 010
WORKINGS
Café Trading Account for the year ended 31 December 2010
$
Café takings (Sales)
Cost of Sales
Opening inventory
Purchases ($8 140 + $760  $700)
Closing inventory
Gross Profit
Café wages
Net Profit on Café
420
8 200
(800)
$
12 260
(7 820)
4 440
(8 000)
3 560
Chapter 1
29
(c)
(i)
(ii)
(iii)
(iv)
(v)
Public limited company
Prepares income statement
Excess of total incomes over total expenses is
called profit
Excess of total expenses over total incomes is
called loss
Shows share capital and reserves
Financial statements are published and
available for general view
Prepares statement of cash flows
Accounts of Non Profit Organisations
Not-for-profit organisation
Prepares income and expenditure account
Excess of total incomes over total expenses is
called surplus
Excess of total expenses over total incomes is
called deficit
Shows accumulated fund
Financial statements are not published
Prepares receipts and payments account
QUESTION 3
NOVEMBER 2011 P23 Q2 (B)
Hamilton Social Club
Balance Sheet
As at 31 March 2011
Non-Current Assets
Equipment
Current Assets
Café inventory [$3 950 – ($120 − $30)]
Inventory of stationery
Subscriptions in arrears
Bank
Current Liabilities
Trade Payables
Loan interest due ($5 000 × 5%)
$
$
$
9 360
3 860
85
120
340
4 405
880
250
1 130
Non-Current Liabilities
5% loan (repayable 2015)
3 275
12 635
5 000
7 635
Financed by
Accumulated fund[$3 400+$240+$5 400+$110+$1 800–$1 570]
Deficit for the year (balancing figure)
9 380
(1 745)
7 635
QUESTION 4
(a)
NOVEMBER 2012 P21 Q2
Subscription Account
$
$
Balance (due) b/f
2 600 Balance (advance) b/d
6 300
Income and expenditure (balancing figure)
86 980 Bank (subscriptions received)
84 400
Balance (advance) c/d
4 500 Bad debts
280
_____ Balance (due) c/d
3 100
94 080
94 080
Balance (due) b/d
3 100 Balance (advance) b/d
4 500
(b)
PPE Rowing Club
Income and Expenditure Account
For the year ended 31 March 2012
Income
Subscriptions (“a” part)
Profit from competitions [$12 200 – ($800 + $3 100 – $300)]
Profit from dinner dance [$14 000 – ($2 400 + $5 200)]
Donations
Interest ($20 000 × 5%)
$
86 980
8 600
6 400
1 500
500
$
103 980
Chapter 1
30
Accounts of Non Profit Organisations
Expenditure
Insurance
Clubhouse maintenance
General expenses ($30 200 + $400 – $800)
Electricity
Bad debts
Depreciation on equipment ($160 000 + $46 000  $26 000  $140 000)
Loss on Sale of fixed asset ($26 000  $24 000)
Surplus of income
(c)
$
9 800
10 300
29 800
1 600
280
40 000
2 000
$
150 000
140 000
4 500
400
Represented By
Accumulated Fund ($150 000 + $160 000  $800 + $2 600 
$6 300 + $800 +$3 000)
Surplus
QUESTION 5
(a)
$
290 000
300
3 100
500
20 000
10 500
34 400
Current Liabilities
Subscriptions in advance
General expenses owing
4 900
309 300
10 200
29 500
319 500
319 500
MAY 2013 P21 Q1
Income statement (trading section) for the year ended 31 March 2013
$
Revenue
Cost of sales
Inventory at 1 August 2012
Purchases
15 400
23 000
38 400
(13 200)
Inventory at 31 March 2013
Gross profit
Gross Profit (%)
=
=
=
(c)
93 780
10 200
Statement of Financial Position
As at 31 March 2012
Non-current assets
Clubhouse
Equipment
Current Assets
Stock of prizes
Subscriptions due and unpaid
Interest owing ($20 000 × 5%)
Deposit account
Bank (through bank account)
(b)
$
Gross Profit
Sales revenue
$24 800
$50 000
$
50 000
(25 200)
24 800
× 100
× 100
49.6%
The obtained gross profit margin is worse than planned margin. This could be due to the following reasons.
 There may have been increase in the cost of purchases without corresponding increase in sales price.
 Loss of inventory by theft or fire not accounted for
 Undervaluation of closing inventory or overvaluation of opening inventory
 Reduction in selling price
Chapter 1
31
(d)
Accounts of Non Profit Organisations
Income and Expenditure account
For the year ended 31 March 2013
INCOMES
Profit on food and drink (“a” part)
Subscriptions ($30 000  $1 600  $400 + $1 000 + $2 600)
Profit on concert ($116 800  $83 500  $27 000)
EXPENSES
Printing ($14 000  $2 600 + $2 800)
Repairs
Salaries ($45 000  $2 800 + $1 600)
Sundry expenses
Sponsorship
Loan interest ($30 000 × 12% × 9/12)
Depreciation [($200 000 – $40 000 + $10 000) x 20%]
Loss on sale of equipment ($32 000  $30 000)
Deficit of expenditure/income
(e)
$
24 800
31 600
6 300
14 200
8 000
43 800
760
1 000
2 700
34 000
2 000
$
62 700
106 460
43 760
Statement of Financial Position at 31 March 2013
Non-Current Assets
Equipment[($200 – $40 + $10)000 ; ($40 –$8 + $34) 000
Current Assets
Inventory
Subscriptions in arrears
Bank
Current Liabilities
Subscriptions prepaid
Salaries accrued
Accrued Interest
Printing accrued
Cost
$
170 000
Depn
$
66 000
13 200
2 600
32 540
48 340
400
1 600
2 700
2 800
7 500
Non-Current Liabilities - Bank loan
Net assets
Accumulated fund (See Workings)
Less
Deficit
WORKINGS
158 600
43 760
114 840
$
177 000
(18 400)
158 600
MAY 2014 P23 Q1
Ocean Fishing Club Shop
Trading Account for the year ended 31 March 2014
$
Sales
cost of sales
Opening Inventory
Purchases ($2 974 + $784  $560)
Closing Inventory
Gross profit
40 840
144 840
30 000
114 840
Calculation of Accumulated Fund
Assets ($160 000 + $15 400 + $1 600)
Less
Liabilities ($2 800 + $1 000 + $2 600 + $12 000)
Accumulated Fund
QUESTION 6
(a)
NBV
$
104 000
975
3 198
4 173
(859)
$
7 690
(3 314)
4 376
Chapter 1
32
Accounts of Non Profit Organisations
Expenses
Wages ($3 670 + $195  $250)
Depreciation – Shop fittings ( $750  $640)
Shop profit for the year
(b)
Incomes
$
3 615
110
$
(3 725)
651
Income and Expenditure Account for the year ended 31 March 2014
Shop profits (‘a’ part)
Subscriptions (350 × $20)
Receipts from annual family day
Interest on deposit account ($6 000 × 5%)
Expenses
Administration expenses
Repairs to equipment ($2 500 + $370  $420)
Depreciation on equipment [($9 800 + $5 600)  $2 940] × 15%
Surplus
Ocean Fishing Club
Statement of Financial Position at 31 March 2014
Non-Current Assets
Cost
$
Equipment ($9 800 + $5 600); ($2 940 + $1 869)
15 400
Shop fittings
750
16 150
Current Assets
Inventory
859
Subscription in arrears(10 × $20)
200
Bank – current account
876
Bank – deposit account [$13 000 + ($6 000 × 5%)]
13 300
Current Liabilities
Trade payables
784
Other payables ($370+ $195)
565
Subscriptions in advance (W 1)
720
$
651
7 000
2 300
300
2 790
2 450
1 869
$
10 251
(7 109)
3 142
(c)
Accumulated Fund at 1 April 2013
Add
Surplus
Donations fund
Dep’n
$
4 809
110
4 919
NBV
$
10 591
640
11 231
15 235
(2 069)
19 805
3 142
22 947
1 450
13 166
24 397
24 397
WORKINGS
(W 1)
Subscription Account
$
Balance b/f - arrears (24 × $20)
480 Balance b/f - advances (30 × $20)
Income & Expenditures A/c (350 × $20)
7 000 Bank - subscriptions received
Balance c/d - advances (Balancing fig )
720 Balance c/d - arrears (10 × $20)
8 200
(W 2)
Calculation of Accumulated Fund
Assets at 1 April 2013
[$975 + $6 000 + ($9 800  $2 940) + $750 + $6 570 (bank) + $480 (W 1)]
Liabilities at 1 April 2013 [$560 + $420 + $250 + $600 (W 1)]
Accumulated Fund at 1 April 2013
$
600
7 400
200
8 200
$
21 635
(1 830)
19 805
Chapter 1
33
Accounts of Non Profit Organisations
(d)
1
2
3
4
Use of funds from the deposit account
Bank loan
Ask members for donations
Fund raising events
(e)
1
Use of funds from the deposit account
Advantage:
Immediate availability of funds.
Disadvantage: No cash reserves will be left. Interest income on deposit will be lost
2
Bank loan
Advantage:
Funds available from bank for full amount.
Disadvantage: Bank loans usually require security. Interest will have to be paid.
3
Ask members for donations
Advantage:
No fixed interest charges.
Disadvantage: May not generate required funds so some other source may be required.
4
Fund raising events
Advantage:
No fixed interest charges.
Disadvantage: May not generate required funds so some other source may be required.
QUESTION 7
MAY 2016 P31 Q1
(a)
In a trading organization, term capital is used to represent the amount invested by owner within the
business. As there are no owner(s) in non-profit organisations so accumulated fund replaces capital in this
case and represents the accumulation of surpluses over a number of years.
(b)
Incomes
Income and expenditure accountfor the year ended 31 March 2016
Subscriptions (350 members @ $100)
Life membership [(25 × $750)/15 years]
Restaurant profit (W 1)
Expenses
Administrative expenses ($4 750 + $350 – $200)
Depreciation on fixtures [($20 000× 80%×80%)+$34 500]×20%
Surplus
(W 1)
$
35 000
1 250
4 660
4 900
9 460
$
40 910
(14 360)
26 550
Restaurant Trading Account (to calculate restaurant profit or loss)
$
Restaurant takings
Restaurant purchases ($6 950 + $955 – $845)
Restaurant wages ($5 450 + $280)
Restaurant profit
7 060
5 730
$
17 450
12 790
4 660
(c)
As donations are not received on regular basis and their amounts vary from year to year so clubs capitalise
the donations amounts. In addition, donations may be received for some specific purpose or to complete a
specific future project so should not be treated as income in the year of receipt only.
(d)
(i)
1 Fund raising events
Advantage:
No fixed interest charges.
Disadvantage: May not generate required funds so some other source may be required.
2 Bank deposit and bank loan
Advantage:
Funds available from bank for full amount.
Disadvantage: Bank loans usually require security. Interest will have to be paid.
3 Sponsorship
Chapter 1
34
Accounts of Non Profit Organisations
Advantage:
No fixed interest charges.
Disadvantage: May not generate required funds so some other source may be required.
(d)
(ii)
A combination of the above sources may be more beneficial for the club. For instance, Fund raising
events or sponsorships may be arranged. In case these sources do not generate required funds
then bank balance may be used. In case, there is still some deficiency then a loan may be arranged.
QUESTION 8
MAY 2016 P32 Q1 (a to d)
(a)
Limited companies prepare income statement whereas a not for profit organization prepares income and
expenditure account.
Non- profit organisations use the term ‘surplus’ or ‘deficit’ for the terms profit or loss as used by companies.
Non- profit organisations use the term Accumulated fund for capital as used by companies.
(b)
The Seagulls Boating Club
Trading account for the year ended 31 March 2016
$
Revenues
Less cost of sales
Opening inventory
Purchases ($8 850 + $2 952  $2 831)
Closing inventory
Gross profit
Wages [($600 × 12) + ($25 750 × 10%)]
Profit for the year
(c)
Balance b/f (9 × $80)
Income & expenditure a/c (310 × $80)
Balance c/d (3 × $80)
(d)
Subscriptions account
$
720 Balance b/f (4 × $80)
24 800 Bank (Balancing figure)
240 Balance c/d (12 × $80)
25 760
(9 423)
16 327
(9 775)
6 552
$
320
24 480
960
25 760
The Seagulls Boating Club
Income and expenditure account for the year ended 31 March 2016
Incomes
Subscriptions (‘c’ part)
Cafe profit (‘b’ part)
Expenses
General expenses [$2 500  ($180 × 2/3)]
Depreciation on fixtures [($16 000 × 75% × 75%) × 25%]
Surplus of incomes over expenditures
QUESTION 9
(a)
3 875
8 971
(3 423)
$
25 750
$
24 800
6 552
2 380
2 250
$
31 352
(4 630)
26 722
NOVEMBER 2016 P31 Q1
International Dancing
Income and Expenditure Account for the year ended 31 December 2015
Incomes
$
Annual subscriptions
106 500
Profit on sale of CDs (W 1)
3 300
109 800
Expenses
Rent
15 000
Staff costs
61 000
Insurance and administration ($4 200 – $300 + $50)
3 950
CDs for club use
4 000
Depreciation ($17 200 + $11 700 – $21 300)
7 600
(91 550)
Surplus of income over expenditure
18 250
Chapter 1
35
(W 1)
CD’s Trading Account
For the year ended 31 December 2015
Accounts of Non Profit Organisations
$
Sales
Cost of Sales
Opening Inventory
Purchases
180
2 600
2 780
(280)
Closing Inventory
Profit on sale of CD’s
(b)
(i)
Balance b/f
Subscription
Sale of Cd’s
Balance b/d (balancing figure)
(ii)
Bank Account
$
13 500 Rent
105 500 Staff costs
5 800 Insurance and administration
Purchase of music CDs for resale
Purchase of equipment
Purchase of CDs for club use
______ Balance c/d (balancing figure)
124 800
26 300
(2 500)
3 300
$
15 000
61 000
4 200
2 600
11 700
4 000
26 300
124 800
Statement to calculate the amount of the loan
Purchase price of premises
Amount arranged from existing bank balance [$26 300 (b(i)) × 1/2]
Life membership fees ($5 000 × 10%)
Bank loan needed to finance the project
(c)
$
5 800
$
142 000
(13 150)
(50 000)
78 850
Statement to show the effects of purchase of the premises on future annual cash flows
Rent saved
Loan interest payable ($78 850 × 10%)
Annual membership fees foregone of 10 members joined as life members
Annual net cash flow saving
(d)
$
15 000
(7 885)
(5 000)
2 115
Advantages

Certainty of securing a long term business location

An investment that will potentially increase in value

Helps to avoid any sudden, large rent increases

Ability to customise the premises without the landlord’s consent

Increase the value of the business and the net wealth of the business owner

The unused area of the building space may be sublet to generate some additional revenue
Disadvantages

High initial cost -- which might be used for more important business purposes.

Owning a property also comes with responsibilities like responsibility for maintenance, fixtures and
fittings, decoration and security.

Any fall in the value of the property will decrease your capital.

It is usually harder to relocate the business, because selling business premises is a complex and
sometimes lengthy process.

Payment of loan interest and repayment of loan are also important factors.
Chapter 1
36
QUESTION 10
(a)
Donation
Voluntary basis (not of binding on donors)
May be from both members and non-members
Irregular payment
May be for a specific purpose or for general purpose
(b)
Accounts of Non Profit Organisations
NOVEMBER 2016 P32 Q1
Member subscription
Members’ obligation
From members only
Regular payment, i.e. monthly or annually
For daily running of the organization
Sunshine Social Club
Shop Trading Account for year ended 31 December 2015
$
Gift shop takings
Cost of sales
Inventory at 1 Jan 2015
Purchases ($74 500 + $64 300 – $54 500)
Inventory at 31 December 2015
Gross profit
Expenses
Shopkeeper wages ($30 400 – $3 450 – $3 200)
Depreciation of shop equipment [($55 000 + $4 000) × 20%]
Insurance [($9 460 + $1 400 – $1 660) × 25%]
Water and electricity [($14 800 – $2 700 + $2 000) × 40%]
Shop loss transferred to Income and Expenditure account
(c)




(d)
$
124 200
24 000
84 300
(18 600)
23 750
11 800
2 300
5 640
(89 700)
34 500
(43 490)
(8 990)
start selling goods to non-members as well
reduce or stop discount offers to members
better control of overheads
review the proportion of expenses allocated to gift shop
Statement to calculate the chairman’s contribution to cover the deficit
$
Annual ball tickets
Less
Hire of ballroom & band for annual ball
Food for annual ball
Loss on annual ball
Chairman’s share ($16 000 × 1/2)
$
68 000
48 000
36 000
(84 000)
(16 000)
8 000
QUESTION 11
NOVEMBER 2016 P33 Q2
(a)
A non-profit organisation is a legal entity which nobody owns. It has trustees or members, who run the
organization but cannot sell their "trusteeship or membership". It is not allowed to distribute profits to
anyone, no matter how much money it makes. In these organisations 100% of the money (surplus) earned
is re-invested in the organisation to finance its main cause.
(b)
AB Cricket Club
Income and expenditure account for the year ended 31 August 2016
Incomes
Subscriptions ($11 200 + $165  $295 + $490 – $270)
Profit on the sale of equipment ($4 000  $3 640)
Match ticket sales
Profit from refreshments (W 1) – already given in question
Life membership (
$1 500 + $800
10
)
$
11 290
360
6 400
720
230
$
19 000
Chapter 1
37
Expenses
Groundsman’s wages
Repairs to clubhouse
Awards to players
Administration expenses
Depreciation on equipment [($7 800 + $2 500 – $3 640) × 10%]
Surplus of income over expenditure
(c)
$
7 500
700
1 450
760
666
$
11 076
7 924
AB Cricket Club
Statement of financial position as at 31 August 2016
Non-current assets
Equipment at net book value [($7 800 + $2 500 – $3 640)  $666]
Current assets
Inventory
Subscriptions in arrears
Bank
Savings account
Total assets
Accumulated fund at 1 September 2015
Add
Surplus for the year
Life membership fund ($1 500 + $800  $230)
Clubhouse fund (donation)
Current liabilities
Subscriptions in advance
Trade payables for refreshments
Total funds and liabilities
(d)
Accounts of Non Profit Organisations
$
$
5 994
390
165
11 880
3 500
7 825
7 924
295
315
15 935
21 929
15 749
2 070
3 500
21 319
610
21 929
In case of life membership, the members are generally required to make the payment in a lump sum only
once which enables them to become the members for whole of the life. Life members are not required to
pay the annual membership fees. As 'life membership fees' is a substitute for 'annual membership fees',
therefore, it is desirable that life membership fees should be credited to a separate fund and fair proportion
be credited to income in subsequent years as the organisation is supposed to provide membership facilities
for the rest of their lives.
QUESTION 12
NOVEMBER 2017 P31 Q2
(a)
In a trading organization, term capital is used to represent the amount invested by owner within the
business. As there are no owner(s) in non-profit organisations so accumulated fund replaces capital in this
case and represents the accumulation of surpluses over a number of years. Drawings by a sole trader reduce
his capital but as there is no owner in a non-profit organisation so accumulated fund is not affected by
drawings. Capital increases through profits and reduces by losses & drawings whereas surpluses are added
in accumulated funds and deficits are subtracted.
(b)
EF Tennis Club shop trading account
For the year ended 31 December 2016
$
Sales
Cost of Sales
Opening inventory
Purchases ($5 720 + $1 450 – $1 210)
Closing inventory
Shop staff wages
Shop profit
975
5 960
(826)
$
8 960
(6 109)
2 851
(2 200)
651
Chapter 1
38
Accounts of Non Profit Organisations
(c)
EF Tennis Club
Income and expenditure account for the year ended 31 December 2016
Incomes
$
Subscriptions [$3 600 + (20 × $9) + (10 × $9) – (26 × $10)]
3 610
Shop profit
651
Caterer’s rent ($200 × 12)
2 400
Match ticket sales
2 740
Expenses
Depreciation on equipment [($14 760 + $1 400 – $1 900) × 10%]
1 426
Printing and advertising for matches
3 765
Ground staff wages
4 210
Bad debts (6 × $9)
54
Loss on sale of equipment ($1 900 – $1 760)
140
Deficit for the year
(d)
Statement of Financial Position (Extract) at 31 December 2016
Current assets
Shop inventory
Subscriptions in arrears (10 × $9)
Bank and cash
Current liabilities
Trade payables
Subscriptions in advance (26 × $10)
Rent in advance [$2 600 – ($200 × 12)]
(e)




QUESTION 13
(a)
9 595
(194)
$
9 827
1 910
7 917
NOVEMBER 2017 P32 Q1
Statement to calculate the restaurant profit for the year ended 31 December 2016
$
$
45 000
825
28 700
29 525
(1 650)
Closing inventory ($825 × 2)
Gross profit
Expenses
Insurance [($4 800 + $950 + $1 100) × 50%]
Electricity ($2 000  $450) × 1/2)
Restaurant profit
(i)
1 450
260
200
9 401
As donation is received for a specific long term purpose so should be invested in long term saving
account.
This investment will create a source of income for the organization.
It would diversify the incomes of the organization and reduces its dependency on conventional
earning sources.
The interest on long term saving account may help to “smooth out” the overall income stream.
Revenue
Cost of sales
Opening inventory ($1 100 × 75%)
Purchases [$28 350 + ($1 750 × 120%) – $1 750]
(b)
$
826
90
8 911
$
Difference in gross margins
3 425
775
=
45%
=
6.94%

38.06% (
(27 875)
17 125
(4 200)
12 925
$17 125 ×100
$45 000
)
Chapter 1
39
(ii)
Accounts of Non Profit Organisations
Bulk buying with higher trade discounts.
Increase in selling prices
Change of suppliers with cheaper rates
More sales of higher margin items
(c)
In case of life membership, the members are generally required to make only one payment in a lump sum
which enables them to become the members for whole of their lives. As 'life membership fees' is a
substitute for 'annual membership fees', therefore, it is debited to bank account and credited to a separate
fund and fair proportion be credited to income in subsequent years as the organisation is supposed to
provide membership facilities for the rest of their lives.
(d)
If Gurmukh has $1 000 to pay life fee he would not be required to pay membership fee again in his life
irrespective of changes in annual membership rates. As Gurmukh is a retired personnel so it can only benefit
him on financial grounds if he lives for a period more than one year. Clubs usually offers special benefits for
life members which could also be there. However, life fee, once paid is not recoverable or refundable.
On the basis of above discussion, Gurmukh may become life member if he has ample funds like $1 000and
his health conditions are good.
QUESTION 14
(a)
NOVEMBER 2017 P33 Q1
Not-for-profit organisations
Accumulated fund
Income and Expenditure account
Receipts and payments account
Surplus of income over expenditure
Excess of expenditure over income (deficit)
(b)
Profit-making organisations
Capital / Equity
Income Statement
Bank account/Cash book
Profit
Loss
RS Rowing Club
Income and Expenditure Account for the year ended 31 March 2017
Incomes
Members’ subscriptions ($10 300 + $650 – $700 – $450 + $350)
Profit on sale of equipment [$1850 (sales)  {($364+$1624$429) cost of sales}]
Profit from annual boat race [$4 200  $325  $2 456)
Expenses
Rent of boathouse
General expenses
Wages of boatman
Depreciation of boats and equipment [($24 000  $11 200) × 10%]
Surplus of income over expenditure
(c)
2 800
1 379
3 500
1 280
$
11 860
(8 959)
2 901
RS Rowing Club
Extract from statement of financial position at 31 March 2017
Accumulated fund at 1 April 2016
Surplus of income over expenditure
Accumulated fund at 31 March 2017
(d)
$
10 150
291
1 419
$
40 614
2 901
43 515
In case of life membership, the members are generally required to make only one payment in a lump sum
which enables them to become the members for whole of their lives.
Chapter 1
40
Accounts of Non Profit Organisations
As 'life membership fees' is a substitute for 'annual membership fees', therefore, it is debited to bank
account and credited to a separate life fee fund and fair proportion be credited to income in subsequent
years as the organisation is supposed to provide membership facilities for the rest of their lives.
This treatment is also in compliance with the matching concept. The life fee should be spread over a suitable
time period for which club is expecting to provide services to the life members. The suitable time period
may be determined through dividing the life fee by the annual membership fee. This time period is 8 years
($400/$50) in this case.
(e)
If amount is invested at interest rate of 7.5% then it will generate annual income $2 625 ($35 000 × 7.5%).
On the other hand if club builds its own boat house, then club would save annual rent of boathouse
amounting to $2 800 and in addition it will also generate an annual rental income of $1 250. Total extra
income would be $4 050.
As investment is for three years only so the funds would be available to the club afterwards for other
investment opportunities, this flexibility would not be available in case of building a boathouse. Boathouse
may involve higher maintenance with passing years but as rents usually increase on yearly basis so increase
in rental income and saving also justifies the building of a new boat house.
On purely financial grounds, the club should use the funds to build the new boat-house.
QUESTION 15
(a)
(i)
(ii)
(iii)
(iv)
(v)
MAY 2018 P31 & P33 Q4
Public limited company
Prepares income statement
Excess of total incomes over total expenses is
called profit
Excess of total expenses over total incomes is
called loss
Shows share capital and reserves
Financial statements are published and available
for general view
Prepares statement of cash flows
(b)
Incomes
Not-for-profit organisation
Prepares income and expenditure account
Excess of total incomes over total expenses is called
surplus
Excess of total expenses over total incomes is called
deficit
Shows accumulated fund
Financial statements are not published
Prepares receipts and payments account
Income and Expenditure Account for the year ended 31 December 2017
Subscriptions
Profit on sale of meals
Less expenditure
Loss on trips [($1000 × 2 × 12)  (620 × $25)}
Irrecoverable debts (subscriptions written off)
Depreciation on fixtures and fittings
Other running costs ($18 100 + $200)
Surplus
Statement of Financial Position at 31 December 2017
$
Non-current assets
Cost
Premises
100 000
Fixtures and fittings
15 300
115 300
Current assets
Inventory of meals
Subscriptions in arrears
Bank (W1)
Total assets
$
26 300
2 600
8 500
250
1 530
18 300
$
28 900
(28 580)
320
(c)
$
Acc dep
3 930
3 930
250
600
3 200
$
NBV
100 000
11 370
111 370
4 050
115 420
Chapter 1
41
Accumulated fund at 1 January 2017
Surplus for the year
Accumulated fund at 31 December 2017
Current liabilities
Other payables (accrued staff costs)
Subscriptions in advance
(W 1)
Balance b/f
Subscriptions received
Sale of meals
Sale of trip tickets (620 × 25)
(d)
Accounts of Non Profit Organisations
114 850
320
115 170
200
50
Bank account (to calculate bank balance)
$
4 700 Purchase of meals ($21 500  $2 600)
25 800 Purchase of Fixtures
21 500 Cost of trips ($1 000 × 2 × 12)
15 500 Other running costs
____ Balance c/d
67 500
250
115 420
$
18 900
3 300
24 000
18 100
3 200
67 500
Increase in the price of the coach trip tickets does not seem to be a good option as coaches for trips are
620 bookings
operated at just little more than 50%(
). Increase in ticket price could further depress
1 200 seats
demand.
Company should rather consider reduction in prices of tickets to attract more customers or some
promotions such as a discount for booking on re trips or more could be offered.
Prices of ticket could be adjusted after analysing trip which are most popular in terms of timing or
destinations. Number of trips could be adjusted accordingly.
Chapter 2
42
CHAPTER 2
Accounting For Consignments
ACCOUNTING FOR CONSIGNMENT
QUESTION 1
SPECIMEN 2016 P3 Q2
Lee started a business in Indonesia on 1 January 2013 selling lawn mowers.
During the first year of trading Lee bought 1000 lawn mowers at $50 each. He shipped 400 of these to Albert, his
agent in Jamaica. Lee also sold 550 lawn mowers in Indonesia.
The following additional information is available.
Freight charges paid by Lee
Landing duties paid by Albert
Rate of commission paid to Albert
Cash remitted by Albert to Lee
$3 600
$400
10%
$19 000
Lee’s income statement for the year ended 31 December 2013 included the following.
Gross profit
Consignment profit
Selling, distribution and administration costs (arising in Indonesia)
$
22 000
6 720
17 600
Lee’s statement of financial position at 31 December 2013 included the following inventory.
Jamaica
Indonesia
Total inventory
$
4 800
2 500
7 300
REQUIRED
(a)
Prepare the consignment account in the books of Lee for the year ended 31 December 2013.
(b)
Prepare Albert’s account in the books of Lee for the year ended 31 December 2013.
(c)
Calculate the number of unsold lawn mowers Albert was holding on 31 December 2013.
[8]
[6]
[5]
Additional information
Lee is considering whether to concentrate his efforts on sales in Indonesia or in Jamaica.
REQUIRED
(d)
Advise Lee where to concentrate his sales effort. Support your answer with calculations.
[6]
QUESTION 2
NOVEMBER 2016 P33 Q4
Hamid and Patel trade regularly with each other. Patel is based in India and Hamid is based in Scotland.
On 15 November 2014 Hamid sent 100 cases of goods to Patel costing $12 000. The commission on sales was agreed
at 5% of the gross sales.
On the same day Hamid paid delivery charges of $610 and insurance of $110.
Hamid’s financial year ended on 31 March 2015.
At that date Patel provided the following information:
1
70% of the goods had been sold for $10 600.
2
$7 475 had been sent to Hamid.
3
There was an irrecoverable debt of $120.
4
Storage charges of $350 and selling expenses of $245 had been paid by Patel.
Patel paid the balance due on 31 March 2015.
Hamid incurred bank charges of $12 for processing this payment.
REQUIRED
(a)
Prepare in the books of Hamid the following accounts at 31 March 2015:
(i)
the goods sent on consignment account
[1]
(ii)
the consignment to Patel account
[11]
(iii)
Patel account
[7]
Chapter 2
(b)
43
Analyse the effect on profit of the irrecoverable debt incurred during the year.
Accounting For Consignments
[2]
Additional information
Hamid and Patel are now considering forming a partnership rather than continuing to trade on a consignment basis.
REQUIRED
(c)
Advise whether or not Hamid and Patel should enter into a partnership with each other. Justify your answer.
[4]
QUESTION 3
NOVEMBER 2017 P33 Q3
Aleksander is a trader with a financial year end of 30 June. He buys containers of sunflower seeds for $100 each.
Some of these he ships to his agent Benji in northern Europe. He pays Benji a commission of 10% of sales value.
The following information is available:
1
On 2 April 2017 Aleksander sent 200 containers to Benji. Aleksander paid packing costs of $120 and freight
costs of $6 080.
2
Benji paid additional freight costs of $1 600 for transport from the port to his warehouse.
3
In the period to 30 June 2017 Benji sold 160 containers for $170 each. He remitted $21 000 to Aleksander
on 14 June.
REQUIRED
(a)
Prepare the following ledger accounts in the books of Aleksander for the 3 months ended 30 June 2017.
(i)
goods on consignment account
[2]
(ii)
consignment account
[12]
(iii)
Benji account
[5]
Additional information
The government in Benji’s country decided to introduce import duties from 1 July 2017 which amount to $20 per
container.
REQUIRED
(b)
Explain how Aleksander might have dealt with this increase in cost. Support your answer by considering the
effect on the profit per container.
[4]
(c)
State why an advertising campaign paid for by an agent would not be included in the valuation of inventory.
[2]
QUESTION 4
MAY 2018 P32 Q3
Y Limited is based in Mauritius and has recently sent a consignment of goods to Mahood who lives in Egypt. They
agreed the following terms:
1
Mahood has to make an advance payment before the goods are delivered to him.
2
Mahood is entitled to a commission of 5% on all sales made by him. The commission is calculated on the
sales value after the deductions of the commission.
The following transactions took place during the year ended 31 December 2017.
Y Limited:
sent 1000 units to Mahood and invoiced him at $175 each
paid freight of $15 400 and insurance of $3 200.
Mahood:
made an advance payment of $55 000 to Y Limited
made cash sales of 480 units at $257.50 each
made credit sales of 320 units at $270 each
paid the following:
Chapter 2
44
Accounting For Consignments
$
import duty
1 600
Advertising
9 700
carriage inwards
2 800
carriage outwards
3 300
All customers who bought on credit from Mahood settled their accounts in full at 31 December 2017 except a
customer who bought 16 units. It was confirmed that nothing will be recovered from this customer.
At the year-end 60 units with minor faults were discovered by Mahood. Their net realisable value was $150 each.
Mahood paid the balance owing to Y Limited by cheque.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a)
Calculate the cost per unit to be used when valuing inventory.
(b)
Prepare the consignment account in the books of Y Limited for the year ended 31 December 2017.
(c)
Prepare Mahood’s account in the books of Y Limited for the year ended 31 December 2017.
[2]
[13]
[5]
Additional information
The directors of Y Limited are thinking of opening a branch overseas to sell its goods rather than having a
consignment agreement with Mahood.
(d)
Suggest whether Y Limited should continue consigning goods to Mahood or open a branch overseas. Justify
your answer.
[5]
Chapter 2
45
Accounting For Consignments
SOLUTION
CHAPTER 2
QUESTION 1
(a)
In the books of Lee
Goods on consignment
Bank (freight)
Albert (landing duties)
Albert (commission)
Consignment profit
Balance b/d
SPECIMEN 2016 P3 Q2
Consignment Account
$
20 000 (1) Albert (sales)
3 600 (1) (25 920 ÷ 0.9)
400 (1) Balance c/d
2 880 (1of)
6 720 (1)
33 600
4 800
$
28 800 (1of)
4 800 (1)
____ __
33 600
Note – Mark for word ‘balance’. ‘Inventory’ not awarded.
(b)
In the books of Lee
Consignment account (sales)
Balance b/d
Albert Account
$
28 800 (1of) Consignment A/c (landing duties)
Consignment A/c (commission)
Bank
________ Balance c/d
28 800
6 520 (1of)
(c)
Calculate the number of unsold lawn mowers Albert was holding on 31 December 2013.
Unit cost = 20 000 + (3600 + 400) (1) ÷ 400 (1) = $60 (1of)
Number of units = 4800 (1) ÷ 60 = 80 units (1of)
(d)
•
•
•
•
QUESTION 2
(a)
(i)
$
400 (1)
2 880 (1of)
19 000 (1)
6 520 (1of)
28 800
[5]
Sales in Jamaica – profit per unit is 6720/320 = $21
Assuming freight costs etc. are fully variable this would be replicated. Would Lee need a second
agent? Would another agent work for the same rate of commission?
Could there be problems with exchange rates, import quotas etc?
Sales in Indonesia – profit per unit is (22 000 – 17 600)/550 = $8. Clearly this is much less. But
expenses may have a substantial fixed component. It would be more useful to compare
contribution.
(1 mark) × 6 valid points
NOVEMBER 2016 P33 Q4
Goods sent on consignment account
$
Consignment to Patel
Consignment to Patel account
$
Goods sent on consignment (100 cases)
12 000 Sales ([(100 × 70%) cases]
Bank - Delivery charges
610 Balance c/d ($12 000 + $610 + $110 +
Bank - Insurance
110 $350) × 30%]
Patel - Irrecoverable debt
120
Patel - Storage charges
350
Patel - Selling expenses
245
Patel - Commission ($10 600 × 5%)
530
Bank - Bank charges
12
Profit to income statement
544
14 521
$
12 000
(ii)
$
10 600
3 921
_____
14 521
Chapter 2
46
(iii)
Consignment
Accounting For Consignments
Patel account
$
10 600 Cash (advance)
Consignment - Irrecoverable debts
Consignment - storage expenses
Consignment - Selling expenses
Consignment - Commission
_____ Bank (final settlement)
10 600
(b)
The irrecoverable debt as an expenses will reduce profit for the year by $120
(c)
Hamid and Patel should enter into partnership due to

availability of additional capital

sharing of managerial responsibilities resulting in shared workload and less stress

spread of risk as losses will be shared
$
7 475
120
350
245
530
1 880
10 600
Hamid and Patel should not enter into partnership due to

liability of the partners for debts of their firm is unlimited.

limited life as death or insolvency of partner(s) dissolves the partnership.

possible disputes between partners

practical issues such as speed of communication for decision making between countries e.g. time
differences
QUESTION 3
(a)
(i)
2017
Jun 30 Income statement
NOVEMBER 2017 P33 Q3
Goods on consignment account
$
2017
$
20 000 Apr 2
Consignment account
20 000
(ii)
2017
Apr 2
Jun 30
Jul 1
Consignment account
$
2017
Goods on consignment (200 × $100) 20 000 Jun 30 Benji – sales (160 units × $170)
Bank – packing
120 Jun 30 Balance c/d
[20000 + (120 + 6080 + 1600)] × 40
Bank - freight
6 080
200 units
Benji - additional freight charges
1 600
Benji - commission ($27 200 × 10%)
2 720
Income statement (profit)
2 240
32 760
Balance b/d
5 560
(iii)
2017
Jun 30 Consignment a/c (sales)
Jul 1
(b)
Benji
$
2017
27 200 Apr 02 Consignment a/c - freight
Jun 14 Bank - remittance
Jun 30 Consignment a/c - commission
Balance c/d
27 200
1 880
Balance b/d
Existing profit per container is $14 (
$2 240
$160
$
27 200
5 560
32 760
$
1 600
21 000
2 720
1 880
27 200
). The introduction of import duty of $20 per container will result
in a per container loss of $6 ($20  $14). With increase in import duty it is not viable for Aleksander to
consign goods at the same terms.
If Aleksander still wants to export to Benji’s country then import duty is an unavoidable cost. To make the
consignment profitable again, Aleksander could either increase the selling price or reduce Benji’s
commission by $6. Aleksander should also look for some other sale opportunities.
Chapter 2
(c)
47
Accounting For Consignments
Under IAS 2 advertising cost should not be included in the inventory valuation as it is not incurred on
purchasing or producing inventory items. As per IAS 2 only those costs may be included in inventory
valuation which are incurred on preparing the inventory to its present location or condition.
QUESTION 4
(a)
MAY 2018 P32 Q3
Cost per unit
Total Costs
=
Total Units
15 400+3 200+ 1 600+2 800
=
$175 +
=
$198
1 000 𝑢𝑛𝑖𝑡𝑠
(b)
Consignment account
$
Goods on consignment (1 000 units @ $175) 175 000 Cash sales (480 units @ $257.5)
Bank : Freight
15 400 Credit sales (320 units × $270)
Insurance
3 200 Balance c/d [(1 000 – 480 –320–60)×$198]
Mahood: Import duty
1 600 + (60 × $150)
Advertising
9 700
Carriage inwards
2 800
Carriage outwards
3 300
Bad debt (16 units × $270)
4 320
Commission (W 2)
10 000
Income statement (profit on consignment)
21 400
246 720
Balance b/d (inventory)
36 720
WORKINGS
(W 1) Commission
(W 2)
=
=
=
Sales after Commission
x
Sales after Commission
Sales after Commission (W 2)
$200 000
$10 000
×

=
=
=
Sales before commission
($123 600 + $86 400)
=
$200 000
$
123 600
86 400
36 720
______
246 720
5%
x


Commission
0.05x
$210 000
1.05
(c)
Books of Y Limited
Cash sales
Credit sales
(d)
Mahood Account
$
123 600 Bank - Advance payment
86 400
Import duty
Advertising
Carriage inwards
Carriage outwards
Bad debt (16 units × $270)
Commission (W 2)
______
Bank (balancing figure)
210 000
$
55 000
1 600
9 700
2 800
3 300
4 320
10 000
123 280
210 000
If Y Limited consigns goods to Mahood then it would not need to incur heavy initial cost to set up an
overseas branch. It would also allow to have a trial run in the overseas market before investing heavily. This
will involve low risk in terms of overseas economic, political, cultural and social environment conditions.
Chapter 2
48
Accounting For Consignments
Opening a branch overseas allows overseas expansion of the business if local market is saturated or highly
competitive. Overseas markets usually offer low tax rates. Though opening a new branch involves high costs
but would offer Y Limited complete control of the business activities and would also offer flexibility in
business operations.
Chapter 3
CHAPTER 3
49
Accounting For Joint Ventures
ACCOUNTING FOR JOINT VENTURES
QUESTION 1
MAY 2016 P31 Q2
Ahmed and Bashmir have separate garage businesses and have agreed to form a joint venture to buy and sell second
hand cars.
They have agreed to share the profits and losses as two thirds to Ahmed and one third to Bashmir.
They record purchases and sales of cars in their own books of account.
The following financial information is available for the period of the joint venture.
Credit purchases
Expenses
Commissions received
Discount received
Cash sales
Credit sales
Returns inwards
Irrecoverable debts
Ahmed
$
24 500
3 200
1 000
500
6 000
32 000
4 500
Bashmir
$
17 600
2 300
100
4 800
50 700
300
It was agreed that Bashmir would take over the inventory of unsold cars at the end of the venture. Bashmir has
advised that he has an inventory of unsold cars at the end of the venture valued at $6 500.
REQUIRED
(a)
Prepare the memorandum joint venture account.
[9]
(b)
Prepare the joint venture account in the books of Ahmed and show the balance due to or from Bashmir.
[8]
(c)
State the heading under which the balance due will be shown in Ahmed’s statement of financial
position.
[1]
Additional information
Ahmed has discovered that Bashmir did not hold any inventory but had sold the closing inventory of cars for $12 500.
REQUIRED
(d)
Calculate:
(i)
the correct total profit for the joint venture. Start your calculation with your answer from (a). [3]
(ii)
the extra profit due to Ahmed from the joint venture.
[1]
(e)
Evaluate whether or not Ahmed should have entered into the joint venture with Bashmir. Justify your
answer.
[3]
QUESTION 2
MAY 2017 P31 & P33 Q3
Greaves and Hurst participated in a joint venture sharing profits and losses in the ratio 2 : 1.
Greaves provided goods valued at $15 000 and incurred costs of $900.
Hurst provided goods valued at $10 000 and incurred costs of $800.
Greaves sold all of the goods for $35 000.
It was agreed that a commission of 10% of the sales value would be paid to the person making the sale.
The joint venture was then dissolved.
REQUIRED
(a)
Explain two benefits to Greaves and Hurst of forming a joint venture.
(b)
Calculate the share of profit made by Greaves and Hurst from the joint venture.
[4]
[6]
Chapter 3
50
Accounting For Joint Ventures
Additional information
A separate set of books of account are maintained to record the transactions of the joint venture.
Greaves and Hurst kept their own transactions with the joint venture in their own books.
REQUIRED
(c)
Prepare the following ledger accounts:
(i)
Greaves account with the joint venture
(ii)
Hurst account with the joint venture
[9]
Additional information
Following the closure of the joint venture, Greaves and Hurst have received more orders and are considering forming
a partnership.
REQUIRED
(d)
Advise Greaves and Hurst whether or not they should form a partnership. Justify your answer by discussing
advantages and disadvantages of forming the partnership.
[6]
Chapter 3
51
Accounting For Joint Ventures
SOLUTION
CHAPTER 3
QUESTION 1
(a)
MAY 2016 P31 Q2
Ahmed and Bashmir
Memorandum Joint Venture account
$
$
Trade receivables - Returns inwards
4 500 Bank- Cash Revenue ($6 000 + $4 800)
10 800
Trade payables-Purchases(24500+17600)
42 100 Trade receivables-Cr Sales(32000+50700)
82 700
Bank - Expenses ($3 200 + $2 300)
5 500 Drawings - Closing inventory
6 500
Trade receivables -Irrecoverable debts
300 Bank - Commissions received
1 000
Profit Share: Ahmed (2/3)
$32 800
Trade payables – Dis. received (500+100)
600
Bashmir (1/3)
$16 400
49 200
_______
101 600
101 600
Alternatively
Memorandum Joint Venture account
Revenue [($6 000 + $4 800) + ($32 000 + $50 700)]
Returns inwards
Cost of Sales
Purchases ($24 500 + $17 600)
Closing inventory
Gross profit
Other incomes
Commissions received
Discount received
Expenses
Expenses ($3 200 + $2 300)
Irrecoverable debts
Profit for the year
Profit Share
Ahmed ($49 200 × 2/3)
Bashmir ($49 200 × 1/3)
$
93 500
(4 500)
$
89 000
42 100
(6 500)
(35 600)
53 400
1 000
600
1 600
55 000
5 500
300
(5 800)
49 200
32 800
16 400
49 200
(b)
Books of Ahmed
Joint venture with Bashmir account
$
Trade payables - Credit Purchases
24 500 Bank – cash sales
Trade receivables - Returns inwards
4 500 Trade receivables – credit sales
Bank - Expenses
3 200 Bank - Commissions received
Profit share
32 800 Trade payables – Discount received
Balance c/d
65 000
Balance b/d
25 500
(c)
$
6 000
32 000
1 000
500
25 500
65 000
The balance due from Bashmir would be shown as other receivables in current assets section.
(d)
Calculation of Correct Net Profit
(i)
Profit as per memorandum joint venture account
Profit on sales of inventory [$12 500 (sales proceeds)  $6 500 (cost)]
Correct Net Profit on joint venture
$
49 200
6 000
55 200
Chapter 3
52
(ii)
(e)
Extra profit share of Ahmed
=
=
=
Accounting For Joint Ventures
Total extra Profit × 2/3
($55 200  $49 200) × 2/3
$4 000
The points favouring forming the joint venture may include having a pool of diversified skill, reduced
investments because of pooling of funds, to enter into new markets and sharing of risk as each party
diversifies risk
The points against forming the joint venture may include loss of reputation due to poor choice of business
associate and no enactment is directly applicable on joint ventures.
QUESTION 2
MAY 2017 P31 & P33 Q3
(a)
The points favouring forming the joint venture may include having a pool of diversified skill, reduced
investments because of pooling of funds; to enter into new markets and sharing of risk as each party
diversifies risk.
(b)
Statement to calculate the share of profit made by Greaves and Hurst from the joint venture
$
$
Sales revenue
35 000
Cost of goods ($15 000 + $10 000)
25 000
Commission ($35 000 × 10%)
3 500
Other expenses ($900 + $800)
1 700
(30 200)
Profit share
4 800
Greaves ($4 800 × 2/3)
3 200
Hurst ($4 800 × 1/3)
1 600
4 800
(c)
(i)
Joint venture – Purchases
Joint venture – Expenses
Joint venture – Commission
Joint venture – Profit
Hurst – Cash (balancing figure)
(ii)
Joint venture – Purchases
Joint venture – Expenses
Joint venture – Profit
(d)
Greaves account
$
15 000 Joint venture – Sales
900
3 500
3 200
12 400
35 000
Hurst account
$
10 000
800
1 600
12 400
Greaves– Cash (balancing figure)
$
35 000
______
35 000
$
12 400
_____
12 400
Advantages:

availability of additional capital

sharing of managerial responsibilities resulting in shared workload and less stress

spread of risk as losses will be shared
Disadvantages:

liability of the partners for debts of their firm is unlimited.

limited life as death or insolvency of partner(s) dissolves the partnership.

possible disputes between partners
Keeping in mind the above points Greaves and Hurst whether or not they should form a partnership.
Chapter 4
CHAPTER 4
53
Dissolution & Sale of Business
DISSOLUTION & SALE OF BUSINESS
QUESTION 1
NOVEMBER 2013 P41 Q2 (a to d)
Dilip, Ephraim and Fonzie have been in partnership for many years preparing accounts to 30 June and sharing profits
and losses in the ratio 3:2:1. Due to declining profits they decided to dissolve the partnership on 30 June 2013.
Statement of Financial Position at 30 June 2013
Non-Current Assets
$
$
Land and buildings
195 000
Motor vehicles
43 750
Fixtures and fittings
32 645
271 395
Current Assets
Inventories
29 875
Trade receivables
19 765
Cash and cash equivalents
6 850
56 490
Total assets
327 885
Equity
Capital Account
Dilip
60 000
Ephraim
50 000
Fonzie
40 000
150 000
Current Account
Dilip
33 865
Ephraim
24 910
Fonzie
(1 875)
56 900
206 900
Non-Current Liabilities
Bank loan
100 000
Current Liabilities
Trade payables
14 650
Bank interest accrual
6 335
20 985
327 885
The terms of the dissolution were:
1
The land and buildings were sold for 10% above their net book value. Fixtures and fittings realised 80% of
their net book value.
2
Ephraim took over a motor vehicle at an agreed valuation of $10 000. Fonzie took over a motor vehicle at a
valuation of $7500. The other vehicles realised $18 500.
3
The inventories realised $21 000.
4
The trade receivables raised $15 750 whilst the partners were able to settle the trade payables in full for
$12 500.
5
The dissolution costs totalled $3 450.
6
The partners closed the business bank account by drawing the balances due to them after the above took
place.
REQUIRED
(a)
Prepare the partnership realisation account for the dissolution.
[14]
(b)
Prepare the partnership bank account.
[10]
(c)
Prepare the partners’ capital accounts.
[10]
(d)
State three other reasons why a partnership may be dissolved apart from a decline in Profit.
[6]
QUESTION 2
NOVEMBER 2013 P42 Q1
Alvin, Bertram and Chana are in partnership preparing accounts to 30 June. They share profits and losses in the ratio
4:3:1. On 30 June 2013, the partners decided to convert the business to a new limited company, Albech Ltd.
Statement of Financial Position at 30 June 2013
$
$
Non-current assets (NBV)
250 000
Chapter 4
54
Current assets
Inventories
Trade receivable
Cash and cash equivalents
Total assets
Equity
Capital account
Alvin
Bertram
Chana
Current account
Alvin
Bertram
Chana
Total equity
Liabilities
Non-current liabilities
Alvin 8% loan account
Current liabilities
Trade payables
Total equity and liabilities
Dissolution & Sale of Business
89 345
53 485
9 250
75 000
90 000
60 000
24 840
44 950
18 555
152 080
402 080
225 000
88 345
313 345
40 000
48 735
88 735
402 080
The terms of the transfer were as follows:
1
The agreed valuation of the business was $475 000.
2
Consideration was to be satisfied as follows.
200 000 ordinary shares of $1 each.
200 000 8% non-redeemable preference shares of $0.50 each.
Sufficient 10% long term debentures to enable Alvin to receive the same amount of annual interest
he currently receives on his loan.
The balance to be cash in the form of a long term bank loan.
3
The ordinary shares and cash were allocated in the profit sharing ratio whilst the preference shares were
allocated in the ratio of the capital account balances at 30 June 2013.
4
All assets and liabilities were transferred to the new company with the exception of trade receivables, trade
payables and the cash and cash equivalents.
5
A bad debt of $720 was written off.
6
Discounts of $3 060 were agreed with the suppliers.
7
All other assets were transferred at their book value.
8
The loan from Alvin was repaid to him.
REQUIRED
(a)
Prepare the partnership realisation account.
(b)
Prepare the bank account.
(c)
Prepare the partners’ capital accounts to close the partnership.
(d)
Prepare the opening statement of financial position of Albech Ltd at 1 July 2013.
[8]
[8]
[8]
[10]
QUESTION 3
NOVEMBER 2014 P41 Q1 (a to c)
Aston, Brutus and Cesar have been in partnership for many years sharing profits and losses in the ratio 2:2:1. They
provided the following information.
Aston, Brutus and Cesar
Statement of financial position at 30 September 2014
Non-Current Assets
$
$
Land and buildings
210 000
Plant and machinery
27 950
Motor vehicles
11 352
249 302
Current Assets
Chapter 4
55
Dissolution & Sale of Business
Inventory
17 632
Trade receivables
9 340
Cash and cash equivalents
2 546
29 518
Total assets
278 820
Capital and Liabilities
Capital accounts
Aston
80 000
Brutus
60 000
Cesar
20 000
160 000
Current accounts
Aston
12 735
Brutus
10 873
Cesar
(2 628)
20 980
Non-current Liabilities
Loan from Aston
75 000
Current liabilities
Trade payables
22 840
Total capital and liabilities
278 820
On 30 September 2014 they decided to dissolve the partnership. The terms of the dissolution were:
1.
Land and buildings were sold for $217 000.
2.
Plant and machinery was sold for $25 000.
3.
Motor vehicles were disposed of as follows: one to Aston and one to Brutus at an agreed value of $4 000
each, with the remaining motor vehicles being sold for $5 000.
4.
The inventory was sold for $18 478.
5.
Two customers who owed the partnership $590 and $450 were unable to settle their debts. The remaining
credit customers paid in full after receiving a 2% discount.
6.
All of the trade payables were paid after they allowed a 5% discount.
7.
The total costs of dissolution amounted to $2 250.
REQUIRED
(a)
Prepare the partnership realisation account.
(b)
Prepare the partners’ capital accounts.
(c)
Prepare the partnership bank account.
[13]
[10]
[9]
QUESTION 4
SPECIMEN 2016 P3 Q1
Ayanda and Bola have been in partnership for many years, sharing profits in the ratio of 3 : 2 respectively. The annual
profit has been $60 000 for some years.
On 1 June 2013 the partnership books of account showed the following balances.
Capital account
Current account
Bank
Trade payables
Ayanda
Bola
Ayanda
Bola
$
40 000
25 000
17 000 Cr
2 500 Dr
3 500 Dr
4 000
On that date the business was sold to Hetl Limited for a purchase consideration of $140 000.
This consisted of 50 000 $1 ordinary shares in Hetl Limited with a market value of $1.80, to be shared equally, and
the balance in cash. Hetl Limited took over all the assets and liabilities of the business with the exception of the bank
account and the trade payables.
REQUIRED
(a)
Calculate the gain on realisation arising from the sale of the partnership.
(b)
Calculate the amount in cash due to each partner on the sale of the partnership.
(c)
Prepare the partnership bank account showing the entries to close the account.
[5]
[5]
[5]
Chapter 4
56
Dissolution & Sale of Business
Additional information
Bola thinks it is unfair that Ayanda received more cash than she did.
REQUIRED
(d)
Give four reasons why it is fair that Ayanda received more cash than Bola.
[4]
Additional information
Hetl Limited pays a dividend of $0.25 per share each year. Surplus funds can be put on deposit in a bank and earn
6% interest a year.
Ayanda has accepted a job with Hetl Limited at a salary of $20 000 a year.
REQUIRED
(e)
Compare Ayanda’s current income with his earnings as a partner.
(f)
Suggest one non-financial reason why Ayanda might prefer to be an employee rather than a partner.
QUESTION 5
Anjali and Bailey trade as partners. They share profits and losses in the ratio 3 : 2.
At 30 April 2016 the statement of financial position of the partnership was as follows:
Assets
Non-current assets
Premises
Machinery
Vehicles
Current assets
Inventory
Trade receivables
115 000
40 000
78 000
233 000
7 500
4 500
12 000
252 000
Total capital and liabilities
The partners agreed to form a limited company, XY Limited, to take over their business.
Additional information
The following information relates to the partnership.
1
Two vehicles were taken over by the partners at the following valuations.
$
15 000
12 500
The remaining assets were transferred to XY Limited at the following agreed values.
Premises
Machinery
The remaining vehicles
Inventory
$
130 000
110 000
240 000
Current liabilities
Trade payables
Cash and cash equivalents
2
MAY 2016 P32 Q3
15 000
4 000
19 000
252 000
Total assets
Capital and liabilities
Capital
Anjali
Bailey
Anjali
Bailey
[5]
[1]
$
170 000
30 000
35 000
9 000
Chapter 4
57
Dissolution & Sale of Business
3
Cash collected from trade receivables was $3 900.
4
Trade payables accepted $7 100 in full settlement of amounts due to them.
5
Costs involved in dissolving the partnership were $3 800.
6
The purchase consideration for the partnership of Anjali and Bailey was $255 000. This was made as
follows:
60 000 7% preference shares of $1 each distributed in profit-sharing ratios.
The balance as ordinary shares of $1 at a premium of $0.25 per share distributed to the partners in
proportion to their capital account balances at 30 April 2016.
7
Anjali and Bailey agreed to pay into the business bank account sufficient money to cover any
deficit
on their capital accounts after the shares had been issued.
REQUIRED
(a)
(i)
Prepare the realisation account for Anjali and Bailey.
[7]
(ii)
Prepare the capital accounts of Anjali and Bailey on the realisation of the partnership.
[7]
(iii)
Calculate the total amount of share premium payable to Anjali and Bailey.
[2]
(b)
Assess the effect for Anjali and Bailey if the ordinary shares have been distributed in the profit sharing ratio
rather than in proportion to their capital balances.
[4]
(c)
Explain whether or not Anjali and Bailey made the correct decision to form a limited company. Justify your
answer.
[5]
QUESTION 6
NOVEMBER 2017 P33 Q2
Wembo and Bob are in partnership. They share profits and losses in the ratio 3 : 2.
Another business, C Limited, has been trading for many years.
At 31 March 2017 the summarised statements of financial position of both businesses were as follows:
Wembo
C Limited
and Bob
$
$
Premises
80 000
282 000
Machinery
45 000
112 000
Vehicles
28 000
–
Inventory
15 000
49 000
Trade receivables
6 000
36 000
174 000
479 000
Capital accounts
Wembo
100 000
Bob
60 000
Equity and reserves
Ordinary shares of $1 each
300 000
Share premium
75 000
Revaluation reserve
25 000
Retained earnings
40 000
440 000
Trade payables
9 000
26 000
Bank overdraft
5 000
13 000
174 000
479 000
REQUIRED
(a)
State what is meant by the term ‘revaluation reserve’.
Additional information
The directors of C Limited have decided to purchase Wembo and Bob’s partnership on 31 March 2017.
The following information relates to the purchase of Wembo and Bob’s partnership.
[1]
Chapter 4
1
2
3
4
5
6
58
Dissolution & Sale of Business
Two vehicles were taken over by the partners at the following agreed values:
$
Wembo
11 000
Bob
12 500
The following partnership assets, excluding the partnership overdraft, were transferred to C Limited at the
following agreed values:
$
Premises
90 000
Machinery
36 000
Other vehicles
3 500
Inventory
13 000
Cash collected from trade receivables was $4 900.
Trade payables accepted $8 100 in full settlement of amounts due to them.
Costs involved in dissolving the partnership were $3 800.
The purchase consideration for the partnership was $155 000. This was made up as follows:
$60 000 was from the issue of 7% cumulative preference shares of $1 each distributed in profit-sharing
ratio.
The balance was by the issue of ordinary shares of $1 at a premium of $0.25 per share. These shares were
distributed to the partners in proportion to their capital account balances at 31 March 2017.
REQUIRED
(b)
Prepare the partners’ capital accounts at 31 March 2017 to show the closing entries for the
partnership.
[16]
(c)
Prepare the equity and reserves section of the statement of financial position for C Limited at 31 March
2017 immediately after the purchase of the partnership.
[4]
(d)
Explain one benefit to Wembo and Bob of receiving:
(i)
ordinary shares
(ii)
cumulative preference shares.
[4]
QUESTION 7
NOVEMBER 2017 P31 Q4 (a to d)
Armfield and Bonetti are sole traders. Their statements of financial position at 31 December 2016 are shown below:
Assets
Armfield ($) Bonetti ($)
Non-current assets
85 000
135 000
Current assets
Inventories
8 000
12 000
Trade receivables
6 000
9 000
Cash and cash equivalents
4 000
5 000
18 000
26 000
Total assets
103 000
161 000
Capital and liabilities
Capital accounts
100 000
150 000
Current liabilities
Trade payables
3 000
11 000
103 000
161 000
They have decided to merge their two businesses into a partnership on 1 January 2017. All assets and liabilities, with
the exception of cash and cash equivalents, were transferred to the new partnership at the following agreed values:
Armfield ($)
Bonetti ($)
Non-current assets
80 000
145 000
Inventories
7 000
11 000
Trade receivables
5 000
8 000
Trade payables
3 000
11 000
Chapter 4
59
Dissolution & Sale of Business
REQUIRED
(a)
State the meaning of the term ‘capital account’.
(b)
Prepare the capital accounts of Armfield and Bonetti to close their existing businesses.
Transfer the balances on their capital accounts to new partnership capital accounts.
[2]
[6]
Additional information
Each partner will either invest or withdraw cash to achieve a balance of $125 000 to carry forward on their
partnership capital account.
REQUIRED
(c)
Prepare the partnership capital accounts clearly showing each partner’s adjustment for cash.
(d)
Prepare the opening statement of financial position for the partnership at 1 January 2017.
[3]
[5]
Chapter 4
60
Dissolution & Sale of Business
SOLUTION
CHAPTER 4
QUESTION 1
(a)
Land and buildings
Motor vehicles
Fixtures and fittings
Inventories
Trade receivables ($19 765  $15 750)
Bank (Dissolution costs)
(b)
Bank account
$
6 850 Trade payables
15 750 Dissolution costs
214 500 Bank Loan
26 116 Bank interest accrual
18 500 Capital a/c D
21 000
E
______
F
302 716
Balance b/f
Trade receivables
Realisation a/c: Land & buildings
Realisation a/c: Fixtures & fittings
Realisation a/c: Motor vehicles
Realisation a/c: Inventories
(c)
Current a/c
Realisation
Realisation. – Vehicle
Bank (balancing figure)
(d)
NOVEMBER 2013 P41 Q2 (a to d)
Realisation account
$
$
195 000 Trade payables ($14 650  $12 500)
2 150
43 750 E’s Capital– Motor vehicle
10 000
32 645 F’s Capital – Motor vehicle
7 500
29 875 Bank: Land & buildings ($195 000 × 110%)
214 500
4 015
Fixtures & fittings ($32 645 × 80%)
26 116
3 450
Motor vehicles
18 500
Inventories
21 000
Capital a/c D ($8 969 × 3/6)
$4 484
E ($8 969 × 2/6)
$2 990
______
F ($8 969 × 1/6)
$1 495
8 969
308 735
308 735
Partners’ capital accounts
D ($)
E ($)
F ($)
1 875 Balance b/f
4 484
2 990
1 495 Current a/c
10 000
7 500
89 381 61 920 29 130
93 865 74 910 40 000
$
12 500
3 450
100 000
6 335
$89 381
$61 920
$29 130
180 431
302 716
D ($)
60 000
33 865
E ($)
50 000
24 910
F ($)
40 000
_____
93 865
_____
74 910
_____
40 000
Death or insolvency of one of the partners.
Mutual agreement of the partners to dissolve the business
Disagreement between the partners
Conversion into a company
QUESTION 2
(a)
Non-current assets
Inventories
Trade receivables (Bad debts)
Capital a/c:A($137995×4/8)
B ($137995×3/8)
C ($137995×1/8)
NOVEMBER 2013 P42 Q1
Realisation account
$
250 000 Trade payables (discounts received)
89 345 Albech Ltd (Purchase consideration)
720
68 998
51 748
17 249
137 995
478 060
$
3 060
475 000
______
478 060
Chapter 4
61
(b)
Bank Account
$
9 250 Trade payables ($48 735$3060)
52 765 Capital a/c
B
27 995
C
90 010
Balance b/f
Trade receivables ($53 485  $720)
Capital a/c A
(c)
Ordinary shares (4/8: 3/8: 1/8)
Pref. shares (5/15:6/15:4/15)
Debentures (W 1)
Cash [475 000200 000 
10000032000]×4/8;3/8;1/8
Bank (Balancing figure)
Dissolution & Sale of Business
Partner’s capital accounts
A ($)
B ($)
C ($)
100 000 75 000 25 000 Balance b/f
33 333 40 000 26 667 Current a/c
32 000
Realisation (profit)
Loan
71 500 53 625 17 875 Bank (Balancing fig)
______ 18 073 26 262
236 833 186 698 95 804
A ($)
75 000
24 840
68 998
40 000
27 995
______
236 833
(d)
Statement of Financial Position as at 1 July 2013
Non-Current Assets
Intangible - Goodwill (W 2)
Tangibles
Current Assets
Inventories
Total assets
Equity
200 000 ordinary shares of $1
200 000 8% pref. shares of $0.50
Non-Current Liabilities
10% debentures (W 1)
Bank loan [$475 000  $200 000  $100 000  $32000]
WORKINGS
(W.1) Face value of debentures × 8 %
X
× 10 %
X
(W.2)
=
=
=
Land and buildings
Plant and machinery
Motor vehicles
Inventories
Trade receivables (W 1)
Bank - dissolution costs
Capital a/c A
B
C
18 073
26 262
$
45 675
44 335
90 010
B ($)
90 000
44 950
51 748
C ($)
60 000
18 555
17 249
______
186 698
_____
95 804
$
135 655
250 000
$
200 000
100 000
32 000
143 000
$
385 655
_89 345
475 000
$
300 000
175 000
475 000
Interest on Alvin’s loan of partnership
($40 000 × 8%)
$32 000
Calculation of Goodwill
Purchase consideration of the partnership
Net worth of partnership purchased [250 000 + 89 345]
Goodwill
QUESTION 3
(a)
$
$
475 000
339 345
135 655
NOVEMBER 2014 P41 Q1 (a to c)
Realisation Account
$
210 000 Bank: Land and buildings
27 950 Bank: Plant and machinery
11 352 Bank: Motor vehicles
17 632 Bank: Inventories
1 206 A’s capital – Motor vehicle
2 250 B’s capital – Motor vehicle
$1 692
Trade payables ($22 840 × 5%)
1 692
846
4 230
274 620
$
217 000
25 000
5 000
18 478
4 000
4 000
1 142
______
274 620
Chapter 4
62
WORKING
(W 1) Trade receivables:
(b)
=
$9 340 – [($9 340 – $590  $450) × 98%] = 1206
Partners’ Capital Accounts
B
C
$
$
2 628 Balance b/f
4 000
4 000
Current a/c
165 427 68 565 18 218 Loan – Aston
______
_____
_____ Realisation (profit)
169 427 72 565 20 846
A
$
Current a/c
Realisation - Vehicle
Bank (Balancing figure)
Dissolution & Sale of Business
A
$
80 000
12 735
75 000
1 692
169 427
B
$
60 000
10 873
C
$
20 000
1 692
72 565
846
20 846
(c)
Bank Account
$
Balance b/f
2 546 Trade payables ($22 840 × 95%)
8 134 Realisation - dissolution costs
Trade receivables [9340590450)×98%]
Realisation: Land and buildings
217 000 Capital a/c A (b part)
$165427
Realisation: Plant and machinery
25 000
B (b part)
68 565
Realisation: Motor vehicles
5 000
C (b part)
18 218
Realisation: Inventories
18 478
276 158
QUESTION 4
(a)
(b)
252 210
______
276 158
SPECIMEN 2016 P3 Q1
Calculation of the gain on realisation arising from the sale of the partnership
$
Capital account A
40 000
B
25 000
Current account A
17 000
B
(2 500) (1)
Net assets
79 500
Bank
(3 500)
Trade payables
4 000 (1)
Net assets taken over
80 000 (1of)
Consideration
140 000 (1)
Gain on realisation
60 000 (1of)
Calculation of the amount in cash due to each partner on the sale of the partnership
Ayanda
Bola
$
$
Capital account
40 000
25 000
Current account
17 000
(2 500) (1) both
Gain on realisation
36 000 (1of)
24 000 (1of)
Value of shares
(45 000)
(45 000) (1) both
Amount due
48 000
1 500 (1of) both
(a)
Bal b/d
Hetl Limited
(d)
$
21 698
2 250
Responses could include:
Bank account
$
Trade payables
3 500 (1) Capital A
50 000 (1) Capital B
______
53 500
$
4 000 (1)
48 000 (1of)
1 500 (1of)
53 500
Chapter 4
63
Dissolution & Sale of Business
•
Ayanda’s initial investment was greater
•
Bola received more than just the cash and the shares were distributed equally
•
Bola had a debit balance on her current account
•
excessive drawings in the past meant she had received her benefit earlier
•
the profit sharing ratio meant that Ayanda was entitled to greater benefits.
Accept any reasonable alternative (1 mark) × four valid reasons
(e)
Annual share of profit as a partner
Current annual income
Dividend income
Interest
Salary
Total
$36 000 (1)
6 250 (1)
2 880 (1of)
20 000 (1)
29 130 (1of)
Ayanda is worse off (1of)
(f)
Example:
Less risk/less responsibility/entitlement to holidays or sick pay.
(1 mark) × one reason
QUESTION 5
(a)
(i)
Premises
Machinery
Vehicles
Inventory
Trade receivables
Bank - Trade payables
Bank - Dissolution cost
Profit share A ($31 000 × 3/5)
B ($31 000 × 2/5)
(ii)
Vehicles
Pref. shares ($60 000 × 3/5; 2/5)
Ordinary shares (W 1)
(W.1)
MAY 2016 P32 Q3
Realisation account
$
$
115 000 Trade payables
7 500
40 000 Vehicles- Anjali
15 000
78 000 Vehicles-Bailey
12 500
15 000 Bank – Trade receivables
3 900
4 000 XY Limited - Purchase consideration
255 000
7 100
3 800
18 600
12 400
Realisation – Trade receivables
A’s Capital
B’s capital
______
293 900
Capital Accounts
A
B
$
$
15 000
12 500 Balance b/d
36 000
24 000 Profit on realisation
105 625
89 375 Bank (balancing figure)
156 625
125 875
Purchase consideration
Payment in preference shares
Payment in ordinary shares
A’s shares ($195 000  130/(130 + 110))
B’s shares ($195 000  110/(130 + 110))
(W 2)
31 000
293 900
A
$
130 000
18 600
8 025
156 625
B
$
110 000
12 400
3 475
125 875
$255 000
$60 000
$195 000
$105 625
$89 375
Bank Account
$
3 900 Balance b/f
8 025 Realisation – Trade payables
3 475 Realisation – Dissolution costs
15 400
$195 000
$
4 500
7 100
3 800
15 400
Chapter 4
(iii)
64
Dissolution & Sale of Business
Calculation of total amount of share premium payable to Anjali and Bailey
$
255 000
(60 000)
195 000
Purchase consideration
Payment in preference shares
Payment in ordinary shares
Face value of ordinary shares (
$195 000 × $1.00
Total amount of share premium (
(b)
)
$1.25
$195 000 × $0.25
$1.25
(156 000)
) or ($195 000  $156 000)
39 000
Statement to assess the effect of change in method of profit distribution for Anjali and Bailey
Anjali
Bailey
Distribution of shares in the profit sharing ratio (
$195 000
$1.25
) shares × 3/5; 2/5
Distribution of shares in proportion to capital balances (
$105 625
$1.25
);(
$89 375
$1.25
93 600
)
Difference in shareholdings
62 400
84 500
71 500
9 100
(9 100)
If profit sharing ratio used Anjali would be 9100 shares better off and Bailey would be 9100 shares worse off.
(c)
Anjali and Bailey’s partnerships have low working capital. The partnership had overdrafts and its trade
payables were more than trade receivables. In the absence of inventory or in case of its sales then
partnership had a negative working capital.
As partnerships have unlimited liability and limited companies have limited liability, it seems to be a prudent
action to form a limited company, in order to protect the personal assets of partners.
QUESTION 6
NOVEMBER 2017 P33 Q2
(a)
A revaluation reserve arises when a company revalues its non-current assets at a value which is higher than
their current book value.
(b)
Capital Accounts
Wembo
Bob
$
$
Vehicles (withdrawals)
11 000
12 500 Balance b/d
Prefer. shares ($60 000 × 3/5 ; 2/5) 36 000
24 000 Realisation profit (W1)
Ordinary shares
Bank (balancing figure)
59 375
35 625
($155 000  $60 000) × 10/16 ; 6/16
106 375
72 125
(W 1)
Premises
Machinery
Vehicles
Inventory
Trade receivables
Bank – Trade payables
Bank – Dissolution costs
Realisation profit
Capital – W ($6 500 × 3/5)
B ($6 500 × 2/5)
Realisation Account
$
80 000 Trade payables
45 000 C Ltd (purchase consideration)
28 000 Bank – Trade receivables
15 000 Capital – Wembo
6 000
Bob
8 100
3 800
3 900
2 600
6 500
192 400
Wembo
$
100 000
3 900
2 475
Bob
$
60 000
2 600
9 525
106 375
72 125
$
9 000
155 000
4 900
11 000
12 500
______
192 400
Chapter 4
65
Dissolution & Sale of Business
(c)
Extract from the statement of financial position for Chantelle Limited at 31 March 2018
Equity and reserves
$
Ordinary shares [$300 000 + ($155 000  $60 000) ×
$1.00
]
376 000
$1.00 + $0.25
Preference shares
60 000
Share premium [$75 000 + ($155 000  $60 000) ×
$0.25
]
94 000
$1.00 + $0.25
Revaluation reserve
Retained earnings
Total equity
(d)
25 000
40 000
595 000
Ordinary shares
Wembo and Bob will be entitled to vote at the annual general meeting and may also earn a higher dividend
in periods of high profits
Cumulative preference shares receive dividends at fixed rate and amount of $4 200. They also have low risk
as are entitled to be paid any arrears of their dividend before ordinary shares receive any dividends
QUESTION 7
NOVEMBER 2017 P31 Q4 (a to d)
(a)
Capital account records the injection of funds within the business or withdrawal of funds out of the business
by the owner. It may also incorporate changes within the owner’s capital through business operations like
profits etc.
(b)
Capital accounts
Armfield Bonetti
$
$
7 000
Balance b/d
4 000
5 000 Revaluation profit (W 1)
89 000 153 000
100 000 158 000
Balance b/d
Revaluation loss (W 1)
Cash and cash equivalents
Balance c/d
(W 1)
Non-current assets (85 00080 000)
Inventories
Trade receivables
B’s Capital (Revaluation profit)
(c)
Cash ($153 000  $125 000)
Bal. c/d (as per agreement)
(d)
Armfield
$
100 000
Bonetti
$
150 000
8 000
100 000
89 000
158 000
153 000
Revaluation accounts
A ($)
B ($)
A ($)
5 000
Non-current assets(145000135000)
1 000
1 000 A’s Capital (Revaluation loss)
7 000
1 000
1 000
____
8 000
_____
7 000 10 000
7 000
Partnership Capital accounts
Armfield Bonetti
$
$
28 000 Balance b/d
125 000 125 000 Cash ($125 000  $89 000)
125 000 153 000
Balance b/d
B ($)
10 000
_____
10 000
Armfield
$
89 000
36 000
125 000
125 000
Bonetti
$
153 000
$
$
225 000
153 000
125 000
Armfield and Bonetti
Statement of Financial Position at 1 January 2017
Non-current assets ($80 000 +$145 000)
Chapter 4
Current assets
Inventories ($7 000 + $11 000)
Trade receivables ($5 000 + $8 000)
Cash & cash equivalents ($36 000  $28 000)
Total assets
Capital accounts:
Armfield
Bonetti
Current liabilities
Trade payables ($3 000 + $11 000)
66
Dissolution & Sale of Business
$
18 000
13 000
8 000
125 000
125 000
$
39 000
264 000
250 000
14 000
264 000
Chapter 5
67
CHAPTER 5
Purchase of Business
PURCHASE OF BUSINESS
QUESTION 1
NOVEMBER 2011 P43 Q1(a)
Prescott, Rohini and Singh have been in partnership for many years with a profit sharing ratio of 2: 2: 1. Their
statement of financial position (balance sheet) at 30 June 2011 was as follows:
Prescott, Rohini and Singh
Statement of Financial Position (Balance Sheet) at 30 June 2011
Non-current assets
Land and buildings
Fixtures and fittings
Motor vehicles
Current assets
Inventories
Trade receivables
Bank
$
100 000
34 500
16 750
$
151 250
23 500
14 850
7 595
45 945
Current liabilities
Trade payables
(9 450)
Non-current liabilities
Loan from Prescott at 12%
Financed by:
Capital Accounts: Prescott
Rohini
Singh
36 495
187 745
(25 000)
162 745
70 345
54 250
38 150
162 745
The partners sold their business to Ashburton Ltd on 1 July 2011 for $215 000. Ashburton Ltd took over all of the
assets and liabilities except the bank account.
The purchase consideration was satisfied by:
1
The issue of 100 000 ordinary shares of $1 at a premium of $0.50.
2
The issue of 8% debentures redeemable at par in 2020 to Prescott to ensure that he receives the same
amount of annual interest that he received from the loan.
3
The balance was paid by cash.
On 1 July 2011 the partnership assets were revalued as follows:
$
115 000
32 000
15 000
22 000
13 500
Land and buildings
Fixtures and fittings
Motor vehicles
Inventories
Trade receivables
Ashburton Ltd’s statement of financial position at 30 June 2011 was as follows:
Ashburton Ltd
Statement of Financial Position at 30 June 2011
Non-current assets
Land and buildings
Fixtures and fittings
Motor vehicles
$
125 000
67 750
24 975
$
217 725
Chapter 5
68
Current assets
Inventories
Trade receivables
Bank
Purchase of Business
22 875
14 363
28 462
65 700
Current liabilities
Trade payables
14 630
Financed by:
Ordinary shares of $1
Share premium
Retained profit
200 000
20 000
48 795
51 070
268 795
268 795
REQUIRED
Prepare Ashburton Ltd’s statement of financial position immediately after the acquisition of partnership.
[22]
QUESTION 2
MAY 2012 P43 Q2 (a & b)
Brian Mills and Beryl Smart had been in partnership for many years. Accounts were prepared to 30 April. It was
decided that the partners would retire on 30 April 2012 and the business was sold to Chipperfield Ltd.
The partnership's statement of financial position at 30 April 2012 was as follows:
Non-Current Assets
Property
Fixtures and fittings
Plant and machinery
Current Assets
Inventories
Trade receivables
Bank
Total assets
Current Liabilities
Trade payables
Non-Current Liabilities
Loan from Brian Mills at 8% per annum
Loan from Beryl Smart at 6% per annum
Net assets
Capital accounts
Brian Mills
Beryl Smart
Chipperfield Ltd’s statement of financial position at 30 April 2012 was as follows:
Non-Current Assets
Property
Fixtures and fittings
Plant and machinery
Current Assets
Inventories
Trade receivables
Bank
Total assets
Current Liabilities
Trade payables
Net assets
$
85 000
27 500
14 750
28 800
10 950
5 450
$
127 250
45 200
172 450
13 950
158 500
15 000
10 000
76 000
57 500
$
39 450
12 380
69 675
25 000
133 500
133 500
$
145 000
57 750
18 750
221 500
121 505
343 005
18 675
324 330
Chapter 5
69
Equity
300 000 Ordinary shares of $0.50
Share premium
Retained earnings
Purchase of Business
$
150 000
75 000
99 330
$
324 330
Chipperfield Ltd purchased the business on 1 May 2012 for $160 000. The company took over all of the assets (except
the bank account) together with the current liabilities.
The purchase consideration was:
1
120 000 ordinary shares of $0.50 nominal value issued at a premium of $0.10.
2
30 000 6% non-redeemable preference shares of $0.50.
3
10% debentures redeemable in 2020 issued so that Brian and Beryl receive the same interest
payments as in the partnership.
4
The balance paid from the bank account. The partnership assets were re-valued as follows:
$
Property
95 000
Fixtures and fittings
24 500
Plant and machinery
12 500
Inventories
27 500
Trade receivables
10 250
REQUIRED
(a)
Prepare Chipperfield Ltd’s statement of financial position at 1 May 2012, after the partnership had been
acquired.
[22]
Chipperfield Ltd’s profit for the year ended 30 April 2012 was $82 350. The budgeted profit for the year ended 30
April 2013 is $116 000.
REQUIRED
(b)
Calculate the return on capital employed for the two years. State whether Chipperfield Ltd has benefited
from the purchase of the partnership.
[7]
QUESTION 3
MAY 2014 P43 Q1
On 1 October 2013, Rezwan Limited agreed to purchase the net assets, excluding cash and cash equivalents, of
Nimra, a sole trader.
Nimra provided the following information at 30 September.
Assets
Non-Current Assets
Land and buildings
Plant and equipment
Current Assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets
Equity
Capital Balance
Profit for the year
Drawings
Total equity
Liabilities
Current Liabilities
Trade payables
Total equity and liabilities
2013
$
110 000
76 500
186 500
2012
$
110 000
85 000
195 000
21 000
34 000
11 000
66 000
252 500
17 000
28 000
3 500
48 500
243 500
207 500
58 000
(54 000)
211 500
201 500
54 000
(48 000)
207 500
41 000
252 500
36 000
243 500
Chapter 5
70
Purchase of Business
Additional information
On 1 October 2013:
1
The land and buildings are revalued at $170 000.
2
Additional depreciation of $8 500 is provided on the plant and equipment.
3
Inventory valued at 15% of the total is written off.
4
Bad debts equal to 10% of the trade receivables are written off.
REQUIRED
(a)
Calculate the value of the net assets acquired by Rezwan Limited.
[6]
Additional information
The directors of Rezwan Limited agreed to pay Nimra five times the average profit for the year for the last two years.
They made a payment in cash of $100 000 and issued new $1 ordinary shares to Nimra at a premium of $0.50 for
the balance of the purchase price.
REQUIRED
(b)
Calculate the amount the directors of Rezwan Limited paid for Nimra’s business.
[2]
(c)
Calculate the number of new $1 shares issued by Rezwan Limited.
[4]
Additional information
Rezwan Limited’s statement of financial position at 30 September 2013 before it acquired Nimra’s business and
assets is as follows:
Statement of financial position at 30 September 2013
Assets
Non-Current Assets
Land and buildings
Plant and equipment
Current Assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets
Equity
Ordinary shares of $1 each
Share premium
Retained earnings
Total equity
Liabilities
Current liabilities
Trade payables
Total equity and liabilities
$
120 000
60 000
180 000
45 000
24 000
132 000
201 000
381 000
$
200 000
20 000
110 000
330 000
51 000
381 000
REQUIRED
(d)
Prepare Rezwan’s statement of financial position at 1 October 2013 immediately after acquiring Nimra’s
business.
[14]
(e)
Explain why the directors of Rezwan Limited are prepared to pay more for the assets acquired than their
book value.
[6]
Additional information
The directors of Rezwan Limited expect that the value of goodwill acquired from Nimra may reduce over a period of
years.
Chapter 5
71
Purchase of Business
REQUIRED
(f)
Explain, making reference to IAS 36 and 38, how any reduction will be calculated and state the accounting
adjustments which will be made in future financial statements.
[8]
QUESTION 4
MAY 2014 P43 Q1 (d to f)
On 1 July 2013 Clemens, August and Bleeker converted their partnership into a limited company.
The company issued ordinary shares of $1 each to Clemens and August at a premium of 10% to settle the capital
account balances.
$1 non-redeemable 5% preference shares will be issued to Bleeker at par to settle his capital balance.
The balances in each partner’s capital at 30 June 2013 were as follows.
Clemens
August
Bleeker
$
$
$
Balances at 30 June 2013
88 000
132 000
60 000
REQUIRED
(d)
Calculate the number of shares issued to each partner.
[5]
(e)
Show the equity section of the statement of financial position at 1 July 2013.
[3]
(f)
Explain how each partner will receive a return on their investment in the new company.
[6]
QUESTION 5
NOVEMBER 2016 P32 Q3
Husna had been a sole trader for many years and has decided to retire. Her statement of financial position at 30
June 2016 was as follows:
Statement of Financial Position at 30 June 2016
Assets
$
Non-current assets
Premises
120 000
Equipment
14 600
134 600
Current assets
Inventory
29 500
Trade receivables
17 200
Cash & Cash equivalents
46 700
Total assets
181 300
Capital and liabilities
Opening capital
162 100
Profit for the year
41 600
203 700
Drawings
36 000
Closing capital
167 700
Current liabilities
Bank
2 000
Trade payables
11 600
13 600
Total capital and liabilities
181 300
On 30 June 2016 Husna sold her business to FLF Limited.
The statement of financial position of FLF Limited at 30 June 2016 before the sale was as follows:
Statement of Financial Position at 30 June 2016
Assets
Non-current assets
Premises
Equipment
Vehicles
$
815 100
190 900
81 500
1 087 500
Chapter 5
72
Purchase of Business
Current assets
Inventory
Trade and other receivables
Cash and cash equivalents
103 600
99 400
7 100
210 100
1 297 600
Total assets
Equity and liabilities
Equity
800 000 ordinary shares of $1 each
Retained earnings
General reserve
Total equity
Current liabilities
Trade and other payables
Total equity and liabilities
800 000
322 500
80 000
1 202 500
95 100
1 297 600
For the sale of the business, Husna’s premises were revalued at $280 000 and trade receivables balances of $1 200
were written off.
FLF Limited took over all the assets and liabilities of Husna’s business except the bank account.
The total purchase consideration was $440 000. This was made up as follows:
Cash
8% debentures (2025)
$1 ordinary shares issued at a premium
$70 000
$120 000
100 000 shares
At the same time as the business purchase, the directors of FLF Limited decided to have their own premises revalued.
The premises were revalued at $1 000 000.
REQUIRED
(a)
Prepare the statement of financial position of FLF Limited on 1 July 2016 immediately after the purchase of
Husna’s business.
[16]
Additional information
FLF Limited’s dividend yield is 3%. A bank deposit account pays interest of 4%.
Husna’s young nephew is disappointed with his aunt’s decision to sell the business. He says that if she wanted to
retire she could have appointed him to manage the business at an annual salary of $20 000.
REQUIRED
(b)
Assess whether Husna made the right decision in selling the business. Support your answer with
calculations.
[9]
QUESTION 6
Alex and Brown were in partnership sharing profits and losses in the ratio of 3 : 2 respectively.
They provided the following information at 31 October 2016:
$
Land and buildings
Plant and machinery
Motor vehicles
Inventory
Trade receivables
Cash and cash equivalents
Trade payables
$
MAY 2017 P32 Q4
$
320 000
135 000
110 000
38 000
54 000
19 000
(39 000)
637 000
Chapter 5
73
Capital accounts
Current accounts
Balance at 1 November 2015
Partners’ salaries
Interest on capital
Share of residual profit
Drawings
Balance at 31 October 2016
Purchase of Business
Alex
300 000
Brown
200 000
72 000
30 000
15 000
36 000
(77 000)
76 000
57 000
45 000
10 000
24 000
(75 000)
61 000
500 000
137 000
637 000
C Limited purchased this partnership business on 1 November 2016. They took over all the assets and liabilities with
the exception of:
Cash and cash equivalents
One motor vehicle which was taken over by Alex at an agreed value of $28 000.
The remaining assets taken over by C Limited had the following values:
$
Land and buildings
450 000
Plant and machinery
120 000
Motor vehicles
60 000
Inventory
49 000
Trade receivables
52 000
The purchase consideration was five times the partnership profit for the year ended 31 October 2016.
This purchase consideration was settled by C Limited as follows:
1
$127 500 cash was paid into the partnership bank account.
2
Alex and Brown were issued an amount of 8% debentures. Both will continue to receive the same amount
of interest as they had received from the interest on capital.
3
The balance of the purchase consideration was settled by an issue of $1 ordinary shares at a price of $1.80
each. The shares were distributed between the partners in their profit and loss sharing ratios.
REQUIRED
(a)
State what is meant by ‘goodwill’.
(b)
Calculate the value of goodwill paid for by C Limited.
(c)
Calculate the total profit on realisation due to the partners.
(d)
Prepare the partners’ capital accounts to close their business.
[1]
[4]
[4]
[11]
Additional information
The capital employed of C Limited at 31 October 2016 before purchasing the partnership business was as follows:
Ordinary shares of $1 each
Share premium
Retained earnings
$
3 400 000
300 000
816 000
4 516 000
The company made a profit for the year ended 31 October 2016 of $352 000.
The directors of C Limited estimate that the profit for the coming year after purchasing the partnership business will
be increased to $540 000.
REQUIRED
(e)
Discuss the advantages to C Limited, other than increase in the profit, of purchasing Alex and Brown’s
business.
[5]
Chapter 5
74
Purchase of Business
QUESTION 7
NOVEMBER 2017 P31 Q4 (e & f)
Armfield and Bonetti are sole traders. Profit for the year ended 31 December 2016 of Armfield was $80 000 and
Bonetti was $120 000.
They have decided to merge their two businesses into a partnership on 1 January 2017.
The profit for the year of the partnership for the year ending 31 December 2017 is expected to be $200 000. The
partners agreed to share the profits and losses equally.
REQUIRED
(e)
Discuss whether or not the merger of the two businesses has been beneficial to each partner.
[5]
Additional information
After the first year’s successful trading as a partnership the partners were advised to consider incorporating their
business. Both partners are close to retirement age and have family.
(f)
Discuss two advantages to the partners of incorporating their business.
[4]
QUESTION 8
MAY 2018 P32 Q4
Ephraim and Fikriyah are sole traders. They agreed to merge their two businesses into a partnership on 1 October
2017 sharing profits and losses equally.
Ephraim and Fikriyah’s statements of financial position at 30 September 2017 were as follows:
Ephraim
$
45 000
Fikriyah
$
110 000
7 500
9 000
6 500
23 000
68 000
11 500
15 500
1 000
28 000
138 000
60 000
120 000
8 000
68 000
18 000
138 000
The agreed valuations for the merger were:
Ephraim
$
Non-current assets
55 000
Inventories
8 000
Goodwill
10 000
Fikriyah
$
115 000
10 500
6 000
Non-current assets
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
Capital
Current liabilities
Trade payables
All other assets and liabilities were transferred at their book value.
Goodwill was not to be retained in the books of account.
REQUIRED
(a)
Prepare the opening statement of financial position for the partnership at 1 October 2017.
[13]
Additional information
The average annual profit earned by Ephraim for the past three years was $60 000.
The average annual profit earned by Fikriyah for the past three years was $40 000.
The budgeted profit for the partnership for its first year’s trading is expected to be $100 000. In each of the following
three years it is expected to be 10% less than the previous year. This is as a result of the increasing competition.
(b)
Discuss the benefits and limitations of the merger to each partner. Justify your answer using both financial
and non-financial factors.
[12]
Chapter 5
75
Purchase of Business
SOLUTION
CHAPTER 5
QUESTION 1
(a)
NOVEMBER 2011 P43 Q1(a)
Ashburton Ltd
Statement of financial position after acquisition of the partnership
Non-current assets
$
$
Goodwill (W 1)
26 950
Land & buildings ($125 000 + $115 000)
240 000
Fixtures & fittings ($67 750 + $32 000)
99 750
Motor vehicles ($24 975 + $15 000)
39 975
406 675
Current assets
Inventories ($22 875 + $22 000)
44 875
Trade receivables ($14 363 + $13 500)
27 863
Bank [$28 462 – $27 500 (W 2)]
962
73 700
Total assets
480 375
Shareholders’ Equity
Ordinary shares of $1 [$200 000 + (100 000 × $1)]
300 000
Share premium [$20 000 + ($100 000 × 0.5)]
70 000
Retained profit
48 795
418 795
Non-current liabilities
8% debentures 2020 (W 2)
37 500
Current liabilities
Trade payables ($14 630 + $9 450)
24 080
Total liabilities and equity
480 375
WORKINGS
(W 1)
Calculation of Goodwill
Purchase consideration of the business
Fair value of net assets purchased ($115 000+$32 000+$15 000+$22 000+$13 500 – $9 450)
Goodwill
$
215 000
(188 050)
26 950
(W 2)
Calculation of Cash Payment
Purchase consideration of the business
Payment in ordinary shares [100 000 × ($1.0 + $0.5)]
$
215 000
(150 000)
Payment in debentures (
$25 000 ×12%
8%
)
(37 500)
Payment in cash (balancing figure)
QUESTION 2
(a)
27 500
MAY 2012 P43 Q2 (a & b)
Chipperfields Ltd
Statement of Financial Position as at 1 May 2012
Non-Current assets
Intangible
Goodwill (W 1)
Tangible
Property ($145 000 + $95 000)
Fixtures and fittings ($57 750 + $24 500)
Plant and machinery ($18 750 + $12 500)
Current assets
Inventories ($39 450 + $27 500)
Trade receivables ($12 380 + $10 250)
Bank $[69675–(160000–18000)+(120000@$0.6)+(30000 @$0.5)]
$
$
$
4 200
240 000
82 250
31 250
66 950
22 630
14 675
104 255
353 500
357 700
Chapter 5
76
Current liabilities
Trade payables ($18 675 + $13 950)
Purchase of Business
(32 625)
Non-current liabilities
10% Debenture 2020 ($12 000 + $6 000)
71 630
429 330
(18 000)
411 330
Equity
420 000 Ordinary shares of $0.50 [$150 000) + (120 000@$0.5)]
30 000 6% non-redeemable preference shares of $0.50
Share premium [$75 000 + (120 000@$0.1)]
Retained earnings
(b)
Return on Capital Employed
2012
411 330
Operating Profit ×100
=
Capital Employed
$82 350 ×100
=
$324 330
=
2013
210 000
15 000
87 000
99 300
25.39%
$116 000 ×100
=
$429 330
=
27.02%
The ROCE has increased so Chipperfield Ltd has benefited from the acquisition.
WORKINGS
(W 1)
Calculation of Goodwill
$
Purchase price of Business
Agreed value of tangible net assets
Property
Fixtures and fittings
Plant and machinery
Inventories
Trade receivables
95 000
24 500
12 500
27 500
10 250
169 750
(13 950)
Less
Trade payables
Goodwill
(W 2)
Value of Debentures to be issued on purchase of Business
Debentures to be issued to Brian (
Debentures to be issued to Beryl (
)
12 000
)
6 000
10%
$10 000 ×6%
Total value of debentures to be issued
QUESTION 3
(a)
155 800
4 200
$
$15 000 ×8%
10%
$
160 000
Rezwan Limited
Calculation of net assets acquired on 1 October 2013
Fair value of assets taken over
Land and buildings
Plant and equipment ($76 500  $8 500)
Inventory [$21 000  ($21 000 × 15%)]
Trade receivables [$34 000  ($34 000 × 10%)]
Fair value of liabilities taken over
Trade payables
Fair value of the net assets acquired by Rezwan Limited
18 000
MAY 2014 P43 Q1
$
170 000
68 000
17 850
30 600
$
286 450
(41 000)
245 450
Chapter 5
(b)
77
Purchase consideration
=
=
(c)
Consideration in shares
Average profit x5
($58 000+$54 000)
2
$280 000
=
=
$280 000 – $100 000
$180 000
=
$180 000
$1.50
120 000 shares
Rezwan Limited
Statement of financial position at 1 October 2013
$
Non-Current Assets
Tangible Assets
Land and buildings ($120 000 + $170 000)
Plant and equipment ($60 000 + $68 000)
Intangible asset
Goodwill($280 000 – $245 450)
Current Assets
Inventory ($45 000 + $17 850)
Trade receivables ($24 000 + $30 600)
Cash and cash equivalents ($132 000 – $100 000)
Total assets
Equity
Ordinary shares of $1 each [$200 000 + (120 000 × $1)]
Share premium [$20 000 + (120 000 × $0.50)]
Retained earnings
Current Liabilities
Trade payables ($51 000 + $41 000)
(e)
x5
=
Number of shares issued at $1.50 =
(d)
Purchase of Business
$
$
290 000
128 000
418 000
34 550
452 550
62 850
54 600
32 000
320 000
80 000
110 000
Goodwill paid by Rezwan Limited is $34 550 ($280 000 – $245 450) which is almost 14% (
149 450
602 000
510 000
92 000
602 000
$34 55𝑜
$245 450
)in excess
of the agreed value of the net assets acquired.
Rezwan Limited, as the acquiring business pays, goodwill for the reputation, advantageous location,
customers’ loyalty, quality products etc.
As this Goodwill is included in Rezwan’s statement of financial position after acquisition.
(f)
As this goodwill arises on purchase of business so under IAS 38 (Intangible assets), Rezwan Ltd can show it
as an intangible non-current asset in the Statement of Financial Position. Rezwan must then amortise the
goodwill on the straight line basis over the estimated useful life of goodwill. This is done by transferring an
equal charge from goodwill to its Income Statement. The amortisation period should be reviewed annually
and changes made in the amortisation in line with this review.
Under IAS 36 (Impairment of assets) each year Rezwan should also compare the carrying value of the
goodwill (i.e. its net book value after amortisation) with its recoverable amount (its value in use). If the
recoverable amount is less than the carrying value then an impairment loss is shown as an additional
expense in its income statement.
Chapter 5
78
Purchase of Business
QUESTION 4
(d)
MAY 2014 P43 Q1 (d to f)
Value of total capital in partnership
÷
Issue price per share
Number of shares issued
(e)
Clemens
88 000
÷ $1.10
80 000
August
132 000
÷ $1.10
120 000
Statement of financial position at 1 July 2013 (Equity section)
$
200 000
20 000
60 000
280 000
Ordinary shares of $1 each (80 000 + 120 000) shares @$1 each
Share premium account (80 000 + 120 000) shares @$0.10 each
Preference shares of $1 each 60 000 shares @$1 each
(f)
Bleeker
60 000
÷ $1.00
60 000
All partners will become shareholders in the new company. As a result, all of them will receive their return
in the form of dividends.
As Bleeker owns preference shares in the new company so he will receive preference dividends at a fixed
rate. In addition this dividend payment will take priority in preference to the ordinary dividend.
Clemens and August will own ordinary shares. The ordinary dividend amount may vary from year to year
and is declared by the directors out of distributable profits. In the absence of any distributable profits the
shareholders may not receive any dividend. In addition, directors usually do not distribute all the profits as
dividend.
QUESTION 5
(a)
NOVEMBER 2016 P32 Q3
FLF Limited
Statement of Financial Position at 1 July 2016
Assets
Non-current assets
Intangible
Goodwill (W 1)
Tangible
Premises ($1 000 000 + $280 000 )
Equipment ($190 900 + $14 600)
Vehicles
Current Assets
Inventory ($103 600 + $29 500)
Trade and other receivables [$99 400 + ($17 200 – $1 200)]
Total assets
Equity and liabilities
Equity
900 000 ordinary shares of $1 each ($800 000 + $100 000 )
Share premium (W 2)
Retained earnings
General reserve
Revaluation reserve ($1 000 000 – $815 100)
Non-current liabilities
8% debentures (2025)
Current liabilities
Trade and other payables ($95 100 + $11 600)
Cash and cash equivalents ($70 000 – $7 100)
Total equity and liabilities
$
$
111 500
1 280 000
205 500
81 500
133 100
115 400
900 000
150 000
322 500
80 000
184 900
1 567 000
1 678 500
248 500
1 927 000
1 637 400
120 000
106 700
62 900
169 600
1 927 000
Chapter 5
79
Purchase of Business
WORKINGS
(W 1)
Calculation of Goodwill
$
Purchase price of business
440 000
Fair value of the business’ net assets [280 000+14 600 + $29 500 + ($17 200 – $1 200) –11 600] (328 500)
Goodwill
111 500
(W 2)
Calculation of Premium on issue of shares
$
Total purchase consideration
440 000
Payment in cash
(70 000)
Payment in debentures
(120 000)
Face value of ordinary shares issued
(100 000)
Total premium on issue of shares
150 000
(b)
Statement to calculate Total income for Husna if she sells the business
$
Debenture interest ($120 000 × 8%)
9 600
Dividends on ordinary shares ($250 000 × 3%)
7 500
Bank interest ($70 000 – $2 000) × 4%
2 720
Total income for Husna after sale of business
19 820
Statement to calculate total income for Husna if she continues her business
Profit for the year as per balance sheet of partnership
Nephew’s annual salary as manager
Total net income for Husna after sale of business
$
41 600
(20 000)
21 600
Husna is likely to earn more profits if she accept the offer from her nephew as the profit with him as a manager
appears to be higher. Though the nephew is ready to take the initiative but his skills and experience may not be
sufficient to have smooth functioning of business operations. In the absence of Husna there might be a reduction in
profits.
Husna would be relatively safe if she makes her investment in a larger business. Husna has gained an opportunity
for capital gains on the value of her shares. Both options give a return lower than the previous level of drawings.
Husna’s shares might fall in value.
QUESTION 6
MAY 2017 P32 Q4
(a)
Goodwill is an intangible non-current asset. It arises from the factors like advantageous location, good
reputation, quality products & customer loyalty of the concerned business. Mathematically, it represents
the value of the business in excess of the book value of its net assets.
(b)
Statement to calculate Goodwill
Purchase consideration (W 1)
Fair value of net assets taken over $(450 000 + 120 000 + 60 000 + 49 000 + 52 000  39 000)
Goodwill
(c)
Land and buildings
Plant and machinery
Motor vehicles
Inventory
Trade receivables
Profit share
Capital – A ($210 000 × 3/5)
B ($210 000 × 2/5)
Realisation account
$
320 000 Trade payables
135 000 C Ltd - Purchase consideration (W 1)
110 000 Alex Capital - Vehicle
38 000
54 000
126 000
84 000
210 000
867 000
$
800 000
692 000
108 000
$
39 000
800 000
28 000
______
867 000
Chapter 5
80
(d)
Realisation - vehicle taken over
8%Debentures (W 2)
Ordinary shares (W 2)
Bank (balancing figure)
(W 1)
Purchase consideration
=
=
=
=
Purchase of Business
Capital Accounts
Alex
Brown
$
$
28 000
Balance b/f
187 500
125 000 Current account
216 000
144 000 Realisation profit (b part)
70 500
76 000
502 000
345 000
Profit before appropriation:
[Residue profit
+ Partners' salaries
(36 000 + 24 000) + (30 000 + 45 000)
$800 000
+
+
Alex
$
300 000
76 000
126 000
Brown
$
200 000
61 000
84 000
502 000
345 000
Interest on capital]
(15 000 + 10 000)]
×
×
×
5
5
5
(W 2)
$
$
Purchase consideration
800 000
Payment through cash
(127 500)
8% Debentures: Alex ($15 000 ÷ 8%)
187 500
Brown ($10 000 ÷ 8%)
125 000 (312 500)
Settled by ordinary shares
360 000
Alex ($360 000  60%)
216 000
Brown ($360 000  40%)
144 000 (360 000)
(e)
The ‘return on capital employed’ before the acquisition is 7.79% ($352 000 /$4 516 000) whereas the
additional return from this acquisition is expected to be 23.5% [($540 000 – $352 000) / $800 000]. This will
improve overall profitability of the business to 10.16% [($540 000 / ($4 516 000 + $800 000]] from 7.79%.
The improvement in profit could have been due to economies of scale or due to synergy effect. The goodwill
of partnership may also bring additional revenue or customers for the business. As a result the shareholders
may receive higher dividend.
QUESTION 7
NOVEMBER 2017 P31 Q4 (e & f)
(e)
As only one year’s data is available so is difficult to make a safe decision. Based on available data Armfield
would be better off in terms of increased profits by $20 000 whereas Bonetti will be worse off by $20 000
in the form of reduction in his profits.
The advantages are:

availability of additional capital

sharing of managerial responsibilities resulting in shared workload and less stress

spread of risk as losses will be shared

different skills may be beneficial to the business

Holiday / sickness cover
The disadvantages are:

Sharing of profits

Delayed decision making

Possible disputes

sharing of managerial responsibilities
(f)





The liability that each shareholder has for company debts is only limited to the amount paid for his or
her shares.
Company may find it easier to raise finance through loans, issue of shares and debentures
Continuity of the business
Partners have to work in the business where shareholders may only invest
Shares can easily be transferred by shareholders to other individuals or entities.
Chapter 5
81




On the other side a company has to comply with a number of statutory regulations. It has to audit its
accounts annually and also has to publish audited accounts on annual basis.
A company’s affairs are less private than those of a sole trader or partnership, since company accounts
are made available for publication.
Separation of ownership and control makes it difficult for ordinary shareholders to take concerted
action to oust bad management group.
Compliance with the Companies Act imposes an increased administrative burden on the company. This
also involves occurrence of higher overheads on accounting and secretarial services.
QUESTION 8
(a)
Purchase of Business
MAY 2018 P32 Q4
Ephrain and Fikriyah
Statement of financial position at 1 October 2017
$
Non-current assets ($55 000 + $115 000)
Current assets
Inventories ($8 000 + $10 500)
Trade receivables ($9 000 + $15 500)
Cash & cash equivalents ($6 500 + $1 000)
Total assets
Capital and liabilities
Capital accounts:
Ephraim (W 1)
Fikriyah (W 1)
Current liabilities
Trade payables ($8 000 + $18 000)
18 500
24 500
7 500
72 500
122 000
Capital accounts
Ephraim Fikriyah
Ephraim
$
$
$
1
Goodwill[($10 000 + $6 000) × /2)
8 000
8 000 Balance b/f
60 000
1 000 Goodwill
10 000
Inventories  ($11 500 10 500)
Balance c/d
72 500 122 000 Non-current assets  ($55 000 
10 000
$45 000) ; ($115 000 110 000)
_____
_____ Inventories  ($8 000  $7 500)
500
80 500 131 000
80 500
$
170 000
50 500
220 500
194 500
26 000
220 500
(W 1)
(b)
Fikriyah
$
120 000
6 000
5 000
______
131 000
Profits are subject to consistent annual reduction of 10% per annum. Profits in the first year of merger will
be $100 000. Second year profits will be $90 000 ($100 000 × 90%), third year $81 000 ($90 000 × 90%), and
fourth year $72 900 ($81 000 × 90%).
As profits are shared equally between Ephraim and Fikriyah so Ephraim who has been earning profits of
$60 000 for the last three years is worse off throughout the period as his maximum profit share in a year is
just $50 000 ($100 000 × 1/2).
Fikriyah is better off for first three years as his third year profit share will be $40 500 ($81 000 × 1/2) but is
also worse off in year four.
It can be assumed safely, that the increased competition would affect profit of Ephraim and Fikriyah as sole
traders in the same way as affecting the partnership. The formation of partnership would rather help
partners to compete in a better way.
On financial grounds, it looks that on financial grounds the merger is beneficial for Fikriyah but not for
Ephraim.
Chapter 5
82
Purchase of Business
The benefits of forming the partnership like risk sharing, responsibility sharing etc need to outweigh any
financial loss in earnings for Ephraim.
Both partners have ample time for making plan to combat reduction in profits in coming years
Chapter 6
CHAPTER 6
83
Financial Statements of Companies
FINANCIAL STATEMENTS OF COMPANIES
QUESTION 1
A public limited company is required to publish a Report of the Directors.
List five items which appear in the Report of the Directors.
MAY 2011 P42 Q2 (d)
[10]
QUESTION 2
MAY 2011 P43 Q1
On 30 April 2010 Frog Log plc’s statement of financial position (balance sheet) showed the following:
$000
Non-current assets
2012
Net current assets
983
2 995
Non-current liabilities
5% convertible loan stock
250
7% debentures
200
2545
Equity
$000
1 000 000 ordinary shares of $1 each
1000
200 000 redeemable ordinary shares of $0.50 each
100
Share premium
750
General reserve
80
Retained earnings
615
2545
The following additional information is available:
1
On 1 May 2010 the premises were revalued at $530 000.
They were included in the statement of financial position on 30 April 2010 at a cost of $270 000 with
accumulated depreciation of $20 000.
2
In August 2010 Frog Log plc redeemed its redeemable ordinary shares at a premium of $0.05 per share.
They had originally been issued at a premium of $0.10 per share.
3
The convertible loan stock is due to be repaid on 31 December 2011.
Loan stock can be converted into ordinary shares at a price of $3 per share in the period between
1 January 2010 and 31 December 2011.
In December 2010 holders of $150 000 of the loan stock decided to convert their loan stock.
4
Profit for the year ended 30 April 2011 was $170 000.
$50 000 was transferred to general reserves.
Dividends paid during the year amounted to $95 000.
5
There were no acquisitions or disposals of non-current assets during the year.
The income statement included depreciation charges of $5 000 on the premises and $112 000 on other
non-current assets.
6
Current assets on 30 April 2011 totalled $1 610 000.
REQUIRED
(a)
Prepare, in as much detail as possible, the statement of financial position of Frog Log plc at 30 April
2011.
[32]
(b)
State whether each reserve in your balance sheet is a revenue reserve or a capital reserve.
[5]
(c)
In what circumstances would stockholders wish to exercise their right to convert loan stock into ordinary
shares?
[3]
QUESTION 3
The trial balance of Ashbourne plc at 30 June 2011 was as follows:
Land and buildings - cost
Land and buildings - depreciation
NOVEMBER 2011 P42 Q2
Dr.
$000
8 473
Cr.
$000
2 173
Chapter 6
84
Financial Statements of Companies
Other non-current assets - cost
Other non-current assets - depreciation
Revenue
Purchases
Distribution costs
Administrative expenses
Finance charges
Final dividend paid for year ended 30 June 2010
Interim dividend paid for year ended 30 June 2011
Inventories at 1 July 2010
Trade receivables
Trade payables
Prepaid and accrued expenses
Bank
Ordinary share capital ($0.50 ordinary shares)
Share premium
8% debentures 2020 (issued in 2008)
Retained earnings
1 058
236
7 216
4 425
1 485
1 098
80
100
125
1 596
897
265
74
_____
19 676
173
146
5 000
2 500
2 000
232
19 676
Additional information:
1
The inventories at 30 June 2011 were valued at $1 730 000.
2
Land, included in the trial balance total at $4 million, is to be revalued at $5 million.
3
All of the depreciation on the relevant non-current assets has been accounted for.
4
There was a flood at the company's premises on 29 July 2011 resulting in a material uninsured
loss of $215 000.
5
On 14 August 2011 the company declared its final dividend for the year ended 30 June 2011
of $0.03 per share.
REQUIRED
(a)
Prepare the income statement for the year ended 30 June 2011.
(b)
Prepare the statement of financial position (balance sheet) at 30 June 2011.
[12]
[20]
IAS 10 (events after the statement of financial position date) identifies two types of event as adjusting events and
non-adjusting events.
REQUIRED
(c)
State the difference between adjusting and non-adjusting events. Explain their treatment in the financial
statements.
[4]
(d)
State if the items in points 4 and 5 in the additional information are adjusting or non-adjusting events. Justify
your answer.
[4]
QUESTION 4
MAY 2012 P41 Q1 (c & d)
(c)
Describe the treatment of a proposed final dividend in the financial statements. Give the reason for this
treatment.
[4]
(d)
Name one item included in a statement of changes in equity which would not appear in a statement of
recognised income and expenses.
[2]
QUESTION 5
The financial statements of Manik plc showed the following in respect of non-current assets:
$000
Cost at 1 January 2012
2 000
Less: accumulated depreciation
200
Net book value at 1 January 2012
1 800
MAY 2013 P41 Q2
Chapter 6
85
Financial Statements of Companies
During the year ended 31 December 2012 the following took place.
New machinery costing $100 000 was purchased. This had been entered in the ledger. Machinery which had cost
$200 000 and had been depreciated by $50 000 was sold. The proceeds of the sale were $145 000 and this had been
credited to the suspense account.
No depreciation has been charged on the plant and machinery for the year. Depreciation is charged at 10% on the
net book value of plant and machinery at 31 December 2012. The charge is to be included in the Administrative
expenses for the year.
REQUIRED
(a)
Prepare a statement suitable for inclusion in the published accounts to show the cost, accumulated
depreciation and net book value of plant and machinery at 31 December 2012.
[8]
The trainee accountant at Manik plc has provided the following financial information at 31 December 2012.
Revenue
Cost of sales
Administrative expenses
Distribution costs
Suspense account
Dividends paid and proposed
Inventory
Trade receivables
Trade payables
Cash and cash equivalents
Long term loan
Ordinary shares of $1 each
Retained earnings at 1 January 2012
$000
4 000
1 000
1 700
450
145
135
400
385
120
170
300
1 250
265
Additional information
1
No adjustments have been made in respect of distribution costs owing of $20 000 and administrative
expenses prepaid of $15 000.
2
Interest on the long-term loan is chargeable at 10% per annum. Only the interest paid during the year of
$20 000 has been included in administrative expenses.
3
The estimated tax charge for the year is $365 000.
4
The figure for dividends paid and proposed is made up as follows:
Final dividend for the year ended 31 December 2011 paid in 2012 $50 000
Interim dividend paid 30 September 2012 $25 000
Proposed final dividend to be paid in March 2013 $60 000
5
On 1 December 2012 the company issued a further 500 000 shares of $1 each at $1.50.
These shares would qualify for the proposed final dividend to be paid in March 2013.
REQUIRED
(b)
Prepare the company’s income statement for the year ended 31 December 2012.
(c)
Prepare a statement of changes in equity for the year ended 31 December 2012.
(d)
Prepare the company’s statement of financial position at 31 December 2012.
(e)
Explain how proposed dividends are treated in the published accounts.
[11]
[10]
[8]
[3]
QUESTION 6
NOVEMBER 2013 P41 Q1 (c)
Manchi plc are preparing their budgets for the forthcoming year ending 30 September 2014. They provide the
following information.
1
The following note was extracted from the financial statements at 30 September 2013.
Chapter 6
86
Financial Statements of Companies
Non-current assets
Cost
Depreciation
Net book value
Property plant and equipment
$000
$000
$000
Land
1500
1500
Buildings
800
250
550
Plant and equipment
1500
600
900
Motor vehicles
150
50
100
Total
3 950
900
3 050
2
The land is expected to increase in value by $100 000 during the year.
3
Budgeted capital expenditure for the year on buildings is $80 000; plant and equipment $280 000; motor
vehicles $30 000 and goodwill $50 000.
4
Budgeted depreciation for the year on buildings is $50 000; plant and equipment $255 000 and motor
vehicles $25 000.
5
Plant and equipment with an original cost of $35 000 and depreciation of $15 000 is budgeted to be disposed
of for proceeds of $10 000.
REQUIRED
Prepare the property, plant and equipment section of the non-current assets note to the budgeted statement of
financial position at 30 September 2014.
[10]
QUESTION 7
NOVEMBER 2013 P42 Q3 (e)
Sanghera Manufacturing plc produces office desks in two versions, standard and superior. The directors of Sanghera
Manufacturing plc wish to raise additional finance for investment.
REQUIRED
(i)
Identify two possible sources of finance the directors could use.
[2]
(ii)
Explain one advantage and one disadvantage of each method you have chosen.
[6]
QUESTION 8
MAY 2014 P41 Q2 (a to c)
Bridlington plc prepares accounts annually to 30 September. The directors provide the following information.
Trial Balance at 30 September 2013
Debit ($)
Credit ($)
Revenue
936 011
Purchases
479 352
Distribution costs
108 376
Administrative expenses
236 758
Ordinary share capital
400 000
Share premium
40 000
Retained earnings
57 386
Land and buildings
Cost
380 000
Accumulated depreciation
78 400
Plant and machinery
Cost
105 000
Accumulated depreciation
66 500
Motor vehicles
Cost
65 000
Accumulated depreciation
37 578
Loss on disposal of motor vehicle
850
Inventory at 1 October 2012
177 838
Provision for doubtful receivables
6 834
Trade receivables
138 450
Trade payables
51 243
Cash and cash equivalents
_______
17 672
1 691 624
1 691 624
Chapter 6
87
Additional information
1
Land, which cost $100 000, is not to be depreciated.
2
Depreciation is to be provided as follows:
Buildings
plant and machinery
motor vehicles
3
4
5
6
7
Financial Statements of Companies
4% on cost,
10% on cost,
25% reducing balance.
A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.
The charge is split in the ratio 3:1 between administrative expenses and distribution costs.
Plant and machinery costing $10 000 was acquired on 1 April 2013.
A motor vehicle which had been purchased on 1 February 2011 for $16 000 was sold on 1 June 2013 for $8
150.
The inventory at 30 September 2013 was valued as follows:
Net realisable value
$212 653
Cost
$172 927
The provision for doubtful receivables is to be provided at 4% of the trade receivables and the movement
is to be treated as an administrative expense.
An invoice for an administrative expense of $4 525 remained unpaid at 30 September 2013.
There was a prepayment for a distribution cost at 30 September 2013 of $2 760.
The tax charge for the year is estimated to be $16730.
REQUIRED
(a)
Prepare an income statement for the year ended 30 September 2013.
[16]
(b)
Prepare a schedule of property, plant and equipment at 30 September 2013 suitable to be used as a note
to the accounts.
[10]
(c)
Prepare a statement of financial position at 30 September 2013.
[8]
QUESTION 9
NOVEMBER 2014 P43 Q1(a &b)
The following extract from the income statement has been prepared for Asteroid plc for the year ended 30 June
2014.
$000
Revenue
11 735
Cost of sales
(5 872)
Gross profit
5 863
Dividends received
750
Gain on disposal of non-current asset
395
Distribution costs
(2 138)
Administrative expenses
(1 574)
Profit from operations
3 296
On 1 May 2014 the directors issued $5 625 000 8% debentures redeemable in 2022.
The estimated tax liability for the year was $782 000.
REQUIRED
(a)
Calculate the finance costs which would be entered in the income statement.
(b)
Calculate the profit before taxation and profit attributable to equity holders.
[3]
[2]
QUESTION 10
MAY 2015 P41 & P42 Q3(e & f)
Abdul is considering forming a company by issuing ordinary and preference shares.
REQUIRED
(e)
State one advantage and one disadvantage of ordinary shares to:
(i)
the company
[2]
(ii)
a shareholder.
[2]
Chapter 6
(f)
88
State one advantage and one disadvantage of preference shares to:
(i)
the company
(ii)
a shareholder.
Financial Statements of Companies
[2]
[2]
QUESTION 11
MAY 2015 P43 Q1 (a to c)
The directors of Plantin plc have produced the following.
Plantin plc
Statement of Financial Position at 1 April 2014
Non-current assets
$
$
$
Tangible
Cost
Depreciation Book value
Land and buildings
260 000
90 000
170 000
Plant and equipment
152 000
87 000
65 000
412 000
177 000
235 000
Investments
55 000
290 000
Intangible: Goodwill
80 000
370 000
Current assets
Inventories
45 000
Trade and other receivables
56 000
101 000
Total assets
471 000
Equity
Ordinary share capital ($1 shares)
100 000
5% Non-redeemable $1 preference shares
80 000
Retained earnings
110 000
290 000
Non-current liabilities
5% debentures
100 000
Current liabilities
Trade and other payables
24 000
Taxation
40 000
Cash and cash equivalents
17 000
81 000
Total equity and liabilities
471 000
The following information is also available for the following year.
Extract from Income Statement for the year ended 31 March 2015
$
Profit from operations
74 000
Income from investments
5 000
Finance costs
(12 000)
Profit before taxation
67 000
Taxation
(15 000)
Profit for the year
52 000
Statement of cash flows for the year ended 31 March 2015
Operating activities
$
$
Profit from operations
74 000
Depreciation
- buildings
28 000
- plant and equipment
33 000
Impairment of goodwill
20 000
Increase in inventories
(30 000)
Increase in trade receivables
(40 000)
Increase in trade payables
30 000
41 000
Cash from operations
115 000
Interest paid
(12 000)
Tax paid
(40 000)
Chapter 6
89
Net cash flow from operations
Investing activities
Purchase of non-current assets
- buildings
- plant and equipment
Income from investments
Financing activities
Redemption of debentures
Proceeds of issue of non-redeemable preference shares
Proceeds of issue of 50 000 ordinary shares
Dividends paid (preference)
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 April 2014
Cash and cash equivalents at 31 March 2015
Financial Statements of Companies
63 000
(80 000)
(80 000)
5 000
(50 000)
20 000
80 000
(4 000)
(155 000)
46 000
(46 000)
(17 000)
(63 000)
REQUIRED
(a)
Prepare an extract from the statement of changes in equity for the year ended 31 March 2015 showing the
retained earnings column.
[4]
(b)
Prepare the property, plant and equipment section of the non-current assets note to the statement of
financial position at 31 March 2015.
[7]
(c)
Prepare Plantin plc’s statement of financial position at 31 March 2015. (Comparatives are not
required.)
[21]
QUESTION 12
November 2015 P41 Q1 (a & b)
The directors of Corbiere plc have extracted the following balances from the books of account at 30 September 2015.
Dr ($)
Cr ($)
6% debentures (2020)
68 000
Accrued expenses
2 480
Administrative expenses
63 810
Cash and cash equivalents
12 770
Carriage inwards
3 600
Distribution costs
49 330
Interest paid
3 060
Inventories at 1 October 2014
62 500
Motor vehicles: Cost
84 600
Provision for depreciation
38 760
Plant and machinery:
Cost
68 700
Provision for depreciation
32 300
Prepaid expenses
4 400
Property
220 000
Purchases
392 340
Retained earnings
69 700
Returns inwards
3 470
Returns outwards
2 780
Revenue
756 690
Share capital ($1 ordinary shares)
50 000
Share premium
15 000
Trade payables
48 730
Trade receivables
86 500
Wages and salaries
54 900
Additional information
The directors have discovered the following.
1
Inventories have all been valued at cost at $73 100 on 30 September 2015.
Chapter 6
2
3
4
5
6
7
8
9
10
11
90
Financial Statements of Companies
Included in this valuation are some items which originally cost $5 000 but have been damaged. They would
normally sell for $10000. The items could be repaired at a cost of $3 000 and then sold for $6 500.
On 13 October 2015 a flood resulted in the loss of inventory valued at $17 500.
Purchase of new plant and machinery on 1 October 2014 of $6 000 has been posted in error to
administrative expenses.
Motor vehicles are to be depreciated at 20% per annum using the straight-line method. The estimated
residual value of motor vehicles is $20000. Depreciation is apportioned 80% to distribution costs and the
remainder to administrative expenses.
Plant and machinery is to be depreciated at 15% per annum using the reducing balance method.
Depreciation is apportioned 80% to administrative expenses and the remainder to distribution costs.
A payment for administrative expenses of $14400 has been made on 15 January 2015 covering the period
from 1 February 2015 to 31 January 2016.
At 30 September 2015 there was an additional accrual for wages and salaries of $1700.
Wages and salaries are apportioned between distribution costs and administrative expenses in the ratio
4:1.
The 6% debenture included in the balances was issued on 1 October 2014.
The taxation charge for the year is $28200.
The directors wish to create a provision for doubtful debts equal to 2% of trade receivables at 30 September
2015. This provision is to be treated as an administrative expense.
The directors proposed a final dividend of $0.05 per share. No dividends were paid during the year.
REQUIRED
(a)
Prepare the income statement for the year ended 30 September 2015 in accordance with International
Accounting Standards.
[21]
(b)
Prepare the statement of financial position at 30 September 2015 in accordance with International
Accounting Standards.
[13]
(You are not required to prepare notes to financial accounts.)
QUESTION 13
NOVEMBER 2015 P43 Q1(a & b)
Pitman plc has been trading for many years. The following balances have been extracted from the books of account
at 30 June 2015.
Administrative expenses
Cash and cash equivalents
Distribution costs
Land and buildings: Cost
Provision for depreciation at 1 July 2014
Fixtures and fittings: Cost
Provision for depreciation at 1 July 2014
Motor vehicles:
Cost
Provision for depreciation at 1 July 2014
Inventories at 1 July 2014
Purchases
Retained earnings
Revenue
Ordinary share capital ($1 shares)
Trade payables
Trade receivables
Other payables
Other receivables
Dr
$
141 970
650
36 120
135 000
Cr
$
21 840
18 110
5 310
41 600
19 200
62 400
268 200
30 740
563 800
60 000
80 250
76 920
1 040
782 010
870
_______
782 010
Chapter 6
91
Financial Statements of Companies
Additional information
1
Inventories were valued at cost $70 300 on 30 June 2015.
2
At 30 June 2015 land and buildings were revalued. Land was valued at $90 000 and buildings at $65 000.
3
Depreciation is to be charged to administrative expenses as follows:
Buildings
2% per annum using the straight-line method
Fixtures and fittings
15% per annum using the reducing balance method
Motor vehicles
25% per annum using the reducing balance method
4
Goods with a cost price of $6000 had been sold on credit at a mark-up of 20%. The customer who had
purchased these goods has been declared bankrupt and the debt is to be written off. The bad debt is to be
charged to administrative expenses.
5
A provision for doubtful debts is to be provided at 2.5% of the closing trade receivables balance. This is to
be charged to administrative expenses.
6
On 1 April 2015 the company issued a 5% debenture for $50 000 repayable in 2024. On the same day it also
made a fully subscribed rights issue of 1 ordinary share for every 4 ordinary shares held for $1.50 per share.
No entries have been made in the books of account in respect of either of these items.
7
The taxation charge for the year is $12 650.
REQUIRED
(a)
Prepare an income statement for the year ended 30 June 2015 in line with International Accounting
Standards.
[12]
(b)
Prepare statement of financial position at 30 June 2015 in line with Accounting Standards.
[18]
QUESTION 14
ACM plc provided the following information about its non-current assets.
Accumulated depn
Cost at
at1 January 2015
1 January 2015
$
$
Property
17 000
200 000
Plant and machinery
210 000
258 000
Delivery vans
10 000
23 000
MAY 2016 P31 Q3 (a to c)
Cost at
31 December 2015
$
200 000
310 000
23 000
Additional information
1
Half of the value of property relates to land. Property is depreciated at the rate of 1% per annum using the
straight-line method.
2
Plant and machinery is depreciated at the rate of 10% per annum using the straight-line method. A full year’s
depreciation is provided in the year of purchase and none in the year of disposal.
On 1 June 2015 a machine, bought on 10 July 2007, was sold for $17 800. This resulted in a profit on disposal
of $13 000.
3
The delivery vans are depreciated at the rate of 25% per annum on the reducing balance basis.
REQUIRED
(a)
Prepare the disposal of machinery account for the year ended 31 December2015.
[6]
(b)
Prepare the non-current assets schedule for inclusion in the published financial statements of the company
for the year ended 31 December 2015 in accordance with International Accounting Standards.
[8]
(c)
Explain why a business depreciates its non-current assets.
[3]
QUESTION 15
NOVEMBER 2016 P31 Q4 (a to c)
Scrumpton plc has been trading successfully for many years. The company required additional finance to renew its
plant. The following selected balances are available at 1 October 2015:
Property, plant and equipment
Ordinary share capital
Share premium
Retained earnings
$
400 000
1 200 000
300 000
125 000
Chapter 6
92
Financial Statements of Companies
A draft profit of $167 500 was recorded for the year ended 30 September 2016 before making the following
adjustments:
1
Property, plant and equipment with a net book value of $200 000 was sold for $180 000 and replaced by
new items at a cost of $250 000.
Depreciation is charged at 15% using the reducing balance method. A full year’s depreciation is charged in
the year of acquisition and none in the year of disposal.
2
A trade receivable owing $15 000 was declared bankrupt.
3
Distribution costs of $7 500 were still owing at the year-end.
4
The nominal value of the ordinary share capital is $1 each. The final dividend of $0.02 per share for the year
ended 30 September 2015 was paid on shares held at that date.
5
During the year ended 30 September 2016 there was a rights issue of one share for every four held. The
shares were issued at $1.20 each and were fully taken up.
REQUIRED
(a)
Explain what is meant by a ‘rights issue’.
[3]
(b)
Prepare the statement of changes in equity for the year ended 30 September 2016.
[10]
(c)
State how a proposed dividend would be treated in the financial statements.
[2]
QUESTION 16
The following balances were extracted from the books of XY plc on 31 January 2017.
Land and buildings - at cost
Equipment - at cost
Motor vehicles - at cost
Accumulated depreciation
Land and buildings
Equipment
Motor vehicles
Ordinary shares of $5 each
Share premium
Retained earnings at 1 February 2016
Inventory at 1 February 2016
Trade receivables
8% Loan
Provision for doubtful debts
Revenue
Purchases
Administrative expenses
Distribution costs
Interim dividend paid
MAY 2017 P31 & P33 Q1
$
700 000
320 000
230 000
100 000
186 000
96 000
500 000
120 000
125 000
37 100
102 000
150 000
2 100
985 000
428 000
346 000
144 000
20 000
Additional information
1
Inventories at 31 January 2017 included 100 units of damaged items. These items, with a unit cost of $80,
were all sold on 2 February 2017 for $65 each.
At 31 January 2017 all other inventories were valued at cost, $36 000, and had a net realisable value of $85
400.
2
The administrative expenses include an amount of $30 000 for a machine purchased on 1 February 2016.
The machine has a useful life of three years and will then be scrapped with nil proceeds. Any costs related
to the machine should be charged to the cost of sales.
3
The figure for land and buildings (at cost) includes land which had cost $300 000.
4
During the year, XY plc purchased a motor vehicle which cost $60 000. This was settled by a payment of $40
000 from the bank and the part exchange of an old vehicle. This old vehicle had originally cost $75 000 and
had been depreciated by $27 000. Only the bank payment had been recorded in the books of account.
Chapter 6
5
6
7
93
Financial Statements of Companies
Depreciation is to be charged on the following basis:
Land
not depreciated
Buildings
straight-line method over 25 years, charged to cost of sales
Equipment
straight-line method over 5 years, charged to administrative expenses
Motor vehicles
reducing balance method at 20% per annum, charged to distribution costs
The company policy is to charge a full year’s depreciation in the year of purchase and none in the year of
sale.
Trade receivables included an irrecoverable debt of $8 800. A provision for doubtful debts of 4% is to be
maintained. These items need to be included in administrative expenses.
The loan was obtained on 1 September 2016.
REQUIRED
(a)
State two objectives of financial statements of a limited company.
(b)
Prepare the income statement for the year ended 31 January 2017.
[2]
[15]
Additional information
In October 2016 XY plc made a bonus issue of 1 ordinary share for every 10 ordinary shares held. No entry had
been made in the books of account.
REQUIRED
(c)
Prepare the statement of changes in equity for the year ended 31 January 2017. (A total column is not
required.)
[4]
Additional information
The directors are considering making a further issue of bonus shares rather than paying a cash dividend.
REQUIRED
(d)
Advise the directors which course of action they should take. Justify your answer.
[4]
QUESTION 17
MAY 2018 P31 & P33 Q2
The directors of D plc are preparing the end of year financial statements including the notes to the accounts.
The following information is available at 1 January 2017:
$
Ordinary share capital (shares of $2 each)
2 000 000
Share premium
300 000
Revaluation reserve
400 000
General reserve
100 000
Retained earnings
1 500 000
During the year ended 31 December 2017 the following took place:
1
On 1 June an interim dividend of $0.20 per ordinary share was paid.
2
On 1 October an issue of 500 000 ordinary shares was made at $2.40 per share to raise money to
purchase an additional factory.
3
On 1 November there was a rights issue of 2 shares for every 5 currently held at $2.25.
The rights issue was necessary to fund the unexpected costs on the purchase of the factory. The issue was
fully subscribed.
4
On 1 December there was a bonus issue of 4 shares for every 10 held on that date. The reserves were
maintained in their most flexible form.
On 31 December 2017 the finance director informed the other directors that:
1
The profit from operations for the year was $520 000.
2
Finance charges of $64 000 had been paid during the year.
3
The end of year tax liability on profits had been calculated as $93 000.
4
There had been a transfer to the general reserve of $47 000.
5
A final dividend of $0.10 per ordinary share had been proposed.
Chapter 6
94
Financial Statements of Companies
REQUIRED
(a)
State three uses of the notes to the accounts within the financial statements.
[3]
(b)
Prepare the statement of changes in equity for the year ended 31 December 2017. A total column is not
required.
[15]
Additional information
After the share issues there was a decrease in the market price of one ordinary share to $2.10. One of the
shareholders at the Annual General Meeting (AGM) stated that instead of the share issues the directors should have
carried out the following:
1
Financed the purchase of the new factory through a loan of $2 200 000 repayable over 5 years with total
interest payable of $68 000.
2
Paid the shareholders an extra $0.50 per share in their final dividend rather than a bonus issue of shares.
REQUIRED
(c)
Advise whether or not the directors acted in the best interests of the shareholders. Justify your answer with
relevant calculations.
[7]
QUESTION 18
The trial balance of N plc at 31 December 2017 was as follows:
Land and buildings: cost
provision for depreciation 1 January 2017
Equipment:
cost
provision for depreciation 1 January 2017
Revenue
Purchases
Administrative expenses
Distribution costs
Finance charges
Inventory 1 January 2017
Trade receivables
Trade payables
Cash and cash equivalent
Ordinary share capital
Share premium
6% debentures (2021)
Retained earnings
MAY 2018 P32 Q2 (a & b)
$
600 000
$
72 000
278 000
112 000
2 354 000
1 322 000
674 000
296 000
9 000
241 000
456 000
394 000
62 000
________
3 938 000
600 000
140 000
200 000
66 000
3 938 000
The following information is also available.
1
Revenue included a deposit of $6 000 from a customer for the goods to be delivered in March 2018.
2
Total inventory at 31 December 2017 cost $265 000. Of this the goods costing $24 600 had a net realisable
value of $18 800.
3
Land and buildings were acquired in 2008. On 1 January 2017 they were revalued at $720 000 of which twothirds was allocated to land and one-third to buildings. N plc had not recorded this revaluation.
4
During the year, a new photocopier was purchased for $80 000. The purchase consideration was settled by
an exchange for a fully depreciated old photocopier with a trade-in value of $10 000. The old photocopier
had been purchased in 2011 for $40 000. The balance of the purchase had been paid by cheque. N plc had
recorded only the bank payment transaction. There was no other purchase or sale of non-current asset
during the year.
5
Depreciation is to be charged as follows:
Land
Nil
Buildings
over the useful life of 25 years
Equipment
25% per annum on cost
Chapter 6
6
7
95
Financial Statements of Companies
A full year’s depreciation is charged in the year of purchase and none in the year of disposal.
All depreciation charged is to be included in administrative expenses.
An interim dividend of $30 000 was paid on 1 October 2017 and included in administrative expenses.
Interest for 3 months on the debentures had not been recorded.
REQUIRED
(a)
Prepare the income statement for the year ended 31 December 2017.
[15]
(b)
Calculate the balance on the revaluation reserve account at 1 January 2017 following the revaluation. [5]
Chapter 6
96
Financial Statements of Companies
SOLUTION
CHAPTER 6
QUESTION 1
MAY 2011 P42 Q2 (d)
The Directors’ Report should contain the following:

The state of affair of the company (review of business performance during the year).

Statement of company’s principal activities with significant changes.

An indication of research and development activities of the business.

A statement of political and charitable donations

Proposed transfers to reserves

Amounts of recommended dividends

Details of directors’ remuneration

Names of directors and their holdings of shares and debentures in the company

A statement of principal risks and uncertainties which the company is facing

A statement of details of annual general meeting (AGM)
QUESTION 2
(a)
MAY 2011 P43 Q1
Frog Log plc
Statement of Financial Position
As at 30 April 2011
Non-current assets
Premises ($530 000 – $5 000)
Other assets ($2 012 000 – ($270 000 − $20 000) – $112 000]
$000
Current assets
Current liabilities
Convertible loan stock 2011 [$250 000 − $150 000(W 2)]
Trade and other payables (W 1)
$000
$000
525
1 650
2 175
1 610
100
545
645
965
3 140
Non-current liabilities
Debentures
200
2 940
Equity
Ordinary shares [$1 000 000 + $50 000 (W 2)]
Share premium [$750 000+ 100 000(W 2)]
Revaluation reserve [$530 000 – ($270 000 − $20 000)]
Capital redemption reserve
General reserve ($80 000 + $50 000)
Retained earnings $[615 000+170000–(100000×110%)–50000–95 000)
1 050
850
280
100
130
530
WORKINGS
(W 1)
Profit for the year
Redemption of shares ($100 000 × 110%)
Dividends paid
Depreciation:
Premises
Other non-current assets
Increase in net-current assets($1 610 000 − $983 000)
Trade and other payables
(W.2)
2 940
$
170 000
(110 000)
(95 000)
112 000
5 000
(627 000)
545 000
Number of shares to be issued
=
$150 000 ×
Convertible loan stock
Ordinary Shares Capital
Share premium
=
=
=
50 000 × 3
50 000 × 1
50 000 × 2
1
3
=
50 000 shares
=
=
=
$150 000 
$50 000 ↑
$100 000 ↑
Chapter 6
(b)
(c)
97
Share premium
Revaluation reserve
Capital redemption reserves
General reserve
Retained earnings
Financial Statements of Companies
capital reserve
capital reserve
capital reserve
revenue reserve
revenue reserve
If at the time of conversion, the offered price of $3 for conversion is less than the market price of the shares,
it could be advantageous to exercise the option.
QUESTION 3
(a)
NOVEMBER 2011 P42 Q2
Income Statement
For the year ended 30 June 2011
$000
Sales Revenue
Cost of Sales
Inventories at 1 July 2010
Purchases
Inventories at 30 June 2011
Gross Profit
Operating Expenses
Distribution costs
Administrative expenses
Operating Profit
Finance charges ($2 000 000 × 8%)
Profit after interest
(b)
Statement of Financial Position
As at 30 June 2011
Land and buildings [8 473 + (5 000  4 000)]
Other non-current assets
1 596
4 425
(1 730)
1 485
1 098
Cost/Value
$000
9 473
1 058
Current Assets
Inventories at 30 June 2011
Trade receivables
Prepaid expenses
Bank
Current Liabilities
Trade payables
Accrued finance charges ($200 000 × 8%)
Accrued expenses
$000
173
80
146
$000
7 216
(4 291)
2 925
(2 583)
342
(160)
182
Depn Book value
$000
$000
2 173
7 300
236
822
8 122
1 730
897
265
74
2 966
$000
(399)
Non-Current Liabilities
8% debentures 2020 (issued in 2008)
$000
2 567
10 689
(2 000)
8 689
Equity
Ordinary share capital ($0.50 ordinary shares)
Surplus on revaluation of land ($5 000 000  $4 000 000)
Share premium
Retained earnings (232 000 + 182 000  100 000  125 000)
5 000
1 000
2 500
189
3 689
8 689
Chapter 6
98
WORKINGS
Balance at 1 July 2011
Current year profit
Surplus on land revaluation($5m  $4 m)
Final dividend paid for year to 30-6-2010
Interim dividend paid for year to 30-6-2011
Balances at 30 June 2011
Notes


(c)
Financial Statements of Companies
Statement of Changes in Equity
Ordinary Revaluation
Share
capital
reserves
premium
$000
$000
$000
5 000
Nil
2 500
Retained
earnings
$000
232
182
1 000
_____
5 000
_____
1 000
____
2 500
(100)
(125)
189
Total
$000
7 732
182
1 000
(100)
(125)
8 689
There was a flood at the company's premises on 29 July 2011 resulting in a material uninsured loss of $215
000.
On 14 August 2011 the company declared its final dividend for the year ended 30 June 2011 of $0.03 per
share.
Adjusting event: Adjusting events refer to situations where the events after balance sheet date provide
new evidence of conditions that exist at the balance sheet date, and result in adjustment to the financial
statements.
Non-adjusting event: Non-adjusting events represent events that are indicative of conditions that arose
after the balance sheet date. As a result, they should be reflected in the financial statements of the following
accounting period, but not adjusted for in the financial statements of the current accounting period.
However, if it is considered that these events are relevant and material and that users of the financial
statements need the information for making economic decisions, these events can be disclosed in notes to
the accounts. Otherwise, users of financial statements would be deprived of material information.
(d)
Dividends
The accounting standard (IAS 10.2) stipulates that if a company declares dividends after the balance sheet
date, then the declared dividends should not be recognized as a liability in the financial statements. This is
a non-adjusting event and should be disclosed in the notes to the financial statements.
Flood
Natural disasters such as severe flooding are unexpected; sudden; and can have significant impact on an
entity’s operations. That’s why this is a non-adjusting event and should be disclosed in the notes to the
financial statements.
QUESTION 4
MAY 2012 P41 Q1 (c & d)
(c)
Only dividends paid during the year are now included in the financial statements. They are shown as
deductions in the Statement of changes in equity. This implies that current year’s interim dividend and last
year’s final dividend paid during the current year (provided the latter has been approved by the
shareholders) will be included in the current year’s financial statements.
The proposed final dividend of current year needs shareholders’ approval at the Annual General Meeting
and accordingly is not provided for in the financial statements and can only be disclosed by way of a note
to the financial statements.
(d)
Issue of shares including premium
Dividends.
QUESTION 5
MAY 2013 P41 Q2
(a)
Statement of cost, accumulated depreciation and net book value at 31 December 2012
$000
Cost at 1 January 2012
2 000
Additions (purchases) during the year
100
Disposals during the year
(200)
Cost at 31 December 2012
1 900
Chapter 6
99
Financial Statements of Companies
Accumulated depreciation at 1 January 2012
Accumulated Depreciation on disposals
Charge for the year [{$1 900 000 – ($200 000  $50 000)} × 10%]
Accumulated depreciation at 31 December 2012
Net book value at 31 December 2012 ($1 900 000  $325 000)
(b)
200
(50)
175
325
1575
Manik Limited
Income Statement
For the year ended 31 December 2012
$000
Revenue
Cost of sales
Gross profit
Operating Expenses
Administrative expenses $[1 700– 15 – 20 + 175 (depn)+[(20050)145]000
Distribution costs ($450 000 + $20 000)
Operating Profit
Financial costs – interest on loan ($300 000 × 10%)
Profit before tax
Tax
Profit for the year attributable to equity holders
1 845
470
Statement of changes in equity for the year ended 31 December 2012
Ordinary
Share
Retained
Details
Shares
Premium
Earnings
$000
$000
$000
At 31 December 2011
500
–
265
Profit attributable to equity holders
290
New issue of shares
500
250
Dividends paid ($50 000 + $25 000)
____
___
(75)
At 31 December 2012
1 000
250
480
$000
4 000
1 000
3 000
(2 315)
685
(30)
655
(365)
290
(c)
(d)
Statement of financial position at 31 December 2012
Non-current assets
$000
Plant and machinery (a)
1 900
Current Assets
Inventory
400
Trade receivables
385
Other receivables (prepayments)
15
Cash and cash equivalents
170
Current Liabilities
Trade payables
120
Tax payable
365
30
Other payables - accruals [$20 000 + ($30 000  $20 000)]
$000
325
Total
$000
765
290
750
(75)
1 730
$000
1575
970
515
Non-Current Liabilities
Loan
455
2 030
(300)
1 730
Equity
Ordinary shares of $1 each
Share premium
Retained earnings
1 000
250
480
1 730
Chapter 6
(e)
100
Financial Statements of Companies
Proposed ordinary dividend is treated as a non-adjusting event so is disclosed by way of a note to the
financial statements. This will not be included anywhere in the financial statements for 2012.
QUESTION 6
NOVEMBER 2013 P41 Q1 (c)
Manchi plc
Note to the budgeted statement of financial position for the year ending 30 September 2014
Plant and
Motor
Property, plant and equipment
Land
Buildings
Total
equipment
vehicles
Cost / valuation
$000
$000
$000
$000
$000
Balance at 1 October 2013
1 500
800
1 500
150
3 950
Add
Revaluation
100
100
Add
Purchases
80
280
30
390
Less
Disposals
____
___
(35)
___
(35)
Balance at 30 September 2014 (a)
1 600
880
1 745
180
4 405
Depreciation
Balance at 1 October 2013
Less
Disposals
Add
Depreciation charge for the year
Balance at 30 September 2014 (b)
Net book value at 30 September 2014(a-b)
250
1 600
50
50
300
600
(15)
255
840
25
75
900
(15)
330
1 215
580
905
105
3 190
QUESTION 7
NOVEMBER 2013 P42 Q3(e)
(i)
Public issue of shares, rights issue, debentures issue, bank loan, disposal of surplus non-current assets, debt
factoring.
(ii)
Public issue
Advantages

Reduce gearing level

no legal obligation to pay dividend in the years of low or no profitability
Disadvantages

Expensive

needs underwriting to ensure success

dilutes control of existing owners
Right issue
Advantages

no dilution of control of existing owners

no legal necessity to pay dividend in a bad year

Enjoy voting rights
Debenture issue/loan
Advantages

charging of interest against profit which is admissible expense for tax purposes

trading on equity
Disadvantages

need to be redeemed (repaid)

interest is always payable regardless of profitability

no voting rights in general meeting
Disposal of non-current assets
Advantages

no loss of control within ownership

no fixed costs involved

will generate immediate cash
Chapter 6
101
Financial Statements of Companies
Disadvantages

may affect business operations

may become insufficient as business grows
QUESTION 8
(a)
MAY 2014 P41 Q2 (a to c)
Bridlington PLC
Income statement for year ended 30 September 2013
$
Revenue
Cost of sales
Opening Inventory
Purchases
Closing Inventory (lower of cost or NRV)
Gross profit
Distribution costs (W 1)
Administrative expenses (W 2)
Operating Profit
Tax
Profit for the year
$
936 011
177 838
479 352
(172 927)
112 967
262 042
(484 263)
451 748
(375 009)
76 739
(16 730)
60 009
(W 1) Distribution costs
Balance as per Trial balance
Prepayments
Loss on disposal of motor vehicle ($850 × 1/4)
Depreciation[$28 556 (W 3) × 1/4]
Total Distribution costs
$
108 376
(2 760)
212
7 139
112 967
(W 2) Administrative expenses:
Balance as per Trial balance
Accrual
Decrease in provision for doubtful debts [$6 834  ($138 450 × 4%)]
Loss on disposal of motor vehicle ($850 × 3/4)
Depreciation[$28 556 (W 3) × 3/4]
Total administrative costs
$
236 758
4 525
(1 296)
638
21 417
262 042
(W 3) Calculation of Current year Depreciation
Buildings ($280 000 × 4%)
Plant and machinery ($105 000 × 10%)
Motor vehicles [$65 000  ($44 578  $7 000)] × 25%
Total Depreciation charge for the year
$
11 200
10 500
6 856
28 556
(b)
Cost
Balance at year start (1/10/2012)
Additions during the year
Disposal during the year
Balance at year end (30/9/2013) (a)
Depreciation
Balance at year start (1/10/2012)
Disposal [$16 000  ($8 150 + $850)]
Current year depreciation charge (W 3)
Balance at year end (30/9/2013) (b)
Net Book Value at 30.09.13
Net Book Value at 30.09.12 (a  b)
Non-Current asset Schedule
Land
Buildings
100 000
280 000
______
100 000
______
280 000
Plant & Machine
95 000
10 000
______
105 000
Zero
78 400
66 500
Zero
Zero
100 000
100 000
11 200
89 600
190 400
201 600
10 500
77 000
28 000
28 500
Motor Vehicle
81 000)
44 578
(7 000)
6 856)
44 434
20 566
36 422
(16 000)
65 000)
Chapter 6
102
(c)
Statement of Financial Position
Assets
Non-current assets
Property, plant and equipment
Current assets
Closing Inventory
Trade receivables
Provision for doubtful debts ($138 450 × 4%)
Other receivables (prepayments)
Total assets
Equity and liabilities
Equity
Share capital
Share premium
Retained earnings ($57 386 + $60 009)
Current liabilities
Trade payables
Other payables (accruals)
Tax liability
Cash and cash equivalents (bank overdraft)
Total equity and liabilities
QUESTION 9
(a)
Finance costs
=
$5 625 000 × 8% × 2/12
=
$75 000
(b)
Profit before tax
=
=
Profit attributable to equity holders =
=
QUESTION 10
(e)
(i)
(ii)
(f)
(i)
(ii)
QUESTION 11
(a)
Financial Statements of Companies
$
$
$
338 966
172 927
138 450)
(5 538)
132 912
2 760
400 000
40 000
117 395
308 599
647 565
557 395
51 243
4 525
16 730
17 672
90 170
647 565
NOVEMBER 2014 P43 Q1(a &b)
$3 296 000 – $75 000
$3 221 000
$3 221 000 – $782 000
$2 439 000
MAY 2015 P41 & P42 Q3(e & f)
Advantage
– dividends need not be paid if profits are insufficient
Disadvantage – sharing of management control as ordinary shareholders control have the voting
rights
Advantage
– entitled to vote at the annual general meeting
may earn a higher dividend in periods of high profits
Disadvantage – may not receive any dividend in the periods of low or no profits
ordinary shareholders only receive what residue is left after paying to all lenders
and preference shareholders on winding-up of company.
Advantage – an allowable expense for tax purposes if shares are redeemable
Disadvantage – No control over the amount of dividend as it is fixed.
Advantage – preference shareholders receive the dividend before ordinary shareholders.
Disadvantage – do not receive higher dividends in the periods of higher profits as preference
dividend is a fixed amount.
MAY 2015 P43 Q1 (a to c)
Plantin plc
Statement of changes in equity (an extract to show retained earnings)
$000
Retained earnings at 1 April 2014
110
Profit for the year
52
Preference dividend paid ($80 000 × 5%)
(4)
Retained earnings at 31 March 2015
158
Chapter 6
103
Financial Statements of Companies
(b)
Plantin plc
Note to the statement of financial position at 31 March 2015.
Property, plant and equipment
Land and
Plant and
buildings
equipment
Cost
$000
$000
Balance at 1 April 2014
260
152
Purchases
80
80
Balance at 31 March 2015
340
232
Depreciation
Balance at 1 April 2014
90
87
Charge for the year
28
33
Balance at 31 March 2015
118
120
Net book value
Balance at 31 March 2015
222
112
Balance at 31 March 2014
170
65
(c)
Non-current assets
Tangible
Property, plant and equipment
Land and buildings
Plant and equipment
Investments
Plantin plc
Statement of Financial Position
As at 31 March 2015
Cost
$000
340
232
177
61
238
334
235
Book value
$000
118
120
222
112
55
389
60
449
75
96
171
620
150
100
30
158
438
Non-current liabilities
5% debentures
50
Current liabilities
Trade and other payables ($24 000 + $30 000)
Taxation (Income Statement)
Cash and cash equivalents (Statement of Cash flows)
Total equity and liabilities
QUESTION 12
(a)
$000
412
160
572
Depreciation
$000
Intangible
Goodwill ($80 000 – $20 000)
Current assets
Inventories ($45 000 + $30 000)
Trade and other receivables ($56 000 + $40 000)
Total assets
Equity
Ordinary share capital[$100 000 + (50 000 shares × $1)]
Non-redeemable $1 preference shares ($80 000 + $20 000)
Share premium [$80 000  (50 000 shares × $1)]
Retained earnings (‘a’ part)
Total
54
15
63
132
620
NOVEMBER 2015 P41 Q1 (a & b)
Corbiereplc
Income statement for the year ended 30 September 2015
Chapter 6
104
Financial Statements of Companies
$
Revenue ($756 690 – $3 470)
Cost of Sales (W 1)
Gross Profit
Operating Expenses
Administrative Expenses (W 2)
Distribution Costs (W 3)
Operating Profit
Finance Costs ($68 000 × 6%)
Profit before tax
Taxation
Profit for the year
Workings
(W1)
Calculation of Cost of Sales
73 732
106 218
$
Opening Inventories
Purchases
Returns outwards
392 340
(2 780)
389 560
3 600
Carriage Inwards
Closing inventories [$73 100 – {$5 000  ($6 500  $3 000)]
Cost of Sales
Calculation of Administrative and Distribution Expenses
Administrative
Expenses
4
53 010
Administrative expenses [$63 810 – $6 000  ($14 400 × /12)]
Distribution costs
Depreciation motor vehicles [($84 600 – $20 000) × 20%] × 20% ; 80%
2 584
5 088
Depreciation Plant [($68 700 + $6 000  $32 300) × 15%) × 80% ; 20%]
1
4
Wages and salaries ($54 900 + $1 700) × /5 ; /5
11 320
Increase in provision for doubtful debts ($86 500 × 2%)
1 730
Total
73 732
$
753 220
(384 060)
369 160
(179 950)
189 210
(4 080)
185 130
(28 200)
156 930
$
62 500
393 160
455 660
(71 600)
384 060
(W2)
(b)
Corbiere plc
Statement of financial position at 30 September 2015
$
Assets
Non-Current Assets
Property
Plant and Machinery ($68 700 + $6 000)
Provision for depreciation ($32 300 + $6 360)
Motor Vehicles
Provision for depreciation ($38 760 + $12 920)
Current Assets
Inventories [$73 100 – {$5 000  ($6 500  $3 000)]
Trade receivables
Provision for doubtful debts ($86 500 × 2%)
Other receivables [$4 400 + ($14 400 × 4/12)]
Total Assets
$
Distribution
Expenses
49 330
10 336
1 272
45 280
_____
106 218
$
220 000
74 700
(38 660)
84 600
(51 680)
36 040
32 920
288 960
71 600
86 500
(1 730)
84 770
9 200
165 570
454 530
Chapter 6
105
Equity and liabilities
Equity
Ordinary share capital
Share Premium
Retained earnings ($69 700 + $156 930)
Non-current liabilities
6% debentures (2020)
Current liabilities
Trade payables
Other payables [$2 480 + $1 700 + ($4 080  $3 060)]
Taxation due
Cash & cash equivalents
Total equity and liabilities
QUESTION 13
(a)
Sales
Cost of sales:
Opening inventories
Purchases
$
50 000
15 000
226 630
$
291 630
68 000
48 730
5 200
28 200
12 770
94 900
454 530
NOVEMBER 2015 P43 Q1 (a & b)
Pitman plc
Income statement for the year ended 30 June 2015
$
$
563 800
Closing inventories
Gross profit
Administrative expenses (W 2)
Distribution costs
Profit from operations
Finance costs (50 000 × 5% × 3/12)
Profit before taxation
Taxation
Profit for the year
(b)
Financial Statements of Companies
62 400
268 200
330 600
(70 300)
158 433
36 120
(260 300)
303 500
(195 853)
107 647
(625)
107 022
(12 650)
94 372
Pitman plc
Statement of financial position at 30 June 2015
Assets
Non-current assets
Property, plant and equipment
Land & Buildings ($90 000 + $65 000)
Fixtures & fittings
Provision for depreciation ($5 310 + $1 920)
Motor vehicles
Provision for depreciation ($19 200 + $5 600)
Current assets
Inventories
Trade and other receivables [$76 920 – ($6 000 × 120%)]
Provision for doubtful debts [($76 920 – $7 200) × 2.5%]
Other receivables
Cash & cash equivalents ($650 + 50 000 + [(60 000 × 1/4) shares@1.5]
Total assets
$
$
155 000
18 110
(7 230)
41 600
(24 800)
70 300
69 720
(1 743)
1 040
73 150
10 880
16 800
182 680
212 467
395 147
Chapter 6
106
Financial Statements of Companies
Equity and liabilities
Equity
Ordinary share capital ($1 shares) [$60 000 + [(60 000 × 1/4)]
Retained earnings ($30 740 + $94 372)
Share premium [(60 000 × 1/4) shares × (1.5 – 1.0)]
Revaluation reserve (W 1)
Non-current liabilities
5% debentures (2024)
Current liabilities
Trade payables
Other payables [$870 + $625 Finance charge)]
Taxation due
Total equity and liabilities
(W 1)
Land & Buildings [($90 000  $65 000)  $135 000]
Provision for depreciation [$21 840 + ($65 000 × 2%)]
Revaluation reserves
(W 2)
$
$
75 000
125 112
7 500
43 140
250 752
50 000
80 250
1 495
12 650
94 395
395 147
↑ $20 000 Dr
↓ $23 140 Dr
↑ $43 140 Cr
Calculation of Administrative expenses
$
Administrative expenses
Depreciation on fixtures & fittings [($18 110  $5 310) × 15%]
Depreciation on motor vehicles [($41 600  $19 200) × 25%]
Bad debts ($6 000 × 120%)
Increase in provision for doubtful debts [($76 920 – $7200) × 2.5%]
Total Administrative expenses
141 970
1 920
5 600
7 200
1 743
158 433
QUESTION 14
MAY 2016 P31 Q3(a to c)
(a)
Disposal of machinery account
2015
$
2015
$
Jun 1
Machinery (W 1)
24 000 Jun 01 Provision for depreciation
19 200
Dec 31
Income statement (profit)
13 000 Jun 01 Bank (selling price)
17 800
37 000
37 000
(W 1)
The machine is sold after 8 years so it means that it has been depreciated by 80% (10% × 8 years) of original
cost. It indicates that the book value of machine sold $4 800 [(17 800 – 13 000) is 20% of original cost (100%
– 80%). This relationship can therefore be used to calculate original cost of machine sold.
Cost of machine sold
=
=
(W 2)
Provision for depreciation
=
=
$4 800
20%
$24 000
$24 000 × 10% × 8 or $24 000  $4 800
$19 200
(b)
Property
Cost
At 1 January 2015
Of additions (Balancing figure)
Of disposals
At 31 December 2015 (a)
Plant and
machinery
$
$
200 000
258 000
76 000
(24 000)
200 000
310 000
Delivery
vans
$
23 000
23 000
Total
$
481 000
76 000
(24 000)
533 000
Chapter 6
107
Financial Statements of Companies
Depreciation
At 1 January 2015
Charge for year ($200 000 × 50% × 1%) ; ($310 000 ×
10%) ; {($23 000  $10 000) × 25%]
Reduction on disposals (W 2)
At 31 December 2015 (b)
$
17 000
$
210 000
$
10 000
$
237 000
1 000
3 250
18 000
31 000
(19 200)
221 800
13 250
35 250
(19 200)
253 050
Net book value at 31 December 2015 (a – b)
Net book value at 31 December 2014
182 000
183 000
88 200
48 000
9 750
13 000
279 950
244 000
(c)
Depreciation is an application of the matching/accruals concept. Depreciation is matched with the benefit
which the asset provides over each accounting period.
The provision for depreciation annually is intended to spread the cost over the useful life of the asset. This
is in accordance with the accruals/prudence concept.
QUESTION 15
NOVEMBER 2016 P31 Q4 (a to c)
(a)
Right issue is a right given to existing ordinary shareholders of the company to buy a certain number of
shares as a proportion to the number of shares, which they already have at a price in between the face price
and market price.
(b)
Scrumpton plc
Statement of changes in equity for the year ended 30 September 2017
Share
Share
Retained
Capital
Premium
Earnings
$
$
$
Balance at start
1 200 000
300 000
125 000
Share issue (W 1)
300 000
60 000
Current year profit (W 2)
57 500
Dividends (1 200 000 shares@$0.02 per share)
_______
______
(24 000)
Balance at year end
1 500 000
360 000
158 500
WORKINGS
(W 1 ) Number of rights issue
Effects of rights issue
$
1 625 000
360 000
57 500
(24 000)
2 018 500
Existing number of shares × 1/4
1 200 000 × 1/4
300 000
Bank ↑ $360 000 (300 000 shares × $1.20)
Share capital ↑ $300 000 (300 000 shares × $1.0)
Share premium ↑ $60 000 (300 000 shares × $0.20)
(W 2)
Profit as per draft statement
Loss on asset disposal ($200 000  $180 000)
Depreciation [($400 000  $200 000 + $250 000) × 15%
Bad debts written off
Accrued distribution costs accounted for
Correct profit attributable to equity holders
(c)
Total
$
167 500
(20 000)
(67 500)
(15 000)
(7 500)
57 500
The proposed final dividend of current year needs shareholders’ approval at the Annual General Meeting
and accordingly is not provided for in the financial statements and can only be disclosed by way of a note
to the financial statements. This implies that current year’s interim dividend and last year’s final dividend
paid during the current year (provided the latter has been approved by the shareholders) will be included
in the current year’s financial statements.
Chapter 6
108
Financial Statements of Companies
QUESTION 16
MAY 2017 P31 & P33 Q1
(a)
Financial statements of a limited company provide information about its
1 financial position and solvency through statement of financial position (balance sheet)
2 financial performance is primarily provided in an income statement through comparison of incomes
with expenses
3 movements of cash flows through cash flow statement
4 changes in equity items including shares and reserves through statement of changes in equity
5 overall position and future prospects which may be very helpful for users of financial statements in
making different solutions
(b)
XY plc
Income Statement for the year ended 31 January 2017
$
$
Revenue
985 000
Cost of sales (W 1)
(448 600)
Gross profit
536 400
Operating expenses
Distribution costs (W 2)
201 200
Administrative expenses (W 3)
390 428
(591 628)
Loss from operations
(55 228)
5
Finance cost – Loan interest ($150 000 × 8% × /12)
(5 000)
Loss for the year
(60 228)
WORKINGS
Cost of sales
$
(W 1)
Opening inventory
37 100
Purchases
428 000
Closing inventory [(100 units @ $65) + $36 000]
(42 500)
422 600
Depreciation on machine ($30 000 ÷ 3 years)
10 000
Depreciation on buildings ($400 000 ÷ 25 years)
16 000
448 600
(W
(W 3)
(c)
2)
Distribution costs
Distribution costs as per trial balance
Depreciation vehicles [($230 000 + $60 000 – $75 000)($96 000 – $27 000)] × 20%
Loss on disposal of motor vehicle [($60 000  $40 000) – ($75 000  $27 000)]
Total distribution costs
$
144 000
29 200
28 000
201 200
Administrative expenses
Administrative expenses as per trial balance
Less
Purchase of machine wrongly included in admin expenses now corrected
Depreciation on equipment ($320 000 ÷ 5 years)
Irrecoverable debt
Increase in provision for doubtful debts [($102 000 – 8 800)  4%] – $2 100
Total administrative expenses
$
346 000
(30 000)
64 000
8 800
1 628
390 428
980
Statement of Changes in Equity for year ended 31 January 2017
Share capital
Share premium
$
$
Balance at start of year
500 000
120 000
Loss for the year
Dividend paid
Bonus shares ($500 000 × 10%)
50 000
(50 000)
Balance at end of year
550 000
70 000
Retained earnings
$
125 000
(60 228)
(20 000)
______
44 772
Chapter 6
109
Financial Statements of Companies
(d)
In the initial growth phase of a company, preserving cash is of utmost importance while satisfying the return
desires of its shareholders takes precedence when the company is mature. A company has various means
at its disposal to satisfy its objectives and one of these is the type of dividend pay-out. A company can either
choose or is forced to (because of cash constraints) to pay a cash or bonus issue to replace cash dividend.
Each carries its own advantages and disadvantages which are discussed below.
Bonus Issue
 Bonus issue allows the company to declare a dividend without using up cash that may be needed to
finance the profitable investment opportunities within the company.
 Sometimes a company may declare the bonus issue to increase the trading activity and reduce the
market price of the share to make it more attractive to investors.
 The bonus issue does not affect the book value of shareholders’ wealth of the company and therefore
it has no value for them.
 Sometimes, bonus issue is the only way to satisfy the shareholders when a company faces stringent
cash difficulty or where certain restrictions to pay dividend in cash are put under loan agreement.
 The cost of issue of bonus shares is the minimum because no underwriting commission, brokerage etc.
 Bonus issue is specifically beneficial for the investors who believe in the long term story of the company
and want to increase their investment in the same.
 The company doesn’t receive any cash upon issuing bonus shares. So, the company’s ability to raise
money by follow-on offerings is reduced.
Cash dividend
 A cash dividend is paid by a company out of its earnings to investors in the form of cash.
 Cash dividends are beneficial, in that they provide shareholders with regular income on their
investment.
 Cash dividend is specifically beneficial for the investors who believe in the short term story of the
company.
 The receivers of cash dividends must pay tax on the dividend value, lowering its final value.
QUESTION 17
MAY 2018 P31 & P33 Q2
(a)
Notes to the accounts within the financial statements are required to accompany the information shown
on the face of the financial statements in the following way.
 Notes disclose any information as required by international standards but not shown on the face of the
financial statements
 provide additional information that is not presented elsewhere in the financial statements but is
relevant to an understanding of any of them.
 Notes provide explanation of the basis and accounting policies used in preparing the financial
statements e.g. inventory valuation, depreciation policy etc.
 Notes may also provide information regarding future activities that are anticipated to have a notable
impact on the business or its activities.
(b)
Statement of changes in equity for the year ended 31 December 2017
Ordinary
Share
Revaluation General
shares
premium
Reserve
reserve
$000
$000
$000
$000
Balances as at 1 January 2017
2 000
300
400
100
Interim dividend (1 000 000 shares @ $0.20)
Share issue (500 000 × $2) ; (500 000 × $0.40)
1 000
200
Rights issue [600 000 (W 1) × 2] ; [600 000 × 0.25]
1 200
150
Bonus issue [840 000 (W 2) × 2]
1 680
(650)
(400)
(100)
Profit for the year ($520 000 –$64 000 – $93 000)
Transfer to general reserve
____
____
____
47
Balances as at 31 December 2016
5 880
0
0
47
WORKINGS
(W 1)
Number of rights shares
=
$2 000 000+$1 000 000
2
Retained
earnings
$000
1 500
(200)
(530)
363
(47)
1 086
= 1 500 000 shares × 2/5 = 600 000 shares issued
Chapter 6
110
Financial Statements of Companies
(1 500 000 + 600 000) shares × 4/10 = 840 000 shares
(W 2)
Number of bonus shares =
(c)
The directors’ decision may be supported on the basis of the following points.
No finance charges are involved so would save $68 000 over 5 years which would have adversely affected
both the cash flow and the profitability of the business.
No negative impact on profitability will improve shareholders confidence and they would be better off
through extra dividends as 1 940 000 new shares were issued on which dividend of $194 000 is proposed in
addition to dividend of $100 000 on shares held at year start. The company may not have had enough cash
or profit to pay the extra dividend. However, through bonus issue, company avoided payment of extra
5 880 000
dividends $1 470 000.[
2
× 0.50] as suggested by a shareholder. Instead of paying extra dividends,
the directors saved this money which can be used on other areas within the business
Gearing level was also reduced because of increase in ordinary shares
Through three new issue of shares, there has been a decrease in the market price of each share of $0.30
($2.40  $2.10) and $882 000 in total (
5 880 000
2
) × $0.30
Potential shareholders may question why a loan or a debenture was not taken out to finance the purchase
of the factory instead of new share issues.
If proposal by shareholder was accepted, the capital repayment would also reduce the cash flow and the
potential for future dividend payments due to lack of cash.
Through borrowing of loans interest on loan would be charged against profit which is admissible expense
for tax purposes
QUESTION 18
(a)
MAY 2018 P32 Q2 (a & b)
N plc
Income Statement for the year ended 31 December 2017
$
Revenue ($2 354 000 – $6 000)
Cost of sales
Opening inventory
Purchases
Closing inventory [$265 000 – ($24 600 + $18 800)
Gross profit
Distribution costs
Administrative expenses (W2)
Profit from operations
Finance charge ($200 000 × 6%) or [$9 000 + ($200 000 × 6% × 3/12)]
Profit for the year
(W 1)
241 000
1 322 000
(259 200)
(296 000)
(711 000)
1 303 800
1 044 200
(1 007 000)
37 200
(12 000)
25 200
Calculation of Administrative costs
Administrative expenses as per trial balance
Add
Depreciation on building ($720 000 × 1/3) / 16 years (remaining life)
Less
Profit on disposal of equipment
Add
Depreciation on equipment ($278 000 + $10 000 – $40 000) × 25%
Less
Interim dividend paid wrongly included in administrative expenses now corrected
(b)
$
2 348 000
Change in value of Land & Building ($720 000  $600 000)
Provision for depreciation
Revaluation reserve account at 1 January 2017 following the revaluation
$
674 000
15 000
(10 000)
62 000
(30 000)
711 000
↑ $120 000 Dr
↓ $72 000 Dr
↑ $192 000 Cr
Chapter 7
111
CHAPTER 7
Issue of Shares & Debentures
ISSUE OF SHARES & DEBENTURES
QUESTION 1
Explain the difference between a rights issue and a bonus issue.
MAY 2011 P42 Q1 (c)
[4]
QUESTION 2
MAY 2012 P43 Q2 (c)
During the next financial year it is anticipated that plant modernisation will be required and that additional capital
will have to be raised. The directors are considering four options:
1
Bonus issue.
2
Issue of 10% debentures.
3
New share issue.
4
Rights issue.
REQUIRED
Explain the advantages and disadvantages of each option and recommend the most appropriate option.
[11]
QUESTION 3
NOVEMBER 2012 P43 Q2 (d)
The directors of Hyung Ltd believe they should raise finance to use during 2013.
Their options are:
1.
to take out a loan repayable over 5 years with interest at 6% per annum
or
2.
to make a rights issue of one ordinary share for every 2 shares held, at a 5% discount on the current market
price.
REQUIRED
Explain one disadvantage of each of the possible methods of raising the finance.
[6]
QUESTION 4
MAY 2013 P43 1(d)
Explain the terms ‘participating preference shares’ and ‘convertible loan stock’.
[6]
QUESTION 5
MAY 2013 P43 1 (a & f)
Kaunus plc was formed on 1 January 2010. On that day the company issued 200 000 ordinary shares of $1.00 each
at a premium of $0.25 and issued 150 000 redeemable preference shares of $1.00 at a premium of $0.10. The
company also issued $100 000 6% debentures redeemable on 1 January 2013.
REQUIRED
(a)
Prepare the company’s statement of financial position at 1 January 2010 immediately after issuing the
shares and debentures.
[6]
(f)
Explain for what purposes the following balances may be used:
(i)
the share premium account
(ii)
the retained earnings.
[2]
[2]
QUESTION 6
MAY 2014 P41 Q2(d)/MAY 2014 P42 Q2(d)
Bridlington plc prepares accounts annually to 30 September. During October 2013 the following transactions took
place.
6 October
A rights issue of 1 share for each 8 held was made at $1.50 per share.
The rights were fully taken up. Nominal value of each share is $1.00.
15 October
A bonus issue of 1 share for every 10 held was made. The company maintains its reserves in
the most flexible manner.
31 October
Land which cost $100 000, was revalued at $200 000.
Profit for the month of October was $2 615.
The company had the following balances as at 30 September 2013.
Ordinary share capital
400 000 ordinary shares of $1 each.
Company’s share premium
$40 000.
Retained profits
$117 395
REQUIRED
Prepare the equity section of the statement of financial position at 31 October 2013.
[6]
Chapter 7
112
Issue of Shares & Debentures
QUESTION 7
NOVEMBER 2014 P42 Q1 (a to d)
The directors of Aston plc provided the following financial information at 1 June 2013.
Ordinary share capital ($1 shares)
Share premium
Revaluation reserve
Retained earnings
$000
25 000
5 000
1 000
2 950
Land
6 000
On 1 July 2013 $1 800 000 8% debentures were issued.
For the year ended 31 May 2014 profit from operations was $3 752 000.
The tax charge for the year was 25% of the profit before taxation.
REQUIRED
(a)
Prepare the income statement for the year ended 31 May 2014.
[6]
Additional information
On 1 September 2013 a final dividend relating to the previous year of $0.04 per ordinary share was paid.
On 1 October 2013, 5 000 000 ordinary shares of $1 each were issued at a premium of $0.10 per share.
On 1 November 2013 a rights issue was made of 1 ordinary share for every 5 ordinary shares owned at $1 per share.
This was fully subscribed.
On 1 February 2014 land was revalued at $7 500 000.
On 1 February 2014 an interim dividend of $0.03 per ordinary share was paid.
On 1 March 2014 a transfer of $500 000 was made from retained earnings to a newly formed general reserve.
On 1 April 2014 the directors proposed a final dividend for the year 50% higher per share than the previous year.
REQUIRED
(b)
Prepare a statement of changes in equity for the year ended 31 May 2014.
[20]
(c)
Explain the treatment of the final dividend proposed on 1 April 2014.
[4]
Additional information
The directors are hoping to expand the business. They are planning a bonus issue of 1 new ordinary share for every
5 ordinary shares held on 31 May 2014.
REQUIRED
(d)
Explain what is meant by a bonus issue and also explain whether it would help the expansion plans for the
business.
[4]
QUESTION 8
MAY 2015 P43 Q2 (c)
Chandra wishes to invest the $60 000 which he received from the partnership. He is considering acquiring a
debenture or convertible loan stock.
REQUIRED
Explain what is meant by a debenture and convertible loan stock highlighting the major difference between
them.
[5]
QUESTION 9
SPECIMEN 2016 P3 Q3 (a to c)
The following information is available about Whittlesford plc on 31 December 2011.
500 000 ordinary shares of $1 each
Share premium
General reserve
Retained earnings
$
500 000
200 000
70 000
298 300
Chapter 7
113
Issue of Shares & Debentures
Further information is as follows:
1
The draft profit for the year ended 31 December 2012 was $122 800.
2
On 1 January 2012 property was revalued from $520 000 to $780 000.
3
On 31 January 2012 a rights issue of 1 share for every 5 held was made at a premium of $0.25 each.
4
On 30 June 2012 an interim dividend of $0.08 per share was paid.
5
On 31 October 2012 a bonus issue of shares of 1 for every 4 held was made. The directors decided to keep
the reserves in their most flexible form.
6
On 31 December 2012 $40 000 was transferred to general reserve and a final dividend of $0.12 per share
was proposed.
7
On 5 January 2013 it was discovered that a customer who had owed $4200 at the year end had been
declared bankrupt. It was also discovered that goods in inventory at the year end, with a cost of $3000, had
been water damaged and could now only be sold for $600.
8
On 17 January 2013 a burglary at the business premises resulted in the loss of computer equipment, $15
700.
REQUIRED
(a)
Explain what is meant by keeping reserves in their most flexible form.
(b)
Prepare the statement of changes in equity for the year ended 31 December 2012.
(c)
Explain whether the event on 17 January 2013 was an adjusting or a non-adjusting event.
[3]
[13]
[2]
QUESTION 10
NOVEMBER 2017 P32 Q2
FS plc’s statement of financial position on 1 January 2016 showed the following:
$000
Ordinary share capital (shares of $1 each)
1000
Share premium
300
General reserve
100
Retained earnings
220
During the year ended 31 December 2016 the following took place:
1
On 30 June 2016, an interim dividend of $55 000 was paid.
2
On 1 October 2016, an issue of 700 000 ordinary shares was made at $1.80 per share. All the funds raised
from this share issue were used to buy a second factory on 7 January 2017.
3
On 1 November 2016, a bonus issue of shares was made with 3 new shares being issued for every 10 held.
Reserves were maintained in their most flexible form.
4
For the year ended 31 December 2016, the company made a profit from operations of $288 000. Finance
charges of $52 000 had been paid. The directors provided $41 000 for the tax liability for the year.
5
At 31 December 2016, $40 000 was transferred to general reserve and a final dividend of $75 000 was
proposed.
REQUIRED
(a)
Prepare the statement of changes in equity for the year ended 31 December 2016 (a total column is not
required).
[12]
(b)
Explain how the proposed final dividend should be treated in the financial statements for the year ended
31 December 2016.
[2]
(c)
Explain the treatment in the financial statements for the year ended 31 December 2016 of the purchase of
the second factory on 7 January 2017.
[3]
Additional information
A shareholder at the Annual General Meeting said that the purchase of the new factory would cause non-current
asset turnover to fall, with an adverse effect on shareholder confidence.
REQUIRED
(d)
Advise the directors whether or not they should be concerned about the shareholder’s comment. Justify
your answer.
[5]
(e)
State how an upward revaluation of an existing non-current asset is recorded in the financial statements of
a company.
[3]
Chapter 7
114
Issue of Shares & Debentures
QUESTION 11
NOVEMBER 2017 P33 Q4
W Limited has been trading for several years. The company is now in a position to expand operations and trade
abroad. A new warehouse is required for this expansion, which will cost $550 000.
An extract from the statement of financial position at 31 March 2016 showed the following:
$
Ordinary shares of $1 each
400 000
Revaluation reserve
150 000
Share premium
50 000
Retained earnings
350 000
REQUIRED
(a)
Explain how share premium arises.
[2]
Additional information
The directors believe that the purchase of the new warehouse can be financed by:
A rights issue of ordinary shares on the basis of one share for every share currently held and any remaining balance
by an issue of a 5% debenture.
The directors expect that 60% of the ordinary shareholders will take up the rights issue of ordinary shares at $1.75
per share.
REQUIRED
(b)
Calculate the amount of finance that will need to be raised by the issue of the debenture.
[3]
Additional information
The following information is available for the year ended 31 March 2017:
On 1 October 2016
An interim dividend of $0.02 was paid on the ordinary shares held at that date.
On 1 January 2017
The company made the planned rights issue on the ordinary shares. These were taken up as expected. A
5% debenture was also issued.
On 31 March 2017
The profit from operations for the year was $245 000.
Finance charges were $70 000 excluding any debenture interest.
A taxation charge of 20% was to be provided.
A final dividend of $0.04 was proposed on all the ordinary shares held at that date.
REQUIRED
(c)
(i)
(ii)
Prepare the statement of changes in equity for the year ended 31 March 2017 (total column is not
required)
[9]
Prepare any supporting note to the financial statements in respect of the proposed dividend. [2]
Additional information
Profits have been constant for a number of years.
At the Annual General Meeting, the directors were confident that following the expansion next year the ordinary
shareholders will see an increase in dividends as profits for the year were expected to increase by 20%.
However, one of the ordinary shareholders expressed concerns that the Earnings Per Share would fall following the
rights issue on 1 January 2017. He proposed that a further expansion planned for two years’ time should be financed
by a long-term loan instead.
REQUIRED
(d)
Recommend whether the directors should finance the future expansion with loans or rights issues. Justify
your choice using relevant calculations.
[9]
Chapter 7
115
Issue of Shares & Debentures
SOLUTION
CHAPTER 7
QUESTION 1
A rights issue is made to raise additional finance for the business.
A bonus issue is a free issue of ordinary shares out of reserves
MAY 2011 P42 Q1 (c)
QUESTION 2
MAY 2012 P43 Q2 (c)
Bonus issue:
Issue of bonus shares should not be considered as it does not involve any cash inflow as bonus shares are issued free
of price to existing shareholders.
Issue of 10% debentures:
Debentures issue will raise the finance needed. However fixed annual interest payment has to be made irrespective
of profit or loss but as interest expense is an allowable expense for tax purposes it reduces the tax liability as well.
Moreover when debentures will be repaid cash will be required for their redemption.
New share issue:
The issue of new shares will also raise the finance needed but could affect control of existing shareholders. There is
no compulsion to pay dividend annually to the ordinary shareholders; moreover dividends are not allowable expense
for tax purposes. Issue of such high number of shares may utilise limit of authorised capital or market value of shares
may fall.
Rights issue:
The issue of new shares will raise the finance needed but would not affect control of existing shareholders. There is
no compulsion to pay dividend annually to the ordinary shareholders; moreover dividends are not allowable expense
for tax purposes.
QUESTION 3
NOVEMBER 2012 P43 Q2 (d)
On loans, fixed amount of interest has to be paid irrespective of profit or loss made by the company. In addition, if
the loan is secured on non-current assets then these assets cannot be sold unless loan is being paid off.
Rights issue usually results in reduction in market value of shares. It is possible that all shareholders do not take up
their rights and as a result required funds could not be raised.
QUESTION 4
MAY 2013 P43 1(d)
Participating Preference Shares entitle the bearer to a certain minimum dividend as well as an additional dividend
based on some predetermined condition. The dividend paid may be higher than the fixed minimum dividend
depending upon company performance. In any case, these dividends must be paid before any dividends are paid
on common stock, and if a company is unable to pay dividends on participating preferred stock, stockholders have
the right to force the liquidation of the company.
Through convertible loan stocks, a stockholder (lender) may exchange, at any time after a waiting period, for ordinary
shares in the company issuing the loan stock. This conversion is under specified conditions and with a predetermined conversion rate.
The number of shares one receives for each loan stock is determined when the convertible loan stock is issued. A
convertible loan stock usually carries lower interest rate than debentures.
QUESTION 5
(a)
MAY 2013 P43 1 (a & f)
Kaunus plc
Statement of financial position at 1 January 2010
Current Assets
Cash & cash equivalents [(200 000 × $1.25) + (150 000 × $1.10) + $100 000]
Non-Current Liabilities
6% debentures
Redeemable preference shares of $1.00 each
$000
100
150
$000
515
250
265
Equity
200 000 ordinary shares of $1.00 each
Share premium [(200 000 shares @ $0.25) + (150 000 shares @ $0.10)]
200
65
265
Chapter 7
(f)
116
Issue of Shares & Debentures
(i)
The share premium account may be used
to pay up new shares issued as fully paid bonus shares
to write off expenses and any commission paid on the issue of share
(ii)
The retained earnings may be used
1
to pay cash dividends
2
to issue fully paid bonus shares
3
to fund a reduction or repayment of capital
4
to provide for prior year adjustments
QUESTION 6
MAY 2014 P41 Q2(d)/MAY 2014 P42 Q2(d)
Equity section of the statement of financial position at 31 October 2013
$
Share capital [$400 000 + $50 000 (W 1) + $45 000 (W 2)]
495 000
Share premium [$40 000 + $25 000 (W 1) – $45 000 (W 2)]
20 000
Revaluation reserve (W 3)
100 000
Retained earnings [$117 395 (c part) + $2 615)
120 010
735 010
WORKINGS
(W 1)
Number of right shares = (400 000 × 1/8) = 50 000 shares
Effects = Ordinary Capital (50 000 shares × 1.0)
Share Premium (105 000 shares × 0.50)
Bank
(W 2)
(W 3)
$000
↑ 50
↑ 25
↑75
Number of bonus shares = (400 000 +50 000) shares × 1/5 = 45 000 shares
Effects: Share Premium
Ordinary capital
↓ 45
↑ 45
Effects: Land ($200 000  $100 000)
Revaluation Reserves
↑ 100
↑ 100
QUESTION 7
(a)
NOVEMBER 2014 P42 Q1 (a to d)
Income statement for the year ended 31 May 2014
$000
3 752.
(132)
3 620.
(905)
2 715.
Profit from operations
Finance costs ($1 800 000 × 8% × 11/12)
Profit before tax
Tax ($3 620 000 × 25%)
Profit for the year
(b)
Statement of changes in equity for the year ended 31 May 2014
Share
Share Revaluation General
Capital
Premium Reserve
Reserve
$000
$000
$000
$000
Balance at start
25 000
5 000
1 000
Zero
Dividend paid (W 1)
Issue of share (W 2)
5 000
500
Rights issue (W 3)
6 000
Revaluation (W 4)
1 500
Interim dividend (W 5)
Transfer to Genl reserves (W 6)
500
Profit for the year
_____
_____
____
____
Balance at end
36 000
5 500
2 500
500
Retained
Earnings
$000
2 950
(1 000)
(1 080)
(500)
2 715
3 085
Total
$000
33 950
(1 000)
5 500
6 000
1 500
(1 080)
------2 715
47 585
Chapter 7
117
Workings
W1
Retained Profits ↓ $1 000 000 ($25 m × $0.04)
W2
Bank ↑ $5 500 000( $5 m × 1.10)
Issue of Shares & Debentures
Bank ↓ $1 000 000 ($25 m × $0.04)
Share capital ↑ $5 000 000 ($5 m × $1.00)
Premium ↑ $500 000 ($5 m × $0.10)
Share capital ↑ $6 000 000 ($6 m × 1.0)
Revaluation reserves↑$1 500 000($7.5m$6m)
Bank ↓ (25m+5m+6m)×0.03=$1 080 000
General reserves ↑ $500 000
W3
W4
W5
W6
Bank ↑ $6 000 000 ($6 m × $1)
Land ↑ $1 500 000 ($7.5 m  $6 m)
Ret. Profits ↓ (25m+5m+6m)×0.03=$1 080 000
Retained Profits ↓ $500 000
(c)
Under IAS 1, the final dividend is not accounted for in the financial statements unless it is approved by the
ordinary shareholders in the annual general meeting.
It is however disclosed as a note to the accounts as non-adjusting event. This is included in the next year
financial statements.
(d)
A bonus issue is a free issue of ordinary shares to the existing ordinary shareholders in proportion to their
present shareholdings. The proposed plan would result in 1 new share for each 5 held being given to the
existing shareholders. This is simply a bookkeeping exercise and a reserve is debited without receiving any
cash on the issue. As a result, it would not help Aston plc in the expansion plans for the business.
QUESTION 8
MAY 2015 P43 Q2 (c)
Debentures are secured long-term loans for the company. They have to be redeemed by the company at a fixed
future date. Interest is paid on debentures at a fixed rate whether the company makes profit or not.
Likewise convertible loan stocks are also a long term loan to the company. They also carry a fixed rate of interest. Its
major difference with debentures is that the holders of convertible loan stocks have the right to exchange their stock
for ordinary shares in the company at a predetermined price at a specified future date.
QUESTION 9
SPECIMEN 2016 P3 Q3 (a to c)
(a)
This means using capital reserves before revenue reserves in order to maintain distributable reserves so
that maximum future dividends can be paid.
Developed explanation (2–3 marks)
Basic explanation (1 mark)
(b)
Statement of changes in equity for the year ended 31 December 2012
Balance at 1 January 2012
Profit attributable to
equity shareholders
Revaluation of property
Rights issue
Dividend paid
Transfer to reserves
Bonus issue
Balance at 31 December 2012
Ordinary
Share capital
$000
500
Share
premium
$000
200
100 (1)
25 (1)
General
reserve
$000
70
Revaluation
reserve
$000
Retained
Earnings
$000
298.3 (1 all)
116.2*
260 (1)
150 (1)
750
_____
225
_____
110
(150) (1)
110
(48) (1)
(40) (1)
___________
326.5 (1of) all
* 122.8 (1) – 4.2 (1) – 2.4 (1) = 116.2 (1of)
(c)
Example:
Non-adjusting event. It does not affect conditions which existed on the 31 December 2012.
Developed explanation (2 marks)
Basic explanation (1 mark)
Chapter 7
118
Issue of Shares & Debentures
QUESTION 10
(a)
NOVEMBER 2017 P32 Q2
Statement of changes in equity for the year ended 31 December 2016
Ordinary
Share
General Retained
share capital Premium reserve earnings
$000s
$000s
$000s
$000s
Balances at 1 Jan 2016
1 000
300
100
220
Share issue (700 000 shares @$1) ; (700 000 shares @$0.80)
700
560
Bonus issue [(1 000 000 + 700 000) × 1/3]
510
(510)
Profit for the year ($288 000 – $52 000 – $41 000)
195
Transfer to general reserve
40
(40)
Interim dividend paid
____
___
___
(55)
Balances at 31 Dec 2016
2 210
350
140
320
(b)
Under IAS 1, the final dividend is not accounted for in the financial statements unless it is approved by the
ordinary shareholders in the annual general meeting.
It is however disclosed as a note to the accounts as non-adjusting event. This is included in the next year
financial statements.
(c)
This is a non-adjusting event as its condition did not exist at the reporting date (date of statement of
financial position). It will be disclosed by way of note to the financial statement. However it will be recorded
in the financial statements of the following year.
(d)
The non-current assets turnover ratio may fall in the short term as new factory will not start working at full
capacity immediately.
Once factory becomes fully operational then there should be an increase in revenues and profits.
Increase in revenues and profits are more relevant for shareholders than non-current assets ratio.
Increase in revenues will also increase the non-current assets turnover ratio in the long term.
Purchase of a new factory should also boost the shareholders’ confidence as it indicates the company is
growing.
Though this does not seem to be big issue but as it is raised in the annual general meeting so should be
addressed seriously by the directors.
The dissatisfaction of shareholders may adversely affect their confidence. The shareholders may elect new
directors. They may sell their shares in the company and due to negative impact in the market new
shareholders may not be inclined to buy the company’s shares.
(e)
An upward revaluation of an existing non-current asset is credited to a capital reserve called revaluation
reserve.
It increases the value of the non-current asset to reflect the true and fair view of the financial position of
the business.
It reduces the accumulated depreciation in the statement of financial position.
It increases the shareholders’ equity and is recorded in the statement of changes in equity and also shown
as part of equity in the statement of financial position.
QUESTION 11
NOVEMBER 2017 P33 Q4
(a)
A share premium arises when a share is sold for more than its nominal value. The difference between the
selling price and the nominal value is called the share premium.
(b)
Statement to calculate the amount of finance to be raised by the issue of the debentures
Cost of warehouse expansion
Amount received through rights issue [(400 000 × 60%) shares @ $1.75]
Finance to be raised by the issue of the debenture
$
550 000
(420 000)
130 000
Chapter 7
(c)
119
Issue of Shares & Debentures
(i)
Statement of Changes in Equity for the year ended 31 March 2017
Ordinary
Share
Revaluation Retained
share capital
premium
reserve
earnings
$000s
$000s
$000s
$000s
Balances at 1 April 2016
400
50
150
350.0
Interim dividend paid (400 000 × $0.02)
(8.0)
Rights issue [(400 000 × 60%) shares × $1.00 ; $0.75]
240
180
Profit for the year [{($245 000 – $70 000– (130 000 ×
5% × 3/12)} × 80%]
___
___
___
138.7
Balances at 31 March 2017
640
230
150
480.7
(ii)
(d)
Notes to the financial statements:
Ordinary share dividends proposed for the year ending 31 March 2018 amounting to $25 600 (640
000 × 0.04).
Earnings per share is $0.22 (
$138 700
$640 000
) per share for the current year and in the absence of rights issue, the
EPS would have been $0.35 per share(
$138 700
$400 000
).
Borrowing a long term loan will increase gearing and income gearing. Though cash will be received for the
time being but as loan is repayable after two years so would also affect liquidity. Interest on loan would
have to be paid irrespective of the amounts of profits. Higher income gearing would also result in lower
profits available for ordinary shareholders leading to lower EPS.
Earnings per share has fallen considerably due to increase in the number of shares by 60% without a
corresponding increase in profits. Even if profits increase by 20% in 2017-18 then it would not be able to
generate EPS at the same higher level as it was before the rights issue. Profits need to increase by 60% to
match it with the current EPS as increase in shares is 60%.
Chapter 8
120
CHAPTER 8
International Accounting Standards
INTERNATIONAL ACCOUNTING STANDARDS
QUESTION 1
MAY 2012 P42 Q1 (c & d)
IAS 23 sets out the required accounting treatment for borrowing costs.
REQUIRED
(c)
Explain how the directors should deal with the interest on a loan taken out to acquire a ‘qualifying
asset’.
[5]
IAS 36 sets out the accounting procedures to ensure that assets are carried on the statement of financial position at
no more than their recoverable amount.
REQUIRED
(d)
Explain the accounting treatment to ensure that this is achieved.
[3]
QUESTION 2
NOVEMBER 2012 P41 Q1 (c to g)
The following balances were extracted from the draft financial statements of Flott plc on 31 January 2012:
$
2 120 600
1 180 800
420 800
205 400
91 100
Revenue
Purchases
Non-current assets
Trade receivables
Trade payables
The non-current asset figure includes the net book value of an item of equipment which was bought on 1 February
2010 at a cost of $50 000. This equipment had been subject to depreciation at the rate of 20% a year on the reducing
balance basis.
This equipment could now be sold on the open market for $26 000 although the company would incur transport
costs of $200.
If the company continued to use the equipment it could be used for four more years.
The associated revenues and costs (excluding depreciation) would be as follows:
Year
1
2
3
4
Revenue ($)
42 292
34 444
30 622
24 810
Costs ($)
32 611
25 364
22 500
18 221
The discount factors used by the company are as follows
Year
1
2
3
4
Discount factor
0.909
0.826
0.751
0.683
REQUIRED
(c)
Calculate at 31 January 2012:
(i)
the equipment’s carrying amount;
[3]
(ii)
its fair value less costs to sell;
[2]
(iii)
its value in use.
[9]
(d)
(i)
state the equipment’s recoverable amount at 31 January 2012;
[2]
(ii)
state the value at which the equipment should be included in the statement of financial position
at 31 January 2012.
[2]
(e)
Calculate:
(i)
the impairment loss;
[2]
Chapter 8
121
(ii)
(f)
International Accounting Standards
(iii)
the correct value for total non-current assets in the statement of financial position at 31 January
2012;
[2]
the cost of capital used by the company.
[2]
(i)
(ii)
Suggest two possible reasons for impairment loss.
Name the IAS which deals with impairment losses.
[4]
[2]
Additional information:
The equipment operates in a factory which the company recently built. The figure for non-current assets includes
the amounts paid to the seller of the land, the supplier of the building materials, and the building contractor who
supplied the labour.
REQUIRED
(g)
Name one (1) additional cost involved in building the factory which is included in non-current assets.
[2]
QUESTION 3
IAS 2 defines cost as cost of purchase or cost of conversion.
REQUIRED
Give two examples of cost of purchase and two examples of cost of conversion.
MAY 2013 P43 Q3(e)
[4]
QUESTION 4
Explain the term ‘impairment of non-current assets’ with reference to IAS 36.
NOVEMBER 2013 P42 Q2(c)
[4]
QUESTION 5
MAY 2014 P43 Q1 (f)
The directors of Rezwan Limited expect that the value of goodwill acquired from Nimra may reduce over a period of
years.
REQUIRED
Explain, making reference to IAS 36 and 38, how any reduction will be calculated and state the accounting
adjustments which will be made in future financial statements.
[8]
QUESTION 6
NOVEMBER 2014 P41 Q1(d & e)
Aston is considering investing in a limited company. He does not understand some of the accounting terminology.
REQUIRED
(d)
Give an example of a revenue reserve and a capital reserve.
[2]
(e)
Explain the following terms in accordance with IAS 37:
(i)
Provision
(ii)
Contingent liability
(iii)
Contingent asset
[6]
QUESTION 7
NOVEMBER 2014 P42 Q1 (e)
In July 2014, the directors carried out impairment review of their plant and equipment.
The data for this review is shown below:
Asset
1
2
3
Carrying value
$
1 870
2 423
1 368
Net selling price
$
1 560
2 514
1 287
Value in use
$
1 362
2 625
1 313
REQUIRED
(i)
Explain what is meant by impairment.
[2]
(ii)
Calculate the total impairment loss that would be recognised in the income statement for the year ending
31 May 2015 in accordance with IAS 36, Impairment of assets.
[4]
Chapter 8
122
International Accounting Standards
QUESTION 8
NOVEMBER 2014 P42 Q2 (g)
State the IAS which deals with property, plant and equipment and identify five items which a company can add to
the cost price of an asset.
[6]
QUESTION 9
NOVEMBER 2014 P43 Q3 (e)
The following information relates to Asteroid plc for the year ended 30 June 2014.
On 18 July 2014 a flood damaged a material amount of inventory.
On 29 July 2014 a company which owed Asteroid plc a material amount went into liquidation.
On 11 August 2014 a dividend of $0.03 per ordinary share was declared.
REQUIRED
State which type of event each occurrence is and say how they would be treated in the accounts for the year ended
30 June 2014. Your answer should be in accordance with IAS 10.
[7]
QUESTION 10
MAY 2015 P43 Q1 (d)
The directors of Plantin plc have recently discovered a material error in the published financial statements for the
year ended 31 March 2014. It was discovered that sales of $30 000, which had never taken place, had been included
in revenue and in trade receivables.
REQUIRED
(i)
State how this error has affected the financial statements for the year ended 31 March 2014.
[4]
(ii)
Explain how the directors of Plantin plc should deal with this error in its financial statements in accordance
with IAS 8.
[4]
QUESTION 11
NOVEMBER 2015 P41 Q1 (c)
The directors of Corbiere plc have discovered the following.
1
Inventories have all been valued at cost at $73 100 on 30 September 2015.
Included in this valuation are some items which originally cost $5 000 but have been damaged. They would
normally sell for $10000. The items could be repaired at a cost of $3 000 and then sold for $6 500.
2
On 13 October 2015 a flood resulted in the loss of inventory valued at $17 500.
3
The directors proposed a final dividend of $0.05 per share. No dividends were paid during the year.
REQUIRED
Explain your treatment of the points listed above.
[6]
QUESTION 12
NOVEMBER 2015 P42 Q2 (b & c)
Jamal prepared his own financial statements for the year ended 31 August 2015. After the financial statements were
prepared his accountant made the following discoveries.
1
An impairment review of three delivery vans was as follows:
Van
1
2
3
Carrying amount
$
16 000
18 000
24 000
Net selling price
$
15 000
14 000
20 000
Value in use
$
17 000
16 000
16 750
Jamal entered the carrying amount in his statement of financial position.
2
When preparing his income statement Jamal treated the opening inventory of $6 000 as closing inventory
and closing inventory of $4 000 as opening inventory.
Jamal’s income statement for the year ended 31 August 2015 showed a draft profit for the year of $40
000.
REQUIRED
(a)
Calculate the revised profit for the year.
[5]
Chapter 8
123
International Accounting Standards
Additional information
Jamal calculated his return on capital employed for the year ended 31 August 2015 as 40%. He did this by dividing
his profit for the year of $40 000 by the closing balance on his capital account.
REQUIRED
(b)
Calculate to one decimal place Jamal’s revised return on capital employed after the adjustments.
[5]
QUESTION 13
NOVEMBER 2015 P43 Q1(c to e)
After the financial statements had been prepared it was discovered that an item of fixtures and fittings should have
been impaired. The item was bought two years ago for $6 000. It could now be sold for $4 000 and has a value in use
of $3 000.
Depreciation is to be charged on Fixtures and fittings at 15% per annum using the reducing balance method
REQUIRED
(c)
Explain the term impairment and the treatment of impairment in the financial statements.
[4]
(d)
Advise the directors as to whether or not the item of fixture and fittings is impaired. Show your
workings.
[4]
(e)
Explain how your advice would differ if the value in use had been $5 000.
[2]
QUESTION 14
NOVEMBER 2016 P31 Q2 (e)
Advise the directors whether or not they should apply the International Accounting Standards when preparing the
published accounts. Justify your answer.
[4]
QUESTION 15
NOVEMBER 2016 P31 Q4 (d & e)
Before the financial statements for 30 September 2016 were approved, the directors were made aware that another
trade receivable owing $10 000 at 30 September 2016 had been made bankrupt.
REQUIRED
(d)
(i)
(ii)
Explain the difference between an adjusting event and a non-adjusting event.
[4]
Explain, with reference to IAS 10, how this event should be dealt with in the financial
statements.
[2]
Additional information
An impairment review was carried out and revealed that an item of plant with a carrying value of $100 000 could be
sold for $65 000. Its value in use was $70 000. The directors are uncertain how this should be treated in the financial
statements.
REQUIRED
(e)
Calculate the effect on the profit for the year of the impairment review.
[4]
QUESTION 16
NOVEMBER 2016 P33 Q3 (d)
XY Limited has been trading for many years.
Before the end of year audit, the chairman made the following statement:
‘I am pleased to report that the profit for the year ended 31 March 2016 has increased from $86 000 to $174 000.
These results have been achieved through careful cost control and concentrating on those areas which offer the
greatest return.’
However during the end of year audit the auditors discovered the following:
1
Equipment with a net book value of $180 000 had become obsolete during the year but had not been
written off. The directors believed that the buildings have increased in value by $200 000, which cancelled
out any loss on the obsolete equipment. So no adjustment had been made.
2
The method of inventory valuation had been changed at the end of the year from AVCO to FIFO. The AVCO
valuation had been $142 000 whereas the FIFO valuation was $184 000.
3
At 31 March 2016 the trade receivables amounted to $675 000. During the year a debt for $81000 had been
written off. However, a cheque for 75% of this amount had been discovered during the audit. The cheque
had not been recorded in the books of account but is expected to clear the bank.
Chapter 8
124
International Accounting Standards
REQUIRED
(i)
Describe the correct accounting treatment of points 1, 2 and 3 with reference to the relevant accounting
standards.
[9]
(ii)
Analyse the effects of any correction on the profit for the year ended 31 March 2016.
[6]
QUESTION 17
MAY 2017 P31 & P33 Q2 (a, b & e)
The directors of G Limited prepared the following draft statement of financial position at 31 December 2016:
G Limited
Statement of Financial Position at 31 December 2016
$
Non-current assets
642 000
Current assets
Inventory
78 000
Trade receivables
189 000
Other receivables
3 000
Cash and cash equivalents
54 000
324 000
Total assets
966 000
Equity and liabilities
Equity
Ordinary shares of $1 each
550 000
Retained earnings
235 000
785 000
Current liabilities
Trade payables
171 000
Other payables
10 000
181 000
Total equity and liabilities
966 000
The auditor brings the following items to the attention of the directors:
1
G Limited entered into an 18-month rental agreement for a warehouse on 1 May 2016. The following
payments totalling $220 000 were made and charged as an expense in the draft income statement:
$20 000 rental deposit which is refundable at the end of the lease period; and $200 000 total rent covering
the period from 1 May 2016 to 28 February 2017.
2
After an inspection of G Limited’s office premises by the local authority in December 2016, it was found
that the fire exits did not meet the safety specifications. A penalty of $27 000 is probable and G Limited will
incur a cost of $47 000 to rebuild the fire exits. No accounting entries had been made for this.
3
A customer who owed $12 000 at 31 December 2016 was declared bankrupt on 12 January 2017. It is
probable that only 20% of the debt is recoverable. No accounting entries had been made for this.
REQUIRED
(a)
Prepare the revised statement of financial position at 31 December 2016.
(b)
Explain how each of items 1 and 2 should be treated in the financial statements.
[10]
[5]
Additional information
G Limited adopted the Weighted Average Cost (AVCO) method to ascertain the value of inventories in 2016. The
purchase price has been increasing over recent years. The directors are now considering changing to First in, First
out (FIFO) method to value inventory in 2017.
REQUIRED
(e)
Advise the directors whether or not the method of valuing inventory should be changed.
Justify your answer.
[4]
Chapter 8
125
International Accounting Standards
QUESTION 18
MAY 2017 P32 Q3 (a, c & d)
Lushan and Samson are the directors of Z Limited which was newly formed on 1 January 2016. They understand that
they are legally obliged to prepare financial statements in accordance with International Accounting Standards.
REQUIRED
(a)
State four reasons why the business should comply with International Accounting Standards when financial
statements are being prepared.
[4]
Additional information
The directors prepared the following draft statement of financial position at 31 December 2016:
Z Limited
Statement of financial position at 31 December 2016
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables
Cash and cash equivalents
$
478 000
Total assets
Equity and liabilities
Equity
Ordinary shares of $1 each
Retained earnings
Total equity
Current liabilities
Trade payables
Taxation
500 000
210 000
710 000
Total equity and liabilities
124 000
217 000
132 000
473 000
951 000
188 000
53 000
241 000
951 000
Julia is the auditor of Z Limited. During the course of conducting her audit she was provided with the following
information.
1
On 31 December 2016, Z Limited had been sued for an amount of $29 000. Legal advice indicated that Z
Limited had a 90% chance of losing the case.
2
Included in the trade receivables was a debt of $30 000 owed by P Limited which was in financial difficulty.
The directors of Z Limited had accepted office equipment from P Limited on 31 December 2016 to settle
70% of P Limited’s debt. They were of the opinion that the recovery of the remaining debt was highly
improbable.
3
A piece of machinery had been purchased on 1 January 2016 for $50 000. The machinery had been
depreciated at an annual rate of 20% by using the straight-line method. At 31 December 2016, it had an
estimated fair value of $32 500 and the estimated value in use was $19 500.
REQUIRED
(c)
Prepare a revised draft statement of financial position at 31 December 2016 after considering the
information provided to Julia.
[8]
(d)
Explain the adjustments you have made to the statement of financial position in (c).
[6]
QUESTION 19
MAY 2018 P31 & P33 Q3 (b to d)
The directors of K Limited provided information on the following balances at 31 December 2017:
$
Plant and machinery at net book value
654 000
Human asset (see note 1)
116 000
Chapter 8
126
International Accounting Standards
Inventory
146 000
Trade receivables
182 000
Cash and cash equivalents
56 000
$1 Ordinary shares
600 000
Retained earnings at 1 January 2017
215 000
Profit for the year
98 000
Trade payables
166 000
Other payables
75 000
During the course of the year-end audit, the external auditor obtained the following information from the directors
(notes 1 to 3).
1
During the year, K Limited paid a deposit of $70 000 for a 6-month training programme commencing on 1
November 2017. The balance of $50 000 will be paid on completion of the programme. This had been
included in ‘other payables’.
The directors believed that the training would benefit the company for 5 years. The total payments were
regarded as an intangible asset and recorded as a ‘human asset’. Amortisation of $4 000 had been provided.
2
Inventory at 31 December 2017 included some obsolete goods. These had been included in the inventory
at their original cost of $12 000. They could only be sold at half of the normal selling price which was 25%
above cost.
3
On 1 July 2017, K Limited paid $60 000 for acquiring the right to use computer software for three years. The
full amount had been charged as an expense in the income statement.
REQUIRED
(b)
Explain the correct accounting treatment of the items in notes 1 and 2.
[5]
(c)
Calculate the revised profit for the year ended 31 December 2017 after taking into account notes 1, 2 and
3.
[8]
(d)
State the values at which the following should be included in the statement of financial position at 31
December 2017.
(i)
Software licence
[2]
(ii)
Inventory
[1]
(iii)
Retained earnings
[1]
(iv)
Other payables
[1]
QUESTION 20
MAY 2018 P32 Q2 (c & d)
There was a water leak in the company’s printing room in January 2018. This destroyed the new photocopier which
was not insured.
(c)
State how this should be treated in both 2017 financial statements and 2018 financial statements.
[3]
(d)
State what is meant by impairment loss in respect of non-current assets.
[2]
Chapter 8
127
International Accounting Standards
SOLUTION
CHAPTER 8
QUESTION 1
MAY 2012 P42 Q1 (c & d)
(c)
A qualifying asset is an asset for which activities to prepare the asset for its intended use or sales are in
progress. The borrowing costs related to its acquisition should be capitalised as soon as such activities start.
Capitalization of borrowing costs ends when all such activities are complete.
(d)
When the carrying amount of an asset is more than its recoverable value then it has to be reduced to its
recoverable amount. This reduction in the asset’s value is an impairment loss. The impairment loss is
recorded as an expense in the income statement. Once an impairment loss is recognized, the asset should
be valued in the balance sheet at its recoverable value
QUESTION 2
(c)
(i)
(ii)
Calculation of Equipment’s carrying amount
Cost of equipment at 1 February 2010
Depreciation for 2010-2011 ($50 000 × 20%)
Depreciation for 2011-2012 ($40 000 × 20%)
Equipment’s carrying amount at 31 January 2012
Calculation of fair value less costs to sell
Open market (fair) value
Transport costs to be incurred to sell the inventory
Fair value less costs to sell
(iii)
Year
Revenue (a)
$
1
42 292
2
34 444
3
30 622
4
24 810
Value in Use
(d)
(i)
(ii)
(e)
NOVEMBER 2012 P41 Q1 (c to g)
$
50 000
(10 000)
40 000
(8 000)
32 000
Calculation of Value in Use
Costs (b) Cash Flow Discount factor
$
$ (a –b)
32 611
9 681
0.909
25 364
9 080
0.826
22 500
8 122
0.751
18 221
6 589
0.683
26 000
(200)
25 800
Discounted cash flow
$
8 800
7 500
6 100
4 500
26 900
Recoverable amount of an asset is the higher of its fair value less costs to sell ($25 800) and its
value in use ($26 900) so it is $26 900 in this case.
As after an impairment loss, the asset should be shown on the balance sheet at its recoverable
amount so it will be shown at $26 900.
(i)
Calculation of Impairment Loss
=
Carrying amount
=
$32 000
=
$5 100


Recoverable amount
$26 900
Original Value
$420 800
$415 700


Impairment Loss
$5 100
×
Discount factor
×
0.909
=
1
=
1.1
So cost of capital is 0.10 (1.10  1.00) or 10%
=
=

Present Value
1.00
0.909
Impairment loss
(ii)
Correct Balance sheet value
(iii)
As
Future Value
Future Value
=
=
=
Chapter 8
(f)
128
(i)
Decline in market value
Increases in market interest rates
Obsolescence or physical damage
Negative changes in technology, markets, economy, or laws
IAS36 - Impairment of Assets
(ii)
(g)
International Accounting Standards
Legal costs
Commission of property agent
Architect’s fees
QUESTION 3
Cost of purchase –
Cost of conversion –
MAY 2013 P43 Q3(e)
Purchase price, carriage inwards, import duty, handling costs other costs directly
attributable to purchased items.
direct labour, other direct expenses, production overheads
QUESTION 4
NOVEMBER 2013 P42 Q2(c)
When the carrying amount of an asset is more than its recoverable value then it has to be reduced to its recoverable
amount. This reduction in the asset’s value is an impairment loss. The impairment loss is recorded as an expense in
the income statement. Once an impairment loss is recognized, the asset should be valued in the balance sheet at its
recoverable value.
QUESTION 5
MAY 2014 P43 Q1 (f)
As this goodwill arises on purchase of business so under IAS 38 (Intangible assets), Rezwan Ltd can show it as an
intangible non-current asset in the Statement of Financial Position. Rezwan must then amortise the goodwill on the
straight line basis over the estimated useful life of goodwill. This is done by transferring an equal charge from
goodwill to its Income Statement. The amortisation period should be reviewed annually and changes made in the
amortisation in line with this review.
Under IAS 36 (Impairment of assets) each year Rezwan should also compare the carrying value of the goodwill (i.e.
its net book value after amortisation) with its recoverable amount (its value in use). If the recoverable amount is less
than the carrying value then an impairment loss is shown as an additional expense in its income statement.
QUESTION 6
NOVEMBER 2014 P41 Q1(d & e)
(d)
Revenue reserves – Retained earnings, general reserve, assets replacement reserves.
Capital reserves – Share premium, capital redemption reserve, revaluation reserve.
(e)
(i)
A provision is a liability of uncertain timing and amount.
(ii)
A contingent liability is a possible liability which arises from a past event whose existence will be
confirmed by the occurrence or non-occurrence of an uncertain future event not wholly within the
control of enterprise.
A contingent asset is a possible asset which arises from a past event whose existence will be
confirmed by the occurrence or non-occurrence of an uncertain future event not wholly within the
control of enterprise.
(iii)
QUESTION 7
NOVEMBER 2014 P42 Q1 (e)
(i)
Impairment loss occurs when the carrying amount of property, plant and equipment exceeds the
recoverable amount. The recoverable amount is the higher of the net realisable value and the value in use.
(ii)
Asset
1
2
3
Calculation of total impairment loss
Net selling
Value in use
Recoverable
Carrying value
price ($)
($)
amount ($)
($)
1 560
1 362
1 560
1 870
2 514
2 625
2 625
2 423
1 287
1 313
1 313
1 368
Total impairment loss charged to income statement
Impairment
loss ($)
310
Nil
55
365
Chapter 8
129
International Accounting Standards
QUESTION 8
NOVEMBER 2014 P42 Q2 (g)
IAS16 deals with property, plant and equipment
The items which a company can add to the cost price of an asset may include import duties, installation costs,
delivery charges, handling charges, inspection and testing costs, delivery and handling costs.
QUESTION 9
NOVEMBER 2014 P43 Q3 (e)
(i)
Non-adjusting event and it should be disclosed as a note to the accounts.
(ii)
Adjusting event and it should be written off in the accounts.
(iii)
Non-adjusting event and the dividend of $120 000 (4 000 0000 × $0.03) should be disclosed as a note to the
accounts.
QUESTION 10
MAY 2015 P43 Q1 (d)
(i)
In this case, revenue, profit for the year , trade receivables and retained earnings have all been overstated
by $30 000.
(ii)
IAS 8 states that where an error is discovered a business must correct material errors from prior periods in
the next set of financial statements. Comparative amounts from prior periods must be restated.
QUESTION 11
NOVEMBER 2015 P41 Q1 (c)
1
As per IAS 2, inventory is valued at lower of cost and net realisable value. This is to comply with prudence
and matching concepts. This treatment avoids overstatement of inventory and helps to recognize a loss of
reduction in inventory’s value as soon as it arises.
2
The flood occurred (on 13 October) after the date of the financial statements (30 September) when no
condition existed relating to the fire event. As per IAS 10, this is non-adjusting event and should only be
disclosed as a note without making any adjustment in the financial statements.
3
Proposed dividend (unless approved by the shareholders) is treated as a non- adjusting event under IAS 10.
It is only disclosed as a note to the statement of financial position but not shown within the financial
statements.
QUESTION 12
(b)
NOVEMBER 2015 P42 Q2 (b & c)
Calculation of revised profit for the year ended 31 August 2015
$000
Original profit as per financial statements
40
Impairment loss of van 2 ($18 000 – $16 000)
(2)
Impairment loss of van 3 ($24 000 – $20 000)
(4)
Correction of opening inventory understatement ($6 000 – $4 000)
(2)
Correction of closing inventory overstatement ($4 000 – $6 000)
(2)
Revised profit for the year
30
(c)
Revised return on capital employed
=
=
=
Operating Profit
× 100
Capital Employed
$30 000
× 100
($40 000÷40%)−$10000(fall in profits)
33.33%
QUESTION 13
NOVEMBER 2015 P43 Q1(c to e)
(c)
Impairment is the reduction in value if the recoverable amount is less than the carrying amount.
Recoverable amount is the higher of net realizable value and value in use.
It is accounted for by reducing the value of the asset by the impaired amount and is written off in the
income statement.
(d)
(e)
Carrying amount = $6 000 – ($6 000 × 15%) = $5 100 – ($5 100 × 15%) = $4 335
Recoverable amount = $4000 [higher of net realizable value ($4 000) and value in use ($3 000)]
Since the recoverable amount is below the carrying amount, the fixture should be impaired by $335 and the
directors are correct.
If value in use had been $5 000 then recoverable amount is $3 000. Since in this case the recoverable amount
is greater than the carrying amount the fixture would not be impaired
Chapter 8
130
International Accounting Standards
QUESTION 14
NOVEMBER 2016 P31 Q2 (e)
The international accounting standards should be applied by the directors as they offer the following benefits.

They reduce the confusing variations in the accounting treatments while preparing financial statements.

They describe the accounting principles, the valuation techniques and the method of applying accounting
principles so to ensure true and fair view.

Where important information is not statutorily required, accounting standards calls for its disclosure

Accounting standards facilitate comparison of financial statements of companies in the same industry
situated in different parts of the world.

Accounting standards help in resolving conflict of financial interest among various stakeholders.

Accounting standards help the auditors in case of preparation of financial statements and any deviation can
be disclosed in the reports so that users are aware of such deviations.
QUESTION 15
(d)
(i)
NOVEMBER 2016 P31 Q4 (d & e)
Adjusting event: Adjusting events refer to situations where the events after balance sheet date
provide new evidence of conditions that exist at the balance sheet date, and result in adjustment
to the financial statements.
Non-adjusting event: Non-adjusting events represent events that are indicative of conditions that
arose after the balance sheet date. As a result, they should be reflected in the financial statements
of the following accounting period, but not adjusted for in the financial statements of the current
accounting period. However, if it is considered that these events are relevant and material and
that users of the financial statements need the information for making economic decisions, these
events can be disclosed in notes to the accounts. Otherwise, users of financial statements would
be deprived of material information.
(ii)
(e)
The bankruptcy is an adjusting event since it provides further evidence of conditions that existed
at the end of the reporting period.
Under IAS 36, non-current assets should be valued at lower of the carrying amount and recoverable
amount. The carrying amount of the plant is $100 000 whereas the recoverable amount which is the higher
of fair value less costs to sell and value in use ($70 000) is only $70 000. As a result of reduction in asset’s
value ($100 000 - $70 000) the profit therefore reduced by $30000.
QUESTION 16
NOVEMBER 2016 P33 Q3 (d)
(i)
1 IAS 36.
Non-current assets should be valued at lower of carrying value and recoverable amount. Recoverable
amount is higher of the fair value less cost to sell and value in use. Though the asset has carrying value
of $180 0000 but it has nil recoverable value, so the value of asset needs to be reduced by $180 000 in
the balance sheet. This should also be recorded in the income statement as an impairment loss.
2
IAS2 / IAS8
XY Limited should be consistent in applying different accounting methods (consistency concept). This is
also important as if he falsely manipulates the accounts by changing valuation method it will not only
distort true and fair view but comparison of current year results with of the last year will be
meaningless.
As per IAS 2, inventory must be valued at the lower of cost and net realisable value. The value of
inventory should be decreased by $42 000 ($184 000 - $142 000) both in the statement of financial
position and in the income statement which will decrease the amount of profit for the year
3
IAS 10
If a material event exists at the end of the year and the outcome is known before the accounts are
approved, then this is an adjusting event and the financial statements must be amended. As the 75%
of the debt has been recovered so this should be written back in the receivables. This will increase total
current assets in the balance sheet and profit in the income statement as bad debt recovered of $60
750.
Chapter 8
131
(ii)
International Accounting Standards
Statement to show the effects of any correction on the profit
$
174 000
(180 000)
(42 000)
60 750
12 750
Original operating profit
Less
Impairment of equipment
Overvaluation of inventory due to shift to FIFO ($184 000  $142 000)
Add
Bad debt recovery accounted for ($81 000 × 75%)
Adjusted profit for the year
QUESTION 17
(a)
MAY 2017 P31 & P33 Q2 (a, b & e)
G Limited
Revised statement of financial position at 31 December 2016
$
$
642 000
Non-current assets
Current assets
Inventory
Trade receivables [$189 000 – ($12 000  80%)]
Other receivables ($3000 + $20 000 (security) + $40 000)
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Ordinary shares of $1 each
Retained earnings ($235 000+$20 000 + $40 000–$27 000–$9600)
Current liabilities
Trade payables
Other payables ($10 000 + $27 000)
Total equity and liabilities
78 000
179 400
63 000
54 000
550 000
258 400
171 000
37 000
374 400
1 016 400
808 400
208 000
1 016 400
(b)
As $20 000 of the rental deposit is refundable within 12 months’ time so it should be treated as a current
asset.
Prepaid rent of $40 000 ($200 000  2/10) should also be treated as a current assets as its benefits will be
realised within 12 months whereas $160 000 should be recognised as expense in the income statement.
This is in accordance with ‘Matching concept’.
The violation of the safety specifications by the company resulted in a present obligation of $27 000 arising
from past events of breach of law. As this penalty is probable so it should be treated as a liability. IAS 37
specifies that probable obligations like this penalty of $27 000 should be charged to income statement with
the creation of liability in the balance sheet at the same time.
On the other hand, $47 000 expected to be incurred to rebuild the fire exists is not a present obligation so
no provision or disclosure of this amount is required.
(e)
IAS 2 allows both FIFO and AVCO to value inventories. The business should, however, select that method
which gives more relevant and reliable information about the state of the transaction.
Consistency concept requires that accounting methods, once chosen, should be used with consistency. The
businesses may, however, are allowed to change the change the accounting method if it is requirement of
an IAS or change is expected to provide reliable and more relevant information about the effects of
transactions.
The directors, therefore, should not change the AVCO method to FIFO to have a higher inventory value and
therefore a higher gross profit.
QUESTION 18
MAY 2017 P32 Q3 (a, c & d)
(a)
The international accounting standards should be applied so that the information contained within the
published accounts is useful and aids making economic decisions is comparable, consistent,
understandable, relevant and reliable.
If international standards are not complied with the external auditor will qualify the audit report as the
financial statements do not show a true and fair view
Chapter 8
132
(c)
Z Limited
Statement of financial position
As at 31 December 2016
Non-current assets
Property, plant & equipment[$478000 + ($30 000 × 70%)]– ($40 000  $32 500)]
Current assets
Inventories
Trade receivables [$217 000 – ($30 000 × 70%)]
Provision for doubtful debts
Cash and cash equivalents
Total assets
Equity
Ordinary shares of $1 each
Retained earnings($210 000 – $29 000 – $9 000 – ($40 000  $32 500)]
Current liabilities
Trade payables
Provision for compensation
Taxation
Total equity and liabilities
(d)
1
2
3
(b)
International Accounting Standards
$
$
124 000
196 000
(9 000)
132 000
500 000
164 500
188 000
29 000
53 000
$
491 500
$
443 000
934 500
664 500
270 000
934 500
Under the guidelines of IAS 37 a provision for compensation of $29 000 should be made as a
current liability. This is due to 90% probability of losing the case.
Z Limited is only able to recover $21 000 ($30 000 × 70%) in the form of office equipment. As the
recovery of remaining $9 000 ($30 000  $21 000) is highly improbable. Prudence concept of
accounting requires to make a specific provision for this debt of $9 000.
According to IAS 36, an asset should be valued at lower of its carrying value [$40 000 ($50 000 ×
80%] and recoverable amount ($32 500). The reduction in the value of asset is $7500 ($40 000 –
$32 500) which should be accounted for as impairment loss in the income statement as an
expense. Recoverable amount is the higher of its fair value ($32 500) and value in use ($19 500).
1
Cost on training programme should be treated as expense because it is an operating expense of
the business. The expense on training cannot be treated as an asset as it is difficult to establish a
direct relationship between training programme and future benefits from efficiency of employees.
It is sometimes very difficult to measure improvement in efficiency – money measurement
concept. Moreover there could be other contributing factors towards improved efficiency.
As total cost of the 6-month programme is $120 000 ($70 000 + $50 000) so monthly expense
should have been $20 000 ($120 000 ÷ 6). As per matching concept only $40 000 (cost of 2 months)
has been expensed whereas $30 000 ($70 000  $40 000) should be treated as prepayment (other
receivables) but no amount should be included in other payables.
2
Under IAS 2 inventory should be valued at $7 500 which is lower of cost ($12 000) and net realisable
value ($7 500) [($12 000 × 125%) × 1/2)]. This adjustment will reduce the profit for the year and the
value of inventory in current assets. This is in accordance with the prudence concept.
(c)
Profit for the year ended 31 December 2017
Add:
Amortisation wrongly charged
Less:
Training expenses ($70 000 + $50 000) × 2/6
Less:
Inventory valued at lower of cost & NRV [$12 000 – ($12 000 × 125% × 1/2)]
Add:
Licence fee for the year [$60 000  ($60 000 ÷ 3 years × 6/12)
Revised profit for the year ended 31 December 2017
$
98 000
4 000
(40 000)
(4 500)
50 000
107 500
Chapter 8
133
(d)
(i)
(ii)
(iii)
(iv)
QUESTION 19
(b)
1
2
Software license [$60 000  {($60 000 ÷ 3 years) × 6/1}2}]
Inventory [$146 000 – $4 500 (‘c’ part)]
Retained earnings [$215 000 + $107 500 (‘c’ part)]
Other payables [$75 000 – $50 000 (training cost)]
International Accounting Standards
$
50 000
141 500
322 500
25 000
MAY 2018 P31 & P33 Q3 (b to d)
Cost on training programme should be treated as expense because it is an operating expense of
the business. The expense on training cannot be treated as an asset as it is difficult to establish a
direct relationship between training programme and future benefits from efficiency of employees.
It is sometimes very difficult to measure improvement in efficiency – money measurement
concept. Moreover there could be other contributing factors towards improved efficiency.
As total cost of the 6-month programme is $120 000 ($70 000 + $50 000) so monthly expense
should have been $20 000 ($120 000 ÷ 6). As per matching concept only $40 000 (cost of 2 months)
has been expensed whereas $30 000 ($70 000  $40 000) should be treated as prepayment (other
receivables) but no amount should be included in other payables.
Under IAS 2 inventory should be valued at $7 500 which is lower of cost ($12 000) and net realisable
value ($7 500) [($12 000 × 125%) × 1/2)]. This adjustment will reduce the profit for the year and the
value of inventory in current assets. This is in accordance with the prudence concept.
(c)
Profit for the year ended 31 December 2017
Add:
Amortisation wrongly charged
Less:
Training expenses ($70 000 + $50 000) × 2/6
Less:
Inventory valued at lower of cost & NRV [$12 000 – ($12 000 × 125% × 1/2)]
Add:
Licence fee for the year [$60 000  ($60 000 ÷ 3 years × 6/12)
Revised profit for the year ended 31 December 2017
(d)
(i)
(ii)
(iii)
(iv)
Software license [$60 000  {($60 000 ÷ 3 years) × 6/1}2}]
Inventory [$146 000 – $4 500 (‘c’ part)]
Retained earnings [$215 000 + $107 500 (‘c’ part)]
Other payables [$75 000 – $50 000 (training cost)]
$
98 000
4 000
(40 000)
(4 500)
50 000
107 500
$
50 000
141 500
322 500
25 000
QUESTION 20
MAY 2018 P32 Q2 (c & d)
(c)
It will be treated as a non-adjusting event (IAS 10) in the financial statements of 2017 as the loss was not
expected at the reporting date so only requires disclosure in the notes to the financial statements.
In 2018 financial statements the asset will be written off as an uninsured photocopier was destroyed in
2018.
(d)
When the carrying amount of an asset is more than its recoverable value then it has to be reduced to its
recoverable amount. Recoverable amount is the higher of net realizable value and value in use.
This reduction in the asset’s value is an impairment loss. The impairment loss is recorded as an expense in
the income statement. Once an impairment loss is recognized, the asset should be valued in the balance
sheet at its recoverable value.
Chapter 9
134
CHAPTER 9
Auditing & Stewardship
AUDITING & STEWARDSHIP
QUESTION 1
(d)
State three characteristics of an auditor’s report.
SPECIMEN 2016 P3 Q3 (d & e)
[3]
Additional information
The auditor’s report for Whittlesford plc did not give an unqualified opinion on the financial statements because
$150 000 of investments included in non-current assets have become worthless but have not been written off.
REQUIRED
(e)
Assess the effect that this auditor’s report will have on shareholders.
[4]
QUESTION 2
NOVEMBER 2016 P32 Q4
The turnover of Soames Limited has been increasing and the directors have been advised that they must now
produce audited accounts. They are therefore required to appoint an auditor to provide the company with an audit
report.
REQUIRED
(a)
List five duties which the auditor would carry out during an audit.
[5]
Additional information
The first audit report was qualified. Included in current assets was inventory valued at cost of $1 million. This had
become damaged and now could only be sold for $750 000 after repairs costing $200 000.
REQUIRED
(b)
Explain what is meant by a qualified audit report.
[2]
(c)
Explain, with reference to the relevant International Accounting Standard, the necessary adjustment that
must be made to the financial statements.
[8]
(d)
Analyse the importance to the shareholders of Soames Limited of the auditors providing a true and fair view
of the company’s accounts.
[6]
Additional information
The audit report was signed by Aamir, the brother of the finance director of Soames Limited. Aamir was an
unqualified auditor.
(e)
Evaluate the validity of this audit report.
[4]
QUESTION 3
NOVEMBER 2016 P33 Q3 (a to c & e)
XY Limited has been trading for many years.
Before the end of year audit, the chairman made the following statement:
‘I am pleased to report that the profit for the year ended 31 March 2016 has increased from $86 000 to $174 000.
These results have been achieved through careful cost control and concentrating on those areas which offer the
greatest return.’
However during the end of year audit the auditors discovered the following:
1
Equipment with a net book value of $180 000 had become obsolete during the year but had not been
written off. The directors believed that the buildings have increased in value by $200 000, which cancelled
out any loss on the obsolete equipment. So no adjustment had been made.
2
The method of inventory valuation had been changed at the end of the year from AVCO to FIFO. The AVCO
valuation had been $142 000 whereas the FIFO valuation was $184 000.
3
At 31 March 2016 the trade receivables amounted to $675 000. During the year a debt for $81000 had been
written off. However, a cheque for 75% of this amount had been discovered during the audit. The cheque
had not been recorded in the books of account but is expected to clear the bank.
REQUIRED
(a)
Explain the term stewardship.
(b)
Explain the purpose of an end of year audit.
[2]
[2]
Chapter 9
(c)
(e)
135
Auditing & Stewardship
State whether the published audit report will be qualified or not.
Assess the implications of a qualified audit report.
[1]
[5]
QUESTION 4
MAY 2017 P31 & P33 Q2 (c & d)
(c)
Explain the role of an external auditor.
[4]
(d)
Explain why the audit report of a limited company is addressed to the company’s shareholders and not its
directors.
[2]
QUESTION 5
(b)
Explain what is meant by stewardship with regard to the role of the directors.
MAY 2017 P32 Q3 (b & e)
[2]
Additional information
Jack, Julia's brother, is the sole trader of a small business. He has asked his sister if his accounts should be audited.
REQUIRED
(e)
Discuss the advantages and disadvantages to Jack of having his accounts audited.
[5]
QUESTION 6
NOVEMBER 2017 P32 Q3
LS Limited has completed its first year of trading. The company has four directors, of whom two are not shareholders.
The auditors are currently carrying out the end of year audit.
REQUIRED
(a)
(i)
(ii)
(iii)
Explain the term ‘stewardship’.
Explain how directors carry out their role of stewardship within a limited company.
Explain the purpose of an end of year audit.
[2]
[2]
[2]
Additional information
The draft financial statements for the year showed the following:
$
Sales
182 000
Sales returns
8 000
Purchases
154 000
Purchases returns
12 000
All sales were at a mark-up of 150%.
During the audit the auditors discovered that included in the sales records was a sales invoice for $6 000 which had
been prepared for a customer but not yet been sent. The customer had received the inventory on a sale or return
basis, but had yet to decide whether or not to keep the inventory.
REQUIRED
(b)
(i)
(ii)
Calculate what should have been the value of the closing inventory.
Calculate the gross profit for the year.
[5]
[1]
Additional information
During the year the warehouse manager had been absent from work for a long period of time.
There had been little control over the movement of inventory. Staff had valued the inventory actually in the
warehouse at the end of the year at $24 000.
REQUIRED
(c)
Calculate the percentage change in gross profit if the inventory valuation from the warehouse had been
used.
[3]
(d)
Discuss three possible reasons for the difference between the warehouse inventory valuation and the
calculated value of inventory.
[6]
Chapter 9
(e)
136
Auditing & Stewardship
Discuss whether the directors should use the warehouse inventory valuation or the amount from the
accounting records as the inventory figure in the financial statements. Justify your answer.
[4]
QUESTION 7
Explain the role of an external auditor.
MAY 2018 P31 & P33 Q3 (a)
[2]
Chapter 9
137
SOLUTION
Auditing & Stewardship
CHAPTER 9
QUESTION 1
(d)
•
•
•
•
•
SPECIMEN 2016 P3 Q3 (d & e)
a report to shareholders
prepared by an independent person
prepared by a suitably qualified person
prepared following an inspection of the company’s books
contains the auditor’s stated opinion as to whether the financial statements give a true and fair
view.
Accept any reasonable alternative.
(1 mark) × three characteristics
(e)
•
Shareholders will know that they cannot rely on the financial statements as they do not
give a true and fair view.
•
They will know that the statement of financial position does not show the true assets and liabilities
of the company.
•
They will know that the underlying share value is lower than they previously thought.
•
The market value of their shares may fall.
•
Potential investors are likely to be deterred from investing.
•
Shareholders may not have the required knowledge of auditing and audit reports and they may
not care. They may simply be interested in the dividends the company pays.
•
Shareholders may question whether the qualification of the audit report is the result of a
disagreement between the directors and the auditors.
Accept any reasonable alternative.
QUESTION 2
NOVEMBER 2016 P32 Q4
(a)
The auditors are appointed to act as an independent check on the reliability of the company’s accounting
records. The auditors are required to carry out their duties objectively.
 They should inquire of management and others to gain an understanding of the organization itself, its
operations, financial reporting, and known fraud or error
 They must ensure that the accounts comply with current accounting standards and the requirements
of Companies Acts.
 They should perform analytical procedures on expected or unexpected variances in account balances
or classes of transactions
 They should test documentation supporting account balances or classes of transactions
 They should observe the physical inventory count
 The overriding requirement is that auditors must ensure the accounts present a true and fair picture
of the company’s financial affairs and that they are free from significant errors.
 The auditors are required to report to shareholders as part of the annual report giving their judgment
as to whether or not the financial statements meet these criteria.
 At the completion of the audit, the auditor may also offer objective advice for improving financial
reporting and internal controls to maximize a company’s performance and efficiency.
(b)
A qualified audit report is issued after an audit is done by a professional auditor that suggests that
misstatements (i-e non-compliance with accounting standards/accounting principles, misstatement in
account balances and disclosures), individually or in the aggregate, are material, but not pervasive, to the
financial statements. Auditors who deem audits as qualified opinions are safeguarding the shareholders’
interest by advising them that the information within the audit is not complete or the accounting
methods used by the company do not follow IAS.
(c)
As per IAS 2, inventory must be valued at the lower of cost and net realisable value. This treatment avoids
overstatement of inventory and helps to recognize a loss of reduction in inventory’s value as soon as it arises.
Chapter 9
138
Auditing & Stewardship
Net realizable value is the estimated selling price less costs to make the inventory ready for sale. The cost
of inventory is 1 million whereas the net realisable value is only $550 000 ($750 000 – $200 000).
This requires reduction in the value of inventory by $450 000 ($1 000 000 – $550 000). This adjustment will
result in reduction of reported profits by $450 000 in the income statement. Inventory value in the balance
sheet should also be reduced by the same amount to show a true and fair view.
(d)
The phrase ‘true and fair view’ in auditing refers to the auditor’s opinion regarding the quality of information
given in financial statements. “Fair” in this context implies that financial statements are free from material
misstatements and “True” entails true representation of the performance and financial position of the
business. They are also important for tax computations, for management decisions and quotations from
lending institutions. Thus, it can clearly be seen why independence and objectivity are important in the
statements. This can be linked back to the four basic concepts on presenting this information: going
concern, accruals (matching), consistency, and prudence. However, a true and fair view is not a guarantee,
but an opinion.
(e)
The auditors’ responsibility is to express an independent opinion on financial statements. Independence of
the internal auditor means independence from parties whose interests might be harmed by the results of
an audit. As Aamir is the brother of the finance director of Soames Limited and in addition to that he was
an unqualified auditor so the audit report signed by him will not be valid. Therefore the company must reappoint a new qualified and independent auditor.
QUESTION 3
NOVEMBER 2016 P33 Q3 (a to c & e)
(a)
Steward is “a person employed to manage another’s property”, which seems straightforward enough.
However, today, stewardship is generally taken to refer to the role of the numerous fund managers
employed by major institutions to invest many trillions of pounds, dollars, yen etc, on behalf of billions of
people via millions of corporations around the world.
(b)
A financial statement audit is the examination of an entity's financial statements and accompanying
disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting
to the fairness of presentation of the financial statements and related disclosures. The auditor's report must
accompany the financial statements when they are issued to the intended recipients.
(c)
The published audit report would be qualified
A qualified audit report is issued after an audit is done by a professional auditor that suggests that
misstatements (i-e non-compliance with accounting standards or accounting principles, misstatement in
account balances and disclosures), individually or in the aggregate, are material, but not pervasive, to the
financial statements. Auditors who deem audits as qualified opinions are safeguarding the shareholders’
interest by advising them that the information within the audit is not complete or the accounting
methods used by the company do not follow IAS.
QUESTION 4
MAY 2017 P31 & P33 Q2 (c & d)
(c)
The auditors are required to carry out their duties objectively.

They should inquire of management and others to gain an understanding of the organization itself,
its operations, financial reporting, and known fraud or error

They must ensure that the accounts comply with current accounting standards and the
requirements of Companies Acts.

They should perform analytical procedures on expected or unexpected variances in account
balances or classes of transactions

They should test documentation supporting account balances or classes of transactions

The overriding requirement is that auditors must ensure that the accounts present a true and fair
picture of the company’s financial affairs and that they are free from significant errors.

The auditors are required to report to shareholders as part of the annual report giving their
judgment as to whether or not the financial statements meet these criteria.

At the completion of the audit, the auditor may also offer objective advice for improving financial
reporting and internal controls to maximize a company’s performance and efficiency.
Chapter 9
(d)
139
Auditing & Stewardship
As auditors are appointed by shareholders in the annual general meeting (AGM) so they are required to
work to serve the requirements of shareholders and not the directors.
QUESTION 5
MAY 2017 P32 Q3 (b & e)
(b)
Steward is “a person employed to manage another’s property”, which seems straightforward enough.
However, today, stewardship is generally taken to refer to the role of the numerous fund managers
employed by major institutions to invest many trillions of pounds, dollars, yen etc, on behalf of billions of
people via millions of corporations around the world.
(e)
Advantages of Audit

Audited accounts are readily accepted by Government authorities like Tax authorities.

By auditing the accounts errors and frauds can be detected and rectified in time.

Audited accounts are lot more reliable than the accounts which have not been audited.

For accessing finance from financial institutions like Banks, previous years audited accounts are
evaluated for determining repayment capability.

Regular audit of account create fear among the employees in the accounts department and
exercise a great moral influence on clients staff thereby restraining them from commit frauds and
errors.

In the event of loss of property by fire or on happening of the event insured against, Audited
accounts help in the early settlement of claims from the insurance company.

To determine the value of the business in the event of purchase or sales of the business, audited
account will be the treated as the base for the evaluation.
Disadvantages of Audit

The payment of audit fees brings extra cost burden to the organization.

During an audit the auditor requires the attention of several staff and therefore causes disruption.

An audit does not assure future viability of the organization audited

An audit does not assure the effectiveness and efficiency of management.

Auditors express opinion and therefore does not give total assurance of the true fair presentation
of annual reports.
QUESTION 6
NOVEMBER 2017 P32 Q3
(a)
(i)
Steward is “a person employed to manage another’s property”, which seems straightforward
enough. However, today, stewardship is generally taken to refer to the role of the numerous fund
managers employed by major institutions to invest many trillions of pounds, dollars, yen etc, on
behalf of billions of people via millions of corporations around the world.
(b)
(ii)
The directors act as stewards on behalf of the shareholders. They are responsible for ensuring that
the resources of the company are managed to best effect on behalf of the shareholders. To this
end directors are responsible for ensuring that proper books of account are prepared, and that an
annual report is published including financial statements which present a true and fair picture of
the company’s affairs. The law also requires directors to include a report on their management of
the company as part of the report.
(iii)
A financial statement audit is the examination of an entity's financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a report by
the auditor, attesting to the fairness of presentation of the financial statements and related
disclosures. The auditor's report must accompany the financial statements when they are issued
to the intended recipients.
(i)
Statement to calculate the value of closing inventory
Purchases
Purchases returns
Sales at cost [($182 000  $6 000) × 100/250)]
Sales return at cost ($8 000 × 100/250)
Closing inventory
$
154 000
(12 000)
(70 400)
3 200
74 800
Chapter 9
140
(ii)
(c)
Gross profit
=
=
=
Existing Gross profit
New Gross profit [$100 800  ($74 800  $24 000)]
Decrease in Gross profit
Decrease in Gross Profit (%)
=
=
(d)






(e)
Cost of sales
($154 000  $12 000  $74 800)
$100 800
$50 800
$100 800
Auditing & Stewardship
×
×
Mark-up (%)
150%
$100 800
$50 000
$50 800
× 100
50.4%
Goods lost by theft/fire
Goods sent on sale or return or on consignment and are with the customers so not part of physical
count.
Sales of inventory were omitted from the books
Mistakes in physical count
Purchase returns was not accounted for
Outdated or damaged inventory value was not reduced to its net realisable value.
Inventory should be valued at the lower of cost and net realisable value in line with IAS2. First of all a
statement needs to be made to reconcile book value of inventory with the physical value. Once it is
reconciled then it should be valued as per the guidelines of IAS 2.
QUESTION 7
MAY 2018 P31 & P33 Q3 (a)
The auditors are appointed to act as an independent check on the reliability of the company’s accounting records.
The auditors are required to carry out their duties objectively.

They should inquire of management and others to gain an understanding of the organization itself, its
operations, financial reporting, and known fraud or error

They must ensure that the accounts comply with current accounting standards and the requirements of
Companies Acts.

The auditors are required to report to shareholders as part of the annual report giving their judgment as to
whether or not the financial statements meet these criteria.

The overriding requirement is that auditors must ensure the accounts present a true and fair picture of the
company’s financial affairs and that they are free from significant errors.
Chapter 10
CHAPTER 10
141
Computerised Accounting
COMPUTERISED ACCOUNTING
QUESTION 1
MAY 2016 P32 Q1 (e)
Recommend to the treasurer whether or not he should introduce a computerised accounting system. Justify your
answer analysing both benefits and limitations to the club.
[9]
QUESTION 2
NOVEMBER 2017 P32 Q6 (d)
The directors are considering investing $60 000 in a new computer system to improve inventory control. According
to the payment terms, 50% is payable in March 2018 and the remaining 50% in the following month.
REQUIRED
Advise the directors whether or not they should purchase the new computer. Justify your answer.
[5]
QUESTION 3
MAY 2018 P31 & P33 Q3 (e)
K Limited needs additional computer software. The directors are considering whether to buy the computer software
or acquire the right to use the new software for three years.
REQUIRED
Evaluate whether the directors should buy the computer software or acquire the right to use it for three years. Justify
your answer.
[5]
Chapter 10
SOLUTION
142
Computerised Accounting
CHAPTER 10
QUESTION 1
MAY 2016 P32 Q1 (e)
Computerised accounting has the advantage of automatically posting to both ledger accounts affected by a
transaction, and therefore should eliminate some types of error, including arithmetical ones. It helps to reduce
storage space as uses less paper.
However, there will still be the possibility of errors of omission and errors of original entry due to incorrect
data inputting. Computer system could crash which could lead to loss of information.
QUESTION 2
NOVEMBER 2017 P32 Q6 (d)
Business has a meager net cash balance of $8 500 at 31 March 2018. Half payment of $30 000 will result in cash
deficit in March. As new computer system is needed to improve inventory control so it may allow better
management of cash flows in future. But as in March cash position of the business is not very good so it would be
better to delay the purchase.
Another option could be to seek extended credit from the supplier or to find another supplier with more flexible
credit terms. Borrowing of loan could be an alternative but it would involve additional interest expense which would
affect profits and cash flows.
QUESTION 3
MAY 2018 P31 & P33 Q3 (e)
If company acquires the right to use a computer software for three years then it would be less costly compared to
buying the software so less cash outlay would be required.
Buying a computer software will increase non-current asset subject to amortisation expense over three years life
whereas acquiring the software will directly be charged to income statement as operating expense but with relatively
lower amount.
As technology is subject to rapid advancements so the computer software may get obsolete after three years so it
would be better to go to the cheaper option of acquiring the software licence.
Chapter 11
CHAPTER 11
143
Ratio Analysis
RATIO ANALYSIS
QUESTION 1
NOVEMBER 2011 P41 Q2
The following information is available for Phoenicia Ltd for the year ended 30 June 2011.
Inventories at 1 July 2010
$28 000
Inventories at 30 June 2011
$34 000
Rate of inventory turnover
8 times
Gross profit percentage
35%
Net profit percentage
12%
Income gearing
40%
Administrative expenses were twice as much as distribution costs.
The share capital consists of 250 000 ordinary shares of $0.50 nominal value. Dividends paid during the year were
$0.05 per share.
The directors are not required to implement the IAS regulations because Phoenicia Ltd is a private limited company.
REQUIRED
(a)
Prepare an income statement & appropriation account, in as much detail as possible, for the year ended 30
June 2011.
[20]
The directors of Phoenicia Ltd have decided to invest in either Algebra plc or Vector plc.
Financial information for these two companies is shown below:
For the year ended 30 June 2011
Algebra plc
Vector plc
$000
$000
Profit from operations
100
200
Finance charges
(40)
(70)
Profit for the year
60
130
Preference dividend
(8)
(40)
Ordinary dividend
(20)
(10)
Retained profit for the year
32
80
At 30 June 2011
Algebra plc
Vector plc
$000
$000
Non-current assets
850
Non-current assets
1 450
Net current assets
80
Net current assets
130
2020 8% Debentures
500
2016 10% Debentures
700
430
880
Ordinary shares of $1
100
Ordinary shares of $1
100
8% $1 Preference shares
100
8% $1 Preference shares
500
Retained profit
230
Retained profit
280
430
880
The market value of one ordinary share at 30 June 2011 in each company was:
Algebra plc
$2.50
Vector plc
$3.25
REQUIRED:
(b)
For each company calculate the following ratios giving your answer to two decimal places.
(i)
Gearing ratio
(ii)
Earnings per share
(iii)
Price earnings ratio
(iv)
Dividend cover
(v)
Dividend per share
(vi)
Dividend yield
[12]
(c)
Based on these calculations advise the directors of Phoenicia Ltd whether they should invest in either
Algebra plc or Vector plc. Give reasons for your decision.
[8]
Chapter 11
144
Ratio Analysis
QUESTION 2
NOVEMBER 2011 P43 Q1(b & c)
An extract from Ashburton Ltd’s income statement (profit and loss account) for the year ended 30 June 2011 is shown
below:
Revenue
Cost of sales
Gross profit
Expenses
Operating profit
Taxation
Profit after taxation
Dividend paid
Retained profit for the year
$
385 746
246 328
139 418
101 925
37 493
9 276
28 217
10 000
18 217
Ordinary shares (200 000 + 100 000) shares @ 1 (100 000 shares issued in current year)
8% Debentures
215 000
37 500
Following the acquisition of the partnership Ashburton Ltd anticipate that:
1
the revenue will increase by 60%
2
cost of sales will increase by 40%
3
expenses will increase by 35%.
4
There will be no change in ordinary dividend rate from the last year.
The projected taxation liability will be $33 500 and the dividend per share will remain unchanged.
REQUIRED
(b)
Prepare a forecast income statement (profit and loss account) for Ashburton Ltd for the year ending 30 June
2012.
[12]
(c)
Calculate the earnings per share for the year ended 30 June 2011 and the forecast earnings per share for
the year ending 30 June 2012.
[6]
QUESTION 3
NOVEMBER 2011 P43 Q2 (c & d)
Sabrina plc has been trading for many years as a worldwide supplier of office equipment. The summarised accounts
prepared for internal purposes for 2011 and 2010 are set out below.
Sabrina plc
Income Statement for the year ended 30 June
2011
2010
$000
$000
Revenue
2 546
1 458
Cost of sales
981
512
Gross profit
1 565
946
Depreciation
786
384
Other expenses
108
84
Profit on disposal of non-current assets
15
8
Operating profit
686
486
Interest
225
80
461
406
Taxation
103
94
Profit after taxation
358
312
Dividends
160
80
Retained profit for year
198
232
Retained profit b/f
821
589
Retained profit c/f
1 019
821
Chapter 11
Non-current assets
Current assets
Inventories
Trade receivables
Bank
145
Ratio Analysis
Statement of Financial Position (Balance Sheet) at 30 June
2011
$000
5 214
2010
$000
2 576
441
639
–
1 080
227
361
78
666
347
80
103
195
725
355
287
40
94
–
421
245
2 500
3 069
$000
2 000
50
1 019
3 069
1 000
1 821
$000
1 000
–
821
1 821
Current liabilities
Trade payables
Dividends
Taxation
Bank
Working capital
Non-current liabilities
8% Debentures (2020)
Capital and reserves
Ordinary share capital
Share premium
Retained earnings
The directors are concerned about the bank overdraft and are seeking a bank loan. The bank asks for some financial
information.
REQUIRED
(c)
Calculate the following ratios for both years, 2011 and 2010.
(i)
Return on equity
(ii)
Trade receivables collection period (turnover) (in days)
(iii)
Trade payables payment period (turnover) (in days)
(iv)
Income gearing
(v)
Gearing ratio.
(d)
[10]
Based on these ratios, state whether the bank is likely to give a loan to Sabrina plc. Give three reasons for
your answer.
[4]
QUESTION 4
Exa Emsig plc provides the following information
Statements of financial position at
Non-current assets
Intangible
Goodwill
Tangible
Property
Plant
Equipment
Current assets
Inventory
Trade receivables
Cash and cash equivalents
NOVEMBER 2012 P41 Q2
$000
31 March 2012
$000
$000
$000
31 March 2011
$000
$000
148
58
900
248
950
550
250
517
620
230
127
2 246
224
186
58
977
468
1 375
Chapter 11
146
Current liabilities
Trade payables
Taxation
$000
298
46
Ratio Analysis
$000
$000
344
633
2 879
Non-current liabilities
10% debentures
$000
235
36
$000
$000
271
197
1 572
310
2 569
–
1 572
Equity
Ordinary shares of $0.50 each
6% preference shares of $1 each
Share premium
Revaluation reserve
Profit and loss
Additional information:
For the year ended
Finance costs for the year excluding debenture interest
Taxation provided
Profit for the year attributable to equity holders
Total dividends paid
Ordinary dividends paid
1
2
3
4
5
1 200
300
400
350
319
2 569
31 March 2012
$000
16
46
?
140
122
800
300
200
–
272
1 572
31 March 2011
$000
20
36
99
98
80
The company had undertaken a major expansion during the year.
The debentures were issued on 30 September 2011.
No new shares had been issued during the year ended 31 March 2011. However a new share issue took
place on 30 June 2011.
Only one ordinary dividend was declared in the year ended 31 March 2012. All the new shares were eligible
for dividend.
Property was re-valued on 1 April 2011.
REQUIRED
(a)
Calculate for the year ended 31 March 2012:
(i)
the profit for the year attributable to equity holders;
[2]
(ii)
the profit from operations.
[3]
(b)
Prepare a statement of recognised income and expenses for the year ended31 March 2012, providing
comparative figures for the preceding year.
[6]
(c)
Explain why the goodwill has increased.
[4]
(d)
Calculate the following for both years, to two decimal places:
(i)
income gearing;
[6]
(ii)
gearing ratio.
[6]
For the year ended 31 March 2011 earnings per share were $0.0506 and the dividend per share was $0.05.
REQUIRED
(e)
Calculate for the year ended 31 March 2012:
(i)
earnings per share;
[4]
(ii)
dividend per share.
[3]
(f)
Comment on the performance of the company over the year from the viewpoint of:
(iii)
a debenture holder;
[3]
(iv)
an ordinary shareholder.
[3]
QUESTION 5
NOVEMBER 2012 P42 Q1
The final accounts for Abercrombie plc for the year ended 30 April 2012 had been prepared. Due to a fire it is now
necessary to prepare them again from limited information.
The accountant provides you with the following details:
Chapter 11
147
Rate of inventory turnover
Gross profit ratio
Net profit ratio
Income gearing
Ratio Analysis
10 times
35%
15%
12.5%
The administrative expenses for the year were twice as much as the distribution costs.
The taxation charge for the year was equal to half of the interest charge.
The inventories at 30 April 2012 were valued at $81 250 which was 25% higher than the inventories valuation at 1
May 2011.
REQUIRED
(a)
Prepare the income statement for the year ended 30 April 2012.
[18]
Additional information
1
The non-current asset turnover was 2.
2
The current ratio was 1.9:1.
3
Current assets also included the bank balance and the only current liability was trade payables.
4
Trade receivables turnover was 34 days. All sales were on credit.
5
Trade payables turnover was 59 days. All purchases were on credit.
6
Interest was paid on a 10% debenture redeemable in 2020.
7
No interim dividends were paid but a final dividend of $0.05 per share was proposed.
8
The total proposed dividend was $10 000, ordinary shares are $1 nominal value and there was no share
premium.
9
The balance on the retained earnings account at 1 May 2011 was $23 756 credit.
10
There was a revaluation reserve which was the balancing figure.
REQUIRED
(b)
Prepare the statement of financial position at 30 April 2012.
(c)
State how a proposed final dividend should be dealt with in the accounts.
QUESTION 6
Hyung Ltd has the following statements of financial position
Non-Current Assets (Note 1)
Current Assets
Inventories
Trade receivables
Cash and cash equivalents
Current Liabilities
Trade payables
Cash and cash equivalents
NOVEMBER 2012 P43 Q2 (c)
At 31 March 2012
$000
$000
1 700
At 31 March 2011
$000
$000
1 260
108
90
–
198
82
72
174
328
52
41
93
108
–
108
Total assets less current liabilities
Non-Current Liabilities
8% Debentures 2010-2020
Equity And Reserves
Ordinary shares of $1 fully paid
Share premium
General reserve
Retained profits
[20]
[2]
105
1 805
120
1 685
1 400
70
200
15
1 685
220
1 480
200
1 280
1 000
50
200
30
1 280
Chapter 11
148
Ratio Analysis
REQUIRED
Assess the liquidity and profitability of Hyung Ltd at 31 March 2012.
[8]
QUESTION 7
MAY 2013 P43 Q2 (d & e)
Winston is a sole trader. He provides the following financial information in respect of his business.
Winston has been given $250 000 in cash by his uncle. He is considering investing the money and has two options:
1
To invest the money in a bank deposit account which currently pays interest at 3% per annum.
2
To purchase shares in either company A or company B.
He has calculated the following ratios for company B:
Gearing 40%
Interest cover 2 times
Dividend yield 5%
He has obtained the following financial information regarding company A:
Share capital 1 million ordinary shares of $1 each
Total equity $2 625 000
10% debenture $500 000
Profit for the year before tax $200 000
Dividends for the year $150 000
Current market price of the share $4.00
REQUIRED
(d)
Calculate the same ratios for company A from the information provided.
(e)
Advise Winston how he should invest the $250 000.
[9]
[6]
QUESTION 8
NOVEMBER 2013 P43 Q3 (c & d)
Riffatulah, a retailer provides the following budgeted information for the year ending 31 May 2014.
Budgeted income statement for the year ending 31 May 2014
$
Revenue [(4 200 × $3.10) + (4 800 × $3.20)+ (4 600 × $3.40)+ (4 500 × $3.30)]
Cost of Sales
Opening inventory
Purchases [(4 700 × $1.20)+(4 600×$1.30)+(4 500×$1.30)+(4 500×1.40)]
Closing inventory
Gross profit
Budgeted statement of financial position at 31 May 2014
$
Current Assets
Inventory
Trade receivables (W 1)
Other receivables - insurance ($2 000 × 3/12)
Current liabilities
Trade payables (W 2)
Other payables - interest ($480  $240)
Cash and cash equivalents ($6 600 + payments  receipts)
Working Capital
4 800
23 770
28 570
(5 100)
$
5 100
9 304
500
8 932
240
5 340
$
58 870
23 470
35 400
$
14 904
14 512
392
REQUIRED
(c)
Using only figures from your answers to (a) and (b), calculate Riffatulah’s working capital cycle.
(d)
Suggest three ways Riffatulah could improve his working capital cycle and reduce his bank overdraft.
[7]
[3]
Chapter 11
149
Ratio Analysis
QUESTION 9
The directors of Wotknot Limited provided the following information.
NOVEMBER 2014 P41 Q2
Equity and liabilities (balances) at 1 May 2013
$
100 000
40 000
(40 000)
50 000
Share capital, 200 000 ordinary shares of $0.50 each
General reserves
Retained earnings
10% debentures
At 30 April 2014 inventory was valued at $80 000. This was 100% more than the inventory valuation at 30 April 2013.
The following information is available for the year ended 30 April 2014.
Inventory turnover
Gross profit margin
Operating expenses to sales ratio
Administrative expenses
Transfer to general reserves
Dividends paid
Non-current asset turnover
Trade receivables turnover
Trade payables turnover
10 times
40%
21%
$140 000
$20 000
$0.08 per share
0.2 times
40 days
35 days
The only current assets were inventory and trade receivables. All sales and purchases were on a credit basis.
REQUIRED
(a)
Prepare, in as much detail as possible, the income statement for the year ended 30 April 2014.
(b)
Prepare the statement of changes in equity for the year ended 30 April 2014.
(c)
Prepare, in as much detail as possible, the statement of financial position at 30 April 2014.
[10]
[5]
[12]
Additional information
The following information is available for Siri Limited, a similar business, for the year ended 30 April 2014.
Inventory turnover
Gross profit margin
Operating profit margin
Current ratio
Trade receivables turnover
Trade payables turnover
Dividend yield
Gearing
15 times
45%
15%
2:1
35 days
28 days
12%
60%
(The market value of Wotknot Limited’s shares at 30 April 2014 was $1.60)
REQUIRED
(d)
Compare the performance of Wotknot Ltd with Siri Limited for the year ended 30 April 2014.
[13]
QUESTION 10
MAY 2015 P43 Q2 (d & e)
Chandra is considering investing in ordinary shares. He has obtained the summarised financial statements of two
companies, Richards Limited and Sobers Limited.
The following data is available.
Income Statements
Gross profit
Profit from operations
Finance charges
Profit before tax
Tax
Profit after tax
Richards Limited ($)
85 000
66 000
(6 000)
60 000
(30 000)
30 000
Sobers Limited ($)
65 000
48 000
(8 000)
40 000
(20 000)
20 000
Chapter 11
150
Statements of Financial Position
Total assets
Equity
$1 ordinary shares
Share premium
Retained earnings
Non-Current Liabilities
8% debentures (2022)
Current Liabilities
Total equity and liabilities
Ratio Analysis
500 000
400 000
150 000
15 000
105 000
270 000
100 000
20 000
85 000
205 000
75 000
155 000
500 000
100 000
95 000
400 000
Both companies have non-current assets equal in value to their current assets.
The market value of an ordinary share in Richards Limited is $1.80.
The market value of an ordinary share in Sobers Limited is $2.40.
Neither company has paid any dividends during the year.
Richards Limited proposes a final dividend of $0.06 per ordinary share and Sobers Limited $0.09 per ordinary share.
REQUIRED
(d)
Calculate the following ratios for both companies.
(i)
Current ratio
(ii)
Return on capital employed
(iii)
Gearing ratio
(iv)
Income gearing
(v)
Earnings per share
(vi)
Price earnings ratio
(vii)
Dividend yield.
(e)
[14]
Advise Chandra which company he should invest in. Base your answer on your calculations for the return
on capital employed, gearing ratio and income gearing only.
[6]
QUESTION 11
SPECIMEN 2016 P3 Q4
Five friends each have $20 000 to invest and are considering whether to invest in ABC plc or
DEF plc. The following information is available from the latest financial statements of ABC plc.
Summarised income statement
$
4 700 000
2 115 000
2 585 000
1 645 000
940 000
50 000
890 000
Revenue
Cost of sales
Gross profit
Expenses
Profit from operations
Debenture interest
Profit for the year
Summarised statement of financial position
$
Non-current assets
Current assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets
880 000
480 000
10 000
$
2 100 000
1 370 000
3 470 000
Chapter 11
151
1 000 000 ordinary shares of $1 each
Share premium
Revaluation reserve
Retained earnings
Non-current liabilities – debentures
Current liabilities – trade payables
Ratio Analysis
1 000 000
400 000
800 000
450 000
2 650 000
500 000
320 000
3 470 000
Other information about ABC plc is as follows:
1
The dividends paid in the year amounted to $440 000.
2
All sales and purchases are made on credit.
3
The value of inventory has remained stable over several years.
4
The market value of one share is $5.60.
The following information is also available about DEF plc.
Earnings per share
Dividend per share
Gearing ratio
Income gearing
Trade payables payment period
Price earnings ratio
Dividend cover
Dividend yield
Par value of one share
$0.57
$0.48
43.4%
17.7%
97 days
7.18
1.19 times
11.7%
$1
The five friends all have different criteria for their investment decision.
Jazgul is an ethical investor and is concerned that suppliers get their money in good time.
Jackson needs a good cash flow and seeks a high return in terms of cash in the short term.
Khan seeks capital growth.
Madge wishes to be confident in a company’s ability to maintain earnings in the future.
Bernard is risk averse and wants to invest in a company which is on a sound financial footing.
REQUIRED
(a)
Identify and calculate for each potential investor the ratio for ABC plc which would particularly interest him
or her.
[10]
(b)
Explain what the ratio you have calculated for each investor shows the investor.
[10]
(c)
Decide which is the most suitable investment for each investor.
[5]
QUESTION 12
MAY 2016 P31 Q3(d)
The Return on Capital Employed (ROCE) of the company was 9.81%. This was lower than the industry average and
the directors wished to find a way to increase it.
Some of the machinery was 10 years old at the start of January 2016 and it had become unreliable and unproductive.
The marketing director suggested that it should be scrapped and replaced at a cost of $120 000, to be financed by
the issue of 8% debentures. This would increase production. Annual sales and costs would be as follows:
Revenue
Prime costs
Selling and distribution costs
$
62 000
39 000
3 000
He calculated that the return from the new machinery would be 62 000 / 120 000 or 51.67%, which, being higher
than the existing 9.81%, would cause the Return on Capital Employed (ROCE) to increase.
REQUIRED
Evaluate the marketing director’s proposal. Support your answer with calculations.
[8]
Chapter 11
152
Ratio Analysis
QUESTION 13
MAY 2016 P31 Q4
Winter bottom plc and Ramsey plc are two similar trading companies which have been successfully trading for many
years. Their financial statements prepared for internal purposes are shown below:
Income statements for the year ended 30 June 2015
Winterbottom
$000
Revenue
6 279
Cost of sales
(2 075)
Gross profit
4 204
Depreciation
(1 285)
Other expenses
(1 227)
Profit on disposal of non-current assets
28
Profit from operations
1 720
Finance charges
(300)
Profit before taxation
1 420
Taxation
(317)
Retained profit for the year
1 103
Statements of financial positions at 30 June 2015
Ramsey
$000
4 527
(1 254)
3 273
(720)
(992)
15
1 576
(180)
1 396
(312)
1 084
Winter bottom
$000
9 864
Ramsey
$000
6 192
782
1 362
135
2 279
12 143
451
742
98
1 291
7 483
Assets
Non-current assets
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Ordinary share capital ($1 each)
Share premium
Retained earnings
Current liabilities
Trade payables
Taxation
Non-current liabilities
6% Debentures (2024)
Total equity and liabilities
4 500
200
1 447
6 147
2 500
–
1 244
3 744
679
317
996
427
312
739
5 000
12 143
3 000
7 483
Additional information
1
Neither company has paid an interim dividend during the year ended 30 June 2015.
2
The directors of Winterbottom plc propose a dividend of $0.20 per share and those of Ramsey plc $0.35 per
share for the year ended 30 June 2015.
3
At 30 June 2015, the market value of an ordinary share in Winterbottom plc is $3.50 and in Ramsey plc
$2.75.
REQUIRED
(a)
Calculate the following ratios for both companies to two decimal places.
(i)
Income gearing
(ii)
Earnings per share
Chapter 11
(iii)
(iv)
(v)
153
Ratio Analysis
Price earnings ratio
Dividend yield
Dividend cover
[10]
Additional information
Alfredo is considering investing in one of the companies but is uncertain which will offer the best return.
Recent industry averages were as follows:
Income gearing
20.25%
Earnings per share
$0.33
Price earnings ratio
12.50
Dividend yield
10.45%
Dividend cover
1.20 times
REQUIRED
(b)
Analyse the performance of both companies compared to the industry averages.
(c)
Advise Alfredo which company he should invest in. Justify your answer.
[10]
[5]
QUESTION 14
MAY 2016 P32 Q4
The directors of Corim plc are using accounting ratios to analyse the performance of the company.
REQUIRED
(a)
Explain two benefits of using accounting ratios.
[4]
Additional information
All sales and purchases of Corim plc are on credit.
The following are the income statement and statement of financial position for Corim plc.
Income Statement
For the year ended 31 December 2015
$
843 000
(425 800)
417 200
(321 000)
96 200
(66 000)
30 200
Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Finance costs
Profit for the year
Statement of Financial Position
As at 31 December 2015
Assets
Non-current assets
Plant and equipment
Current assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Ordinary share capital (of $2 each)
Retained earnings
Total equity
$
884 000
88 800
132 400
14 800
236 000
1 120 000
400 000
77 000
477 000
Chapter 11
154
Ratio Analysis
Non-current liabilities
12% loan
Current liabilities
Trade payables
Total equity and liabilities
Additional information
1
Inventory at 1 January 2015 was $76 000.
2
The market price of one ordinary share at 31 December 2015 was $2.60.
$
550 000
93 000
1 120 000
REQUIRED
(b)
Calculate the following ratios for Corim plc:
(i)
return on capital employed
(ii)
gearing
(iii)
income gearing
(iv)
working capital cycle (in days)
(v)
price earnings.
Calculation should be to two decimal places where appropriate.
[14]
Additional information
Takie plc is the major competitor of Corim plc. Takie plc’s capital employed was $1 025 000 at 31 December 2015
including a 8% loan of $100 000.
Some of its comparative ratios are:
Return on capital employed
Gearing
Income gearing
9.32%
9.76%
8.38%
REQUIRED
(c)
Compare each company’s gearing and income gearing ratios.
[4]
Additional information
Chen has surplus fund and is considering whether or not to invest in the shares of either Takie plc or Corim plc.
REQUIRED
(d)
Identify which company Chen should invest in. Justify your answer.
[3]
QUESTION 15
NOVEMBER 2016 P31 Q3
Alpha plc and Beta plc both operate in the same industry. Both have the same annual sales revenue. Neither have
any preference shares in issue.
The following additional information is provided:
Profit for the year
Profit margin
Finance charges
Profit from operations
Income gearing
Number of ordinary shares
Earnings per share
Price earnings ratio
Market value of one share
Dividend per share
Dividend yield
Total dividend paid
Dividend cover
Alpha plc
$160 000
?
$16 000
?
?
400 000
?
?
$1.20
$0.07
?
?
?
Beta plc
$100 000
10%
?
?
20%
?
$0.20
4.2
$0.84
?
7.14%
?
?
Chapter 11
155
REQUIRED
(a)
Calculate for Alpha plc:
(i)
Profit margin
(ii)
Income gearing
(iii)
Earnings per share
(iv)
Price earnings ratio
(v)
Dividend yield
(vi)
Total dividend paid
(vii)
Dividend cover
Clearly label each answer and show your workings.
Suggest one reason for the difference between the two companies for each of the following:
(i)
Profit margin
(ii)
Income gearing
(iii)
Earnings per share
(iv)
Price earnings ratio
(v)
Dividend yield
(vi)
Market value of one share
Additional information
Amit is considering purchasing shares in either Alpha plc or Beta plc.
Ratio Analysis
[14]
(b)
REQUIRED
(c)
Suggest, with reasons, in which company Amit should invest.
[6]
[5]
QUESTION 16
MAY 2017 P31 & P33 Q4
James has recently retired and received some cash which he wishes to invest in a company.
There are two options. He could invest in either LM plc or AB plc.
The summarised information for the two companies extracted from their financial statements at 31 March 2017 is
as follows:
LM plc
AB plc
$
$
Ordinary share capital
300 000 500 000
4% non-redeemable preference shares of $1 each 100 000 150 000
Retained earnings 1 April 2016
50 000 125 000
10% debentures (2025)
150 000
50 000
Profit for the year
125 000 175 000
The nominal value of the ordinary shares of LM plc is $0.50 and of AB plc $1.
The market price of the ordinary shares at 31 March 2016 of both companies was $2.
At 31 March 2017, this had fallen by 10% for LM plc but increased by 10% for AB plc.
Both companies paid a dividend per share of $0.10 for the year ended 31 March 2017.
REQUIRED
(a)
Calculate the following ratios for both companies. Give your answers to two decimal places.
(i)
Earnings per share
(ii)
Price earnings
(iii)
Dividend yield
(iv)
Dividend cover
(b)
Evaluate the performance of each company using each of the ratios calculated in part (a).
[4]
[8]
Additional information
The industry average gearing ratio is 25%.
REQUIRED
(c)
(i)
(ii)
(iii)
Explain what you understand by gearing.
Calculate the gearing ratio for both companies to two decimal places.
Analyse the gearing ratios of LM plc and AB plc.
[2]
[2]
[5]
Chapter 11
(d)
156
Ratio Analysis
Advise James which company he should invest in. Give reasons for your answer.
QUESTION 17
The summarised statement of financial position of M plc at 31 December 2016 was as follows:
Non-current assets
Net current assets
Share capital and reserves
Ordinary shares of $5 each
Share premium
Retained earnings
[4]
MAY 2017 P32 Q2
$000
4 220
2 080
6 300
5 000
500
800
6 300
Retained earnings for the year ended 31 December 2016 were $160 000, after the payment of dividends which
represented 60% of the profit for the year.
The market price of one ordinary share was $6.40 on 31 December 2016.
REQUIRED
(a)
Calculate to two decimal places the following ratios at 31 December 2016:
(i)
Return on capital employed
(ii)
Earnings per share
(iii)
Price earnings ratio
(iv)
Dividend cover
(v)
Dividend yield
[8]
Additional information
It is estimated that the profit for the year ending 31 December 2017 will be same as 2016. The capital employed will
also remain unchanged.
On 1 January 2017, M plc has the opportunity to invest $1 200 000 in a project which will bring an additional annual
profit of $185 000. The directors are considering an issue of ordinary shares at a premium of 20% to finance this
project. The rate of dividend paid is expected to remain at 60% of the profit for the year.
REQUIRED
(b)
Prepare a statement to show the forecast share capital and reserves at 31 December 2017.
[6]
(c)
Calculate to two decimal places the following expected ratios for the year ending 31 December 2017:
(i)
Return on capital employed
(ii)
Earnings per share
[6]
(d)
Advise the directors whether or not M plc should invest in the project. Justify your answer.
[5]
QUESTION 18
NOVEMBER 2017 P31 Q3
The following information has been extracted from the books of account of M plc at 31 December 2016:
$
Profit for the year
550 000
Ordinary shares ($1)
900 000
6% Preference shares (non-redeemable)
200 000
5% Debentures (2025)
100 000
The market price of one ordinary share at 31 December 2016 was $1.75.
Dividends of $0.08 per ordinary share have been paid during the year ended 31 December 2016.
REQUIRED
(a)
State two advantages of ratio analysis to a user of the financial statements.
(b)
Calculate the following ratios at 31 December 2016 to two decimal places:
(i)
earnings per share
[2]
Chapter 11
(ii)
(iii)
(iv)
157
price earnings ratio
dividend yield
dividend cover.
Ratio Analysis
[5]
Additional information
For the year ended 31 December 2016:
1
The profit for the year was 10% greater than the previous year.
2
There had been a share issue of 300 000 ordinary shares.
3
The dividend per share had fallen by 20%.
REQUIRED
(c)
Calculate the same four ratios as in part (b) at 31 December 2015 to two decimal places.
The market price of one ordinary share at 31 December 2015 was $1.50.
[4]
Additional information
An investor, Bevin, is considering acquiring ordinary shares in M plc. He has been advised that the directors intend
to raise extra funds by issuing a further 5% debenture (repayable 2027).
REQUIRED
(d)
(i)
Analyse the performance of M plc over the two years 2015 and 2016 using the ratios calculated in
parts (b) and (c).
[8]
(ii)
Advise Bevin whether or not he should make the intended investment. Justify your answer. [6]
QUESTION 19
NOVEMBER 2017 P32 Q4
Summarised financial information for E Limited for the year ended 31 August 2016 is as follows:
Summarised Income Statement
$000
Revenue
8 800
Cost of sales
5 045
Gross profit
3 755
Expenses
2 175
Profit from operations
1 580
Finance costs
235
Profit for the year
1 345
Summarised Statement of Financial Position
Assets
Non-current assets
Current assets
Total assets
$000
4 815
3 210
8 025
3 000 000 ordinary shares of $0.50 each
Share premium
Retained earnings
1 500
500
2 540
4 540
Non-current liabilities – 8% debentures repayable 2020
Current liabilities – trade payables
2 935
550
8 025
Additional information
1
The market value of one ordinary share at 31 August 2016 was $1.55.
2
Dividends paid for the year ended 31 August 2016 were $325 000.
Chapter 11
158
REQUIRED
(a)
Calculate the following ratios to two decimal places:
(i)
income gearing
(ii)
gearing
(iii)
dividend cover
(iv)
price earnings
Ratio Analysis
[5]
Additional information
The directors of E Limited had expansion plans and on 1 September 2016 raised $2 000 000 by issuing 10%
debentures repayable in 2026. The profit from operations for the year ended 31 August 2017 was $1 600 000 and
the market price of one ordinary share on that date was $1.30. Dividends paid for the year were $275 000.
REQUIRED
(b)
(i)
(c)
(d)
Prepare an extract from the income statement for the year ended 31 August 2017, starting with
the profit from operations.
[2]
(ii)
Prepare the equity and non-current liabilities section of statement of financial position at 31
August 2017.
[2]
(i)
Calculate the same ratios as in part (a) at 31 August 2017 to two decimal places.
[4]
(ii)
Assess the effect of the new debenture issue on these ratios.
[8]
Discuss two disadvantages to the company of the issue of the debentures.
[4]
QUESTION 20
MAY 2018 P32 Q1
YGP Traders Limited has been trading for several years and has a year end of 31 December. It buys and sells a single
product and makes all its transactions on a credit basis. It has a large bank overdraft and the directors are concerned
about the working capital position of the business.
The following information is available for 2017:
1
Every month 1 000 units were sold at a selling price of $80 each.
2
Payment for half of all credit sales was received in the month following sale. The other half was
received two months after sale.
3
The company purchased 14 000 units during the year.
4
The purchase price has been $50 per unit for some years.
5
At 31 December, 3 500 units were in inventory.
6
Trade payables at the end of the year amounted to $62 000.
REQUIRED
(a)
Calculate for 2017:
(i)
revenue for the year
[1]
(ii)
cost of sales for the year
[1]
(iii)
trade receivables at the year end
[1]
(iv)
average inventory at cost price
[3]
(b)
State what is measured by the working capital cycle.
[2]
(c)
Calculate the working capital cycle for the year.
[7]
Additional information
The directors of the business are considering a new strategy of increasing the selling price to $90 per unit and offering
10% cash discount for payment in the month following sale. The directors believe that demand will be unchanged
and that all customers will take the discount offered.
(d)
Calculate a revised working capital cycle for 2017 if this strategy had been implemented from the start of
the year.
[5]
(e)
Advise the directors whether or not they should proceed with this strategy. Justify your answer.
[5]
Chapter 11
159
Ratio Analysis
SOLUTION
CHAPTER 11
QUESTION 1
(a)
NOVEMBER 2011 P41 Q2
Phoenicia Ltd
Income Statement for the year ended 30 June 2011
$
Revenue ($248 000 ÷ 65%)
Cost of sales
Opening inventories
Purchases [$248 000 + ($34 000 − $28 000)]
28 000
254 000
282 000
(34 000)
Closing inventories
Cost of sales ($31 000 × 8)
Gross profit ($381 538 × 35%)
Administrative expenses [($133 538 − $45 785) × 2/3]
Distribution costs [($133 538 − $45 785) × 1/3]
Operating profit ($381 538 × 12%)
Finance charges ($45 785 × 40%)
Profit for the year
Ordinary dividends (250 000 shares @ $0.05)
Retained profit for the year
(b)
(i)
Gearing
Fixed cost capital
Shareholders equity+Fixed cost capital
(ii)
(iii)
(iv)
(v)
(vi)
Earnings per share
Vector
$600 000
$1 200 000
$930 000
$1 580 000
×100= 64.52%
Profit after tax and preference dividends
$60 000−$8 000
Total number of ordinary shares
100 000 shares
= $0.52
×100= 75.9%
130 000−40 000
100 000 shares
=$0.90
Price/Earnings ratio
Market price per share
$2.50
Earnings per share
$0.52
Dividend cover
= 4.81 times
$3.25
$0.90
= 3.61 times
Profit after tax and preference dividends
$60 000−$8 000
130 000−40 000
Ordinary dividend
$20 000
$10 000
Dividend per share
Total Ordinary dividends
$20 000
Total number of ordinary shares
100 000 shares
=2.6 times
= $0.20
$10 000
=9 times
=$0.10
100 000 shares
Dividend yield
Dividend per share
Market price per share
(c)
248 000
133 538
(58 502)
(29 251)
45 785
(18 314)
27 471
(12 500)
14 971
Algebra
× 100
$
381 538
× 100
$0.20
$2.50
× 100 = 8.00%
$0.10
$3.25
× 100 = 3.08%
Both companies especially Vector are highly geared companies and look as risky investment as more finance
charges will have to be paid before paying ordinary dividends.
Vector’s earnings per share is better than Algebra which may raise company’s ability to pay dividends at
higher rate or to retain reasonable amounts as reserves. This may also result in increase in value of shares
of Vector.
Price earnings ratio of Algebra is better than Vector. This would suggest that investors are more confident
in its ability to sustain its performance in future.
Chapter 11
160
Ratio Analysis
Higher Dividend cover of Vector indicates that Vector could probably maintain dividends at current or even
higher rates in the future
Dividend per share of Vector is half compared to Algebra. This also results in lower dividend yield and higher
dividend cover for Vector as calculated above.
Dividend yield Dividend yield of Vector is less than half compared to Algebra. This shows better returns for
ordinary shareholders on their investment in Algebra.
Overall, both businesses are showing mixed performances.
QUESTION 2
(a)
NOVEMBER 2011 P43 Q1(b & c)
Ashburton Ltd
Statement of financial position after acquisition of the partnership
Non-current assets
$
$
Goodwill (W 1)
26 950
Land & buildings ($125 000 + $115 000)
240 000
Fixtures & fittings ($67 750 + $32 000)
99 750
Motor vehicles ($24 975 + $15 000)
39 975
406 675
Current assets
Inventories ($22 875 + $22 000)
44 875
Trade receivables ($14 363 + $13 500)
27 863
Bank [$28 462 – $27 500 (W 2)]
962
73 700
Total assets
480 375
Shareholders’ Equity
Ordinary shares of $1 [$200 000 + (100 000 × $1)]
300 000
Share premium [$20 000 + ($100 000 × 0.5)]
70 000
Retained profit
48 795
418 795
Non-current liabilities
8% debentures 2020 (W 2)
37 500
Current liabilities
Trade payables ($14 630 + $9 450)
24 080
Total liabilities and equity
480 375
(b)
Ashburton Ltd
Income statement for the year ended 30 June 2012
$
Turnover ($385 746 × 160%)
617 194
Cost of sales ($246 328 × 140%)
344 859
Gross profit
272 335
Expenses ($101 925 × 135%)
137 599
Operating profit
134 736
Interest payable ($37 500 × 8%)
3 000
Profit before taxation
131 736
Taxation
33 500
Profit after taxation
98 236
Dividend paid (
$10 000 ×300 000
200 000
)
15 000
Retained profit for the year
(c)
Earnings per share
2011
83 236
=
=
=
2012
=
Profit after Tax and Preference Dividends
Total number of issued ordinary shares
$28 217
200 000
14.11 ₵
$83 236
300 000
Chapter 11
161
=
QUESTION 3
(c)
Return on equity
Receivables turnover
Ratio Analysis
32.74 ₵
NOVEMBER 2011 P43 Q2 (c & d)
2011
2010
Profits attributable to equity shareholders
$358 000
Shareholders equity
$3 069 000
$1 821 000
11.7%
17.1%
Trade receivables
Credit Sales
×100
×100
$639 000
× 365 days
×365
$2 546 000
$312 000
$361 000
Trade payables
Credit Purchases
$347 000
× 365 days
$981 000
× 365
129.1 days
Income gearing
Fixed interest charges
Operating profits
Gearing ratio
Fixed cost capital
Shareholders equity+ Fixed cost capital
(d)
$225 000
×100
×100
$686 000
× 100
90.4 days
$287 000
$512 000
× 365
204.6 days
$80 000
$486 000
×100
32.8%
16.5%
$2 500 000
$1 000 000
$5 569 000
$2 821 000
×100
×100
44.9%
35.4%
The bank should not authorise the loan as we can see that over the period all of the ratios have
worsened.
(i)
Company’s return on equity has deteriorated which shows decrease in earning power of the equity
invested.
(ii)
Trade receivables’ collection period is slightly worsened which means that cash is slower coming in
from its customers.
(iii)
Company’s payables' turnover shows that either it has been given longer credit period to pay its
debts and enjoys more time to make use of that amount. On the other hand delayed payments
may result in loss of its credit facilities in future.
(iv)
Gearing level has increased which shows more dependence of the business on external borrowings
and reveal more risk for the business.
(v)
Increased gearing level also worsened income gearing as it is almost half of the last year. If this
trend continues company may not be able to serve its interest payment in future.
QUESTION 4
(a)
(i)
(ii)
NOVEMBER 2012 P41 Q2
Calculation of profit for the year attributable to equity holders
Profit attributable to
Total dividends
Retained
Retained profits b/f
+
=

equity holders
paid
profits c/f
Profit attributable to
$272 000
+
$140 000
=
$319 000

equity holders
Profit attributable to
=
$187 000
equity holders
Calculation of profit from operations
$000
Operating profit (balancing figure)
Finance costs for the year excluding debenture interest
Interest on debentures ($310 000 × 10% × 6/12)
Taxation provided
Profit for the year attributable to equity holders
(b)
×365
$1 458 000
91.6 days
Payables turnover
×100
(16.0)
(15.5)
Statement of Recognised income and expenses for the year ended 31March 2012
2012
2011
$000
$000
$000
264.5
(31.5)
(46.0)
187.0
Chapter 11
162
Ratio Analysis
Revaluation surplus
350
–
Profit for the year
187
99
(c)
Under International Financial Reporting Standards only purchased goodwill can be shown in the financial
statements. The increase in the value of goodwill therefore represents goodwill arising on purchase of
another business.
(d)
Income
gearing
2012
2011
Interest Expense
$16 000+$15 500
$20 000
Operating Profit
$264500
$(99+36+20)000
× 100
× 100
11.91%
Gearing
12.9%
Fixed Cost Capital
$310 000+$300 000
$300 000
Total Capital
$2 879 000
$1 572 000
× 100
× 100
21.19%
(e)
(i)
Earnings per share
× 100
× 100
19.08%
Profit after tax & 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
$187 000 −$18 000
Number of issued ordinary shares
1600000+(800000×9÷12)
$ 0.0768 per share
(ii)
Dividends per share
Total Dividends paid
$122 000
Number of issued ordinary share
2 400 000 shares
= $0.0508 per share
(f)
(i)
Gearing has though increased from 19.08% to 21.19% in 2012 but Exa Emsig plc is still low geared
firm. This indicates a relative safe investment.
On the other hand, the income gearing has decreased slightly which indicates increase in profits at
a higher rate than interest. This indicates increase in company’s ability to pay debenture interest
from its operating profits.
(ii)
As company is low geared so it is a safe investment for the ordinary shareholders as most of the
capital has been contributed by the equity holders. Low income gearing also ensures the better
ability of company to make consistent dividend payments.
QUESTION 5
(a)
NOVEMBER 2012 P42 Q1
Abercrombie plc
Income statement
For the year ended 30 April 2012
$
Revenue (W 2)
Cost of sales
Opening inventories (
$81 250 ×100
125
)
Ordinary goods purchased ($731 250 + $81 250 – $65 000)
Closing inventories
Cost of sales (W 1)
Gross profit
Distribution costs [($393 750  $168 750) × 1/3]
Administrative expenses [($393 750  $168 750) × 2/3]
Operating Profit ($1 125 000 × 15%)
Interest (W 3)
Profit before tax
Taxation ($21 094× 50%)
Retained earnings for the year
$
1 125 000
65 000
747 500
(81 250)
(731 250)
393 750
75 000
150 000
(225 000)
168 750
(21 094)
147 656
(10 547)
137 109
Chapter 11
163
(b)
Ratio Analysis
Abercrombie plc Statement of financial position at 30 April 2012
$
$1 125 000
Non-Current Assets (
2
)
562 500
Current Assets
Inventories
Trade receivables (W 4)
Cash & cash equivalents (W 5)
81 250
104 795
43 530
229 575
Current Liabilities
Trade payables (W 5)
Non-Current Liabilities
10% Debentures – 2020 (
$
(120 829)
$21 094
10%
)
108 746
671 246
$
(210 940)
460 306
Equity
200 000 ordinary shares of $1 [(
$10 000
) shares × $1]
$0.05
200 000
Retained earnings ($23 756 + $137 109)
Revaluation reserve (balancing figure)
(c)
The proposed final dividend is not accounted for anywhere in the financial statements. This is only recorded
when is approved by the ordinary shareholders and until then it is disclosed as a note to the financial
statements.
WORKINGS
(W 1)
(W 2)
(W 4)
(W 5)
Cost of Sales
Inventory turnover
=
10
=
Cost of Sales
=
$731 250
Sales
x


Cost of sales
$731 250
X (sales)
=
=
(W 3)
160 865
99 441
460 306
Income gearing
=
12.5%
=
Interest
=
Receivables turnover
=
34
=
Trade receivables
=
Payables turnover
=
59
=
Average Inventory
Cost of Sales
($65 000+$81 250)/2
=
=
$731 250
0.65
$1 125 000
Interest Charges
Operating Profit
Interest Charges
× 100
$168 750
$21 094
Trade Receivables
Credit Sales
Trade Receivables
$1 125 000
× 365
× 365
$104 795
Trade Payables
Credit Purchases
Trade Payables
$747 500
× 365
× 365
Gross profit
0.35x
Chapter 11
164
Trade payables
=
Current Ratio
=
1.9
=
Bank
=
(W 6)
QUESTION 6
Current ratio
=
=
=
Acid test
=
=
=
Return on capital employed
=
=
=
Return on Equity
=
=
=
Ratio Analysis
$120 829
Current Assets
Current Liabilities
$81 250+$104 795+Bank
$120 829
$43 530
NOVEMBER 2012 P43 Q2 (c)
Current Assets
Current Liabilities
$198 000
$93 000
2.13:1
Current Assets −Closing Inventory
$90 000
Current Liabilities
$93 000
0.97:1
Operating Profit
Capital Employed
−$15 000
$1 805 000
× 100
× 100
0.83%
Profit after tax and preference dividends
−$15 000
Shareholders′ Equity
$1 685 000
× 100
× 100
0.89%
The current ratio of Hyung Ltd signifies a good liquidity position. However, as it includes inventories so the use of
acid-test ratio, which excludes inventories from the calculations, could be a better option. The inventories levels look
as they are excessively high but even then acid-test ratio still look reasonable to cover its current liabilities as and
when they are due. Due to loss there is a small negative return both on capital employed and equity for the business.
QUESTION 7
(d)
Calculation of ratios
(e)
MAY 2013 P43 Q2 (d & e)
Gearing
=
Interest cover
=
Dividend yield
=
$500 000
× 100
($500 000 +$2 625 000)
$200 000 +($500 000 ×10%)
$500 000 ×10%
$150 000/1 000 000 shares
× 100
$4.00
=
16%
=
5 times
=
3.75%
The investment of $250 0000 in a bank deposit account at an annual interest rate of 3% is though a relatively
safe investment but may not be as profitable as investment in the shares of a company could have been.
The return on shares (dividend yield) for Company A is higher, but its gearing level is also higher than
company B so could be more risky than Company B.
The return on shares (dividend yield) for Company B is lower, but its gearing level is also lower than company
A so will be less risky.
If Winston prefers a better investment, then company B would be a better option. If higher return is
preference, then company A would be a better option.
Chapter 11
QUESTION 8
(c)
Trade receivables days
+ Inventory days
− Trade payables days
165
Ratio Analysis
=
$9 304
NOVEMBER 2013 P43 Q3 (c & d)
=
57.7 days
=
$58 870
($4 800+$5 150)/2
=
$23 470
$8932
$23 770
x 365
x 365
x 365
=
77.0 days
=
137.2 days
Working Capital Cycle
(d)








QUESTION 9
(a)
(2.5) days
Improved (strict) credit terms for credit customers
Negotiate more relaxed credit terms from the credit suppliers
Use of debt factoring
Reduction in inventory levels
Sale of surplus non-current assets (if any)
Take additional bank loan
Additional capital invested by the owner
Reduction in owner’s drawings
NOVEMBER 2014 P41 Q2
Wotknot Limited
Income Statement for the year ended 30 April 2014
$
Revenue ($600 000 ÷ 60%)
Cost of Sales
Opening inventory ($80 000 × 50%)
Purchases (balancing figure)
Closing inventory
Cost of Sales [($40 000 + $80 000)/2} × 2]
Gross profit ($1 000 000 × 40%)
Expenses
Administrative expenses
Distribution expenses ($210 000  $140 000)
Total operating expenses ($1 000 000 × 21%)
Operating Profit
Finance costs ($50 000 × 10%)
Profit for the year
(b)
40 000
640 000
680 000.
(80 000)
(600 000)
400 000
140 000
70 000
(210 000)
190 000
(5 000)
185 000
Statement of changes in equity for the year ended 30 April 2014
$
185 000
(20 000)
(16 000)
(40 000)
109 000.
Profit for the year
Transfer to general reserve
Dividends paid (200 000 shares @ $0.08)
Retained earnings b/f
Retained earnings c/f
(c)
$
1 000 000
Wotknot Limited
Statement of Financial Position at 30 April 2014
Assets
Non-Current Assets ($1 000 000 × 0.2)
Current Assets
$
$
200 000
Chapter 11
166
Ratio Analysis
Inventory
Trade receivables ($1 000 000 × 40 ÷ 365)
Total assets
Equity and liabilities
Ordinary share capital
General reserve ($40 000 + $20 000)
Retained earnings
Non-Current Liabilities
10% Debenture
Current Liabilities
Trade payables ($640 000 × 35 ÷ 365)
Bank overdraft
Total liabilities and Equity
(d)
80 000
109 589
189 589
389 589
$
$
100 000
60 000
109 000
269 000
50 000
61 370
9 219
70 589
389 589
Siri Limited has a better inventory turnover and gross profit margin. This shows that Siri Limted is not only
able to sell its inventory at a faster pace but also with a better profit margin. However Wotknot Limited has
a better operating profit margin which reflects the better performance of Wotknot in controlling its
operating expenses. The current ratio of Wotknot Limited is 2.69:1 (
$189 589
$70 589
) which is higher than 2.0:1 of
Siri Limited. This looks better but the higher inventory level and negative bank balance (overdraft) of
Wotknot Limited may indicate poor working capital management by Wotknot Limited.
Siri Limited seems slightly better(5 days) than Wotknot Ltd in collecting their debts however this benefit
was nullified by lengthy payment period (7 days) available to Wotknot in settling their current obligations.
Siri Limited has a better dividend yield (12%) compared to Wotknot ratio of just 5%(
$0.08
$1.60
). Siri Limited,
however has a worse gearing ratio of 60% which could be very risky in periods of falling profits whereas
Wotknot has low gearing ratio of only 15.67%(
$50 000
$319 000
).
QUESTION 10
(d)
Current ratio
MAY 2015 P43 Q2 (d & e)
Richards Limited
Current Assets
$500 000/2
Current Liabilities
$155 000
$95 000
1.61 : 1
Return on capital
employed
Gearing ratio
Income gearing
Operating Profit
Capital Employed
Fixed cost capital
Total capital
× 100
× 100
2.11 : 1
$66 000
Price earnings ratio
Dividend yield
×100
$48 000
$270 000+$75 000
$205 000+$100 000
19.13%
15.74%
$75 0000
×100
$100 000
$270 000+$75 000
$205 000+$100 000
21.74%
32.79%
Fixed interest charges
$6 000
Operating profit
$66 000
× 100
9.09%
Earnings per share
Sobers Limited
$400 000/2
$8 000
$48 000
× 100
16.67%
Profit for ord. shareholders
$30 000
$20 000
Total no of ordinary shares
150 000 shares
100 000 shares
$0.20
$0.20
Market price per share
$1.80
$2.40
Earnings per share
$0.20
$0.20
9.00
12.00
Dividend per share
×100
Market price per share
$0.06
$1.80
3.33%
× 100
$0.09
×100
$2,40
3.75%
×100
×100
Chapter 11
(e)
167
Ratio Analysis
Though current ratio of Richards Limited is a bit lower however current ratios of both companies look
reasonable to pay the current obligations as and when they become due.
The Return on Capital Employed of both companies is higher than the interest rate on debentures so would
help the business to give some additional returns for the ordinary shareholders after meeting fixed interest
charges. Richards Limited has the higher Return on Capital Employed so looks like more profitable
investment.
Both companies have low gearing being less than 50% showing that they rely less on outside borrowings
and most of the investment comes from owners.
Although neither company causes concern with income gearing, Richards Limited again has the better ratio
as it only pays 9% of its operating profits for interest compared to 16.67% of Sobers Limited.
Earnings per share indicate that both companies are at par. However, price earnings ratios show that stock
market is more confident about Sobers Limited’s performance in the future. Dividend yield of Sobers
Limited is also relatively better.
Though investments in both companies look viable, however Sobers Limited would be a better investment.
QUESTION 11
SPECIMEN 2016 P3 Q4
(a)
Identify and calculate for each potential investor the ratio for ABC plc which would particularly interest
him or her.
[10]
Investor
Jazgul
Jackson
Ratio
Trade payables payment period (1)
Dividend yield (1)
Khan
Dividend cover (1)
Madge
Price earnings ratio (1)
Income gearing (1)
or
gearing ratio (1)
Bernard
Calculation of ratio
56 days (1)
7.9% (1)
2.02 times (1)
(Also allow difference between earnings per
share and dividend per share.)
6.29 (1)
5.3% (1)
or
15.9% (1)
(b)
Explain what the ratio you have calculated for each investor shows the investor.
[10]
Investor
Explanation
Jazgul
Enables investor to see that ABC plc pays its creditors 41 days sooner. (max 2 marks)
Jackson
DEF plc has a dividend yield 3.8% higher. This means the investor will have a higher income by $760.
(max 2 marks)
Khan
This is 0.83 times higher for ABC plc, which is nearly double. This means that more funds are being
retained in the business rather than distributed so that the net asset value of the company should
increase. (max 2 marks)
Madge
This is 0.89 times higher in DEF plc which indicates that the stock market has more confidence in
DEF plc maintains its earnings. (max 2 marks)
Bernard
This is 12.45% or 27.5% higher in DEF plc which means that DEF plc is more at risk from changes in
interest rates or from a need to repay debt. (max 2 marks)
For each:
(c)
Developed explanation (2 marks)
Basic explanation (1 marks)
Decide which is the most suitable investment for each investor.
Investor
Jazgul
Jackson
Khan
Decision
The investor will select ABC plc. (1)
The investor will select DEF plc. (1)
The investor will select ABC plc. (1)
[5]
Chapter 11
168
Madge
Bernard
Ratio Analysis
The investor will select DEF plc. (1)
The investor will select ABC plc. (1)
QUESTION 12
MAY 2016 P31 Q3(d)
The calculations of return on capital employed by the marketing director as 51.67% are wrong as he used total
revenue instead of operating profit in the calculation($62 000/$120 000). As ROCE calculation is based on profits so
correct return would be 6.67% by dividing operating profits of $8 000 [$62 000 – $39 000 – $3 000 – $12 000
(depreciation) over capital invested of $120 000.
Since this return (6.67%) is less than the existing ROCE (9.81%) so the proposal would not increase ROCE. Moreover
the calculation of ROCE is based on profit before interest but if debenture interest of $9 600 is included then there
is a loss resulting in negative ROCE.
On the contrary, it may be necessary anyway to replace the existing machinery as and it had become unreliable and
unproductive. Moreover, because of its age as spare parts may no longer be available and the machinery may be
impossible to repair. The productivity of the machinery may fall further with time resulting in the reduction of
existing ROCE.
QUESTION 13
(a)
(i)
Income gearing
MAY 2016 P31 Q4
Fixed interest expense
Profit before interest and tax
Winterbottom
$300 000
$1 720 000
× 100
= 17.44%
(ii)
(iii)
Earnings per share
= 11.42%
$1 103 000
$1 084 000
4 500 000 shares
2 500 000 shares
=$0.25
=$0.43
$3.50
$2.75
$0.25
$0.43
= 14 times
= 6.40 times
$0.20
$0.35
Price/Earnings ratio
Market price per share
× 100
Dividend yield
Dividends per share
× 100
$3.50
× 100
= 5.71%
(b)
× 100
Total number of ordinary shares
Market price per shares
(v)
$180 000
$1 576 000
Profits after tax and preference dividends
Earnings per shares
(iv)
Ramsey
Dividend cover
$2.75
× 100
= 12.73%
Profits after tax and preference dividends
$1 103 000
$1 084 000
Ordinary Dividends
4 500 000×0.20
2 500 000×0.35
= 1.23 times
= 1.24 times
Income gearing shows interest expense in proportion to operating profits. Both companies have a lower
income gearing than the industry average and interest charges are comfortably covered by operating profits
so there should be no concerns with regard to interest payments.
The earnings per share of Ramsey is higher than the industry average while that of Winterbottom is lower
so Winterbottom’s performance may be a point of concern.
Price earnings ratio relates the market price of a share to its earnings. Ramsey has a lower PE ratio than
industry average but PE ratio for Winterbottom is higher which is indicating greater confidence of Investors
in the company.
Dividend yield expresses the dividend as a percentage of the market price of a share this will indicate to
investors how much they can expect as a return on each $ invested. The dividend yield of Winterbottom is
much lower than the industry average while that of Ramsey is higher so an investor who seeks short term
income would prefer Ramsey.
Chapter 11
169
Ratio Analysis
Dividend cover shows how many times the ordinary dividend can be paid out of profits after interest, tax
and preference dividends. The dividend cover of both companies is slightly higher than the industry average
so although apparently low there should not be major concerns.
(c)
On the basis of financial ratios calculated in ‘b’ part, we can see the mixed performance indicators for both
companies. However if Alfredo is planning to make short term investment then Ramsey could be a better
option. Ramsey has lower income gearing ratio than both its competitor and industry average indicating its
better ability to handle its fixed interest obligations.
Both EPS and dividend yield for Ramsey are also higher than industry average and Winterbottom making
investment in Ramsey more attractive for Alfredo. Dividend cover for both companies is approximately
similar to industry average though Ramsey is again at a slight advantage.
Price earnings ratio is the only performance indicator which favours investment in Winterbottom as it
shows greater confidence of Investors in the company to sustain its earnings in the long run.
QUESTION 14
MAY 2016 P32 Q4
(a)
 Ratios simplify the comprehension of financial statements. Ratios tell the whole story of changes in the
financial condition of the business
 Ratios facilitate inter-firm comparison. Ratios highlight the factors associated with successful and
unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms.
 Ratios help in planning and forecasting. Ratios can assist management, in its basic functions of
forecasting.
 Ratios make inter-firm comparison possible: Ratios analysis also makes possible comparison of the
performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency
or otherwise in the past and likely performance in the future.
(c)
(i)
Return on capital employed
Operating Profit
× 100
Capital Employed
$96 200
× 100
$477 000 + $550 000
9.37%
(ii)
Gearing
Fixed Cost Capital
× 100
Total Capital
$550 000
× 100
$477 000 + $550 000
53.55%
(iii)
Income gearing
Interest Charges
× 100
Operating Profit
$66 000
× 100
$96 200
68.61%
(iv)
Working capital cycle
Inventory turnover (days)
Average Inventory
× 365
Cost of Sales
($88 800+$76 000)/2
× 365
$425 800
71 days
+
Receivables turnover
Trade Receivables
× 365
Credit Sales
$132 400 × 365
$843 000
57 days

Trade Payables Turnover
Trade Payables
× 365
Credit Purchases
$93 000 ×365
425 800 + 88 800 – 76 000
77 days
51 days
Working capital cycle
(v)
(c)
Price earnings ratio
Market price per share
$2.60
Earnings per share
$30 200/($400 000÷$2) shares
17.22
Takie plc is low geared as gearing ratio is far below 50% as fixed cost capital is only 9.76% of total capital
employed and may pose less financial risk to the ordinary shareholders.
Low gearing also resulted in low income gearing. It shows that company’s finance charges are easily covered
by current operating profits. It also reflects small burden of interest charge.
Corim plc is high geared in relative terms as gearing ratio is just above 50% as fixed cost capital is 53.55% of
total capital employe.
Chapter 11
170
Ratio Analysis
This also caused higher income gearing due to higher proportion of interest to operating profits (i.e.
68.61%). This may pose higher financial risk to the ordinary shareholders as the lower the income gearing
the more secure are the interests of the debenture holders and the shareholders.
(d)
The loan interest rate of Takie plc is 8%, which is lower than the return on capital employed of 9.32%.
Shareholders of Takie plc will benefit. On the other hand, the loan interest rate of Corim plc is 12%, which
is higher than the return on capital employed of 9.37%. Shareholders of Corim plc will suffer.
Takie plc is less risky as ROCE is higher than interest rate whereas opposite is true for Corim plc. Chen should
invest in Takie plc Limited as it would be in a better position to meet its fixed interest obligations.
QUESTION 15
(a)
(i)
Profit margin
=
=
=
(ii)
Income gearing
=
=
=
(iii)
Earnings per share
=
=
=
(iv)
Price earnings ratio
=
=
=
(v)
Dividend yield
=
=
Sales Revenue
$160 000
NOVEMBER 2016 P31 Q3
×100
×100
($100 000 ÷10%)
16.00%
Fixed Finance charges
Operating profits
$16 000
($160 000+$16 000)
×100
×100
9.09%
Profits after tax and preference dividends
Total number of ordinary shares
$160 000
400 000 shares
$0.40 per share
Market price per share
Earnings per shares
$1.20
$0.40
3 times
Dividends per share
Market price per shares
$0.07
$1.20
× 100
× 100
=
5.83%
Number of issued shares × Per share dividend
400 000  0.07
$28 000
(vi)
Total dividend paid
=
=
=
(vii)
Dividend cover
=
=
=
(b)
Profits for the year
Profits after tax and preference dividends
$160 000
Ordinary Dividends
$28 000
5.71 times
(i)
Profit margin of Alpha plc is better which may be due to the following reasons

higher selling price

more sale of higher margin items

better control over expenses
(ii)
Income gearing of Alpha plc is better which may be due to the following reasons

higher profits from operations
Chapter 11
171

(c)
Ratio Analysis
lower financial costs (interest)
(iii)
Earnings per share of Alpha pls is twice to Beta plc is better which may be due to the following
reasons

higher profits attributable to ordinary shareholders

lesser number of ordinary shares
(iv)
Price earnings ratio of Beta plc is better which may be due to the following reasons

Investors have more confidence in Beta plc’s prospects

Market value of Beta’s plc shares may be overvalued
(v)
Dividend yield of Beta plc is better which may be due to the following reasons

Payment of a higher total dividend

Lower market value per share
(vi)
Market value of one share of Alpha plc is higher which may be due to the following reasons

greater net assets

greater confidence of investors in the ability of the company to maintain the EPS

more demand for shares in the market
Investment in shares of Alpha plc seems to be a better option due to better profitability indicators like
higher profit margins, higher dividend per share, and higher earnings per share.
Lower income gearing and better dividend cover entails that investment involves less risk.
Though dividend yield and price-earnings ratios are lower for Alpha plc but has higher market price per
share showing the confidence of stock market in its prospects.
QUESTION 16
(a)
(i)
Earnings per share
MAY 2017 P31 & P33 Q4
LM plc
Profits after tax and preference dividends
Total number of ordinary shares
(ii)
Earnings per shares
× 100
(500 000 ÷ 1)shares
=$0.20
=$0.34
$2.00 ×90%
$2.00 ×110%
Market price per shares
$0.20
$0.34
= 9.00 times
LM plc
Dividend yield
Dividends per share
× 100
$0.10
$2.00 ×90%
× 100
= 5.56%
(iv)
(b)
$175 000−$6 000
Price/Earnings ratio
Market price per share
(iii)
AB plc
$125 000−$4 000
(300 000 ÷ 0.50) shares
= 6.47 times
AB plc
$0.10
$2.00 ×110%
× 100
= 4.55%
Dividend cover
Profits after tax and preference dividends
$125 000−$4 000
$175 000−$6 000
Ordinary Dividends
(600 000 shares @$0.1)
(500 000 shares @$0.1)
= 2.02 times
= 3.38 times
Earnings per share shows how much profit (after interest, tax and preference dividends) is attributable to
each ordinary share. The ratio is used as a convenient measure of success. The EPS ratio of AB plc ($0.34) is
significantly better than LM plc ($0.20).
Price earnings ratio relates the market price of a share to its earnings. The current market price compared
to earnings per share of LM plc is higher indicating greater confidence of Investors in LM plc.
Chapter 11
172
Ratio Analysis
Dividend yield expresses the dividend as a percentage of the market price of a share this will indicate to
investors how much they can expect as a return on each $ invested. It is higher for LM plc (5.56%) compared
to 4.55% of AB plc.
Dividend cover shows how many times the ordinary dividend can be paid out of profits after interest, tax
and preference dividends. Though both companies paid dividend at the same rate of 10%, however higher
ratio of AB plc signifies greater ability of the company to maintain dividends payments in future.
Though, there have been mixed results for both companies but on overall basis, AB plc seems to have
performed in a better way.
(c)
(i)
(ii)
Gearing is the proportion of company’s long-term funds, which have been provided by lenders.
There are several ways to calculate this, but a frequently used method of its calculation is as
follows:
Gearing
=
Gearing ratio
=
LM plc
=
Preference share capital+Long term loans
All share capitals and reserves+Long term loans
Fixed cost capital
× 100
Shareholders equity+ Fixed cost capital
$100 000 + $150 000
$[300000+100 000+150 000+(50000+125 000−4000−60000)]
=
AB plc
37.82%
$150 000 + $50 000
=
(d)
×100
$(500000+150 000+50 000+(125 000+175000−6000−50000)
=
(iii)
×100
21.19%
The gearing ratio of LM plc (37.82%) is above the industry average of 25% whilst AB plc gearing
level (21.19%) is below the industry average. The industry average is quite low as well indicating
that most of the companies are not too much dependent on external borrowings.
Both are low geared companies as their gearing level is below 50% indicating low financial risks.
James could therefore should be confident to receive future dividends provided that the
companies continue to be profitable.
Both the companies have mixed financial results. LM plc has better price earnings and dividend yield ratios.
AB plc has better earnings per share and dividend cover. AB plc has low gearing compared to LM plc and
industry average and looks like a safer investment for Jmaes.
The increase in the market value of shares of AB plc have increased by 10% contrary to the reduction by
10% of LM plc shares. This signifies higher confidence of stock market on AB plc to maintain its EPS.
Based on better earnings per share, dividend cover, lower gearing level and higher market price of shares
James should invest in AB plc.
QUESTION 17
(a)
(i)
MAY 2017 P32 Q2
Return on capital employed
Operating Profit
Capital Employed
(ii)
=
× 100
$6 300 000
Profits after tax and preference dividends
Market price per share
× 100
6.35%
=
$160 000 ÷40%
(5 000 000 ÷5) shares
=
$0.40
=
$6.40
$0.40
=
16.00 times
=
3.75%
Dividend yield
Dividends per share
Market price per shares
(iv)
=
Price/Earnings ratio
Earnings per shares
(iv)
× 100
Earnings per share
Total number of ordinary shares
(iii)
$160 000 ÷40%
Dividend cover
× 100
=
$240000(W 1)÷1000000
$6.40
× 100
Chapter 11
173
Profits after tax and preference dividends
Ordinary Dividends
(b)
Ratio Analysis
$160 000 ÷40%
=
=
$240 000
1.67 times
Statement to show share capital and reserves at 31 December 2017
$000
6 000
700
1 034
7 734
Ordinary shares capital [$5 000 000 + $1 000 000 (W 2)]
Share premium [$500 000 + $200 000 (W 2)]
Retained earnings (W 3)
WORKINGS
(W 1)
$160 000 ×60%
=
40%
$240 000
(W 2)
Investment required in the project
Number of ordinary shares to be issued ($1 200 000 ÷ $6.00 )
Ordinary share capital (200 000 shares  $5.00)
Share premium (200 000 shares  $1.0)
(W 3)
Retained earnings at year start
Profit for the year for 2017 ($400 000 + $185 000)
Dividend paid ($585 000  60%)
Retained earnings at year end
(c)
(i)
Operating Profit
× 100
=
$7 734 000
× 100
=
7.56%
Profits after tax and preference dividends
=
$585 000 (W 1)
(6 000 000 ÷5) shares
=
$0.49
The project independent rate of return is 15.42% ($185 000 / $1 200 000) which is far higher than the 2016
return on capital employed of 6.35% resulting in improvement of ‘return on capital employed’ from 6.35%
to overall ROCE of 7.56%.
Earnings per share will also improve from $0.40 to $0.49 per share.
Due to improved profitability and better earnings per share, the share price may also increase. On the
contrary, the share price may decrease due to issue of more shares.
Based on the above facts and improved profitability, M plc should make investment in the project.
QUESTION 18
(a)
(i)
(ii)
(iii)
(iv)
(b)
$585 000 (W 2)
Earnings per share
Total number of ordinary shares
(d)
800 000
585 000
(351 000)
1 034 000
Return on capital employed
Capital Employed
(ii)
$1 200 000
200 000 shares
$1 000 000
$200 000
(i)
NOVEMBER 2017 P31 Q3
Comparing one year with another of the same business (Trend analysis)
Comparing one business with another for the same year.
Ratios help the management in decision-making and also point out problem areas.
Ratios also highlight issues of performance that can be investigated.
Earnings per share
=
Profits after tax and preference dividends
Total number of ordinary shares
=
=
(ii)
Price earnings ratio
=
Market price per share
Earnings per shares
=
=
$550 000 –$12000
900 000
$0.60 per share
1.75
0.60
2.92 times
Chapter 11
174
(iii)
Dividend yield
=
Ratio Analysis
Dividends per share
Market price per shares
× 100
0.08
=
1.75
=
(iv)
Dividend cover
=
Profits after tax and preference dividends
4.57%
$550 000 –$12 000
=
Ordinary Dividends
(900 000 ×$0.08)
=
(c)
(i)
Earnings per share
=
Profits after tax and preference dividends
Total number of ordinary shares
=
Price earnings ratio
=
Market price per share
=
Earnings per shares
(900 000−300 000)shares
$0.81 per share
1.50
0.81
=
(iii)
Dividend yield
=
Dividends per share
Market price per shares
× 100
=
1.85 times
($0.80÷80%)
1.50
=
(iv)
Dividend cover
=
Profits after tax and preference dividends
Ordinary Dividends
=
$500 000 –$12 000
60 000
8.13 times
(i)
There has been an increase in the amount of profit earned by the company but due to issue of
shares, the increase in share capital was more significant. The increase in share capital reduced
Earnings per share from $0.81 per share to $0.60 per share. The decrease in EPS indicates a lower
return for the shareholder. Though market price per share has reduced by $0.25 per share, but still
there is a rise of 57.84% in the PE ratio due to decrease in earnings per share at a higher rate.
Dividend yield worsened by 31.48% due to increase in market price from $1.50 to $1.75 and
decrease in dividend paid per share by 20%.
Dividend cover has deteriorated by 8.73% due to increase in total dividend paid at a higher
proportion compared to the profits available to pay ordinary dividend.
Though most of the ratios have worsened but increase in the price earnings ratio indicates
improved confidence by the investors in the shares of the company.
Ratios are not the only factor to make an obvious decision, other factors need to be considered.
Data is also of two years only so difficult to do a comprehensive analysis. Inter firm comparison or
comparison with industry averages could be a better option.
(ii)






Interest on the debentures must be paid whether the company makes a profit or a loss.
Debenture interest is an allowable expense for tax purposes.
If company’s makes huge profits, additional profit after paying debentures holders at a fixed
rate will be available for ordinary shareholders.
If company’s makes low profits, the payment of ordinary dividend could be at risk.
The issue of debentures will increase the gearing level.
Needs to be redeemed after the agreed time period
QUESTION 19
(a)
× 100%
6.67%
=
(d)
7.47 times
$500 000 –$12 000
=
(ii)
× 100%
Income gearing
Gearing
Dividend cover
Interest Charges
Operating Profit
NOVEMBER 2017 P32 Q4
× 100
$235 000
× 100
14.87%
$1 580 000
Fixed Cost Capital
$2 935 000
Total Capital
$2 935 000 + 4 540 000
× 100
Profits after tax and preference dividends
$1 345 000
Ordinary Dividends
$325 000
× 100
39.26%
4.14 times
Chapter 11
175
Price earnings
(b)
(i)
Ratio Analysis
Market price per share
$1.55
Earnings per share
$1 345 000/3 000 000
3.46 times
Income statement (extract)
For the year ended 31 August 2017
$000
Profit from operations
1 600
Finance costs [($2 000 000 × 10%) + $235 000)
(435)
Profit for the year
1 165
(ii)
Statement of financial position (extract) to show equity and non-current liabilities section
As at 31 August 2017.
Equity and liabilities
$000
Ordinary share capital - 3 000 000 ordinary shares of $0.50 each
1 500
Share premium
500
3 430
Retained earnings [$2 540 000 + $1 165 000 {b (i)} $275 000)]
Total equity
5 430
Non-current liabilities
8% debentures 2020
10% debentures 2026
(c)
(i)
Income gearing
Gearing
Dividend cover
2 935
2 000
4 935
Interest Charges
× 100
Operating Profit
Fixed Cost Capital
Total Capital
× 100
(ii)
(d)
$1 600 000
× 100
$2 935 000+2 000 000
$1 165 000
Ordinary Dividends
$275 000
Earnings per share
× 100
$5 430 000+$4 935 000
Profits after tax & pref. dividends
Market price per share
Price earnings ratio
$235 000+$200 000
$1.30
$1165 000/3 000 000
27.19%
47.61%
4.24
times
3.35
times
There is a significant increase in income gearing from 2016 because of extra interest payable on
newly issued debentures. This is more risky for a shareholder. This will reduce profit available to
equity holders and therefore also impact other investment ratios.
The gearing ratio has also increased because of a greater increase in fixed cost capital than the
increase in retained earnings. This increases the risk of the company due to increased interest
burden and repayment of debt.
Dividend cover slightly increased due to decrease in the both profit available for distribution and
the ordinary dividends.
The price earnings ratio is almost stable. This reflects the confidence of the stock market on the
company. Both market price of a share and the earnings per share decreased at the same rate.
The issue of the debentures will adversely affect gearing and the income gearing ratio. With the increase in
gearing level, the company will be more risky. The issue of debentures resulted in additional finance costs,
which has to be paid whether or not company makes a profit. This also reduced profits available to
distribute to shareholders.
Issue of debentures may also negatively affect company’s liquidity. The company has to make an effective
plan with regard to repayment of debentures and annual interest payment.
Issue of debentures does not involve any sharing of management control. Moreover, debenture interest is
an allowable expense for tax purposes
Chapter 11
176
QUESTION 20
(a)
(i)
(ii)
(iii)
(iv)
Units of sales
(1000 × 12) units
Units of sales
(1000 × 12) units
Receivables at 31
December
Average inventory
Ratio Analysis
×
×
×
×
=
Per unit selling price
$80
Per unit cost price
$50
Receivables for December sales
=
=
=
=
+
=
=
(1000 × $80)
$120 000
+
MAY 2018 P32 Q1
Total revenue
$960 000
Total cost
$600 000
Receivables for November
sales
(1000 × $80 × 1/2))
=
Opening Inventory+Closing Inventory
=
2
[1500(W1)×50]+[3500×50]
=
$125 000
2
=
=
=
Opening inventory
(b)
The working capital cycle is the time period between when a business pays cash to its suppliers for inventory
and receives cash from its customers.
(c)
Working capital cycle
=
=
(d)
Working capital cycle
+
+
Closing inventory
3 500
Inventory
turnover (days)
+
Trade receivables
collection (days)

$125 000
+
$120 000

$600 000
× 365
$960 000
× 365
Purchases
14 000
Trade payables
payment (days)
$62 000
$700 000
× 365
=
=
77 days
90 days
+
46 days

33 days
=
Inventory
turnover (days)
+
Trade receivables
collection (days)

Trade payables
payment (days)
$125 000
+
(1000 ×$90)

$62 000
=
=
=
(e)
Units of sales
(1000 × 12)
1 500 units


(W 1)
$600 000
77 days
75 days
× 365
(12 000 ×$90)
+
31 days
× 365
$700 000

× 365
33 days
Though this strategy looks workable as it will reduce working capital cycle. The cycle could also be reduced
by managing inventory which has increased sharply during the year
Better credit control might have the same effect on working capital cycle as the discount
Payment to trade payables may be delayed through negotiations with the suppliers without affecting
creditability.
It will also increase profits by $1 per unit as increase in selling price per unit ($10) is greater than the
discount ($9) offered on per unit basis.
Directors’ assumption that all customers will take the discount may get wrong.
Directors may not be realistic in expecting constant sales demand.
Chapter 12
177
CHAPTER 12
Statements of Cash Flows
STATEMENTS OF CASH FLOWS
QUESTION 1
MAY 2011 P42 Q1 (a, b & d)
The statement of financial position (balance sheet) of Whane plc showed the following:
At 30 April 2011
At 30 April 2010
Intangible non-current assets
$000
$000
$000
$000
$000
$000
Patents
125
150
Tangible non-current assets
3 430
3 173
3 555
3 323
Current assets
Inventory
124
106
Trade receivables
78
82
Cash and cash equivalents
58
260
–
188
Current liabilities
Trade payables
63
56
Taxation
28
24
Interest
4
14
Cash and cash equivalents
–
95
165
42
136
52
3 720
3 375
Non-current liabilities: 10% debentures 2028
300
–
3 420
3 375
Equity
Ordinary shares of $1 each
2 000
1 000
Share premium
250
1 000
Revaluation reserve
–
250
Retained earnings
1 170
3 420
1 125
3 375
Further information was available as follows:
1
The income statement for the year ended 30 April 2011 showed interest payable of $32 000 and taxation of
$28 000. Dividends paid during the year amounted to $30 000.
2
A bonus issue was made during the year which doubled the number of ordinary shares in issue. An issue of
debentures also took place.
3
At 30 April tangible non-current assets comprised:
2011 ($000)
2010 ($000)
Land at valuation
1600
1600
Buildings Cost
Accumulated depreciation
1200
(168)
1200
(144)
Plant and equipment Cost
Accumulated depreciation
1125
729
(327)
(212)
798
517
During the year plant which had cost $92 000 was sold for $20 000. Depreciation of $75 000 had been
provided on the plant.
4
There were no acquisitions or disposals of patents during the year.
REQUIRED
(a)
Calculate, for the year ended 30 April 2011,
(i)
the profit for the year attributable to equity holders
[3]
(ii)
the profit from operations
[4]
(b)
Prepare a statement of cash flows for the year ended 30 April 2011
[25]
QUESTION 2
NOVEMBER 2011 P43 Q2 (a & b)
Sabrina plc has been trading for many years as a worldwide supplier of office equipment. The summarised accounts
Chapter 12
178
Statements of Cash Flows
prepared for internal purposes for 2011 and 2010 are set out below.
Sabrina plc
Income Statement for the year ended 30 June
2011
$000
2 546
981
1 565
786
108
15
686
225
461
103
358
160
198
821
1 019
2010
$000
1 458
512
946
384
84
8
486
80
406
94
312
80
232
589
821
Statement of Financial Position (Balance Sheet) at 30 June
2011
$000
5 214
2010
$000
2 576
441
639
–
1 080
227
361
78
666
347
80
103
195
725
355
287
40
94
–
421
245
2 500
3 069
1 000
1 821
2 000
50
1 019
3 069
1 000
–
821
1 821
Revenue
Cost of sales
Gross profit
Depreciation
Other expenses
Profit on disposal of non-current assets
Operating profit
Interest
Taxation
Profit after taxation
Dividends
Retained profit for year
Retained profit b/f
Retained profit c/f
Non-current assets
Current assets
Inventories
Trade receivables
Bank
Current liabilities
Trade payables
Dividends
Taxation
Bank
Working capital
Non-current liabilities
8% Debentures (2020)
Capital and reserves
Ordinary share capital
Share premium
Retained earnings
Note:
1
2
All sales and purchases are made on credit.
Non-current assets costing $40 000, with accumulated depreciation of $25 000, were sold during the year
REQUIRED
(a)
Prepare a reconciliation between cash flows from operating activities and operating profit for the year
ended 30 June 2011.
[9]
(b)
Prepare a cash flow statement for the year ended 30 June 2011 in accordance with IAS 7.
[17]
Chapter 12
179
QUESTION 3
Swamp Circus plc provides the following information:
Statements of financial position
at
31 March 2012
Non-current assets
$000
$000
$000
Intangible
Patents
220
Tangible
Property
2 400
Equipment
920
3 540
Current Assets
$000
$000
$000
Inventory
480
Trade receivables
611
Cash and cash equivalents
79
1 170
Current Liabilities
Trade payables
512
Other payables
76
Taxation
220
Cash and cash equivalents
–
808
362
3 902
Non-Current Liabilities
Debentures
500
3 402
Equity
Ordinary share capital
1 500
Revaluation reserve
700
General reserve
400
Retained earnings
802
3 402
Statements of Cash Flows
MAY 2012 P41 Q1 (a & b)
$000
31 March 2011
$000
$000
180
$000
501
54
195
71
$000
509
569
–
1 078
821
1 700
610
2 490
$000
257
2 747
400
2 347
1 200
200
947
2 347
Income statement for the year ended 31 March 2012
$000
Profit from operations
636
Finance charges
(61)
Taxation
(220)
Profit for the year attributable to equity holders
355
Additional information:
1
During the year the directors transferred $200 000 to the general reserve and paid dividends of $300 000.
2
At 31 March 2011 equipment had cost $905 000 and was shown after the provision of $295 000
depreciation. At 31 March 2012 equipment had cost $1 240 000 and depreciation of $320 000 had been
provided.
3
During the year equipment which had cost $172 000 was sold for $90 000.
Depreciation of $101 000 had been provided on it.
4
Other payables include $21 000 unpaid interest at 31 March 2012 and $11 000 unpaid interest at 31 March
2011.
5
During the year an issue of both ordinary shares and debentures had taken place, and the property had
been re-valued.
REQUIRED
(a)
Prepare a statement of changes in equity for the year ended 31 March 2012.
[13]
(b)
Prepare a statement of cash flows in accordance with the provisions of IAS 7 for the year ended 31 March
2012.
[21]
Chapter 12
180
Statements of Cash Flows
QUESTION 4
MAY 2012 P43 Q1 (a & b)
Smilbo Smaggins plc has been manufacturing cutlery for many years. It provided the following financial statements:
Statements of financial position
As at 30 April
2012
2011
Non-Current Assets
$
$
$
$
Plant and machinery
82 500
64 900
Office equipment
34 519
117 019
38 355
103 255
Current Assets
Inventories
18 758
16 521
Trade receivables
17 623
12 517
Cash and cash equivalents
27 754
64 135
6 459
35 497
Total Assets
181 154
138 752
Current Liabilities
Trade payables
22 758
18 654
Taxation
5 350
28 108
4 200
22 854
153 046
115 898
Non-Current Liabilities
4% Debentures 2020
30 000
50 000
Net assets
123 046
65 898
Equity
Ordinary share capital
60 000
40 000
Share premium
18 000
8 000
Retained earnings
45 046
123 046
17 898
65 898
Income statement
For the year ended 30 April 2012
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit from operations
Finance costs
Profit before taxation
Taxation
Profit attributable to equity holders
$
396 672
259 329
137 343
32 357
70 438
34 548
1 600
32 948
5 800
27 148
Additional information:
1
The debentures were redeemed at par.
2
Plant and machinery costing $27 500 was sold during the year for $10 000. It had been depreciated by $19
600.
3
Additional machinery was purchased at a cost of $35 000. There is no depreciation charge in the year of
acquisition.
4
There were no acquisitions or disposals of office equipment during the year.
REQUIRED
(a)
Prepare a statement to show the net cash flow from operating activities.
(b)
Prepare a statement of cash flows for the year ended 30 April 2012 in accordance with IAS 7.
QUESTION 5
Hyung Ltd has the following statements of financial position
[16]
[13]
NOVEMBER 2012 P43 Q2 (a & b)
Chapter 12
181
Statements of Cash Flows
At 31 March 2012
$000
$000
1 700
Non-Current Assets (Note 1)
Current Assets
Inventories
Trade receivables
Cash and cash equivalents
Current Liabilities
Trade payables
Cash and cash equivalents
108
90
–
198
82
72
174
328
52
41
93
108
–
108
Total assets less current liabilities
Non-Current Liabilities
8% Debentures 2010-2020
At 31 March 2011
Additions
Disposals
At 31 March 2012
105
1 805
220
1 480
120
1 685
Equity And Reserves
Ordinary shares of $1 fully paid
Share premium
General reserve
Retained profits
Notes
1.
Non-current assets
At cost
At 31 March 2011
$000
$000
1 260
1 400
70
200
15
Freehold Property
$000
2 000
Provisions for depreciation
At 31 March 2011
Disposals
Charge for the year
At 31 March 2012
Net book value at 31 March 2011
Net book value at 31 March 2012
1 685
200
1 280
1 000
50
200
30
1 280
____
2 000
Motor Vehicles
$000
370
808
(240)
938
Total
$000
2 370
808
(240)
2 938
910
100
1 010
1 090
990
200
(108)
136
228
170
710
1 110
(108)
236
1 238
1 260
1 700
2.
Proceeds from the sale of fixed assets
$
Motor Vehicles
130 000
3.
No dividends were paid during the year.
REQUIRED
(a)
Prepare, in accordance with IAS 7, a statement of cash flows for year ended 31 March 2012.
[24]
(b)
[2]
Explain the difference between cash and profit.
QUESTION 6
MAY 2013 P43 Q2 (a to c)
Winston is a sole trader. He provides the following financial information in respect of his business.
Chapter 12
182
Statements of Cash Flows
Income statement for the year ended 31 December 2012
$000
3 380
(2 000)
(1 200)
180
Sales
Cost of sales
Expenses
Profit for the year
Statements of financial position at:
Non-Current Assets
Freehold land
Plant and machinery at cost
Less: depreciation
Current Assets
Inventory
Trade receivables
Cash and cash equivalents
Current Liabilities
Trade payables
Bank overdraft
Non-current liability – loan
Net assets
31 December 2011
$000
$000
2 000
900
(500)
400
2 400
31 December 2012
$000
$000
3 500
1 020
(470)
550
4 050
310
240
10
560
320
210
530
200
200
500
2 260
160
530
690
350
3 540
Additional information
1
During the year the land was revalued by a professional valuer.
2
During the year Winston purchased new plant at a cost of $200 000. He also sold some plant that had a net
book value of $20 000 and had been depreciated by $60 000. This resulted in a loss on disposal of $2 000.
REQUIRED
(a)
Calculate Winston’s drawings for the year ended 31 December 2012.
(b)
Prepare a statement of cash flows for the year ended 31 December 2012.
(c)
Explain why Winston has an overdraft at the end of 2012, despite making a profit for the year.
[4]
[16]
[5]
QUESTION 7
NOVEMBER 2013 P41 Q1 (a & b)
Manchi plc are preparing their budgets for the forthcoming year ending 30 September 2014. They provide the
following information.
Statements of Financial Position at 30 September
Assets
2013
2014
(actual)
(budgeted)
Non-Current Assets
$000
$000
Property plant and equipment
3 050
3 190
Goodwill
400
450
Investments
300
240
3 750
3 880
Current Assets
Inventories
750
790
Trade and other receivables
460
425
Cash and cash equivalents
210
574
1 420
1 789
Total Assets
5 170
5 669
Chapter 12
183
Equity
Ordinary shares
Non-redeemable preference shares
Revaluation reserve
Retained earnings
Total equity
Liabilities
Non-Current Liabilities
7% debentures
Current Liabilities
Trade and other payables
Current tax liabilities
Total Liabilities
Total equity and liabilities
Statements of Cash Flows
$000
1 200
500
300
930
2 930
$000
1 400
500
400
834
3 134
1 000
1 300
960
280
1 240
2 240
5 170
1 075
160
1 235
2 535
5 669
Budgeted Statement of Changes in Equity for Year Ending 30 September 2014
Retained earnings at 1 October 2013
Budgeted profit for year
$000
930
214
1 144
(110)
(200)
834
Dividends payable
Transfer to share capital (bonus issue)
Retained earnings at 30 September 2014
Additional information
1
The tax charge for the year ending 30 September 2014 has been budgeted as $160 000.
2
Income from investments is budgeted at $40 000.
3
Manchi plc issued additional 7% debentures on 1 October 2013. Interest for the year will be paid on all the
issued debentures on 30 September 2014.
4
A bonus issue of 1 new ordinary share for every 6 held is budgeted for 1 April 2014.
5
The following note was extracted from the financial statements at 30 September 2013.
Non-current assets
Cost
Depreciation
Net book value
Property plant and equipment
$000
$000
$000
Land
1500
1500
Buildings
800
250
550
Plant and equipment
1500
600
900
Motor vehicles
150
50
100
Total
3 950
900
3 050
6
The land is expected to increase in value by $100 000 during the year.
7
Budgeted capital expenditure for the year on buildings is $80 000; plant and equipment $280 000; motor
vehicles $30 000 and goodwill $50 000.
8
Budgeted depreciation for the year on buildings is $50 000; plant and equipment $255 000 and motor
vehicles $25 000.
9
Plant and equipment with an original cost of $35 000 and depreciation of $15 000 is budgeted to be disposed
of for proceeds of $10 000.
10
An impairment review has shown that the carrying value of the investments should be $240 000 at 30
September 2014.
REQUIRED
(a)
Calculate company’s budgeted profit from operations for the year ending 30 September 2014.
[5]
(b)
Prepare a budgeted statement of cash flows for the year ending 30 September 2014 in accordance with IAS
7.
[25]
Chapter 12
184
Statements of Cash Flows
QUESTION 8
NOVEMBER 2013 P42 Q2 (a & b)
Switfsure plc has provided the following financial information for the year ended 31 March 2013
Income Statement for the year ended 31 March
2013
2012
$000
$000
Revenue
756
942
Cost of sales
(454)
(528)
Gross profit
302
414
Distribution costs
(126)
(130)
Administrative expenses
(200)
(165)
Profit/(Loss) from operations
(24)
119
Income from investments
5
4
Finance costs
(12)
(12)
Profit/(Loss) before tax
(31)
111
Tax
0
(25)
Profit/(Loss) for the year attributable to equity holders
(31)
86
Statement of changes in equity (to show changes in retained earnings)
For the year ended 31 March
Retained earnings balance at start of year
Profit/(Loss) for the year
Dividends paid
Retained earnings balance at end of year
Statement of Financial Position at 31 March
Assets
Non-current assets
Property plant and equipment
Goodwill
Investment
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Equity
Ordinary shares
Non-redeemable preference shares
Share premium
Retained earnings
Total equity
Non-current liabilities: 6% debentures
Current liabilities
Trade and other payables
Current tax liabilities
Bank overdraft
Total liabilities
Total equity and liabilities
2013
$000
110
(31)
(49)
30
2012
$000
70
86
(46)
110
2013
$000
274
90
75
439
2012
$000
217
90
75
382
74
95
169
608
54
65
76
195
577
180
100
30
30
340
150
120
80
110
310
200
57
61
118
268
608
42
25
67
267
577
Chapter 12
185
Note to the statement of financial position at 31 March 2013
Buildings
Plant &
equipment
Cost
$000
$000
Balance at 1 April 2012
240
110
Add
Purchases
80
68
Less
Disposals
(20)
Balance at 31 March 2013
320
158
Depreciation
Balance at 1 April 2012
87
62
Less
Disposals
(12)
Add
Charge for the year
55
28
Balance at 31 March 2013
142
78
Net book value
Balance at 31 March 2013
178
80
Balance at 31 March 2012
153
48
Statements of Cash Flows
Motor
vehicles
$000
24
12
36
Total
8
12
20
157
(12)
95
240
16
16
274
217
$000
374
160
(20)
514
During the year plant and equipment was sold for $5 000.
Additional information
1
$50 000 of the 6% debentures were redeemed at par on 31 March 2013.
2
20 000 additional $1 non-redeemable preference shares were issued at par on 1 October 2012.
Preference dividends of $4 000 were paid during the year.
3
A rights issue of 1 new ordinary $1 share for every 2 held at a premium of $0.50 was made on 1 January
2013. No new shares had been issued in the year ended 31 March 2012.
4
A final dividend on the ordinary shares of $0.30 per share was paid on 30 June 2012 and an
interim
dividend of $0.05 per share was paid on 31 March 2013.
REQUIRED
(a)
Prepare a statement of cash flows for the year ended 31 March 2013 in accordance with IAS 7 [28]
(b)
(i)
Explain the difference between a cash budget and a statement of cash flows.
(ii)
State two purposes for which Swiftsure plc would use a statement of cash flows.
[4]
[4]
QUESTION 9
NOVEMBER 2014 P43 Q3 (c & d)
The following extract from income statement has been prepared for Asteroid plc for the year ended 30 June 2014.
$000
Profit from operations
3 296
Estimated tax liability for the year
782
Profit on equipment disposal
395
Dividends received
750
On 1 May 2014 the directors issued $5 625 000 8% debentures redeemable in 2022.
Additional information
The last two statements of financial position were as follows:
Statement of financial position at 30 June
Assets
Non-Current Assets
Property, plant and equipment (net book value)
Current Assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
2014
$000
19 735
19 735
2013
$000
10 509
10 509
2 048
1 562
454
4 064
23 799
1 659
1 158
____
2 817
13 326
Chapter 12
Equity and Liabilities
Equity
Ordinary share capital ($1)
Share premium
Retained earnings
Total equity
Non-Current Liabilities
8% Debentures (2022)
Current Liabilities
Trade payables
Taxation
Bank overdraft
186
Statements of Cash Flows
$000
4 000
2 000
9 627
15 627
$000
3 000
1 500
7 338
11 838
5 625
-
1 735
812
796
609
83
1 488
1 488
13 326
2 547
Total Liabilities
8 172
Total Equity and Liabilities
23 799
Other information is as follows:
1
During the year the company paid total dividends of $150 000.
2
During the year property, plant and equipment costing $840 000 was sold. The accumulated depreciation
on this property, plant and equipment was $715 000.
3
The total depreciation charge for the year was $2 050 000.
4
Gain on disposal was $395 000.
5
Dividends received during the year amounting to $750 000.
REQUIRED
(c)
Prepare a statement to show the net cash from operating activities for the year ended 30 June 2014. [12]
(d)
Prepare a statement of cash flows for the year ended 30 June 2014 in accordance with IAS 7.
[16]
QUESTION 10
NOVEMBER 2016 P31 Q2 (a to d)
The directors of Hank Limited provide the following statements of financial position at 31 March:
Assets
Non-current assets (net book value)
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
Equity and Liabilities
Equity
Share capital
Share premium
Retained earnings
Non-current liabilities
Bank loan (repayable 2020)
Current liabilities
Trade payables
Bank overdraft
Other payables – taxation
Total equity and liabilities
2016
$000
259
2015
$000
224
128
132
–
260
519
102
118
14
234
458
210
15
107
332
180
–
131
311
42
20
102
23
20
145
519
109
–
18
127
458
Chapter 12
187
Statements of Cash Flows
Additional information
The following information relates to the year ended 31 March 2016:
1
The profit from operations was $30 000.
2
During the year non-current assets with a cost of $24 000 and accumulated depreciation of $19 000 were
sold for $8 000.
3
The depreciation charge for the year was $12 000. All non-current assets held at the end of the financial
year are depreciated over 25 years using the straight-line method.
4
Interest paid for the year was $9 000.
5
Dividends paid during the year were $25 000. A dividend of $30 000 had been proposed at the end of the
year.
6
The taxation charge was $20 000.
REQUIRED
(a)
Explain the difference between a statement of cash flows and a cash budget.
[2]
(b)
Prepare a statement of cash flows for Hank Limited for the year ended 31 March 2016 in accordance with
IAS 7.
[10]
(c)
Explain with reference to the statement of cash flows whether Hank Limited has a strong or a weak cash
position.
[4]
(d)
Prepare a summarised schedule of non-current assets as it would appear as a note in the published accounts
for the year ended 31 March 2016.
[5]
Chapter 12
188
Statements of Cash Flows
SOLUTION
CHAPTER 12
QUESTION 1
(a)
(i)
Profit for the year (balancing figure)
Dividends paid
Current year retained earnings
Last year retained earnings
Retained earnings c/f
MAY 2011 P42 Q1 (a & b)
$000
75
(30)
45
1 125
1 170
(ii)
$000
135
(32)
(28)
75
Profit from operations (balancing figure)
Interest
Taxation
Profit for the year [a (i)]
(b)
Statement of cash flows
For the year ended 30 April 2011
OPERATING ACTIVITIES
Profit from operations
Amortisation of patents ($150 000 – $125 000)
Depreciation: Buildings ($168 000 – $144 000)
Plant (W 1)
Increase in inventory ($124 000 – $106 000)
Decrease in trade receivables ($82 000 – $78 000)
Increase in trade payables ($63 000 – $56 000)
Profit on disposal [$20 000 – ($92 000 – $75 000)]
Tax paid
Interest paid ($32 000 + $14 000 – $4 000)
Net cash from operating activities
Investing activities
Proceeds of sale of plant
Purchase of plant (W 2)
Net Cash inflow before Financing
Financing activities
Proceeds of debenture issue
Dividend paid
Net increase in cash and cash equivalents
Cash and cash equivalents at start of year
Cash and cash equivalents at end of year
WORKINGS
(W 1)
Plant Disposal
Balance c/d
(W 2)
Balance b/f
Bank (balancing figure)
Provision for Depreciation (Plant)
$000
75 Balance b/f
327 Depreciation (balancing figure)
402
Plant Account
$000
729 Plant Disposal
488 Balance c/d
1 217
$000
25
24
190
(18)
4
7
(3)
(24)
(42)
20
(488)
300
(30)
$000
135
163
298
(468)
(170)
270
100
(42)
58
$000
212
190
402
$000
92
1 125
1 217
Chapter 12
189
Statements of Cash Flows
QUESTION 2
(a)
NOVEMBER 2011 P43 Q2 (a & b)
Reconciliation of operating profit to net cash inflow from operating activities
$000
Operating profit
686
Depreciation
786
Profit on disposal of non-current assets
(15)
Increase in inventories ($441 000 − $227 000)
(214)
Increase in trade receivables ($639 000 − $361 000)
(278)
Increase in trade payables ($347 000 − $287 000)
60
Cash from operations
1 025
Interest paid
(225)
Tax paid
(94)
Net cash from operating activities
706
(b)
Cash Flow Statement of Sabrina plc
For the year ended 30 June 2011
$000
Net cash from operating activities
Cash flows from investing activities
Payment for purchase of assets $[2 576 000 −786 000−(40 000−25000)−5214 000)
Receipts from sale of assets [($40 000 − $25 000) + $15 000]
Net cash used in investing activities
Cash flows from financing activities
Equity dividends paid ($160 000 + $40 000 − $80 000)
Issue of debentures ($2 500 000 − $1 000 000)
Issue of shares [($2 000 000 − $1 000 000) + $50 000]
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
QUESTION 3
(a)
(3 439)
30
(3 409)
(120)
1 500
1 050
2 430
(273)
78
(195)
MAY 2012 P41 Q1 (a & b)
Statement of changes in equity
For the year ended 31 March 2012
Ordinary share Revaluation
capital
reserve
$000
$000
1 200
Balance at 1 April 2011
Profit for the year
Transfer to General reserves
Revaluation reserve
Issue of shares ($1 500 000 − $1 200 000)
Dividends paid
Balance at 31 March 2012
(b)
$000
706
General
reserve
$000
200
200
Retained
Earnings
$000
947
355
(200)
___
400
(300)
802
700
300
____
1 500
___
700
Statement of Cash flow
For the year ended 31 March 2012
$000
Profit from operations
Depreciation [$320 000 – ($295 000 – $101 000)]
Profit on plant disposal [$90 000 – ($172 000 – $101 000)]
$000
636
126
(19)
Chapter 12
190
Statements of Cash Flows
Decrease in inventory ($509 000 − $480 000)
Increase in trade receivables ($611 000 − $569 000)
Increase in trade payables ($512 000 − $501 000)
Increase in other payables excl. interest $[(76000−21000)−(54000−11000)]
Interest paid($11 000 + $61 000 − $21 000)
Tax paid
Net cash from operating activities
Cash flows from investing activities
Purchase of equipment [$1 240 000 – ($905 000 – $172 000)]
Purchase of patents ($220 000 – $180 000)
Proceeds of sale of non-current assets
Cash used in investing activities
Cash flows from financing activities
Proceeds of share issue ($1 500 000 – $1 200 000)
Proceeds of debenture issue ($500 000 – $400 000)
Dividend paid
Cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
QUESTION 4
(a)
29
(42)
11
12
(51)
(195)
507
(507)
(40)
90
$000
300
100
(300)
100
150
(71)
79
MAY 2012 P43 Q1 (a & b)
Statement to show the net cash flow from operating activities
$
34 548
9 500
3 836
(2 100)
(2 237)
(5 106)
4 104
(1 600)
(4 650)
36 295
Profit from operations
Depreciation:
Plant & machinery [$64 900 – ($10 000 – $2 100) + $35 000 – $82 500]
Office equipment ($38 355 – $34 519)
Profit on plant disposal [$10 000 – ($27 500 – $19 600)]
Increase in inventories ($18 758 – $16 521)
Increase in trade receivables ($17 623 – $12 517)
Increase in trade payables ($22 758 – $18 654)
Interest paid
Tax paid ($4 200 + $5 800 – $5 350)
Net cash from operating activities
(b)
Statement of cash flows for year ended 30 April 2012
$
Cash flow from operating activities
Cash flows from investing activities
Purchase of machinery
Proceeds from sale of machinery
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares [($60 000 – $40 000) + ($18 000 – $8 000)]
Redemption of debentures ($50 000 – $30 000)
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash & cash equivalents at start of year
Cash & cash equivalents at end of year
QUESTION 5
(a)
(457)
$000
$
36 295
(35 000)
10 000
(25 000)
30 000
(20 000)
10 000
21 295
6 459
27 754
NOVEMBER 2012 P43 Q2 (a & b)
Statement of cash flows for Hyung Ltd
For the year ended 31 March 2012
Chapter 12
191
Statements of Cash Flows
$000
Net loss for the year [$30 000$15 000 (last year profit)+($200 000×8%) interest]
Depreciation
Loss on sale of non-current assets [($240 000  $108 000) – $130 000]
Interest paid ($200 000 × 8%)
Increase in inventories($108 000  $82 000)
Increase in trade receivables ($90 000  $72 000)
Decrease in trade payables ($108 000  $52 000)
Net cash flow from operating activities
Investing Activities
Payments to acquire fixed assets
Receipts from the sale of fixed assets
Financing Activities
Issue of share capital ($1400 000  $1 000 000) + ($70 000  $50 000)
Repayment of debentures ($200 000  $120 000)
Net decrease in cash and cash equivalents
Balance at 1 April 2011
Balance at 31 March 2012
(b)
$000
1
236
2
(16)
(26)
(18)
(56)
$000
(808)
130
420
(80)
122
123
$000
(678)
340
(215)
174
(41)
Cash is the actual amount of money physically held by a business, whereas profit is calculated as excess of
incomes over expenses and does not represent actual amount of money.
QUESTION 6
(a)
MAY 2013 P43 Q2 (a to c)
Calculation of drawings
For the year ended 31 December 2012
$000
2 260
1 500
180
3 940
(3 540)
400
Opening capital
Add
Revaluation surplus ($3 500 000  $2 000 000)
Net profit for the year
Less: closing capital
Drawings
(b)
Statement of cash flows for the year ended 31 December 2012
Operating activities
Operating profit
Depreciation on non-current assets ($500 000  $60 000  $470 000)
Loss on disposal of non-current asset
Increase in inventory ($320 000  $310 000)
Decrease in trade receivables ($240 000  $210 000)
Decrease in trade payables ($200 000  $160 000)
Cash from operating activities
Investing Activities
Purchase of non-current assets
Cash from disposal of non-current assets ($20 000  $2 000)
Financing Activities
Loan repayment ($500 000  $350 000)
Drawings (from (a))
Net Cash outflow for the year
Cash and cash equivalents at start
Cash and cash equivalents at end
$000
30
2
(10)
30
(40)
(200)
18
(150)
(400)
$000
180
12
192
(182)
(550)
(540)
10
(530)
Chapter 12
(c)
192
Statements of Cash Flows
The reasons for having an overdraft at the end of 2012, despite making a profit are given below.
 purchase of new non-current assets for $200 000
 repayment of loan amounting to $150 000
 cash drawings amounting to $400 000
QUESTION 7
(a)
NOVEMBER 2013 P41 Q1 (a & b)
Calculation of budgeted profit from operations
For the year ending 30 September 2014
$000
Budgeted profit for the year
Less
Income from investments:
Add
Interest payable
Tax charge
Budgeted profit from operations
(b)
251
425
Budgeted statement of cash flows from operations
For the year ending 30 September 2014
Operating Activities
Budget profit from operations
Add
Depreciation – buildings
– plant and equipment
– motor vehicles
Add
Loss on sale of plant and equipment [$10 000  ($35 000  $15 000)]
Add
Impairment of investments
Less
Increase in inventories ($790 000  $750 000)
Add
Decrease in trade receivables ($460 000  $425 000)
Add
Increase in trade payables ($1 075 000  $960 000)
Less
Interest payable ($1 300 000 × 7%)
Less
Tax payable
Budgeted net cash flow from operations
Investing activities
Purchase of non-current assets
Buildings
Plant and equipment
Motor vehicles
Goodwill
Proceeds from sale of plant and equipment
Income from investments
Budgeted net cash flow from investing activities
Financing activities
Proceeds of issue of debentures
Dividends payable
Budgeted net cash flow from financing activities
Budgeted net increase in cash and cash equivalents
Cash and cash equivalents at 1 October 2013
Budgeted cash and cash equivalents at 30 September 2014
QUESTION 8
(a)
91
160
$000
214
40
$000
$000
$000
425
50
255
25
10
60
(40)
35
115
(91)
(280)
564
$000
(80)
(280)
(30)
(50)
10
40
(390)
300
(110)
190
364
210
574
NOVEMBER 2013 P42 Q2 (a & b)
Swiftsure plc
Statement of cash flows for the year ended 31 March 2013
Operating Activities
$000
$000
Loss from operations
(24)
Depreciation
– buildings
55
– plan and equipment
28
Chapter 12
193
– motor vehicles
Loss on sale of plant and equipment [$5 000  ($20 000  $12 000)]
Increase in inventories ($74 000  $54 000)
Increase in trade receivables ($95 000  $65 000)
Increase in trade payables ($57 000  $42 000)
Interest paid ($200 000 × 6%)
Tax paid (last year)
Net cash flow from operating activities
Investing Activities
Purchases: Buildings
Plant and equipment
Motor vehicles
Proceeds of sale of plant
Income from investments
Financing Activities
Redemption of debentures
Proceeds of issue of preference shares
Proceeds of issue of ordinary shares [(120 000 × 1/2) shares @ $1.50]
Dividends paid: Ordinary {(120 000 × $0.30) + (180 000 × $0.05)]
Preference
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 April 2012
Cash and cash equivalents at 31 March 2013
(b)
Statements of Cash Flows
12
3
(20)
(30)
15
(12)
(25)
2
(80)
(68)
(12)
5
__5
(50)
20
90
(45)
_(4)
(150)
__11
(137)
__76
_(61)
(i)
Cash flow statements are similar to cash budgets in the content that they show sources and uses
of cash but they are different in many respects some of which are given as follows.
(i)
Cash flow statements are published for external use and they are part of a company’s
published financial statements whereas cash budgets are only used for internal purposes.
(ii)
Cash flow statements are based on historic data and shows sources and uses of cash for
previous year whereas a cash budget shows the same for a coming period.
(iii)
There is no set format of cash budgets but a cash flow statement has to be prepared in
compliance with FRS 1.
(iv)
Cash flow statements show reasons for changes in cash for a whole year whereas
companies may prepare cash budgets to show changes in cash on monthly, weekly or
yearly basis.
(v)
A company is bound to prepare a cash flow statement on annual basis whereas there is
no such compulsion for a cash budget.
(ii)
Cash flow statement is intended to show information that is not available from examining the
financial statements. It is intended to fill in gaps in the available published information, between
opening and closing Balance Sheets. In simple words, a Cash Flow statement is nothing more than
a summary of a company’s cash book for the accounting period under review. This shows sources
and uses of cash during the year. Although a cash flow statement shows only historic data, it should
help to assess a company’s ability to;
(a)
generate sufficient cash to fund its day-to-day operation.
(b)
repay loans as they fall due and make payments of loan interest.
(c)
replace and improve non-current assets as necessary.
(d)
make the required payments of tax and maintain an acceptable level of dividend.
(e)
the reason for the difference between profit and cash from operations.
QUESTION 9
(c)
NOVEMBER 2014 P43 Q3 (c & d)
Statement to show the net cash from operating activities
For the year ended 30 June 2014
Chapter 12
194
Statements of Cash Flows
$000
3 296
2 050
(395)
(750)
(389)
(404)
939
(75)
(579)
3 693
Profit from operations
Depreciation charge for the year
Gain on disposal
Dividends received
Increase in inventories ($2 048 000  $1 659 000)
Increase in trade receivables ($1 562 000  $1 158 000)
Increase in trade payables ($1 735 000  $796 000)
Interest paid ($5 625 000 × 8% × 2/12)
Tax paid ($782 000 + $609 000 – $812 000)
Net cash from operating activities
(d)
Statement of cash flows for year ended 30 June 2014
$000
Cash flow from operating activities
Cash flows from investing activities
Purchase of assets ($10 509 $2 050  $125 – $19 735)
Proceeds from property, plant & equip [($840 000$715 000)+$395 000]
Dividends received
Cash flows from financing activities
Proceeds from share issue [($4 000  $3 000) + ($2 000  $1 500)]
Proceeds from issue of debentures
Dividends paid
Net increase in cash and cash equivalents
Cash and cash equivalents at start of year
Cash and cash equivalents at end of year
(11 401)
520
750
1 500
5 625
(150)
$000
3 693
(10 131)
6 975
537
(83)
454
QUESTION 10
NOVEMBER 2016 P31 Q2 (a to d)
(a)
Cash flow statements are similar to cash budgets in the content that they show sources and uses of cash
but they are different in many respects some of which are given below.
(i)
Cash flow statements are published for external use and they are part of a company’s published
financial statements whereas cash budgets are used for internal purposes.
(ii)
Cash flow statements are based on historic data and shows sources and uses of cash for previous
year whereas a cash budget shows the same for a coming period.
(iii)
There is no set format of cash budgets but a cash flow statement is prepared under IAS7.
(iv)
Cash flow statements show reasons for changes in cash for a whole year whereas cash budgets
show changes in cash on monthly, weekly or yearly basis.
(v)
A company is bound to prepare a cash flow statement on annual basis whereas there is no such
compulsion for a cash budget.
(b)
Statement of Cash Flows for Hank Ltd
For the year ended 31 March 2016
Operating Activities
Profit from operations
Add depreciation
Less profit on asset disposal [$8 000 – ($24 000  $19 000)]
Less increase in inventories ($128 000 – $102 000)
Less increase in trade receivables ($132 000 – 118 000)
Less decrease in trade payables ($109 000 – $102 000)
Less interest paid
Less taxation paid ($18 000 + $20 000 – $20 000)
Net cash from operations
$
12 000
(3 000)
(26 000)
(14 000)
(7 000)
(9 000)
(18 000)
$
30 000
(65 000)
(35 000)
Chapter 12
195
Investing Activities
Proceeds from sale of non-current assets
Purchase of non-current assets [$224 000 (opening) – $12 000 (depn) –
{($24 000 – $19 000) disposal}– $259 000 (closing)]
Net cash used in investing activities
Financing Activities
Issue of shares [{$210 000 – $190 000(capital)} + $15 000 (premium)]
Dividends paid
Increase in loan ($42 000 – $20 000)
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the start of the year
Cash and cash equivalents at the end of the year
(c)
Statements of Cash Flows
8 000
(52 000)
(44 000)
45 000
(25 000)
22 000
42 000
(37 000)
14 000
(23 000)
Hank has a weak cash position as its positive bank balance has been converted to bank overdraft at year
end. There has been a reduction in cash and cash equivalents over the period of $37 000. Though operating
profit was only $30 000 but company paid an ordinary dividend of $25 000 which seems quite high
considering the circumstances.
There are also negative movements in working capital items totaling $47 000 resulting in negative cash
from operations amounting to $35 000. Tax payments are quite high as well considering profit before tax
was only $21 000 ($30 000 - $9 000).
There was also an additional investment in non-current assets of $52 000 resulting in negative cash flows
from investing activities of $44 000.
Despite there was increase in the loan by $22 000 and issue of new shares for $45 000 there was a negative
net movement in cash and cash equivalents indicating the weak cash position of the business. It requires
reconsidering the policy of issuing shares or taking out loans on regular basis. Moreover the movements in
working capital also need reviewing.
(d)
Note to the financial statements on non-current assets.
Schedule of Non-Current Assets
Non-current assets
Cost at 1 April 2015
Additions
Disposals
Cost at 31 March 2016 (W 1)
$
272 000
52 000
(24 000)
300 000
Depreciation at 1 April 2015
Charge for the year
Disposals
Depreciation 31 March 2016 (b)
48 000
12 000
(19 000)
41 000
Net book value at 31 March 2016 (a  b)
Net book value at 1 April 2015
259 000
224 000
(W 1)
Annual Depreciation
=
$12 000
=
Cost
=
=
Cost−Scrap value
Estimated life in years
Cost − Zero
25 years
$12 000 × 25
$300 000
Chapter 13
CHAPTER 13
196
Manufacturing Accounts
MANUFACTURING ACCOUNTS
QUESTION 1
Bart, a sole trader, provided the following trial balance for the year ended 30 April 2012.
MAY 2012 P22 Q1
$
Sales Revenue
Inventory at 1 May 2011 (at cost)
Raw materials
Work-in-progress
Finished goods
Purchase of raw materials
Purchase returns
Manufacturing wages
Indirect factory wages
Factory buildings at cost
Factory machinery at cost
Office equipment at cost
Provision for depreciation:
Factory machinery
Office equipment
Insurance
General factory expenses
Factory supervision salaries
Heat and light
Administrative expenses
Office salaries
Trade receivables
Provision for doubtful debts
Trade payables
Bank
Capital
$
799 000
20 000
52 000
78 000
238 000
10 000
265 000
46 000
600 000
260 000
148 000
60 000
44 000
14 000
6 000
15 000
6 000
33 000
55 000
40 000
2 000
32 000
3 000
_______
1 879 000
932 000
1 879 000
Additional Information:
1
Inventory at 30 April 2012 (at cost):
$
Raw materials
56 000
Work-in-progress
58 000
Finished goods
72 000
2
Depreciation is provided on machinery and equipment at a rate of 20% per year using the reducing balance
method.
3
The following expenses should be apportioned as follows:
Factory
Office
Insurance
70%
30%
Heat and light
80%
20%
4
On 30 April 2012 indirect factory wages of $5 000 were unpaid and insurance of $7 000 had been paid in
advance.
5
Provision for doubtful debts is to be maintained at 3% of trade receivables.
REQUIRED
(a)
Prepare Bart’s manufacturing account for the year ended 30 April 2012.
[19]
(b)
Prepare Bart’s income statement for the year ended 30 April 2012.
[8]
(c)
State three examples of how the prudence concept has been applied in the preparation of Bart’s
manufacturing account and income statement.
[3]
Chapter 13
197
Manufacturing Accounts
QUESTION 2
MAY 2012 P42 Q1
Asterix plc, a manufacturing company, has extracted the following balances from its books of account for the year
ended 30 April 2012:
$000
Revenues
6 500
Purchases of raw materials
1 450
Carriage inwards
130
Carriage outwards
75
Direct labour
1 675
Factory overheads
1 350
Office overheads
1 025
Inventories at 1 May 2011:
Raw materials
140
Work in progress
165
Finished goods (at transfer price)
330
Additional information:
1
Factory overheads of $70 000 are accrued at 30 April 2012.
2
Office overheads of $35 000 have been prepaid at 30 April 2012.
3
Depreciation for the year on the non-current assets totalled $150 000 and this is to be split between the
factory and the office in the ratio 2:1.
4
Completed production is transferred at a mark-up on cost of 20%.
5
Inventories were valued on 30 April 2012 as follows:
Raw materials
Work in progress
Finished goods (at transfer price)
$000
235
320
438
REQUIRED
(a)
Prepare a manufacturing account and income statement for the year ended 30 April 2012.
(b)
Prepare an extract from statement of financial position at 30 April 2012 to show all inventories.
QUESTION 3
On 31 March 2012 the following balances were extracted from the books of YCAT.
Inventory – 1 April 2011
Raw materials
Work in progress
Finished goods
Raw materials purchased
Revenue
Direct wages
Carriage inwards on raw materials
Indirect wages
Returns outwards on raw materials
Trade receivables
Revenue returns
Rates and insurance
General factory overheads
Loan interest paid
Office salaries
General office expenses
Premises
Factory machinery at cost
[26]
[6]
NOVEMBER 2012 P23 Q1
$
53 000
80 000
76 000
800 000
2 500 000
450 000
6 000
68 000
18 500
83 000
22 000
38 000
93 000
5 000
80 000
100 000
600 000
220 000
Chapter 13
198
Manufacturing Accounts
Provision for depreciation of factory machinery
10% Long term loan
Provision for doubtful debts
40 000
100 000
3 800
Additional information
1
Inventory - 31 March 2012
2
3
4
5
Raw materials $47 000
Work in progress 92 000
Finished goods
68 000
The provision for doubtful debts is to be 5% of trade receivables.
At 31 March 2012 rates and insurance owing amounted to $950. Rates and insurance are apportioned
between the factory and general office in the ratio of 4:1 respectively.
Depreciation is to be provided on premises at 5% per annum straight line. This is apportioned between the
factory and general office in the ratio of 4:1 respectively.
Depreciation on factory machinery is to be provided at 15% using the reducing balance method.
REQUIRED
(a)
Prepare the manufacturing account for the year ended 31 March 2012.
[13]
(b)
Prepare the income statement for the year ended 31 March 2012.
[11]
(c)
Define the prudence concept. State three examples of how this has been applied in the financial statements.
[6]
QUESTION 4
NOVEMBER 2012 P43 Q1
Nathan Akrill is a sole trader who has successfully run a manufacturing business for many years. His business
manufactures one product, the squam.
On 1 January 2011 there were 1 000 squams in inventory. During the year 10 318 squams were produced by the
factory and transferred to the sales department. On 31 December 2011 there were 1 240 squams in inventory.
Nathan Akrill uses the FIFO method of inventory valuation.
Production is transferred from the factory to the sales department at cost plus 40%.
Unfortunately the book-keeper was taken ill at the year end and Nathan Akrill decided he would have to produce his
financial statements himself. He did not know how to value the inventory of finished goods at that date. Therefore
he decided to value each squam at the same value as had been used on 1 January 2011.
Nathan Akrill produced the following:
Income statement for the year ended 31 December 2011
$
Revenue
Inventory at 1 January 2011
Raw materials
Finished goods
Purchases of raw materials
Inventory at 31 December 2011
Raw materials
Finished goods
Gross profit
Expenses
Manufacturing wages
Supervisory wages
Factory rent
Office rent
Depreciation of factory machinery
Depreciation of office equipment
Direct expenses
Carriage on raw materials
Administrative and selling expenses
Profit for the year
31 000
58 800
46 400
72 912
$
$
880 000
89 800
261 000
350 800
119 312
166 000
42 800
36 000
21 000
13 800
2 900
9 200
2 500
201 000
231 488
648 512
495 200
153 312
Chapter 13
199
Manufacturing Accounts
Statement of Financial Position at 31 December 2011
$
Non-current assets
Current Assets
Inventory:
Raw materials
Finished goods
46 400
72 912
Trade receivables
Bank
Current liabilities
Trade payables
$
$
570 000
119 312
96 200
11 000
226 512
(84 100)
142 412
712 412
Capital
Balance at 1 January 2011
Profit for the year
Drawings
622 300
153 312
(80 000)
REQUIRED
(a)
Prepare, for the year ended 31 December 2011:
(i)
the manufacturing account;
(ii)
the provision for unrealised profit account;
(iii)
a corrected income statement.
(b)
Prepare a corrected statement of financial position at 31 December 2011.
(c)
Explain your treatment of finished goods in the inventory valuation.
695 612
[10]
[8]
[13]
[7]
[2]
QUESTION 5
MAY 2013 P23 Q1
Eagle Manufacturing Limited produces components for cars and lorries. The following figures have been taken from
their books of account.
$000
Revenue
816
Inventories at 1 April 2012
Raw materials
17
Work in progress
19
Finished goods
32
Factory machinery – cost
420
– accumulated depreciation
52
Office equipment – cost
30
– accumulated depreciation
10
Motor vehicles
– cost
60
– accumulated depreciation
34
Purchases of raw materials
194
Labour
153
Electricity
25
Carriage inwards
6
Carriage outwards
22
Rent
60
Salaries
14
Sundry expenses
12
Insurances
18
Additional information:
1
Inventories at 31 March 2013 were:
Raw materials
$18 000
Chapter 13
200
Work in progress
Finished goods
2
3
4
5
6
7
8
Manufacturing Accounts
$15 000
$41 000
Factory machinery and motor vehicles are to be depreciated at 25% using the reducing balance method.
Office equipment is to be depreciated at 10% on cost.
During the year a motor vehicle was sold for $4 000. The profit on disposal was $1 000. A new motor vehicle
was purchased for $9 000. All motor vehicles are used by the sales staff.
A full year’s depreciation is charged in the year of purchase, no depreciation is charged in the year of sale.
At 31 March 2013 electricity of $5 000 was accrued and rent of $10 000 was prepaid.
Labour costs include $16 000 for indirect labour. The balance is direct labour.
Electricity is apportioned between the factory and office in the ratio 4:1.
Rent is apportioned between factory and offices in the ratio 3:2.
Sundry expenses are apportioned between factory and offices in the ratio 1:2.
Insurances are apportioned between factory and offices in the ratio 5:1.
REQUIRED
(a)
Prepare the manufacturing account for the year ended 31 March 2013.
(b)
Prepare the income statement for the year ended 31 March 2013.
(c)
Explain how the following will be affected if the company makes a loss in the year:
(i)
Dividend payable for cumulative preference shares
(ii)
Dividend payable for ordinary shares
(iii)
Dividend payable on non-cumulative preference shares
(iv)
Interest payable on debentures.
[12]
[10]
[2]
[2]
[2]
[2]
QUESTION 6
MAY 2014 P21 Q1 (b & c)
Shane Limited is a small manufacturing company.
Shane Limited’s financial statements also showed the following information for the 6 months ended 31 December
2013.
Inventories at 1 July 2013
Raw materials
Work in progress
Finished goods
Purchases
Raw materials
Finished goods
Sales revenue
Return Inwards
Carriage inwards
Factory power (direct)
Factory machinery at cost
Motor vehicles at cost
Production wages
Electricity
Rent
Factory expenses
General office expenses
Additional information
1
Inventories at 31 December 2013
Raw materials
Work in progress
Finished goods
$000
80
110
204
780
150
3 474
60
128
88
160
140
480
138
326
56
45
$112 000
$146 000
$210 000
Chapter 13
201
Manufacturing Accounts
2
3
Rent prepaid at 31 December 2013, $26 000.
Expenses were allocated as follows:
2
Electricity
/3 factory, 1/3 office
3
Rent
/5 factory, 2/5 office
4
Motor vehicles were used solely for the distribution of finished goods.
5
Depreciation was provided annually on a straight-line basis as follows:
Factory machinery
20%
Motor vehicles
10%
REQUIRED
(b)
Prepare Shane Limited’s manufacturing account for the 6 months ended 31 December 2013.
(c)
Prepare Shane Limited’s income statement for the 6 months ended 31 December 2013.
QUESTION 7
The following information relates to the business of Nother Limited.
Trial Balance at 31 March 2014
NOVEMBER 2014 P22 Q1
Dr
$000
Share capital
Factory premises at cost
Factory machinery at cost
Provisions for depreciation: Premises
Machinery
Inventories at 1 April 2013: Raw materials
Work in progress
Finished goods
Revenue
Purchases of raw materials
Manufacturing wages
Factory expenses
Administrative expenses
Sales expenses
Retained earnings
Trade receivables and payables
Provision for doubtful debts
Bank overdraft
Bad debts written off
[10]
[8]
Cr
$000
1 500
1 000
280
250
140
360
210
432
5054
1 896
1 250
780
80
416
840
16
7 560
196
240
36
144
___
7 560
Additional information
1
Inventories at 31 March 2014
Raw materials
Work in progress
Finished goods
2
Other payables at 31 March 2014
Factory expenses
Sales expenses
Manufacturing wages
3
$
300 000
220 000
480 000
$
112 000
56 000
40 000
Prepayments at 31 March 2014
Administrative expenses
$
8 000
Chapter 13
4
5
6
202
Manufacturing Accounts
During the year ended 31 March 2014 a machine was sold for $14 000. This had been debited to the bank
account and credited to the sales account.
The machine had been purchased for $44 000 and depreciation of $24 000 had been written off up to 31
March 2013. A full year’s depreciation is provided in the year of purchase but none in the year of sale.
Depreciation is to be provided as follows:
Factory premises
1% straight line
Factory machinery
15% reducing (diminishing) balance.
The provision for doubtful debts is to be adjusted to 5% of trade receivables.
REQUIRED
(a)
Prepare Nother Limited’s manufacturing account for the year ended 31 March 2014.
(b)
Prepare Nother Limited’s income statement for the year ended 31 March 2014.
(c)
Explain the following terms.
Direct costs
Indirect costs
Prime cost
Production cost
[10]
[10]
[2]
[4]
[2]
[2]
QUESTION 8
MAY 2015 P23 Q1
Vikran, a sole trader, has extracted the following trial balance from his books of account at 30 June 2014.
Bank
Capital
Carriage inwards
Factory supervision salaries
General factory expenses
Heat and light
Indirect factory wages
Insurance
Inventory at 1 July 2013 at cost
Raw materials
Work in progress
Finished goods
Manufacturing wages
Office salaries
Office equipment at cost
Plant and machinery at cost
Provision for depreciation at 1 July 2013
Office equipment
Plant and machinery
Provision for doubtful debts
Purchase of finished goods
Purchase of raw materials
Returns outwards (raw materials)
Rent and rates
Returns inwards
Revenue
Trade payables
Trade receivables
Additional information
1
Inventory at 30 June 2014 at cost:
Dr ($)
7 600
Cr ($)
200 000
4 200
12 400
8 100
5 400
36 800
12 000
39 000
48 000
57 000
259 100
37 300
90 000
270 000
38 000
90 000
1 600
2 100
162 000
1 200
42 000
1 800
34 800
1 129 600
768 500
30 300
_______
1 129 600
Chapter 13
203
Raw materials
Work in progress
Finished goods
2
3
4
5
6
7
Manufacturing Accounts
$
46 000
54 000
52 000
Depreciation is to be provided on all non-current assets at 15% per annum using the reducing
method.
The following expenses are to be apportioned.
Factory
Office
Rent and rates
85%
15%
Insurance
80%
20%
Heat and light
85%
15%
At 30 June 2014 insurance of $4 000 had been paid in advance.
At 30 June 2014 heat and light of $600 had accrued but remained unpaid.
A bad debt of $1 800 is to be written off at 30 June 2014.
The provision for doubtful debts is to be maintained at 3% of trade receivables.
REQUIRED
(a)
Prepare Vikran’s manufacturing account for the year ended 30 June 2014.
(b)
Prepare Vikran’s manufacturing account for the year ended 30 June 2014.
(c)
Explain why a business should depreciate its non-current assets.
balance
[14]
[12]
[4]
QUESTION 9
NOVEMBER 2015 P42 Q1
A junior in the accounts department of Makewell plc produced the following draft financial statements for the year
ended 31 December 2014. These contained errors and omissions.
Makewell plc
Manufacturing account for the year ended 31 December 2014
$
30 000
410 000
(20 000)
420 000
310 000
730 000
230 000
960 000
240 000
1 200 000
Raw materials at 1 January 2014
Purchases of raw materials
Raw materials at 31 December 2014
Direct labour
Factory overheads
Factory profit
Transfer to income statement
Income statement for the year ended 31 December 2014
$
Revenue
Cost of sales
Finished goods at 1 January 2014
Cost of production
Finished goods at 31 December 2014
Gross profit
Distribution costs
Administrative expenses
Loss for the year
150 000
1 200 000
(180 000)
$
1 500 000
(1 170 000)
330 000
(110 000)
(240 000)
(20 000)
Chapter 13
204
Manufacturing Accounts
Additional information
1
Finished goods have been transferred from the factory to the warehouse at cost plus 25% for some years.
2
Non-current assets at 1 January 2014 had the following values.
Property
Factory and office equipment
3
4
Cost
$
600 000
310 000
Provision for depreciation
$
24 000
86 000
The value of the property included $200 000 for the land. Property is depreciated at 2% per annum on the
straight-line basis. Of the property depreciation, 3/4 relates to the factory and 1/4 to the offices.
Equipment is depreciated at 10% per annum, on cost, and charged on a monthly basis.
On 1 January 2014 factory equipment had a cost of $250 000.
On 1 April 2014 new factory equipment was bought at a cost of $80 000.
On 1 July 2014 office equipment with an original cost of $20 000 was sold.
No depreciation had been provided in the draft financial statements.
Distribution costs included $3000 for carriage inwards.
Work in progress at 1 January 2014 was valued at $65 000 and on 31 December 2014 at $85 000.
REQUIRED
(a)
Prepare for the year ended 31 December 2014:
(i)
A corrected manufacturing account
(ii)
A corrected income statement.
[8]
[9]
Additional information
1
On 1 January 2014 ordinary share capital of $1 shares was $500 000.
On 26 March 2014 a bonus issue was made of 2 ordinary shares for every 5 ordinary shares held.
On 1 November 2014 the directors issued 100 000 more ordinary shares at a price of $1.20 each.
2
On 1 January 2014 the balance on the retained earnings account was $380 000.
No dividend was paid during the year.
3
On 31 December 2014 other balances were as follows.
4
$
Goodwill
35 000
Trade receivables
126 000
Cash and cash equivalents
88 000
Trade payables
98 000
Other payables
26 000
On 19 January 2015 a fire in the warehouse destroyed finished goods which cost $17 000.
REQUIRED
(b)
Prepare the statement of financial position at 31 December 2014 in accordance with IAS1.
[23]
QUESTION 10
MAY 2016 P32 Q2
Kempes Limited is a company which manufactures a single product. Finished goods are transferred from the factory
at production cost plus 15%. Unsold goods are stored in the warehouse.
Selected balances extracted from the trial balance for the year ended 30 September 2015 were as follows:
Revenue
Purchases of raw materials
Carriage inwards
Factory production wages
$
1 845 000
794 750
4 250
382 500
Chapter 13
205
Manufacturing Accounts
Factory supervisory wages
Administrative wages
General expenses
Depreciation:
Factory plant and machinery
Office fixtures and fittings
64 000
115 000
78 000
55 000
37 500
Additional information
1
At 30 September 2015, there were accrued general expenses of $5 000 and prepaid general expenses of $3
000. 65% of the general expenses relate to the factory.
2
Details of inventories were as follows.
Raw materials
Work in progress
Finished goods at transfer price
1 October 2014
$
110 000
17 500
19 550
30 September 2015
$
125 000
14 000
21 505
REQUIRED
(a)
Prepare the manufacturing account for the year ended 30 September 2015.
(b)
Prepare the income statement for the year ended 30 September 2015.
(c)
Explain why a business might create a provision for unrealised profit.
[9]
[6]
[3]
Additional information
The budgeted closing inventory value of finished goods at transfer price at 31 October 2015 was $18 400.
REQUIRED
(d)
Analyse the effect on the budgeted profit for the month of October 2015 due to the changes in the provision
for unrealised profit.
[2]
Additional information
The price at which the product could be bought from an outside supplier is expected to increase.
It is now proposed to transfer finished goods at production cost plus 20%.
REQUIRED
(e)
Advise the directors whether or not the mark-up should be increased. Justify your answer.
[5]
QUESTION 11
NOVEMBER 2016 P32 Q2
Alpha Limited is a manufacturing business making a single product. Each year it produces and sells 1 000 units and
the only inventory it keeps is that of raw materials.
It provides the following information for the year ended 30 April 2016:
$
Revenue
95 000
Inventory of raw materials at 1 May 2015
1 000
Inventory of raw materials at 30 April 2016
3 100
Purchases of raw materials
12 200
Carriage inwards
1 100
Factory workers’ wages
17 500
Factory supervisor’s salary
8 200
Office salaries
8 500
Rent
8 000
Factory overheads
9 700
General office expenses
10 000
Chapter 13
206
Manufacturing Accounts
Additional information
1
Rent is allocated 75% to the factory and 25% to the offices.
2
Production is transferred to finished goods at cost plus 25%.
REQUIRED
(a)
Prepare, for the year ended 30 April 2016,
(i)
the manufacturing account
(ii)
the income statement.
[8]
[7]
Additional information
Management has discovered that general office expenses are 50% fixed and 50% variable with the level of sales.
At the start of May 2016 management expected that in the next year the business would only be able to sell 900
units. There are no expected changes to the selling price or costs per unit.
There were two options.
Option 1
To continue to produce 1000 units and have an inventory of finished goods at the next year end.
Option 2
To reduce production to 900 units and continue to have no inventory of finished goods.
REQUIRED
(b)
Calculate the expected annual profit if option 1 is implemented. Start your calculation with your profit from
(a) and adjust as appropriate.
[5]
Additional information
The annual profit expected from option 2 was known to be $15 100.
REQUIRED
(c)
Advise the management which of the two options it should implement. Justify your answer.
[5]
QUESTION 12
NOVEMBER 2016 P33 Q1
M Limited manufactures a single product. The following balances have been extracted from the ledgers for the year
ended 31 December 2015:
Debit
$
Inventories at cost at 1 January 2015
Raw materials
Work-in-progress
Finished goods at transfer price
Purchases of raw materials
Carriage inwards
Carriage outwards
Direct wages
Indirect wages
Rent
Heat, light and power
General expenses
Office salaries
Revenue
Provision for unrealised profit at 1 January 2015
Plant and machinery at cost
Office equipment at cost
Motor vehicles used by salesmen
Credit
$
10 400
12 600
14 904
146 200
3 160
2 790
249 400
54 650
49 000
28 600
12 600
24 780
742 490
2 484
200 000
15 000
25 000
Chapter 13
207
Provision for depreciation:$2 484
plant and machinery
office equipment
motor vehicles
Manufacturing Accounts
60 000
4 600
5 740
Additional information
1
Inventories at 31 December 2015
Raw materials at cost
Work-in-progress at cost
Finished goods at transfer price
$
11 750
14 670
15 750
2
Expenses are to be apportioned to the production department as follows:
4
Rent
/5
Heat, light and power 4/5
3
General expenses
/4
3
4
5
6
Rent has been prepaid by $4 000 at 31 December 2015.
Heat, light and power is in arrears by $3 500 at 31 December 2015.
Completed goods are transferred at a mark-up on factory cost of 20%.
Depreciation is to be provided as follows:
Plant and machinery 10% per annum on cost
Motor vehicles 25% per annum on cost
Office equipment 15% on the net book value
REQUIRED
(a)
Prepare the manufacturing account for the year ended 31 December 2015.
(b)
Prepare the income statement for the year ended 31 December 2015.
(c)
Explain what is meant by the term transfer price.
[9]
[10]
[2]
Additional information
10 000 units of the product were manufactured in the year, which is the maximum that can be produced. A supplier
has offered to supply the product to M Limited for $60 per unit in the future.
REQUIRED
(d)
Advise the directors of M Limited whether or not they should accept this offer. Justify your answer on
financial grounds.
[4]
QUESTION 13
MAY 2017 P32 Q1
Richard Ang is a sole proprietor manufacturing one type of sofa bed. The following balances are extracted from his
books of account at 31 July 2016.
Revenue
Purchases of direct materials
Carriage inwards
Carriage outwards
Returns inwards
Factory wages
Direct
Indirect
Overheads
Factory
Office
$
986 000
207 600
6 800
17 500
12 000
168 000
51 400
155 000
194 000
Chapter 13
208
Manufacturing Accounts
Additional information
1
Richard maintains a provision for unrealised profit account. Completed products are transferred from the
factory at a mark-up of 20%.
2
Inventories at 31 July 2015 were:
Raw materials
Work in progress
Finished goods (at cost)
3
Inventories at 31 July 2016 were:
Raw materials
Work in progress
Finished goods (at transfer price)
4
5
$
14 800
23 500
32 000
$
16 400
20 200
54 000
Unpaid direct wages at 31 July 2016 amounted to $3 500.
Rent had been allocated to factory overheads and office overheads at $24 000 and $16 000 respectively.
The allocation should have been in the ratio of 3 : 1 respectively.
REQUIRED
(a)
Prepare the manufacturing account for the year ended 31 July 2016.
(b)
Prepare an income statement for the year ended 31 July 2016.
[7]
[7]
Additional information
Richard Ang thought of taking some of the finished goods inventory at 31 July 2016 to help his sister set up a furniture
business on the same day.
REQUIRED
(c)
Prepare an extract from the statement of financial position of Richard Ang’s business at 31 July 2016 to
show how inventories are recorded.
[3]
(d)
Explain why it is important for Richard to create a provision for unrealised profit.
[4]
(e)
State two advantages and two disadvantages to Richard Ang of helping his sister set up her
business.
[4]
QUESTION 14
Ted is the owner of a manufacturing business.
The following information is available for the year ended 31 December 2016:
Factory machinery – at cost
Office equipment – at cost
Provision for depreciation at 1 January 2016
Factory machinery
Office equipment
Inventory at 1 January 2016
Raw materials
Work in progress
Finished goods (at cost)
Revenue
Purchases of raw materials
Factory direct wages
Factory indirect wages
Office salaries
NOVEMBER 2017 P31 Q1
$
330 000
142 000
276 000
67 000
52 000
97 000
122 000
4 268 000
484 000
626 000
132 000
548 000
Chapter 13
209
Manufacturing Accounts
Carriage inwards
Carriage outwards
Direct expenses
Factory overheads
General office expenses
Insurance and rates
Rent
Heat and light
21 000
87 600
120 000
510 900
276 000
92 000
440 000
178 000
Additional information
1
Goods are transferred from the factory at a mark-up of 20%. Increase in provision for unrealised profit at
31 December 2016 amounted to $15 840.
2
Inventory at 31 December 2016:
$
Raw materials
67 000
Work in progress
102 000
Finished goods
?
3
Non-current assets are depreciated at 15% per annum using the reducing balance method.
4
At 31 December 2016:
$
Rent owing
40 000
Insurance and rates prepaid
6 000
Insurance and rates, rent and heat and light are apportioned 3/4 factory and 1/4 general office.
5
Production for the year ended 31 December 2016 was 80 000 units.
REQUIRED
(a)
Explain why a mark-up is added to the factory cost of production.
[3]
(b)
Prepare the manufacturing account for the year ended 31 December 2016.
[10]
(c)
Prepare the trading section of the income statement to show the gross profit for the year ended 31
December 2016.
[6]
(d)
Prepare an extract from the statement of financial position to show the value of finished goods inventory
at 31 December 2016.
[2]
Additional information
In February 2017, Ted was approached by an existing customer for an extra order of 5000 units.
The budgeted production for 2017 was already set at the maximum production capacity. Ted considered whether
or not to source the extra 5000 units from an external supplier at a cost of $28 per unit.
REQUIRED
(e)
Advise Ted whether or not he should have accepted the extra order. Justify your answer.
[4]
QUESTION 15
MAY 2018 P31 & P33 Q1
JH Limited is a manufacturing business producing a single product. The transfer price of finished goods to the income
statement is cost plus a fixed percentage for factory profit. This percentage has remained unchanged for many years.
The following information is available for the year ended 31 October 2017.
$
Prime cost
252 000
Work in progress
at 1 November 2016
28 000
at 31 October 2017
32 000
Inventory of finished goods at transfer price
at 1 November 2016
108 000
at 31 October 2017
96 000
Revenue
1 860 000
Chapter 13
Factory overheads
Distribution costs
Administrative expenses
Finance charges
Provision for unrealised profit
at 1 November 2016
The following information is also available.
1
2
210
Manufacturing Accounts
461 000
216 000
412 000
28 000
18 000
Included in the distribution costs are:
$
Carriage inwards
18 000
Carriage outwards
34 000
Administrative expenses include an amount for buildings insurance of $60 000.
The following items relating to building insurance have not been adjusted:
an outstanding unpaid invoice of $3 000 for the year ended 31 October 2017
a payment in advance of $1 000 brought forward from the year ended 31 October 2016
the allocation of 75% of the total amount to the factory.
REQUIRED
(a)
Explain why a manufacturing business might prepare a manufacturing account as part of its financial
statements.
[4]
(b)
Prepare the manufacturing account for the year ended 31 October 2017 in as much detail as possible. [5]
(c)
Prepare the income statement for the year ended 31 October 2017.
[9]
Additional information
The selling price of one unit is based on the transfer price from the factory plus a mark-up.
Bob, the financial director of JH Limited, has been notified that their main competitor has increased prices. He wishes
to increase the fixed percentage of the transfer price by 5%. The other directors are concerned that this will affect
profit.
(d)
Advise the directors whether or not they should increase the transfer price. Justify your answer using any
relevant calculations.
[7]
Chapter 13
211
Manufacturing Accounts
SOLUTION
CHAPTER 13
QUESTION 1
(a)
Manufacturing Account for the year ended 30 April 2012
Raw Material Cost
Opening Inventory
Add
Purchases of raw materials
Less
Purchase returns
Less
Closing Inventory
Cost of raw materials consumed
Direct labour costs
Prime cost
Factory Overhead
Indirect factory wages ($46 000 + $5 000)
Insurance ($14 000 – $7 000) × 70%
General factory expenses
Factory supervision salaries
Heat and light ($6 000 × 80%)
Depreciation on factory machinery ($260 000 – $60 000) × 20%
Total Manufacturing Cost
Add
Work-in-progress: Opening inventory
Less
Work-in-progress: Closing inventory
Factory cost of production
(b)
MAY 2012 P22 Q1
$
$
20 000
238 000
(10 000)
51 000
4 900
6 000
15 000
4 800
40 000
52 000
(58 000)
121 700
578 700
(6 000)
572 700
Income Statement for the year ended 30 April 2012
$
Sales
Cost of Sales
Opening inventory of finished goods
Factory cost of production
Closing inventory of finished goods
Gross profit
EXPENSES
Insurance($14 000 – $7 000) × 30%
Heat and light ($6 000 × 20%)
Administration expenses
Office salaries
Depreciation on office equipment ($148 000 – $44 000) × 20%
$
799 000
78 000
572 700
650 700
(72 000)
$
2 100
1 200
33 000
55 000
20 800
Other Incomes
Decrease in provision for doubtful debts [$2 000 – ($40 000 × 3%)]
Net profit
(c)
228 000
(56 000)
192 000
265 000
457 000
(578 700)
220 300
$
(112 100)
108 200
800
109 000
Prudence concept may be applied in manufacturing accounts by
1
valuing inventories at lower of cost or net realisable value.
2
providing doubtful debts in the books of accounts
3
charging depreciation against profit
QUESTION 2
(a)
Raw Material Cost
MAY 2012 P42 Q1
Manufacturing Account and Income Statement
For the year ended 30 April 2012
$000
$000
$000
Chapter 13
212
Manufacturing Accounts
Raw materials at 1 May 2011
Purchases of raw materials
Carriage inwards
140
1 450
130
1 580
1 720
(235)
Raw materials at 30 April 2012
Direct Labour Cost
Prime cost
Factory Overheads
Factory overheads ($1 350 000 + $70 000)
Factory depreciation ($150 000 × 2/3)
1 420
100
4 680
Add
Work in progress at 1 May 2011
Less
Work in progress at 30 April 2012
Factory cost of goods produced
Add
Factory profit ($4 525 000 × 20%)
Market value of Transferred to trading account
Add
Finished goods at 1 May 2011
Less
Finished goods at 30 April 2012
Cost of sales
Revenues
Gross profit
Operating Expenses
Office overheads ($1 025 000 – $35 000)
Carriage outwards
Office depreciation ($150 000 × 1/3)
Net profit on trading
Factory profit
Increase in provision for unrealised profit [(438 000 × 20/120)− (330 000×20/120)
Overall net profit
165
(320)
990
75
50
Closing inventory
Cost of raw materials consumed
Direct wages
PRIME COST
(1 115)
63
887
950
$000
$000
235
320
438
(73)
365
920
NOVEMBER 2012 P23 Q1
Manufacturing account
For the year ended 31 March 2012
$
Raw Materials Costs
Opening inventory
Purchases of raw materials
Carriage inwards
Returns outwards
(155)
4 525
905
5 430
330
(438)
(5 322)
6 500
1 178
905
(18)
(b)
Asterix plc – extract of statement of financial position at 30 April 2012.
Current Assets
Inventories:
Raw materials
Work in progress
Finished goods
Less Provision for unrealised profit ($438 000 × 20/120)
QUESTION 3
(a)
1 485
1 675
3 160
$
$
53 000
800 000
6 000
(18 500)
787 500
840 500
(47 000)
793 500
450 000
1 243 500
Chapter 13
213
Manufacturing Accounts
Add Factory Overheads
Indirect wages
Rates and insurance [($38 000 + $950) × 4/5]
General factory overheads
Depreciation premises ($600 000 × 5% × 4/5)
Depreciation machinery [($220 000  $40 000) × 15%]
$
68 000
31 160
93 000
24 000
27 000
Add
Opening work in progress
Less
Closing work in progress
Cost of production
80 000
(92 000)
(b)
243 160
1 486 660
80 000
(12 000)
1 474 660
Income Statement for the year ended 31 March 2012
$
2 500 000
(22 000)
Revenue
Revenue returns
Cost of Sales
Opening inventory
Cost of Production
Closing inventory
Gross profit
Expenses
Rates and insurance [($38 000 + $950) × 1/5]
Loan interest ($100 000 × 10%)
Office salaries
Depreciation: premises ($600 000 × 5% × 1/5)
Increase in provision for doubtful debts [($83 000 × 5%)  $3 800]
General office expenses
Profit for the year
(c)
$
76 000
1 474 660
(68 000)
7 790
10 000
80 000
6 000
350
100 000
$
2 478 000
1 482 660
995 340
(204 140)
791 200
Prudence is a key accounting principle which makes sure that assets and income are not overstated and
liabilities and expenses are not understated. The examples of Prudence may include the valuation of
inventory at lower of cost or market, writing off of receivables as bad debts and providing for doubtful debts
etc.
QUESTION 4
(a)
(i)
NOVEMBER 2012 P43 Q1
Manufacturing account
For the year ended 31 December 2011
Raw Materials Cost
Inventory at 1 January 2011
Add
Purchases
Carriage
Inventory at 31 December 2011
Manufacturing wages
Direct expenses
Prime cost
Factory Overheads
Supervisory wages
Factory rent
Depreciation of machinery
Cost of Production
Factory profit ($515 900 x 40%)
Market value of production
$
261 000
2 500
$
31 000
263 500
294 500
(46 400)
42 800
36 000
13 800
$
248 100
166 000
9 200
423 300
92 600
515 900
206 360
722 260
Chapter 13
214
(ii)
Balance c/d(
Manufacturing Accounts
Provision for unrealised profit
$
$86 800 × 40
140
)
$
24 800
Balance b/f
16 800
_____
24 800
Income statement (balancing figure)
8 000
24 800
WORKINGS
(W 1)
(W 2)
Per unit cost
=
Cost of Closing inventory =
(W 3)
Factory profit rate (%)
(iii)
=
$722 260
10 318 units
1 240 units @ $70 (W 1)
$206 320
$722 260
=
=
$70 per unit
$86 800
40
=
140
Income statement for the year ended 31 December 2011
$
Sales
Cost of Sales
Inventory at 1 January 2011 - Finished goods (1 000 units)
Market Value of Production (10 318 units)
58 800
722 260
781 060
(86 800)
Inventory at 31 December 2011 - Finished goods (W 2)
Gross profit
Factory profit
Less
Increase in provision for unrealised profit (a ii)
206 360
(8 000)
Expenses
Office rent
Depreciation of office equipment
Administrative and selling costs
Profit for the year
(b)
$
880 000
21 000
2 900
201 000
694 260
185 740
198 360
384 100
(224 900)
159 200
Statement of Financial Position
As at 31 December 2011
$
Non-Current Assets
Current Assets
Inventory: Raw materials
Finished goods (W 3)
Provision for unrealised profit ($86 800 x 40/140)
Trade receivables
Bank
Current Liabilities
Trade payables
$
$
570 000
46 400
86 800
(24 800)
62 000
96 200
11 000
215 600
(84 100)
131 500
701 500
Equity
Capital at 1 January 2011
Profit for the year
Drawings
(c)
622 300
159 200
(80 000)
701 500
Under prudence concept inventory’s value should not include an element of profit so factory profit needs
to be removed from the value of finished goods inventory as it has not yet been earned or realised.
Chapter 13
215
Manufacturing Accounts
QUESTION 5
(a)
MAY 2013 P23 Q1
Eagle Manufacturing Limited
Manufacturing Account for the year ended 31 March 2013
Raw Material Cost
$000s
Opening inventory of raw materials
Add purchases
194
Add carriage in
__6
Less closing inventory
Direct materials used
Direct labour ($153 000  $16 000)
Prime cost
Factory Overheads
Indirect labour
Electricity [($25 000 + $5 000) × 4/5]
Rent [($60 000  $10 000 ) × 3/5]
Sundry expenses ($12 000 × 1/3)
Insurance ($18 000 × 5/6)
Depreciation on machinery [($420 000  $52 000) x25%]
Add
$000s
17
200
(18)
199
137
336
16
24
30
4
15
92
Work in progress - Opening inventory
Less
Work in progress - Closing inventory
Cost of Production
(b)
181
517
19
536
(15)
521
Income statement
For the year ended 31 March 2013
$000s
Revenue
Cost of Sales
Finished goods - Opening inventory
Add
Cost of Production
Finished goods - Closing inventory
Gross profit
Expenses
Electricity [($25 000 + $5 000) × 1/5]
Carriage out
Rent [($60 000  $10 000 ) × 2/5]
Salaries
Sundry expenses ($12 000 × 2/3)
Insurance ($18 000 × 1/6)
Depreciation on office fittings ($30 000 × 10%)
Depreciation on vehicles [($60 000  $34 000)  $3 000 + $9 000] × 25%
Profit on sale of motor vehicle
Profit for the year
(c)
$000s
(i)
(ii)
(iii)
(iv)
32
521
41
6
22
20
14
8
3
3
8
$000s
816
(512)
304
(84)
220
__1
221
The unpaid amount of preference dividends will be carried forward to the next year and paid to
the shareholders when there would be a profit.
In case of loss there is no need to pay or propose an ordinary dividend
In case of non-cumulative preference dividends there is no need to carry forward the unpaid
amount to the next year.
As it is binding on the business to pay interest so the interest will still have to be paid irrespective
of incurring loss.
Chapter 13
216
QUESTION 6
(b)
Manufacturing Accounts
MAY 2014 P21 Q1 (b & c)
Manufacturing Account
For the 6 months ended 31 December 2013
Raw Material Costs
Opening Inventory
Purchases
Carriage in
$000
780
128
Closing Inventory
Cost of raw materials consumed
Production wages
Factory power (direct)
Prime cost
Factory overheads
Electricity ($138 000 × 2/3)
Rent and rates ($326 000 – $26 000) × 3/5
Factory expenses
Depreciation on machinery ($160 000 × 20% × 6/12)
$000
908
988
(112)
876
480
88
92
180
56
16
Add
Opening Work in progress
Less
Closing Work in progress
Cost of production
(c)
$000
80
110
(146)
568
1 444
344
1788
(36)
1 752
Income statement for 6 months ended 31 December 2013
$000
Sales (‘a’ part)
Less
Return Inwards (‘a’ part)
Cost of Sales
Opening Inventory : Finished goods
Purchases of Finished Goods
Cost of production
Closing Inventory : Finished goods
Gross profit
Depreciation on motor vehicles ($140 000 × 10% × 6/12)
Electricity ($138 000 × 1/3)
Rent ($326 000 – $26 000) × 2/5
General office expenses
Bad debts (‘a’ part)
Profit for the year
$000
3 474
(60)
$000
3 414
204
150
1 752
1 902
2 106
(210)
7
46
120
45
80
(1 896)
1 518
(298)
1 220
QUESTION 7
NOVEMBER 2014 P22 Q1
(a)
Nother Limited’s Manufacturing Account for the year ended 31 March 2014
Raw Material Cost
$000
$000
Opening Inventory
360
Purchases
1 896
2 256
Closing Inventory
(300)
Cost of raw material consumed
1 956
Manufacturing wages ($1 250 000 + $40 000)
1 290
Prime cost
3 246
Factory expenses ($780 000 + $112 000)
892
Depreciation: Premises ($1000 000 × 1%)
10
Chapter 13
217
Manufacturing Accounts
Machinery [($280 000–$44 000)] – ($140 000–$24 000)]×15%
Loss on machine disposal [$14 000  ($44 000 – $24 000)]
Work in progress: Opening Inventory
Work in progress: Closing Inventory
Factory cost of production
(b)
18
6
210
(220)
(10)
4 162
Nother Limited’s Income Statement for the year ended 31 March 2014
$000
Revenue ($5 054 000 –$14 000)
Cost of Sales
Finished goods: Opening Inventory
Cost of production
Finished goods: Closing Inventory
Gross profit
Expenses
Administrative expenses ($80 000 – $8 000)
Sales expenses ($416 000 + $56 000)
Bad debts written off
Increase in provision for doubtful receivables[($840 000 × 5%)–$36 000]
Profit for the year
(c)
926
4 172
(i)
(ii)
(iii)
(iv)
432
4 162
(480)
72
472
16
6
$000
5 040
(4 114)
926
(566)
360
Direct costs are the manufacturing costs which can be directly traced to a product unit.
Examples of direct costs include direct materials, direct labour etc.
Indirect costs are the manufacturing costs which cannot be economically traced to a product unit.
Examples of indirect costs include indirect wages, indirect materials, factory building expenses like
rent, factory machine expenses like depreciation etc.
Prime cost is simply the total of all direct expenses and is calculated as
Direct materials + direct labour + direct expenses
Production cost is the total cost of producing the goods in the factory. This is calculated as Prime
(direct) cost + Factory (indirect) overheads ± opening/(closing) work in progress
QUESTION 8
(a)
Manufacturing account for the year ended 30 June 2014
Raw materials Costs
$
Opening Inventory
Purchases
162 000
Purchase returns
(1 200)
Carriage inwards
4 200
Closing Inventory
Manufacturing wages
Prime cost
Factory Overheads
Factory supervision salaries
General factory expenses
Heat and light [($5 400 + $600) × 85%]
Indirect factory wages
Insurance [($12 000 – $4 000) × 80%]
Rent and rates ($42 000 × 85%)
Depreciation plant and machinery ($270 000 – $90 000) × 15%
Work in progress - Opening Inventory
Work in progress - Closing Inventory
Cost of Production
MAY 2015 P23 Q1
$
39 000
165 000
(46 000)
12 400
8 100
5 100
36 800
6 400
35 700
27 000
48 000
(54 000)
$
158 000
259 100
417 100
131 500
548 600
(6 000)
542 600
Chapter 13
218
(b)
Vikran
Income statement
Ffor the year ended 30 June 2014
Sales revenue
Returns inwards
Cost of Sales
Opening inventory finished goods
Cost of production
Purchase of finished goods
Closing inventory finished goods
Gross profit
Other Incomes
Decrease in Prov for doubtful debts[$1600{($34800$1 800)×3%}]
Expenses
Office salaries
Heat and light [($5 400 + $600) × 15%]
Rent and rates ($42 000 × 15%)
Insurance ($12 000 – $4 000) × 20%
Depreciation office equipment [($90 000 – $38 000) × 15%]
Bad debts
Profit for the year
(c)
$
768 500
(1 800)
57 000
542 600
2 100
601 700
(52 000)
$
766 700
549 700
217 000
610
217 610
37 300
900
6 300
1 600
7 800
1 800
55 700
161 910
Depreciation represents that part of the cost of an asset that is used up during the accounting period. This
is charged under matching concept. The value of an asset reduces due to reasons like physical deterioration,
obsolescence, inadequacy etc. Depreciating the value of a non-current asset helps the business to include
a charge for use of a non-current asset and include them in the statement of financial position at a true and
fair view.
QUESTION 9
(a)
NOVEMBER 2015 P42 Q1
Makewellplc
Manufacturing account
For the year ended 31 December 2014
Raw Materials Cost
Raw materials at 1 January 2014
Purchases of raw materials
Add
Carriage in
Raw materials at 31 December 2014
Direct Labour
Prime Cost
Factory Overheads
Factory building depreciation [($600 000  $200 000) × 2% × 3/4]
Factory equipment depreciation ($250 000 × 10%) + ($80 000 × 10% × 9/12)
Other Factory Overheads
Add
Less
Manufacturing Accounts
Work in process at 1 January 2014
Work in process at 31 December 2014
Factory Profit ($980 000 × 25%)
Transfer to income statement/cost of production
$000
30
410
3
(20)
6
31
230
$000
423
310
733
267
1 000
65
(85)
980
245
1225
Chapter 13
219
(ii)
Manufacturing Accounts
Income statement
For the year ended 31 December 2014
$000
Revenue
Cost of sales
Finished Goods at 1 January 2014
Cost of production [a (ii)]
150
1 225
1 375
180
Finished goods at 31 December 2014
Gross profit
Operating Expenses
Distribution costs [$110 000 – $3 000 (carriage)]
Administrative expenses (W 1)
Profit from operating activities
Factory profit [‘a (i)’part]
Increase in Provision for unrealized profit (
$180 000 × 25
125
)(
$000
1 500
(1 195)
305
107
247
(354)
(49)
245
$150 000 × 25
125
)
(6)
239
Profit for the year
190
(b)
Statement of financial position at 31 December 2014
Assets
Non-current assets
Intangible – goodwill
Tangible
Property, plant and equipment
Provision for depreciation ($24 000 + $6 000 + $2 000)
Factory and office equipment ($310 000 + $80 000  $20 000)
Provision for depreciation ($86 000 + $31 000 + $5 000)
Current Assets
Inventory : Raw materials
Work in process
Finished goods
Provision for unrealized profit (
$180 000 × 25
125
)
Trade receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Capital and reserves
Share capital [$500 000 + (500 000 × 2/5) Bonus issue + $100 000]
Share premium [100 000 share × ($1.20 – $1.00)]
Retained earnings [$380 000 – $200 000 (bonus) + $190 000 (profit)]
Current liabilities
Trade payables
Other payables
(W 1)
Administrative expenses
Depreciation of property [($600 000  $200 000) × 2% × 1/4]
Office equipment depreciation [($60 000 × 10%)  ($20 000 × 10% × 6/12)
Total Administrative expenses
$000
$000
$000
35
600
(32)
370
(122)
568
248
851
20
85
180
(36)
144
126
88
800
20
370
98
26
463
1 314
1 190
124
1 314
$240 000
2 000
5 000
$247 000
Chapter 13
QUESTION 10
(a)
220
Manufacturing Accounts
MAY 2016 P32 Q2
Kempes Limited
Manufacturing account
For the year ended 30 September 2015
Raw Material cost
Opening inventory
Purchases
Carriage inwards
Closing inventory
Cost of raw materials used
Factory production wages
Prime cost
Factory Overheads
Factory supervisory wages
Depreciation – Factory plant and machinery
General expenses [($78 000 + $5 000  $3 000) × 65%]
$
110 000
794 750
4 250
909 000
(125 000)
784 000
382 500
1 166 500
64 000
55 000
52 000
Add
Opening work in progress
Less
Closing work in progress
Cost of Production
Add
Manufacturing profit ($1 341 000 × 15%)
Market value of Production transferred to trading account
(b)
$
171 000
1 337 500
17 500
(14 000)
1 341 000
201 150
1 542 150
Kempes Limited
Income statement
For the year ended 30 September 2015
$
Revenue
Cost of Sales
Opening inventory of finished goods
Market value of Production
Closing inventory of finished goods
Gross profit
Add
Manufacturing profit
Expenses
Administrative wages
General expenses [($78 000 + $5 000  $3 000) × 35%]
Depreciation on office fixtures & fittings
Increase in prov. for unrealised profit [(21505 × 15/115)− (19550×15/115)
Profit for the year
19 550
1 542 150
1 561 700
(21 505)
115 000
28 000
37 500
255
$
1 845 000
(1 540 195)
304 805
201 150
505 955
(180 755)
325 200
(c)
The finished goods inventories are valued at cost plus the profit margin. IAS 2 clearly states that inventories
must be valued at lower of cost or NRV. Inventories should not include profit element as these profits are
not yet realized. As a result, provision for unrealised profit is created to remove the profit element from the
inventory of finished goods.
(d)
Decrease in provision for unrealised profit [($18 400 × 15/115) − ($21 505 × 15/115) = $405
This will be shown as other income in the income statement of October.
Chapter 13
(e)
221
Manufacturing Accounts
Factory profit is the difference between cost of producing the goods and the cost at which the same goods
could be bought from an outside supplier. Factory profit is added to cost of production so results in increase
in cost of sales and reduction in gross profit. However, as factory profit is added back to net profit, so net
profit remains unaltered.
Due to increase in the bought in price of finished goods, the transfer price should be increased accordingly
provided production cost remains the same. Therefore, the proposal to increase the mark-up to 20% should
be adopted.
QUESTION 11
(a)
(i)
NOVEMBER 2016 P32 Q2
Alpha Limited
Manufacturing Account for the year ended 30 April 2016
Raw Materials Cost
$
$
Raw materials at 1 May 2015
1 000
Purchases of raw materials
12 200
Carriage inwards
1 100
13 300
14 300
Raw materials at 30 April 2016
(3 100)
Cost of raw materials consumed
11 200
Direct factory wages
17 500
Prime cost
28 700
Factory Overheads
Factory supervisor’s salary
8 200
Factory rent ($8 000 × 75%)
6 000
Factory overheads
9 700
23 900
Cost of production
52 600
Factory profit ($52 600 × 25%)
13 150
Market value of Production transferred to Income statement
65 750
(ii)
Alpha Limited
Income Statement for the year ended 30 April 2016
$
Revenue
Market value of Production
Gross profit
Factory profit
Expenses
Office rent ($8 000 × 25%)
Office salaries
General office expenses
Profit for the year
(b)
20 500
21 900
Statement to calculate the expected annual profit if option 1 is implemented
Profit for year ended 30 April 2016
Decrease in sales revenue ($95 000 × 100/1000)
Increase in inventory ($65 750 × 100/1000)
Decrease in general office expenses ($10 000 × 50% × 100/1000)
Provision for unrealised profit ($13 150 × 100/1000)
Expected profit under option 1
(c)
2 000
8 500
10 000
$
95 000
65 750
29 250
13 150
$
21 900
(9 500)
6 575
500
(1 315)
18 160
Option 1 has the higher profit.
Option 1 involves keeping of inventory which will help to avoid sale losses and poor customer service with
losing customer confidence.
Chapter 13
222
Manufacturing Accounts
Buying same quantity from the supplier will help to keep good relationship with suppliers
Option 1 would help to achieve efficient production run
Smooth production operations would avoid difficulties in reducing workers’ hours/redundancies.
This fall in demand may be the start of a longer term trend.
If production continues to exceed demand there would be a large build-up of inventory.
Option 2 avoids inventory holding costs e.g. insurance.
Option 2 avoids the risk of inventory becoming obsolete/damaged.
QUESTION 12
(a)
NOVEMBER 2016 P33 Q1
M Limited
Manufacturing Account for the year ended 31 December 2015
Raw Materials Cost
Opening inventory
Purchases of raw materials
Carriage inwards
Less
Closing inventory
Direct wages
Prime cost
Factory Overheads
Indirect wages
Rent [($49 000  $4 000) × 4/5]
Heat, light and power [($28 600 + $3 500) × 4/5]
General expenses [($12 600 × 3/4]
Depreciation on plant ($200 000 × 10%)
$
10 400
146 200
3 160
(11 750)
Add
Opening work-in-progress
Less
Closing work-in-progress
Factory cost of finished goods
Add
Factory profit ($541 120 × 20%)
Market value of production transferred to income statement
12 600
(14 670)
(b)
54 650
36 000
25 680
9 450
20 000
$
148 010
249 400
397 410
145 780
543 190
(2 070)
541 120
108 224
649 344
M Limited
Income Statement for the year ended 31 December 2015
$
Revenue
Cost of Sales
Opening inventory of finished goods
Add
Market value of production
Closing inventory of finished goods
Gross profit
Expenses
Office salaries
Carriage outwards
Rent [($49 000  $4 000) × 1/5]
Heat, light and power [($28 600 + $3 500) × 1/5]
General expenses ($12 600 × 1/4)
Depreciation on motor vehicle ($25 000 × 25%)
Depreciation on office equipment [($15 000 – $4 600) × 15%]
Profit from operating activities
Add
Factory profit
Less
Increase in provision for unrealised profit[($15 750 × 20/120)  $2 484]
Overall profit for the year
14 904
649 344
(15 750)
24 780
2 790
9 000
6 420
3 150
6 250
1 560
108 224
(141)
$
742 490
648 498
93 992
(53 950)
40 042
108 083
148 125
Chapter 13
223
Manufacturing Accounts
(c)
Transfer price in manufacturing accounts represents the cost at which the manufactured goods could be
bought from an outside supplier. To calculate transfer price, Factory profit is added to cost of production so
it results in increase in cost of sales and reduction in gross profit. However, as factory profit is added back
to net profit, so net profit remains unaltered. This also results in overstatement of inventory of finished
goods which is adjusted through provision for unrealised profit in the balance sheet.
(d)
The offered price is $60 which is higher than the factory cost which is $54.11. The transfer price is, however
$64.93, but will be irrelevant as it includes an element of factory profit. The company should not accept the
offer until they are not able to meet the demand from existing capacity of 10 000 units. However, the
products supplied must be of the same quality and delivery reliable.
QUESTION 13
(a)
MAY 2017 P32 Q1
Richard Ang
Manufacturing account for year ended 31 July 2016
Raw Material Cost
Opening inventory of raw materials
Purchases
Carriage inwards
Closing inventory of raw materials
Cost of raw materials consumed
Direct wages ($168 000 + $3 500)
Prime cost
Factory overhead
Indirect wages
Factory rent [($24 000 + $16 000) × 3/4]
Other factory overheads ($155 000 – $24 000)
Add
Opening work in progress
Less
Closing work in progress
Cost of production
Add
Factory profit ($600 000 × 20%)
Market value of production transferred to Income Statement
(b)
$
14 800
207 600
6 800
229 200
(16 400)
$
212 800
171 500
384 300
51 400
30 000
131 000
23 500
(20 200)
212 400
596 700
3 300
600 000
120 000
720 000
Richard Ang
Income statement for year ended 31 July 2016
$
Revenue
Return inwards
Opening inventory of finished goods ($32 000 × 120%)
Add
Market value transferred from Manufacturing Account
Less
Closing inventory of finished goods
Gross profit
Operating expenses
Carriage outwards
Office rent [($24 000 + $16 000) × 1/4]
Other office overheads ($194 000 – $16 000)
Factory profit
Increase in provision for unrealised profit [($54 000 × 20/120) – ($32 000 × 20%)]
Profit for the year
38 400
720 000
758 400
(54 000)
17 500
10 000
178 000
120 000
(2 600)
$
986 000
(12 000)
974 000
(704 400)
269 600
(205 500)
64 100
117 400
181 500
Chapter 13
224
Manufacturing Accounts
(c)
Statement of financial position (extract to show inventories at 31 July 2106)
Current Assets
$
Inventory
Raw materials
Work in progress
Finished goods
54 000
Less: Provisions for unrealised profit
(9 000)
$
16 400
20 200
45 000
81 600
(d)
Under prudence concept value of an inventory should not include an element of profit so factory profit
needs to be removed from the value of finished goods inventory as it has not yet been earned or realized.
(e)
Richard Ang help to his sister in setting up a furniture business will improve family bonding. This may also
help Richard to expand the business and explore new markets.
On the other hand, the market may become more competitive. Her sister’s business may start price war
through selling at reduced rates. However, as Richard is selling finished goods only, so increase in
production volume may result in economies of scale for him.
QUESTION 14
NOVEMBER 2017 P31 Q1
(a)
Factory profit is the difference between cost of producing the goods and the cost at which the same goods
could be bought from an outside supplier. Factory profit is added to cost of production so results in increase
in cost of sales and reduction in gross profit. However, as factory profit is added back to net profit, so net
profit remains unaltered.
The production department is a profit centre so adding mark up to the factory cost of production helps in
determining its contribution in the overall profits.
(b)
Manufacturing account
For the year ended 31 December 2016
Raw Materials Cost
Opening inventory of raw materials
Purchases
Carriage inwards
Closing inventory of raw materials
Cost of raw materials used
Direct expenses
Direct wages
Prime cost
Factory Overheads
Indirect wages
Factory overheads
Depreciation of factory machinery [($330 000 – $276 000) × 15%]
Rent [($440 000 + $40 000) × 3/4]
Heat and light ($178 000 × 3/4)
Insurance and rates [($92 000 – $6 000) × 3/4]
Add
Opening work in progress
Less
Closing work in progress
Cost of production
Factory profit ($2 440 000 × 20%)
Transferred to the trading section of Income Statement
$
52 000
484 000
21 000
557 000
(67 000)
$
490 000
120 000
626 000
1 236 000
132 000
510 900
8 100
360 000
133 500
64 500
97 000
(102 000)
1 209 000
2 445 000
(5 000)
2 440 000
488 000
2 928 000
Chapter 13
225
(c)
Manufacturing Accounts
Income Statement (trading section)
For the year ended 31 December 2016
$
Revenue
Opening inventory of finished goods ($122 000 × 120%)
Market value of production (80 000 units)
146 400
2 928 000
3 074 400
(241 440)
Closing inventory of finished goods [($122 000 × 20%) + $15 840] × 120/20
Cost of goods sold
Gross profit
2 832 960
1 435 040
(d)
Statement of financial position (extract)
Current Assets
Finished goods
Less : Unrealised profit [($122 000 × 20%) + $15 840] or [($241 440 × 20/120]
(e)
$
4 268 000
$
241 440
(40 240)
Ted should consider accepting the extra order as his production unit cost $30.50 (
$2 440 000
80 000 units
$
201 200
) is higher than
the unit cost $28 demanded by the external supplier. Accepting the order can also maintain the goodwill
with the customer and would increase the customer base. However, he should make sure the quality of
purchased product is of standard quantity
QUESTION 15
MAY 2018 P31 & P33 Q1
The trader with a factory involving the manufacturing of goods has to prepare a manufacturing account or production
account. As its name suggests, a Manufacturing Account is concerned with the calculation of the cost of producing
goods for sale, either to other businesses or directly to the public. It is prepared for the following purposes.

First and foremost the manufacturing account shows the production cost of goods manufactured for the
relevant period by bringing together all the costs involved in purchasing them in raw form and converting
them into completed goods (conversion costs).

It shows profit or loss on manufacturing activities by comparing cost of producing the finished goods and
costs which were to be paid if these produced goods were bought from an outside supplier.

The manufacturing account shows the costs of running and maintaining the factory in which the product is
made.
(b)
Manufacturing account for JH Limited for year ended 31 October 2017
$
270 000
509 000
779 000
28 000
(32 000)
775 000
155 000
930 000
Prime cost ($252 000 + $18 000)
Factory overheads [$461 000 + ($60 000 + $3 000 + $1 000) × 75%]
Add
Opening work in progress
Less
Closing work in progress
Cost of production
Factory profit ($775 000 × 20%*)
Market value of production
*
$18 000
$108 000−$18 000
(c)
= 20%
Income statement for JH Limited for year ended 31 October 2017
$
Revenue
Cost of Sales
Opening inventory of finished goods
Add
Market value of production
Less
Closing inventory of finished goods
Gross profit
108 000
930 000
(96 000)
$
1 860 000
942 000
918 000
Chapter 13
226
Manufacturing Accounts
Factory profit
Decrease in provision for unrealised profit- $18 000  ($96 000 ×
155 000
$155 000
$930 000
)
2 000
157 000
1075 000
Distribution costs ($216 000  $18 000)
Administration expenses ($412 000  $60 000 + ($60 000 + $3 000 + $1 000) × 25%]
Operating profit
Finance charges
Profit for the year
(d)
Cost of production
Add
Factory profit ($775 000 × 20%) ; ($775 000 × 25%)
Market value of production
Gross profit [$918 000  (193 750  $155 000) + ($96 000 × 5%/120%]
Profit for the year
198 000
368 000
Original ($)
775 000
155 000
930 000
918 000
481 000
(566 000)
509 000
(28 000)
481 000
Revised ($)
775 000
193 750
968 750
883 250
481 000
The mark-up over the production cost can be increased by 5%. This will increase the transfer price of goods, however
the impact on sale price is uncertain. The selling prices are usually based on production cost plus a fixed mark-up so
increase in transfer price will also increase selling price. This may make the product uncompetitive unless it has
inelastic demand. Its future demand will also be based on the price increase by the competitor. No change in selling
price may attract more customers.
Increase in transfer price will reduce gross profit but no effect on final profit for the year. The increase in transfer
price may affect bonuses and incentives to production staff which may improve productivity in future. From the
above discussion it looks better to have no increase in price.
.
Chapter 14
227
CHAPTER 14
Absorption Costing
ABSORPTION COSTING
QUESTION 1
NOVEMBER 2012 P43 Q3
Kriti Singh manufactures one product, and uses absorption costing in valuation and pricing decisions.
Each product requires 3 kilos of raw material costing $8 per kilo, and 4 hours of direct labour at $7.50 per hour.
Other direct production costs amount to $4 per unit.
The salesman is paid a commission and earns $2.50 for each item sold. The factory supervisor is paid $18 000 a
year.
Costs of shipping to customers is $1 each.
Every time 50 units are completed maintenance costing $30 is performed on the machinery.
Factory rent is $24 000 a year.
Other fixed manufacturing costs amount to $12 000 a year. Variable administration costs amount to $8.20 per unit
sold.
On 1 April 2012 there were no units in inventory. During the month 1250 units were produced. On 30 April 2012
there were 150 units unsold.
REQUIRED
(a)
Calculate the value of one unit of inventory.
[10]
Additional information
Kriti Singh uses a mark-up of 30% on total cost to calculate the selling price.
REQUIRED
(b)
Starting with your answer from (a), calculate the selling price of one unit.
(c)
Prepare an income statement for the month of April 2012.
(d)
Reconcile the total profit with the mark-up per unit.
[6]
[7]
[3]
Kriti Singh is considering expanding her business and manufacturing an additional product.
Projected costs and revenues for this product are:
Direct production costs $60 per unit Variable administration and distribution costs $10 per unit Rent of second
factory $30 000 a year Supervisor’s salary $22 000 a year.
Other fixed manufacturing costs $18 000 a year.
Production is expected to be 2000 units a year with no inventory of finished goods being held. She will use the
same mark-up for the new product as at present.
REQUIRED
(e)
Calculate the expected profit for the year.
(f)
Calculate the sensitivity of the expected profit to changes in:
(i)
sales price;
(ii)
sales volume;
(iii)
variable costs;
(iv)
fixed costs.
[2]
[2]
[6]
[2]
[2]
Chapter 14
228
Absorption Costing
SOLUTION
CHAPTER 14
QUESTION 1
(a)
NOVEMBER 2012 P43 Q3
Calculation of per unit cost of inventory
$
24.0
30.0
4.0
Raw material (3 kilos @$8 each)
Direct labour (4 hours @ $7.5 each)
Direct costs
$18 000 ÷ 12
Supervisor’s Salary (
$24 000 ÷ 12
Rent (
1 250 units
)
1.2
)
1 250 units
$30
Maintenance (
1.6
)
0.6
50 units
$12 000 ÷ 12
Fixed manufacturing costs (
1 250 units
)
0.8
Per Unit Cost
62.20
(b)
Calculation of selling price per unit
$
62.20
2.50
1.00
8.20
73.90
22.17
96.07
Total production cost per unit (“a” part)
Salesman Commission
Distribution (Shipping Cost)
Administration
Total Costs
Profit ($73.90 × 30%)
Selling price per unit
(c)
Income statement for the month of April 2012
$
Sales [1 100 units (W 1) × $96.07 (b)]
Cost of Sales
Production costs (1 250 units x $62.2 (a)]
Closing inventory (150 units × $62.20)
Gross profit
Operating Expenses [1 100 units × ($1.00 + $2.50 + $8.2)]
Operating Profit
77 750
(9 330)
(d)
Statement to reconcile mark-up per unit with the total profit
Per unit mark-up (‘b’ part)
× Units Sold
Total Profit (same as shown in “c” part)
(e)
(68 420)
37 257
(12 870)
24 387
$22.17
× 1 100
24 387
Calculation of the expected profit for the year
$
140 000
70 000
210 000
× 30%
63 000
Variable costs [2 000 units × ($60 + $10)]
Fixed costs ($30 000 + $22 000 + $18 000)
Profit rate
Expected profit ($210 000 × 30%)
(f)
$
105 677
Sensitivity of the expected profit to changes in:
(i)
Sales price
=
$63 000
$210 000+$63 000
× 100
=
23.08%
Chapter 14
(ii)
Sales volume
=
(iii)
Variable costs
=
(iv)
Fixed costs
=
WORKINGS
(W 1)
(W 2)
229
Opening Inventory
Nil
Break-Even
2 000−1 053 (W 2)
× 100 =
47.35%
× 100
=
45.00%
× 100
=
90.00%
2 000
$63 000
$140 000
$63 000
$70 000
+
+
=
Absorption Costing
Purchases
1 250
$70 000
66.5


Closing inventory
1 100
=
1 053 units
=
=
Units of Sales
150
Chapter 15
CHAPTER 15
230
Budgeting
BUDGETING
QUESTION 1
MAY 2011 P41 Q3
Echoes plc has the following statement of financial position (balance sheet) at 30 April 2011.
$000
$000
$000
Non-current assets
Cost
Depreciation
NBV
Land and buildings
1200
50
1150
Equipment
230
90
140
Motor vehicles
210
115
95
1640
255
1 385
Current assets
Inventory
150
Trade receivables
122
Prepaid rates and insurance
8
280
Current liabilities
Trade payables
75
Tax
30
Cash and cash equivalents
15
120
160
1545
Equity
Ordinary shares of $0.50 each
800
Share premium
100
Retained earnings
645
1545
Sales and purchases budgets have been produced for Echoes plc for the year ending 30 April 2012 as follows:
$000
$000
Sales
Purchases
May to February
1 060
560
March
100
60
April
100
60
Total
1 260
680
Other information is as follows:
1
All sales are on credit. 50% of customers pay in the month after sale and the remaining customers pay in
the second month. On 1 May 2011 the company is introducing a 5% cash discount for customers paying in
the month after sale, applicable to sales made on or after that date.
Discount will only be accounted for when funds are received.
2
Purchases accrue evenly over the month. The company pays its suppliers 1½ months after receipt
of goods.
3
The company pays rates six months in advance on 1 June and 1 December each year.
Each payment amounts to $9 000.
4
The company pays an annual premium for insurance, in advance, on 1 October each year. It is
expected that in 2011 the premium will be $30 000.
5
All other selling, distribution and administration payments for the year, including wages and salaries, are
expected to amount to $184 000.
6
The company plans to modernise its equipment and upgrade its vehicles during the year.
It plans to sell all the vehicles for $80 000 and buy new ones at a total cost of $400 000.
It also plans to sell half the equipment for $75 000 and replace it with new equipment costing $310 000.
7
The cost of land and buildings is split $800 000 for the land and $400 000 for the buildings.
8
The company provides a full year’s depreciation on non-current assets purchased during the year but
none in the year of disposal. Annual depreciation rates are:
Buildings
2.5% on cost
Equipment
20% on cost
Motor vehicles
30% on net book value
Chapter 15
231
Budgeting
9
The company plans to issue 100 000 new shares at a price of $1.70 on 1 July 2011 to part fund the purchase
of the non-current assets.
It also plans to issue $300 000 6% debentures, redeemable in 2028, on 1 July 2011. The first interest
payment on the debentures will be paid on 30 April 2012.
10
Tax is provided for at 20% of profit after finance charges and is paid ten months after the financial
year end.
11
Inventory is expected to increase by 10% over the year.
12
The company intends to pay a dividend of $0.03 per share on 30 June 2011.
REQUIRED
(a)
Calculate the bank balance expected on 30 April 2012.
[14]
(b)
Prepare forecast income statement for the year ending 30 April 2012.
[12]
(c)
Prepare the statement of financial position (balance sheet) at 30 April 2012.
[14]
QUESTION 2
MAY 2011 P43 Q3
Gala Ltd manufactures one product, the Durrell. Its sales for a six month period are expected to be:
2011
Durrells
July
800
August
1 050
September
1 400
October
1 100
November
950
December
850
On 1 July Gala Ltd expects to have 100 Durrells in inventory. It intends to hold inventory levels of 250 Durrells at the
end of July and August, 200 at the end of September and October, and 100 thereafter.
REQUIRED
(a)
Prepare a monthly production budget for Gala Ltd for the six months July to December.
[6]
Each Durrell requires 2 kilos of raw material. Until 31 August this is expected to cost $4 per kilo and $4.50 from 1
September to 30 November and $5 per kilo thereafter.
REQUIRED
(b)
Prepare a monthly raw materials purchasing budget for the six months July to December.
[6]
Selling prices for the Durrell are expected to be $190 each in July, August and September and $200 each thereafter.
All sales are on credit.
50% of debtors pay in the month following sale and receive 4% cash discount, and the remainder pay in the second
month following sale.
REQUIRED
(c)
Calculate the expected value of trade receivables on 1 September.
[2]
(d)
Prepare a monthly trade receivables budget for the four months September to December.
[21]
(e)
State three advantages to Gala Ltd of using budgets.
[3]
(f)
(i)
Name one item which may appear in an income statement but cannot appear in a cash budget[1]
(ii)
Name one item which may appear in a cash budget but cannot appear in income statement. [1]
QUESTION 3
NOVEMBER 2011 P42 Q3
Ada Campellini runs a business which retails high quality clothing. It is particularly busy during the festive season.
The budgeted sales and purchases figures for September 2012 to January 2013 are as follows: Additional
information:
September ($) October ($) November ($) December ($) January ($)
Sales
215 000
225 000
310 000
425 000
195 000
Purchases
175 000
190 000
245 000
135 000
135 000
1
50% of sales are expected to be paid for by cash and these customers will receive a 6% discount.
50% of the remaining sales are expected to be paid in the following month and these customers will receive
a 3% discount.
The remainder will pay 2 months after the sale.
Chapter 15
2
3
4
5
6
7
8
232
Budgeting
30% of purchases are expected to be paid for in the month of purchase and will receive a 4%
discount.
40% of purchases are expected to be paid for in the month after purchase and will receive a
2% discount.
The remainder are paid for 2 months after purchase.
The inventories held on 1 November 2012 are budgeted at $180 000.
The inventories held on 31 January 2013 are budgeted at $129 000.
Total general expenses are budgeted at $18 000 in November 2012 with an expected 10% rise in December
and a 15% reduction (on the December total) in January 2013.
All general expenses are expected to be paid in full in the month in which they occur.
Depreciation on non-current assets acquired before November 2012 will be $1 750 per month.
On 1 November 2012 Ada will acquire a new storage system at a cost of $24 000 and will pay
50% of the cost immediately. The remainder will be paid in equal instalments over the following
12 months without any interest charges.
This new non-current asset will be depreciated at 10% per annum on a monthly basis.
Ada will make drawings of $3 000 every month except for December 2012. In this month she
expects to draw 1.5% of the month's expected sales.
The bank balance at 1 November 2012 is expected to be $34 850.
REQUIRED:
(a)
Prepare a cash budget, in columnar format, for the 3 months commencing November 2012.
[30]
(b)
Prepare a budgeted income statement in as much detail as possible from the given information for this 3
month period ending in January 2013.
[10]
QUESTION 4
MAY 2012 P42 Q3 (a, b, c, e & f)
Hiemstra Limited manufactures a single product. It operates a flexible budgetary control system.
REQUIRED
(a)
Explain what is meant by flexible budgetary control.
[3]
(b)
Explain why flexible budgetary control is better than a fixed budget to monitor the costs of a business. [4]
The budgeted sales in units for the next three months are:
Month
Units
1
1 200
2
1 400
3
1 600
At the start of month 1 it will have 200 units of finished goods in stock. It wishes to reduce the closing stock of finished
goods by 20 units a month.
REQUIRED
(c)
Prepare the company's production budget in units for months 1-3.
Additional information:
The revenue and cost information for one unit:
Selling price
Direct material
Direct labour
Budgeted factory overheads:
Variable
Fixed
Other budgeted fixed costs
$29 per unit
2 kilograms of material at $3 per kilogram
0.5 hours at $10 per hour
@$4 per unit
$15 000
$23 500
Additional information:
The actual results for the three-month period were:
Sales
Selling price
4 400 units
$28 per unit
[8]
Chapter 15
233
Budgeting
Direct material
2 kilograms at $4 per kilogram
Direct labour
0.4 hours at $10 per hour
Factory overheads
$36 200
Fixed overheads
$18 000
REQUIRED
(e)
Prepare a flexible budget statement for the three-month period, clearly showing the actual and budgeted
data and any variances.
[10]
(f)
Explain why, despite an increase in units sold, the actual profit was less than the budgeted profit . [8]
QUESTION 5
Zeresh Limited provides the following information from its sales budget for 2014.
Units
January
10 000
February
11 000
March
11 000
April
12 000
May
12 000
June
14 000
MAY 2013 P41 Q3
Sales price per unit ($)
20
20
21
21
21
24
Additional information
Inventory of finished goods at each month end is maintained at 20% of the units expected to be sold in the following
month.
Each unit requires 0.5 kilos of raw materials, which costs $3 a kilo.
Half a month’s inventory of raw materials is maintained, based on the expected usage in the following month. The
total production cost of each unit is $11 and this is the value used for inventory valuation.
REQUIRED
(a)
(i)
Prepare the production budget for each of the five months January to May 2014.
[11]
(ii)
Prepare the purchases budget for raw materials for each of the four months January to April 2014.
Show purchases of raw materials in both kilos and dollars.
[9]
(b)
Calculate the value of finished goods & raw materials inventory at both 1 January 2014 & 30 April 2014. [4]
(c)
(i)
Prepare a summarised manufacturing account for the four month period ending 30 April 2014.
[6]
(ii)
Prepare the trading account section of the income statement for the same period
. [6]
(d)
State two advantages & two disadvantages to a company of using a budgetary control system.
[4]
QUESTION 6
MAY 2013 P42 Q3
Alfonso Trading Limited provides the following budgeted data for 2014.
January
February
March
April
May
Budgeted sales (units)
5 000
5 200
5 600
5 800
5 500
Sales price per unit
$10
$10
$9
$9.50
$10
Purchase price per unit
$4
$4
$4.20
$4.20
$4.20
The following information is also available:
1
The company uses the FIFO method of inventory valuation.
2
The directors aim to maintain inventory levels at 25% of the following month’s sales.
They expect to achieve this on 31 December 2013 but know it will not be possible every month. The
company can buy in a maximum of 5 500 units in any one month.
3
All sales are on credit. 50% of customers pay in the month following sales and receive a cash discount of 4%.
The remaining customers pay two months after sale.
4
Trade receivables on 1 January 2014 are expected to be $24 000 from November’s sales and $49 000 from
December’s sales
5
Trade payables on 1 January 2014 are expected to total $20 000. The company pays for all its purchases in
the month after purchase, receiving a discount of 5% for prompt payment.
Chapter 15
234
Budgeting
REQUIRED
(a)
Prepare for each of the four months January to April 2014:
(i)
Purchases budget. Show purchases for each month in both units and value.
[8]
(ii)
Trade receivables budget.
[14]
(iii)
Trade payables budget.
[10]
(b)
Prepare an extract from the statement of financial position at 30 April 2014 showing current assets and
current liabilities.
[3]
Additional information relating to April 2014 is as follows:
$
Budgeted total variable costs
24 900
Budgeted total fixed costs
16 700
REQUIRED
(c)
Calculate for April 2014:
(i)
the sensitivity of performance to changes in the selling price
(ii)
the selling price per unit at which profit would be zero
(iii)
the sensitivity of performance to changes in variable cost.
[2]
[1]
[2]
QUESTION 7
NOVEMBER 2013 P43 Q3 (a & b)
Riffatulah, a retailer, is preparing his budgets for the year ending 31 May 2014. He provides the following
information.
Statement of Financial Position at 31 May 2013
Assets
$
$
$
Non-Current Assets
Cost
Depreciation
NBV
Fixtures and fittings
19 200
7 100
12 100
Vehicle
15 100
11 200
3 900
34 300
18 300
16 000
Current Assets
Inventories
4 800
Trade receivables
11 900
Other receivables (insurance)
350
Cash and cash equivalents
6 600
23 650
Total Assets
39 650
Capital
Total Capital
25 550
Non-Current Liabilities
Bank loan (6%)
8 000
Current Liabilities
Trade payables
6 100
Total Liabilities
14 100
Total Capital and Liabilities
39 650
He prepares budgets using three month periods as follows:
Period
1
1 June to 31 August
2
1 September to 30 November
3
1 December to 28 February
4
1 March to 31 May
He provides the following budgeted information for the year ending 31 May 2014.
Period
1
Sales (units)
4 200
Unit selling price
$3.10
2
4 800
$3.20
3
4 600
$3.40
4
4 500
$3.30
Chapter 15
Purchases (units)
Unit purchase price
235
Budgeting
1
4 700
$1.20
2
4 600
$1.30
3
4 500
$1.30
4
4 500
$1.40
3
$
14 000
4
$
15 000
_____
16 500
2
$
14 200
5 000
_____
19 200
3 400
17 400
_____
15 000
5 800
5 700
5 200
18 000
4 000
2 500
2 500
3 000
5 000
2 600
31 300
2 700
14 200
Schedule of receipts and payments
Receipts
Customer receipts
Legacy from uncle
Proceeds of vehicle sale
Total receipts
Payments
Supplier payments
Purchase of new vehicle
Purchase of fixtures
Rent
Loan interest
Drawings
Insurance
Administration costs
Total payments
1
$
16 500
2 500
3 000
2 400
13 700
3 800
2 500
240
4 000
2 000
2 600
20 840
Additional information
1
Inventory on 31 May 2014 is expected to have a value of $5 100.
2
Discount allowed for the year is expected to be 2% of total sales. Bad debts are expected to be 1% of total
sales.
3
Discount received is expected to be 1% of purchases.
4
Riffatulah depreciates vehicles at a rate of 40% a year on the reducing balance basis.
He depreciates fixtures and fittings at a rate of 10% a year on cost. He provides a full year’s depreciation in
the year of purchase and none in the year of disposal. He only keeps one vehicle at a time.
5
The insurance policy runs from 1 September to 31 August each year.
REQUIRED
(a)
Prepare a budgeted income statement for the year ending 31 May 2014.
[13]
(b)
Prepare a budgeted statement of financial position at 31 May 2014.
[17]
(c)
Using only figures from your answers to (a) and (b), calculate Riffatulah’s working capital cycle.
[7]
(d)
Suggest three ways Riffatulah could improve his working capital cycle and reduce his bank overdraft. [3]
QUESTION 8
MAY 2014 P43 Q3
MW Limited manufactures a single product, a Tu. The finance director prepares monthly budgets.
The following budgeted information is available for the first three months of 2015.
1
2
3
The selling price will be fixed at $60 per unit. In January 2015 sales are expected to be 24 000 units. It is
anticipated that there will be a 5% increase in sales volume in every subsequent month up to April 2015.
The finished goods inventory level at the end of each month will be maintained at one-third of the expected
sales volume in the following month. The inventory of finished goods at 31 December 2014 is expected to
be 7 500 units with a value of $242 000. The finished goods inventory value at 31 March 2015 is expected
to be $298 000.
Each unit of Tu requires 10 kilos of raw material. The closing inventory of raw materials each month is
expected to meet 20% of the production requirement of the following month. The inventory of raw
materials at 31 December 2014 is expected to be 48 000 kilos. The purchase price will remain at $1.50 per
kilo.
Direct labour for the first three months of 2015 is expected to be $850 000. Manufacturing overhead is
expected to be 50% of direct labour.
Chapter 15
236
Budgeting
REQUIRED
(a)
Prepare the sales budget for the period January to March 2015. State the units and revenue for each month.
[6]
(b)
Prepare the production budget for the period January to March 2015. State the units for each month. [9]
(c)
Prepare the purchases budgets for the period January to March 2015. State the units and cost for each
month.
[15]
(d)
Prepare the budgeted trading section of the income statement for the three months ending 31 March 2015.
[10]
QUESTION 9
The directors of Drosnan Retail Limited provide the following budgeted information.
Monthly
Revenue
Purchases
depreciation
2014
$
$
$
November
24 000
14 000
120
December
26 000
17 000
120
2015
January
30 000
18 000
120
February
26 000
15 000
120
March
28 000
19 000
150
April
32 000
13 000
150
NOVEMBER 2014 P42 Q3
Administration
Costs
$
6 300
6 200
6 200
6 800
7 100
6 700
Other information is as follows.
1.
10% of all revenue are cash sales.
2.
50% of credit customers pay in the month following the sale and receive a 4% cash discount. Remaining
trade receivables pay in the second month following the sale.
3.
All purchases are on credit and are paid for in the month following purchase, after deducting a 5% early
settlement discount.
4.
The business rent is $9 000 a year. This is paid in two equal installments on 1 February and 1 August each
year.
5.
A dividend of $3 100 is expected to be paid on 19 January 2015.
6.
Administration costs are paid in the month after the one in which they are incurred.
7.
The company expects to take out a bank loan of $10 000 with an interest rate of 7.8% p.a on 1 March 2015.
This is to help finance the purchase of a new vehicle in March which is expected to cost $12 000. The loan
is to be repaid in full together with the interest after one year.
8.
The company directors intend to sell an old vehicle in April 2015. This originally cost $7 200 and by the date
of disposal will have accumulated depreciation of $5 100. The sales proceeds are anticipated to be $1 100.
9.
Inventory on 1 January 2015 is expected to have a value of $2 100. Inventory on 30 April 2015 is expected
to be valued at $3 800.
10.
It is expected that there will be a bank overdraft of $1 303 on 1 January 2015.
REQUIRED
(a)
Prepare a cash budget for each of the four months January to April 2015.
[15]
(b)
Prepare a budgeted income statement for the four month period ending 30 April 2015.
[14]
(c)
Explain two reasons why the change in the bank balance calculated in (a) is different from the profit figure
in (b).
[4]
(d)
State two reasons why management prepares a cash budget.
[2]
Additional information
Drosnan Retail Limited has a financial year end of 31 July 2015.
40% of its annual profit is expected to arise in the four month period ending 30 April. The dividend in January will be
the interim dividend; the final dividend is expected to be double the interim dividend.
REQUIRED
(e)
Calculate the expected dividend cover for the year ending 31 July 2015.
[5]
Chapter 15
237
Budgeting
QUESTION 10
NOVEMBER 2014 P43 Q2
The financial statements of Seko Limited for the year ended 30 June 2014 were as follows.
Income statement for the year ended 30 June 2014
$000
Revenue
Cost of Sales
Gross profit
Operating Expenses
Administrative salaries
Heating and lighting
Rent and rates
Depreciation on plant and machinery
Depreciation on motor vehicles
Bad debts
Sundry expenses
Profit for the year
700
98
340
60
48
4
72
$000
3 000
1 650
1 350
(1 322)
28
Statement of financial position at 30 June 2014
Assets
Non-Current Assets
Plant and machinery
Accumulated provision for depreciation
Motor vehicles
Accumulated provision for depreciation
Current Assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets
Equity and Liabilities
Equity and reserves
200 000 ordinary shares of $1 each
Retained earnings
$000
300
(160)
240
(150)
120
245
86
$000
140
90
230
451
681
200
286
486
Current Liabilities
Trade payables
186
Accrued administrative salaries
9
Total Liabilities
195
Total equity and liabilities
681
Seko Limited plans to expand its business in the following year and would like to prepare a budget for the year ending
30 June 2015.
1
Additional plant and machinery $220 000 and motor vehicles $130 000 are to be purchased on 1 July 2014.
To finance the non-current assets, a 4-year 10% loan $100 000 and a new issue of 250 000 ordinary shares
at $1 each will be raised on the same day. The first payment of loan interest and capital will be made on 1
July 2015.
2
Sales volume is expected to increase by 60% and the selling price is expected to increase by 10%.
3
Gross profit as a percentage of sales is expected to decrease by 5%.
4
Sales and purchases are expected to be made evenly during the year. All sales and purchases are on credit.
The sales credit period will be one month while the purchases credit period will be two months.
5
The closing inventory is expected to be $180 000 on 30 June 2015.
6
Two salesmen will be employed to strengthen the selling activities. Apart from their total annual salaries of
$123 000, the salesmen will be entitled to:
Chapter 15
238
Budgeting
Commission – 3% of gross sales (payable in July 2015)
Bonus – 5% of the profit for the year after charging the bonus (payable in July 2015)
7
All other expenses are expected to increase by 5% in line with the expected inflation rate.
8
Depreciation on non-current assets held at 30 June 2015 will be charged at 20% on the straight-line basis.
9
No bad debts are anticipated. However, a provision for doubtful debts will be made at 2% of the trade
receivables at the year end.
REQUIRED
(a)
Prepare the budgeted income statement for the year ending 30 June 2015.
[16]
(b)
Prepare the budgeted bank account for the year ending 30 June 2015.
[8]
(c)
Prepare the budgeted statement of financial position at 30 June 2015.
[12]
(d)
Explain two reasons why a business prepares a budget.
[4]
QUESTION 11
MAY 2015 P41 & P42 Q1
The financial statements for Zapf plc for the year ended 30 September 2014 have been completed.
The following information is available.
Zapf plc
Summarised Income Statement for the year ended 30 September 2014
$
Revenue
756 000
Cost of sales
(454 000)
Gross profit
302 000
Distribution costs
(96 000)
Administrative expenses
(180 000)
Profit from operations
26 000
Income from investments
5 000
Finance costs
(12 000)
Profit before taxation
19 000
Taxation
(4 000)
Profit for the year
15 000
Extract from Statement of Changes in Equity for the year ended 30 September 2014
Retained
earnings
$
24 000
15 000
(9 000)
30 000
Balance at 1 October 2013
Profit for the year
Dividends paid
Balance at 30 September 2014
Zapf plc
Statement of Financial Position at 30 September 2014
Non-Current Assets
Tangible
Property, plant and equipment
Investments
Intangible
Goodwill
$
$
304 000
75 000
379 000
Current Assets
Inventories
Trade and other receivables
Total Assets
74 000
95 000
60 000
439 000
169 000
608 000
Chapter 15
239
Equity
Ordinary shares of $1 each
5% Non-redeemable preference shares
Share premium
Retained earnings
Non-Current Liabilities
6% Debentures (2021)
Current Liabilities
Trade and other payables
Taxation
Cash and cash equivalents
Total equity and liabilities
Property, plant and equipment
Cost
Depreciation
Net book value
Extract from notes to the financial statements
Buildings
Plant and
equipment
$
$
320 000
158 000
112 000
78 000
208 000
80 000
Budgeting
$
180 000
100 000
30 000
30 000
$
340 000
150 000
53 000
4 000
61 000
Motor
vehicles
$
36 000
20 000
16 000
118 000
608 000
Total
$
514 000
210 000
304 000
The company accountant is now preparing the budgeted financial statements for the year ending 30 September
2015.
Budgeted information for the year ending 30 September 2015 is available.
1
Revenue is expected to increase by 4%.
2
The percentage of gross profit to sales is expected to increase to 42%.
3
Distribution costs and administrative expenses are both expected to increase by 3%.
4
Income from investments is not expected to change.
5
Finance costs are expected to decrease to $10 000.
6
The tax rate will be 20% on the profit before taxation.
7
No dividends are expected to be paid on the ordinary shares during the year.
8
Capital expenditure for the year is expected to be:
$40 000 on buildings
$18 000 on plant and equipment
$9 000 on motor vehicles
No disposals are expected.
9
Depreciation for the year is expected to be:
$18 000 on buildings
$44 000 on plant and equipment
$12 000 on motor vehicles
Depreciation is included in administrative expenses.
10
The trade receivables collection period is expected to be 45 days. All sales will be on credit.
11
Closing inventory is expected to be valued at $70 000.
12
The trade payables payment period is expected to be 40 days. All purchases will be on credit.
A proposed final dividend of $0.10 per ordinary share is due to be paid on 31 October 2015.
REQUIRED
(Make all calculations to nearest thousand $.)
(a)
Prepare the following for the year ending 30 September 2015.
(i)
the budgeted income statement
(ii)
the budgeted statement of changes in equity (retained earnings column only).
(b)
Prepare the following:
[12]
[5]
Chapter 15
(i)
(ii)
240
Budgeting
the property, plant and equipment section of the non-current assets note to the budgeted financial
statements for the year ending 30 September 2015.
[7]
the budgeted statement of financial position at 30 September 2015.
[16]
QUESTION 12
NOVEMBER 2015 P42 Q2(a)
Jamal is a sole trader. He is concerned that during the next few months he may have insufficient cash to pay his
expenses.
He provides the following information.
1
Sales revenue
$000
Actual sales per month
2015
September
135
October
187
Budgeted sales per month 2015
November
209
December
225
2016
January
258
February
293
1
20% of the sales are for cash.
2
80% of the sales are on credit. 60% of the credit customers pay in the month following the sale. The balance
is received two months after the sale.
3
Jamal purchases goods one month before their sale. He marks up his goods at a uniform rate of 50%. He
pays for 75% of these goods in the month following purchase. The balance is paid two months after
purchase.
4
Administration expenses are 10% of sales revenue and will be paid in the month following the sale.
5
Wages of $18 000 will be paid each month.
6
A delivery van costing $20 000 will be purchased in November 2015 and paid for in full by cheque.
7
Equipment which originally cost $25 000 will be sold on 1 December 2015 for $10 000.
Payment will be received, half at the time of sale and half one month later.
8
Equipment costing $30 000 will be purchased in November 2015. A deposit of 30% will be paid on delivery.
Equal monthly payments of 10% of the balance remaining will then be paid. (Ignore any interest)
9
Jamal intends to take cash drawings of $2000 per month in November and December 2015 and $3 000 cash
drawings each month in 2016.
10
A bank loan, $25 000, taken out in 2011 will be repaid in full in January 2016.
11
The balance on the business bank account at 1 November 2015 is expected to be $18 000 debit.
REQUIRED
Prepare a monthly cash budget for each of the three months from November 2015 to January 2016. Show all
workings and work to the nearest thousand dollars.
[30]
QUESTION 13
NOVEMBER 2016 P32 Q6
The directors of Slanting Stores Limited have prepared a cash budget.
REQUIRED
(a)
(i)
State one difference between a cash budget and a statement of cash flows.
[1]
(ii)
State two benefits of preparing a cash budget.
[2]
Additional information
Slanting Stores Limited makes all its sales on credit. Half of all credit customers pay in the month of sale, receiving a
cash discount for early payment. The remainder pay in the following month. Purchases for resale are paid for in the
month after purchase.
The cash budget for the three months ending 31 March 2017 is as follows:
Chapter 15
241
Budgeting
Cash budget for the three months ending 31 March 2017
January
February
$
$
Opening balance
17 800
17 300
Receipts – month of sale
28 500
26 125
Receipts – month following sale
40 000
30 000
Payments to suppliers
(44 000)
(33 000)
Wages
(10 000)
(10 125)
Other expenses
(15 000)
(14 800)
Dividend paid
–
(8 000)
Purchase of non-current asset
–
(9 100)
Closing balance
17 300
(1 600)
REQUIRED
(b)
Calculate
(i)
the value of sales for each of the three months January to March 2017,
(ii)
the value of cash discount for each of the three months January to March 2017,
(iii)
the rate of cash discount given.
(c)
March
$
(1 600)
30 875
27 500
(35 750)
(8 575)
(12 200)
–
–
250
[3]
[3]
[1]
Prepare the trade receivables budget for each of the three months January to March 2017. Trade
receivables at 1 January 2017 are expected to be $40 000.
[8]
Additional information
The directors wish to eliminate the expected deficit in cash at the end of February. They are considering paying $15
000 in January for an advertising campaign which is expected to increase sales from February onwards.
REQUIRED
(d)
Calculate the required increase in February’s sales, after the advertising campaign, needed to avoid the
negative cash balance.
[5]
(e)
Suggest two possible actions the directors could take, other than the advertising campaign, to improve the
cash flow.
[2]
QUESTION 14
Sunil is preparing the annual budgets for his manufacturing business.
NOVEMBER 2016 P33 Q6
REQUIRED
(a)
Explain what is meant by a master budget.
[2]
Additional information
The finished goods inventory held at 1 January 2017 is expected to be 200 units. This is expected to increase by 20
units each month until 31 March 2017.
Unit sales from December 2016 to April 2017 are expected to be:
December
350
January
370
February
410
March
380
REQUIRED
(b)
Prepare a production budget for each of the four months from January to April 2017.
April
430
[4]
Additional information
1
Goods will be sold on credit with a selling price of $30 per unit. One third is expected to be received in the
month of sale with the balance being received in the following month.
2
Other income will arise from the interest received on an investment of $50 000 at 4% per annum. Interest
will be received quarterly starting 1 January 2017.
Chapter 15
3
242
Budgeting
Unit product costs are expected to be as follows:
$
7
5
6
18
Direct materials will be purchased to meet the current month’s production. Half the amount due will be
paid by cash in the month of production and the balance will be paid in the following month. The number
of units produced in December 2016 is expected to be 340.
Direct labour will be paid in the month that the cost is incurred.
Four-fifths of the overheads will be paid in the month in which they are incurred with the balance being
paid in the following month.
Some new equipment is expected to be acquired on 1 January 2017 at a cost of $12 000. A 50% deposit will
be paid on delivery, with the remainder being paid on 1 April 2017. This equipment will be depreciated at
10% using the straight-line method.
The bank account balance at 1 January 2017 is expected to be overdrawn by $10 450.
Direct materials
Direct labour
Overheads
4
5
6
7
8
REQUIRED
(c)
Prepare a cash budget for each of the three months from January to March 2017.
[10]
(d)
Analyse the options available to Sunil to avoid using a bank overdraft.
[6]
(e)
Advise Sunil whether or not he should apply for a loan rather than maintain an overdraft. Justify your
answer.
[3]
QUESTION 15
NOVEMBER 2017 P32 Q6 (a to c)
J Limited sells a single product at a mark-up of 25%. The following information is available:
1
Sales revenue:
$
2017
November
150 000
December
180 000
2018
January
February
March
April
2
3
4
5
6
200 000
210 000
225 000
240 000
All sales are on credit and customers have a credit period of 2 months.
All purchases are on credit and suppliers are paid in the month following purchases.
Inventory level at the end of each month will be maintained at 25% of the sales volume in the following
month.
Monthly operating costs are expected to be $18 000, which includes $3 000 depreciation.
Balance at bank at 1 January 2018 is expected to be $4 500.
REQUIRED
(a)
Prepare the cash budget for each of the three months from January to March 2018.
[9]
(b)
Prepare a budgeted income statement for the three-month period ending 31 March 2018.
[3]
(c)
Prepare a reconciliation of the profit from operations for the three-month period ending 31 March 2018 to
the net cash at 31 March 2018.
[8]
QUESTION 16
NOVEMBER 2017 P33 Q6
Luke’s business is due to start on 1 April 2018, selling a single product obtained from a sole supplier.
Chapter 15
243
Budgeting
The purchase price is $40 per unit and Luke will sell each unit at a mark-up of 60%.
He also wants to maintain inventory at a level sufficient to cover 50% of the next month’s sales.
Budgeted unit sales for the first four months of trading are as follows:
April
5 000
May
8 000
June
4 000
July
3 000
The following information is also available:
1
Luke will introduce $150 000 capital into the business bank account on 1 April 2018. On the same day,
equipment costing $48 000 will be purchased by cheque.
2
Equipment will be depreciated over a period of 60 months with no residual value.
3
All purchases are expected to be paid one month after the purchases are made.
4
All sales will be on credit.
20% of customers are expected to take a cash discount of 11/2% and pay in the month of sale.
30% of customers are expected to pay one month after the sales are made.
The remaining customers are expected to pay two months after the sales are made.
5
Monthly operating expenses will be paid in the month they are incurred. They are expected to be $43 000
including depreciation.
REQUIRED
(a)
State two benefits of preparing a cash budget.
(b)
Prepare the cash budget for each of the three months April, May and June 2018.
(c)
Comment on Luke’s working capital management.
(d)
Prepare a budgeted income statement for the three-month period ending 30 June 2018.
[2]
[11]
[6]
[6]
QUESTION 17
MAY 2018 P31 & P33 Q5
C Limited is a small manufacturing company which operates a budgetary control system.
The following information is available:
1
The budgeted sales in units for the first five months of 2019 are expected to be:
Jan
Feb
Mar
Apr
May
3 500 4 000 4 750 3 750 4 250
2
The inventory of finished goods at 1 January 2019 is expected to be 10% of the budgeted January sales.
The monthly closing inventory of finished goods is to be maintained at the same percentage of the following
month’s budgeted sales.
3
There is a maximum inventory holding of 450 units.
REQUIRED
(a)
State three advantages and two disadvantages of operating a budgetary control system.
(b)
Prepare the production budget in units for each of the four months from January to April 2019.
[5]
[6]
Additional information
Each unit produced requires 3 kilos of raw material which is expected to cost $2 per kilo.
The opening inventory of raw material at 1 January 2019 is expected to be 200 kilos. The closing inventory of raw
material is expected to remain the same for January. It is then expected to increase by 10% for February and a further
10% for March. After that it will remain unchanged.
(c)
Prepare the purchases budget in both kilos and dollars for each of the four months from January to April
2019.
[6]
Additional information
The directors are expecting an increase in demand later in the year and are considering a proposal to increase the
storage capacity of the warehouse. The proposal will be beneficial to the company as it will allow an increase in the
maximum inventory of finished goods holding to 500 units. The cost associated with the storage of each unit (holding
cost) is $10.
Chapter 15
(d)
244
Budgeting
Calculate for the month of February the difference between the current holding cost for the closing
inventory of finished goods and the holding cost if the proposal is accepted.
[4]
Additional information
The cost of increasing the storage capacity is expected to be $20 000. A cash budget which includes this proposed
cost has been prepared. This shows an overdrawn bank balance of $18 000 at the end of February.
However, the bank has refused to give the business an overdraft. The directors are now considering investing their
own money as a loan to the business to finance the proposal.
(e)
Discuss the advantages and disadvantages to the directors of investing their own funds into the
business.
[4]
Chapter 15
245
Budgeting
SOLUTION
CHAPTER 15
QUESTION 1
(a)
MAY 2011 P41 Q3
Bank Account
$000
$000
1 203 Balance b/f
15
80 Trade Payables (W 2)
665
75 Rates ($9 000 + $9 000)
18
300 Insurance
30
170 Purchase of vehicle
400
Purchase of equipment
310
Selling, distribution & admin. Expenses
184
Tax (last year)
30
$800 000 ×0.03
48
Dividend(
)
Receivables (W 1)
Sale of vehicles
Sale of equipment
Debentures
Share issue
0.5
___ _
1 828
(b)
Interest
Balance c/d
15
113
1 828
Echoes plc
Forecast income statement for the year ending 30 April 2012
$000
Sales
Cost of Sales
Opening inventory
Ordinary goods purchased
Closing inventory ($150 000 × 110%)
Cost of sales
Other Incomes
Profit on sale of equipment [$75 000 − ($140 000 × 50%)]
150
680
(165)
Opening inventory
Production units (balancing figure)
Sales
Closing inventory
665
5
600
Expenses
Discount allowed ($1 160 000 × 50% × 5%)
Rates & insurance [(18 000+$30 000+$8 000−($9 000×1/6)−($30 000×5/12)]
Loss on sale of vehicles ($95 000 − $80 000)
Depreciation :
Land and buildings ($400 000 × 2.5%)
Equipment [($230 000 × 50%) + $310 000] × 20%
Vehicles ($400 000 × 30%)
Selling, distribution & administration expenses
Operating profit
Finance charges ($300 000 × 6% × 10/12)
Profit before tax
Tax ($100 000 × 20%)
Profit for the year
QUESTION 2
(a)
$000
1 260
29
42
15
10
85
120
184
485
115
15
100
20
80
MAY 2011 P43 Q3
Production budget
Jul
Aug
100
250
950
1 050
1 050
1 300
(800) (1 050)
250
250
Sep
250
1 350
1 600
(1 400)
200
Oct
200
1 100
1 300
(1 100)
200
Nov
200
850
1 050
(950)
100
Dec
100
850
950
(850)
100
Chapter 15
246
(b)
Raw materials purchasing budget
Jul
Aug
Sep
950
1 050
1 350
×2
×2
×2
1 900
2 100
2 700
×4
×4
×4.5
7 600
8 400
12 150
Production units (‘a’ part)
Number of kilos required per unit
Total kilos needed for production
Price per kilo
Cost in $
(c) Receivables at 1 September
Budgeting
=
=
=
=
July sales × 50%
(800 × $190 × 50%)
$76 000
$275 500
Trade receivables budget
September
$
Opening balance
275 500
Sales (1 400 × 190); (1 100; 950; 850) units @$200
266 000
541 500
Cash Receipts: (Last month sales × 50% ×96%)
95 760
(Two months earlier sales × 50%)
76 000
Discounts allowed (Last month sales × 50% × 4%)
3 990
Closing trade receivables
365 750
+
+
+
Oct
1100
×2
2 200
× 4.5
9 900
Nov
850
×2
1 700
× 4.5
7 650
Dec
850
×2
1 700
×5
8 500
August sales
(1 050 × $190)
$199 500
(d)
(e)




(f)
(i)
(ii)
QUESTION 3
(a)
October November
$
$
365 750
353 000
220 000
190 000
585 750
543 000
127 680
105 600
99 750
133 000
5 320
4 400
353 000
300 000
December
$
300 000
170 000
470 000
91 200
110 000
3 800
265 000
Budgets establish targets for the operating departments to follow.
Budgets predict shortages of cash/labour/materials
Mangers of different departments are forced to work together in order to integrate their individual
plans. This enhances inter-departmental communication, coordination and spirit of teamwork.
Budgets can be used as yardsticks to compare with actual performance in order to highlight the
strengths and weaknesses of an organisation.
Depreciation, bad debts
Increase in Provision for doubtful debts
Loan repayment
Purchase of non-current asset
NOVEMBER 2011 P42 Q3
Ada Campellini
Cash Budget for the three months ended 31 January 2013
Receipts
November ($) December ($) January ($)
Sales: Current month sales × 50% × 94%)
145 700
199 750
91 650
last month sales × 50% × 50% × 97%
54 563
75 175
103 062
two months earlier sales × 50% × 50%
53 750
56 250
77 500
Total receipts (a)
254 013
331 175
272 212
Payments
Purchases: Current month purchases × 30% × 96%
70 560
38 880
38 880
last month purchases × 40% × 98%
74 480
96 040
52 920
two months earlier purchases × 30%
52 500
57 000
73 500
General expenses [18 000; (18 000×110%); (19 800 × 85%)]
18 000
19 800
16 830
12 000
1 000
1 000
Storage system ($24 000 × 50%);[($24 00012 000) × 1/12]
Drawings ($425 000 × 1.5%)
3 000
6 375
3 000
Total Payments (b)
230 540
219 095
186 130
23 473
112 080
86 082
Net receipts(payments) (a  b)
Bank balance at start
34 850
58 323
170 403
Bank balance at end
58 323
170 403
256 485
Chapter 15
(b)
247
Budgeting
Ada Campellini
Income Statement
For the three months ended 31 January 2013
$
Sales ($310 000 + $425 000 + $195 000)
Cost of Sales
Inventories on 1 November 2012
Purchases ($245 000 + $135 000 + 135 000)
Inventories on 31 January 2013
Gross Profit
Expenses
General expenses ($18 000 + $19 800 + $16 830)
Depreciation: Storage Device ($24 000 × 10% × 3/12)
Depreciation on other assets ($1 750 + $1 750 + $1 750)
Discount allowed [($310 000 + $425 000 + $195 000)× 50% × 6%] + [($225
000 + $310 000 + $425 000)× 50% × 50% × 3%)
180 000
515 000
(129 000)
Other Incomes
Discount received [($245 000 + $135 000 + 135 000) × 30% × 4%] +
[($190 000 +$245 000 + $135 000) × 40% × 2%]
Net Profit
$
930 000
(566 000)
364 000
54 630
600
5 250
35 100
(95 580)
268 420
10 740
279 160
QUESTION 4
MAY 2012 P42 Q3 (a, b, c , e & f)
(a)
A company sets a budget for a certain level of output. If the actual level of activity is higher or lower than
the original estimate. The flexible budget adjusts to changes in activity level by flexing the data of original
budget in accordance with the actual level.
(b)
Fixed budget is a budget based on a single level of activity (e.g., a particular volume of sales or production)
and is not adjusted for changes in the volume of output. Businesses using fixed budgets have no allowances
for possible changes in their budgetary needs. If actual output is different from budgeted output It will be
difficult to identify the reason for any difference or what actions to take to correct any problems
(c)
Month
Sales
Closing inventory
Opening inventory
Production (balancing figure)
(e)
Details
Production budget
For months 1–3 (all figures in units)
1
2
Units
Units
1 200
1 400
180
160
1 380
1 560
(200)
(180)
1 180
1 380
Flexible budget statement for Months 1–3
Actual
$
Sales (4 400 × 28) ; (4 400 × 29)
123 200
Direct material (4 400 × 2 × 4) ; (4 400 × 2 × 3)
(35 200)
Direct labour (4 400 × 0.4 × 10) ; (4 400 × 0.5 × 10)
(17 600)
Factory overheads [(4 400 × 4) + $15 000]
(36 200)
Other fixed costs
(18 000)
Profit
16 200
Budget
$
127 600
(26 400)
(22 000)
(32 600)
(23 500)
23 100
3
Units
1 600
140
1 740
(160)
1 580
Variance
$
(4 400)
(8 800)
4 400
(3 600)
5 500
(6 900)
Chapter 15
(f)
248
Budgeting
The following are the reasons that despite of an increase in units sold, the actual profit was less than
the budgeted profit.
 Lower selling price per unit may be to attract more sales volume
 Increase in direct material cost resulting in negative impact on profits
The following items had positive effect on profit
 The direct labour hours worked were lower than budget
 Reduction in factory and other fixed overheads
 Reduction in certain expenses could not offset the additional costs and reduced selling price which
led to a lower profit than budgeted.
QUESTION 5
(a)
(i)
MAY 2013 P41 Q3
Production Budget
For five months ending 30 April 2014
January February
$
$
Sales (units)
10 000
11 000
Add Finished Goods- closing (following month sales × 20%)
2 200
2 200
12 200
13 200
Less Finished Goods - opening
(2 000) (2 200)
Budgeted production (units)
10 200
11 000
Purchases Budget
For four months ending 30 April 2014
January
Budgeted production (units)
10 200
Material usage per unit
× 0.5
Raw materials usage (kilos)
5 100
Add
Raw materials-closing (following month usage×50%)
2 750
7 850
Less
Raw materials - opening
(2 550)
Budget purchases (kilos)
5 300
×
Per kilo cost
×3
Budget purchases (value)
$15 900
March
$
11 000
2 400
13 400
(2 200)
11 200
April
$
12 000
2 400
14 400
(2 400)
12 000
May
$
12 000
2 800
14 800
(2 400)
12 400
(ii)
February
11 000
× 0.5
5 500
2 800
8 300
(2 750)
5 550
×3
$16 650
March
11 200
× 0.5
5 600
3 000
8 600
(2 800)
5 800
×3
$17 400
April
12 000
× 0.5
6 000
3 100
9 100
(3 000)
6 100
×3
$18 300
(b)
Calculation of Values of inventories of Raw materials and finished goods
Inventories at 1 January 2014
$
$
Raw materials [2 550 units (a i) × $3]
7 650
Finished goods [2 000 units (a i) × $11]
22 000
29 650
Inventories at 30 April 2014
Raw materials [3 100 units (a i) × $3]
9 300
Finished goods [2 400 units (a i) × $11]
26 400
35 700
(c)
(i)
Summarised manufacturing account
For four months ending 30 April 2014
Raw Materials Cost
Opening Inventory (b)
Purchases of raw materials ($15 900 + $16 650 + $17 400 +$18 300)
Closing Inventory (b)
Cost of raw materials used [(10 200 + 11 000 + 11 200 + 12 000) × 0.5 kilos @ $3]
Direct labour and production overheads (Balancing figure)
Cost of production [(10 200 + 11 000 + 11 200 + 12 000) units × $11]
$
7 650
68 250
(9 300)
66 600
421 800
488 400
Chapter 15
(ii)
249
Budgeting
Summarised income statement for four months ending 30 April 2014
$
Revenue [(10 000 × $20) + (11 000 × $20) + (11 000 × $21) + (12 000× $21)]
Cost of Sales
Opening inventory - Finished goods (‘b’ part)
Cost of production [(c iii)]
$
22 000
488 400
510 400
(26 400)
Closing inventory - Finished goods (‘b’ part)
Gross profit
(d)
$
903 000
$
(484 000)
419 000
Budgetary control offers several advantages to managers. Some of these are:
 Budgetary control coordinates activities across departments.
 Budgetary control translates strategic plans into action. It specifies the resources, revenues, and
activities required to carry out the strategic plan for the coming year.
 Budgetary control provides an excellent record of organizational activities.
 Budgetary control improves communication with employees.
 Budgetary control improves resources allocation, because all requests are clarified and justified.
 Budgetary control provides a tool for corrective action through reallocations.
 Budgetary control helps to control costs.
However, budgets control can also create problems. The disadvantages of budgets are:
 The major problem occurs when budgetary control is applied mechanically and rigidly.
 Budgetary control can de-motivate employees because of lack of participation. If the budgets are
arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures,
and will not be committed to them.
 Budgetary control can cause perceptions of unfairness.
 Budgetary control can create competition for resources and politics.
 A rigid budgetary control reduces initiative and innovation at lower levels, making it impossible to
obtain money for new ideas.
QUESTION 6
(a)
(i)
MAY 2013 P42 Q3
Purchases budget (in both units and value)
January
February
Units of sales
5 000
5 200
Units in closing inventory (Balancing figure)
1 300
1 400
6 300
6 600
Units in opening inventory (current month sales × 25%)
(1 250)
(1 300)
Units of purchases (to the maximum of 5 500 units)
5 050
5 300
Purchase price per unit
$4.00
$4.00
Purchases (value)
$20 200
$21 200
Trade Receivables Budget
January
$
Trade receivables b/f ($24 000 + $49 000)
73 000
Add
Credit sales (Units of sales × per unit sales price)
50 000
123 000
Less
Receipts
Last month sales × 50% × 96%
23 520
Two months earlier sales × 50%
24 000
Discount allowed (last month sales × 50% × 4%)
980
48 500
Trade receivables c/f
74 500
March
5 600
*1 300
6 900
(1 400)
5 500
$4.20
$23 100
April
5 800
*1 000
6 800
1 300
5 500
$4.20
$23 100
February
$
74 500
52 000
126 500
March
$
77 000
50 400
127 400
April
$
76 400
55 100
131 500
24 000
24 500
1 000
49 500
77 000
24 960
25 000
1 040
51 000
76 400
24 192
26 000
1 008
51 200
80 300
(ii)
Chapter 15
250
Budgeting
(iii)
Trade Payables Budget
January
$
Trade payables b/f
20 000
Add
Credit purchases
20 200
40 200
Less
Cash paid (last month purchases × 95%)
19 000
Discount received (last month purchases × 5%)
1 000
20 000
Trade payables c/f
20 200
(b)
February
$
20 200
21 200
41 400
19 190
1 010
20 200
21 200
March
$
21 200
23 100
44 300
20 140
1 060
21 200
23 100
Statement of financial position (extract)
As at 30 April 2014 to show current assets & liabilities
Current Assets
Inventory [1 000 units { a (i)} × $4.2]
Trade receivables [a (ii)]
Current Liabilities
Trade payables [a (iii)]
(c)
April
$
23 100
23 100
46 200
21 945
1 155
23 100
23 100
(i)
$
4 200
80 300
$13 500 (W 1)
$55 100 (W 1)
× 100
=
24.5%
=
=
$9.50 × (100% – 24.5%)
$7.17
(ii)
Selling price per unit at which profit would be zero
(iii)
Sensitivity of performance to changes in variable cost=
=
$13 500
$24 900
× 100
54.22%
Calculation of profits for April 2014
$
55 100
(24 900)
30 200
(16 700)
13 500
Sales [5 800 units { a (i)} × $9.5]
Less
Variable costs
Contribution
Less
Fixed costs
Profit for the year
QUESTION 7
(a)
84 500
23 100
Sensitivity of performance to changes in selling price =
WORKINGS
(W 1)
$
NOVEMBER 2013 P43 Q3 (a & b)
Budgeted income statement
For the year ending 31 May 2014
$
Revenue [(4 200 × $3.10) + (4 800 × $3.20)+ (4 600 × $3.40)+ (4 500 × $3.30)]
Cost of Sales
Opening inventory
Purchases [(4 700 × $1.20)+(4 600×$1.30)+(4 500×$1.30)+(4 500×1.40)]
Closing inventory
Gross profit
Expenses
Discount allowed ($58 870 × 2%)
Bad debts ($58 870 × 1%)
Rent ($2 500 × 4)
Administration costs ($2 400 + $2 600 + $2 600 + $2 700)
Interest ($8 000 × 6%)
4 800
23 770
(5 100)
1 177
589
10 000
10 300
480
$
58 870
23 470
35 400
Chapter 15
251
Budgeting
Insurance [$2 000  ($2 000 × 3/12) + $350]
Loss on disposal ($3 900  $3 400)
Depreciation
Fixtures and fittings [$19 200 + $3 800) × 10%]
Vehicle ($18 000 × 40%)
1 850
500
2 300
7 200
Other Incomes
Discount received ($23 770 × 1%)
Budgeted profit for the year
(b)
238
1 242
Budgeted statement of financial position
As at 31 May 2014
Non-current assets
Fixtures and fittings ($19 200 + $3 800); ($7 100 + $2 300)
Vehicle
Cost
$
23 000
18 000
41 000
Depreciation Book Value
Current Assets
Inventory
Trade receivables (W 1)
Other receivables - insurance ($2 000 × 3/12)
Current liabilities
Trade payables (W 2)
Other payables - interest ($480  $240)
Cash and cash equivalents ($6 600 + paymentsreceipts)
$
9 400
7 200
16 600
8 932
240
5 340
14 512
Drawings ($3 000 + $4 000 + $3 000 + $5 000)
Balance b/f
Sales (Income statement)
(W 2)
Bank $(5 800+ 5 700 + 5 200 + 4 000)
Discount received ($23 770 × 1%)
Balance c/d (balancing figure)
392
24 792
(8 000)
16 792
EQUITY
Capital at 1 June 2013
Add
Capital introduced (Legacy from uncle)
Profit for the year
WORKINGS
(W 1)
$
13 600
10 800
24 400
5 100
9 304
500
14 904
Non-current liabilities
Bank loan (6%)
Less
(34 396)
1 004
25 550
5 000
1 242
31 792
15 000
16 792
Trade Receivables
$
11 900 Bank $(16 500+14 200+14 000+15 000)
58 870 Discount allowed ($58 870 × 2%)
Bad debts ($58 870 × 1%)
Balance c/d (balancing figure)
70 770
$
59 700
1 177
589
9 304
70 770
Trade Payables
$
20 700 Balance b/f
238 Purchases (Income statement)
8 932
29 870
$
6 100
23 770
_____
29 870
Chapter 15
252
Budgeting
(c)
Forecast Statement of Financial Position at 30 April 2012
Cost
Non-current assets
$000
Land and buildings ($50 000 + $10 000)
1 200
Equipment[($230000×50%)+$310000];[($90000×50%)+$85000]
425
Vehicles ($400 000 × 30%)
400
2 025
Current assets
Inventory ($150 000 × 110%)
Receivables [($100 000(April Sales)+($100000×50%(March sales)]
Prepaid rates and insurance [($9 000 × 1/6) + ($30 000 × 5/12)]
Cash and cash equivalents
Current liabilities
Tax payable
Trade payables
Dep
$000
60
130
120
310
20
90
NBV
$000
1 140
295
280
1 715
165
150
14
113
442
110
Non-current liabilities
Debentures
332
2 047
300
1 747
Equity
Ordinary shares of $0.50 each [$800 000 + ($100 000 × 0.5)]
Share premium [$100 000 + ($100 000 × 1.2)]
Retained earnings ($645 000 − $48 000 + $80 000)
WORKINGS
(W 1)
Balance b/f
Sales
QUESTION 8
(a)
Sales in volume (units) (W 1)
Sales price per unit
Sales revenue ($)
850
220
677
1 747
Trade Receivables Account
$000
122 Discount allowed ($1 160 000 × 50% × 5%)
1 260 Bank (balancing figure)
____ Balance c/d[$100 000 + ($100 000 × 50%)]
1 382
$000
29
1 203
150
1 382
MAY 2014 P43 Q3
Sales budget for the period January to March 2015
January
February
March
24 000
25 200
26 460
× $60
× $60
× $60
1 440 000
1 512 000
1 587 600
(b)
Production Budget for the period January to March 2015
January
February
Units
Units
Sales (W 1)
24 000
25 200
Closing inventory (W 1)
8 400
8 820
Opening inventory
(7 500)
(8 400)
Units to be produced
24 900
25 620
(W 1)
Calculation of Sales and Closing inventory
Closing Inventory
25 200 × 1/3 = $8 400
24 000 × 1.05 = 25 200
26 460 × 1/3 = $8 820
25 200 × 1.05 = 26 460
27 783 × 1/3 = $9 261
26 460 × 1.05 = 27 783
27 783 × 1/3 = $9 261
Sales
January
February
March
April
March
Units
26 460
9 261
(8 820)
26 901
Chapter 15
(c)
253
Budgeting
Purchases Budget
For the period January to March 2015
January
Units
24 900
× 10
249 000
51 240
(48 000)
252 240
× 1.5
378 360
Units to be produced
× Kilos required per unit
Raw materials required
Closing inventory (following month material required × 20%)
Opening inventory
Purchases
× Cost per Kg
Purchases at cost
(d)
March
Units
26 901
× 10
269 010
55 566
(53 802)
270 774
× 1.5
406 161
$
$
4 539 600
Budgeted Income statement
For three months ending 31 March 2015
Sales revenue ($1 440 000 + $1 512 000 + $1 587 600)
Cost of Sales
Opening inventory : Finished Goods
Cost of Production (working 1)
Closing inventory : Finished Goods
Gross profit
242 000
2 436 315
(298 000)
WORKING
Raw Material Cost
Opening inventory – raw materials (48 000 × $1.5)
Purchases ($378 360 + $388 143 + $406 161) (W 3)
Closing inventory – raw materials (55 566 × $1.5)
Direct labour
Manufacturing overhead ($850 000 × 50%)
Cost of Production
QUESTION 9
(a)
Receipts
February
Units
25 620
× 10
256 200
53 802
(51 240)
258 762
× 1.5
388 143
$
72 000
1 172 664
(83 349)
2 380 315
2 159 285
$
1 161 315
850 000
425 000
2 436 315
NOVEMBER 2014 P42 Q3
Cash budget 2015
Cash sales (current month sales × 10%)
Last month credit sales × 90% × 50% × 96%
Two months earlier credit sales × 90% × 50%
Loan received
Proceeds from sale of vehicle
Total Receipts (a)
Payments
Last month purchases × 95%
Vehicle purchase
Rent ($9 000 × 50%)
Dividend paid
Administration costs (last month)
Total payments (b)
Net receipts (payments) (a  b)
Bank balance at start
Bank balance at end
January
$
3 000
11 232
10 800
February
$
2 600
12 960
11 700
_____
25 032
_____
27 260
16 150
17 100
March
$
2 800
11 232
13 500
10 000
_____
37 532
April
$
3 200
12 096
11 700
14 250
12 000
18 050
6 800
33 050
4 482
(2 261)
2 221
7 100
25 150
2 946
2 221
5 167
1 100
28 096
4 500
3 100
6 200
25 450
(418)
(1 303)
(1 721)
6 200
27 800
(540)
(1 721)
(2 261)
Chapter 15
(b)
254
Budgeting
Budgeted income statement for the four months ending 30 April 2015
$
Revenue ($30 000 + $26 000 + $28 000 + $32 000)
Cost of sales
Opening inventory
Purchases ($18 000 + $15 000 + $19 000 + $13 000)
Closing inventory
Gross profit
Expenses
Administration costs ($6 200 +$6 800 + $7 100 + $6 700)
Discount allowed ($26 000 + $30 000 + $26 000 + $28 000)×45%×4%)
Loss on disposal [($7 200  $5 100)  $1 100]
Depreciation ($120 + $120 + $150 + $150)
Interest ($10 000 × 7.8% × 6/12)
Rent ($9 000 × 4/12)
Other Incomes
Discount received [($17 000 + $18 000 + $15 000 + $19 000)× 5%]
Profit for the period
2 100
65 000
(3 800)
26 800
1 980
1 000
540
130
3 000
$
116 000
63 300
52 700
(33 450)
3 450
22 700
(c)
Capital expenditures like purchase of non-current assets appear in the cash budget but not in the income
statement.
Capital receipts like receipts from sale of assets, new capital investment, borrowing of loans appear in the
cash budget but not in the income statement.
Non-cash items like depreciation, discount allowed etc. appear in the income statement but not in the cash
budget.
Credit sales, credit purchases are recorded in the income statement but not in the cash budget.
(d)



(e)
Cash budgets show cash flows on cash surpluses, which can be used, or deficits, which have to be
funded.
Short end long-term cash needs can be identified and funded by business in an appropriate
manner.
A detailed cash budget will encourage efficiency within business and will ease borrowing when
necessary by showing control being exercised over resources.
Dividend cover
=
=
QUESTION 10
(a)
$22 700÷ 0.40
$3 100+($3 100 ×2)
6.1 times
NOVEMBER 2014 P43 Q2
Budgeted income statement
For the year ended 30 June 2015
$
Revenue ($3 000 000 × 160% × 110%)
Cost of Sales
Opening Inventory
Purchases (Balancing Figure)
Closing Inventory
Gross profit [$5 280 000 × 40% (W 1)]
Operating Expenses
Administrative salaries ($700 000 × 105%)
Heating and lighting ($98 000 × 105%)
Rent and rates ($340 000 × 105%)
Sundry expenses ($72 000 × 105%)
120 000
3 228 000
3 348 000
(180 000)
735 000
102 900
357 000
75 600
$
5 280 000
3 168 000
2 112 000
Chapter 15
255
Budgeting
Depreciation:
Plant and machinery [($300 000 + $220 000) × 20%]
Motor vehicles [($240 000 + $130 000) × 20%]
Increase in provision for doubtful debt (
$5 280 000
12
104 000
74 000
8 800
× 2%)
Salaries to salesmen
Commission to salesmen ($5 280 000 × 3%)
Loan interest ($100 000 × 10%)
Budgeted profit before bonus
Bonus ($363 300 × 5/105)
Budgeted net profit for the year
(b)
123 000
158 400
10 000
Bank account (for the year 2015)
$
86 000 Plant & machinery
5 085 000 Motor vehicles
100 000 Trade payables (W 3)
250 000 Admin salaries($735 000 + $9 000)
Heating and lighting
Rent and rates
Sundry expenses
Salaries to salesmen
_______ Balance c/d
5 521 000
892 500
Balance b/f
Trade receivables (W 2)
Loan
Share capital
Balance b/d
(c)
Budgeted statement of financial position at 30 June 2015
Assets
$
Non-Current Assets
Plant and machinery ($300 000 + $220 000)
Accumulated provision for depreciation ($160 000 + $104 000)
Motor vehicles ($240 000 + $130 000)
Accumulated provision for depreciation ($150 000 +$74 000)
520 000
264 000
370 000
224 000
Current Assets
Closing Inventory
180 000
Trade receivables (
$5 280 000
12
)
Provision for doubtful debts ($440 000 × 2%)
Cash and cash equivalent
Total assets
Equity and liabilities
Equity
Ordinary share capital ($200 000 + $250 000)
Retained earnings ($286 000 + $346 000)
Non-current liabilities
10% Loan
Current liabilities
Trade payables (
$3 228 000 ×2
12
)
Accrued commission ($5 280 000 × 3%)
Accrued bonus
Accrued interest ($100 000 × 10%)
Total equity and liabilities
$
(1 748 700)
363 300
(17 300)
346 000
$
220 000
130 000
2 876 000
744 000
102 900
357 000
75 600
123 000
892 500
5 521 000
$
256 000
146 000
402 000
440 000
(8 800)
431 200
892 500
450 000
632 000
1503 700
1905 700
1082 000
100 000
538 000
158 400
17 300
10 000
723 700
1905 700
Chapter 15
256
Budgeting
WORKINGS
(W 1)
Gross profit (%) for 2014
=
Gross profit (%) for 2015
=
=
=
(W 2)
$1 350 000
$3 000 000
× 100
45%
45% – 5
40%
Trade Receivables Account
$
245 000 Bank (Balancing Figure)
Balance b/f
Sales
5 280 000
Balance c/d (
$5 280 000
12
$
5 085 000
)
440 000
5 525 000
(W 3)
Bank (Balancing Figure)
Balance c/d (
$3 228 000 ×2
12
5 525 000
Trade Payables Account
$
2 876 000
Balance b/f
$
186 000
538 000
Purchases
3 228 000
)
3 414 000
(d)






3 414 000
They compel management to look ahead for the company as a whole instead of focusing its attention
solely on daily problem solving.
Mangers of different departments are forced to work together in order to integrate their individual
plans. This enhances inter-departmental communication, coordination and spirit of teamwork.
Budgets can be used as yardsticks to compare with actual performance in order to highlight the
strengths and weaknesses of an organisation.
As managers set the budgets for their own department, they will be more aware of the responsibility
they bear to achieve the goals set.
Participation in setting a budget makes a person psychologically involved in the company. Often the
employee becomes more committed and motivated to achieve the target set.
Budgets establish targets for the operating departments to follow.
QUESTION 11
(a)
(i)
MAY 2015 P41 & P42 Q1
Zapf plc
Budgeted income statement
For the year ending 30 September 2015
$000
Revenue ($756 000 × 104%)
Cost of sales
Opening Inventory
Purchases (Balancing figure)
Closing Inventory
Gross profit ($786 000 × 42%)
Expenses
Distribution costs ($96 000 × 103%)
Administrative expenses ($180 000 × 103%)
Operating Profit
Financial Incomes : Income from investments
Finance costs
Profit before taxation
Taxation ($41 000 × 20%)
Profit for the year
74
452
526
(70)
(99)
(185)
$000
786
(456)
330
(284)
46
5
(10)
41
(8)
33
Chapter 15
257
Budgeting
(ii)
Extract from Statement of Changes in Equity for the year ended 30 September 2015
Retained earnings
Balance at 1 October 2014
Profit for the year
Preference dividends paid (100 000 × 5%)
Balance at 30 September 2015
(b)
Zapf plc
Note to the budgeted statement of financial position
For the year ending 30 September 2015
Property, plant and
Buildings
Plant and
equipment
equipment
Cost
$000
$000
Balance at 1 October 2014
320
158
Additions
40
18
Balance at 30 September 2015
360
176
Depreciation
Balance at 1 October 2014
112
78
Charge for the year
18
44
Balance at 30 September 2015
130
122
Net book value at 30 September 2015
230
54
$000
30
33
(5)
58
(i)
(ii)
Motor
vehicles
$000
36
9
45
Total
$000
514
67
581
20
12
32
13
210
74
284
297
Zapf plc
Budgeted statement of financial position
As at 30 September 2015
Non-current assets
Tangible
Buildings
Plant and equipment
Motor vehicles
Investments
Intangible
Goodwill
$000
130
54
13
75
372
60
432
Current assets
Closing Inventory
70
$786 000 ×45
Trade receivables (
)
365
Total assets
Equity and liabilities
Capital and reserves
Ordinary shares
5% Non-redeemable preference shares
Share premium
Retained earnings
Non-current liabilities
6% Debentures (2021)
Current liabilities
Trade payables (
$000
$452 000×40
365
Taxation due
Cash and cash equivalents
Total equity and liabilities
)
97
167
599
180
100
30
58
368
150
50
8
23
81
599
Chapter 15
258
Budgeting
QUESTION 12
NOVEMBER 2015 P42 Q2 (a)
Jamal – Cash budget for the 3 months ending January 2016
NOV
DEC
JAN
Receipts
$000
$000
$000
Cash Sales (current with sales × 20%)
42
45
52
Last month sales × 80% × 60%
90
100
108
Two months earlier credit sales × 80% × 40%
43
60
67
Sale of equipment ($10 000 × 1/2)
___
5
5
Total Receipts (a)
175
210
232
Payments
Last month purchases × 75%
104
113
129
Two months earlier purchases × 25%
31
35
37
Administration expenses (last month’s sales × 10%)
19
21
23
Wages
18
18
18
Purchase of Delivery Van
20
Purchase of Equipment
9
Equipment installments ($30 000 – $9 000) × 10%
2
2
Drawings
2
2
3
Repayments of loan
___
___
25
Total Payments (b)
203
191
237
Net Cash receipts (payments) (a – b)
(28)
19
(5)
Bank balance at start
18
(10)
9
Bank balance at end
(10)
9
4
WORKINGS
Month
September
Sale ($000)
135
Purchase ($000)
$187 ×
October
187
$209 ×
November
209
$225 ×
December
225
$258 ×
January
258
$293 ×
February
293
100
150
100
150
100
150
100
150
100
150
= $125
= $139
= $150
= $172
= $195
QUESTION 13
NOVEMBER 2016 P32 Q6
(a)
(i)
Cash flow statements are similar to cash budgets in the content that they show sources and uses
of cash but they are different in many respects some of which are given below.

Cash flow statements are published for external use and they are part of a company’s
published financial statements whereas cash budgets are only used for internal purposes.

Cash flow statements are based on historic data and shows sources and uses of cash for
previous year whereas a cash budget shows the same for future periods.

There is no set format of cash budgets but a cash flow statement has to be prepared in
compliance with IAS7.

Cash flow statements show reasons for changes in cash for a whole year whereas companies
may prepare cash budgets to show changes in cash on monthly, weekly or yearly basis.

A company is bound to prepare a cash flow statement on annual basis whereas there is no
such compulsion for a cash budget.
(ii)

Cash budget will show the pattern of future cash flows giving information on cash surpluses,
which can be used, or deficits, which have to be funded.
Chapter 15
259


(b)
Budgeting
Short end long-term cash needs can be identified and funded by Roland in an appropriate
manner.
A detailed cash budget will encourage efficiency within business and will ease borrowing
when necessary by showing control being exercised over resources.
(i)
Calculation of sales
$
60 000
55 000
65 000
January ($30 000 × 2)
February ($27 500 × 2)
March ($30 875 × 27 500/26 125) or ($30 875 × 30 000/28 500)
(ii)
Calculation of Cash discount
$
1 500
1 375
1 625
January ($30 000  $28 500)
February ($27 500  $26 125)
March [($65 000 × 50%)  $30 875)
(iii)
Rate of cash discount
=
=
$1 500
$60 000 ×50%
or
$1 375
$55 000 ×50%
5%
(c)
Slanting Stores Limited
Trade receivables budget for the 3 months ended 31 March 2017
January
February
$
$
Opening balance (Last month sales × 1/2)
40 000
30 000
Add
Credit sales [b (i)]
60 000
55 000
(a)
100 000
85 000
Receipts from current month’s sales (given in question)
28 500
26 125
Receipts from last month’s sales (given in question)
40 000
30 000
Discount allowed [b (ii)]
1 500
1 375
(b)
70 000
57 500
Closing balance (Current month sales × 1/2) or ( a – b)
30 000
27 500
(d)
Increase in cash needed
=
=
$15 000 (advertising) + $1 600 (cash deficit)
$16 600
Increase in sales to avoid shortage =
=
(e)







March
$
27 500
65 000
92 500
30 875
27 500
1 625
60 000
32 500
$16 600 ÷ 0.95 × 2
$34 948
do nothing if indeed the cash deficit is only for one month
reschedule payments
get trade receivables to pay more quickly
negotiate temporary overdraft facility
try to get more credit from suppliers
delay purchase of non-current asset
other sensible solutions to be rewarded accordingly
QUESTION 14
NOVEMBER 2016 P33 Q6
(a)
A master budget is a set of interconnected budgets of sales, production costs, purchases, incomes, etc. and
it also includes pro forma financial statements.
Chapter 15
260
Budgeting
(b)
Production budget
For Four months ending 31 April 2017
January
February
Sales
370
410
Closing inventory (increase @20 units up to March)
220
240
590
650
Opening inventory (increase @20 units per month)
(200)
(220)
Units of production
390
430
(c)
1
Sales – (current month units sold × $30 × /3)
– (last month units sold × $30 × 2/3)
Interest ($50 000 × 4% × 1/4)
Total receipts (a)
Payments
Purchases – cash (current month units produced × $7 × 1/2)
Purchases – credit (last month units produced × $7 × 1/2)
Direct labour (current month units produced × $5)
Overheads (current month units produced × $6 × 4/5)
Overheads (last month units produced × $6 × 1/5)
Purchase of equipment ($12 000 × 50%)
Total payments (b)
Net receipts (payments) (a – b)
Bank balance at month start
Bank balance at month end




(e)
April
430
260
690
(260)
430
January
3 700
7 000
500
11 200
February
4 100
7 400
_____
11 500
March
3 800
8 200
_____
12 000
1 365
January
1 190
1 950
1 872
408
6 000
12 785
(1 585)
(10 450)
(12 035)
1 505
February
1 365
2 150
2 064
468
-------7 552
3 948
(12 035)
(8 087)
1 400
March
1 505
2 000
1 920
516
-----7 341
4 659
(8 087)
(3 428)
Cash budget
For three months ending 31 March 2017
Receipts
(d)
March
380
260
640
(240)
400
If the overdraft will cause problems then make an attempt to reschedule some of the payments
etc.
Trade receivables may be offered cash discounts for early payments.
Purchase of non-current assets may be deferred
Better control on overheads
A long term loan should be more appropriate tool of financing if overdraft balance is expected
throughout the year as the interest on a loan tends to be lower than an overdraft.
QUESTION 15
(a)
NOVEMBER 2017 P32 Q6 (a to c)
Cash budget
For three months from January to March 2018
Balance at month start
Receipts
Receipts from trade receivables (two months earlier sales)
Payments
Payments to trade payables – last month purchases (W 1)
Monthly operating costs ($18 000  $3 000)
Balance at month end
Jan
$
4 500
Feb
$
(8 500)
March
$
(5 500)
150 000
180 000
200 000
148 000
15 000
(8 500)
162 000
15 000
(5 500)
171 000
15 000
8 500
Chapter 15
(b)
261
Budgeting
Budgeted income statement
For the three-month period ended 31 March 2018
$
Sales ($200 000 + $210 000 + $225 000)
Cost of Sales
Opening inventory (W 1)
Purchases ($162 000 + $171 000 + $183 000)
Closing inventory (W 1)
Gross profit
Expenses
Cash expenses ($15 000 × 3)
Depreciation ($3 000 × 3)
Profit for the quarter
(c)
40 000
516 000
(48 000)
45 000
9 000
$
635 000
(508 000)
127 000
(54 000)
73 000
Statement to reconcile profit from operations
For quarter ending 31 March to the net cash
$
73 000
9 000
(8 000)
(105 000)
35 000
4 000
4 500
8 500
Profit from operations
Depreciation
Increase in inventory ($48 000 – $40 000)
Increase in trade receivables [($210 000 + 225 000) – ($150 000 + $180 000)]
Increase in trade payables ($183 000 – $148 000)
Increase in cash
Cash at 1 January 2018
Cash at 31 March 2018
WORKINGS
(W 1) Calculation of Purchases
Revenue
Nov
$
150 000
Dec
$
180 000
Jan
$
200 000
Feb
$
210 000
Mar
$
225 000
April
$
240 000
Cost of sales (sales/1.25)
Closing inventory (following month sales × 25%)
120 000
36 000
144 000
40 000
160 000
42 000
168 000
45 000
180 000
48 000
192 000
Cost of sales
Add Closing inventory
Less Opening inventory
Purchases
120 000
36 000
144 000
40 000
(36 000)
148 000
160 000
42 000
(40 000)
162 000
168 000
45 000
(42 000)
171 000
180 000
48 000
(45 000)
183 000
QUESTION 16
NOVEMBER 2017 P33 Q6
(a)
Cash budget will show to Roland the pattern of future cash flows giving information on cash surpluses, which
can be used, or deficits, which have to be funded.
Short end long-term cash needs can be identified and funded by Roland in an appropriate manner.
A detailed cash budget will encourage efficiency within Roland business and will ease borrowing when
necessary by showing control being exercised over resources.
(b)
Cash budget for the three months ending 30 June 2018
Receipts
April ($)
Capital introduced
150 000
May ($)
June ($)
Chapter 15
262
Receipts from customers
Current month units sold (W 1) × $64 × 20% × 98.5%
Last month units sold (W 1) × $64 × 30%
Two months earlier sales × $64 × 50%
Total receipts (a)
Payments
Payments to suppliers [last month purchases (W 1)]
Purchase of equipment
Operating expenses [$43 000  (48 000 ÷ 60 months)]
Total payments (b)
Net receipts (payments) (a  b)
Opening balance
Closing balance
(c)
63 040
______
213 040
0
48 000
42 200
90 200
122 840
0
122 840
100 864
96 000
_______
196 864
50 432
153 600
160 000
364 032
360 000
240 000
42 200
402 200
(205 336)
122 840
(82 496)
42 200
282 200
81 832
(82 496)
(664)
There is a negative cash balance of $664 on 30 June but at that time liquidity position does not look bad as
the cash position was even worse at the end of May.
Almost half of trade receivables pay two months after sale which were received first time for the sale of
first month of business in June. This reduced cash deficit from $82 496 to $664. Luke should consider to
tighten its credit policy. Discounts on making prompt payments may be offered to customers. Currently
only 20% of trade receivables take the advantage of cash discount, Luke may consider to increase the cash
discount.
There are frequent changes in sales volume may be due to seasonal fluctuations. Sale promotion schemes,
offering of trade discounts in low sale period could have been an option.
On the other hand, as Luke is buying a single product from a sole supplier so it looks like that Luke does not
have much bargaining power as he has to pay within one month following the purchases and is not allowed
any cash discount.
Inventory levels are also very high and are having negative impact on cash flows.
It can, however, be expected that in July business will have positive net cash balance at the end of the
month due to receipt of $256 000 on account of May sales. Luke should, therefore, concentrate to avoid
the huge cash deficit in May.
WORKING
(W 1)
Purchases Budget
Units of sales
Add
Closing inventory (following month sales × 50%)
Less
Opening inventory (last month closing inventory)
Purchases (in unit)
×
Per unit purchase price
Purchases ($)
(c)
Budgeting
April
5 000
4 000
(0)
9 000
× 40
360 000
May
8 000
2 000
(4 000)
6 000
× 40
240 000
June
4 000
1 500
(2 000)
3 500
× 40
140 000
July
3 000
2 000
(1 500)
3 500
× 40
740 000
Cash flow not bad, i.e. has net operating cash inflow; cash received from customers $994 560 ($63 040 +
$196 864 + $364 032 + $370 624) is greater than operating cash outflows $908 800 ($360 000 + $240 000 +
$140 000 + $42 200 × 4)
Cash deficit in May and June, should plan ahead.
Sales not evenly distributed, i.e. seasonal trade and this will affect the regularity of cash inflow.
Not many trade receivables take the advantage of cash discount, Luke may consider to increase the cash
discount.
More than 50% of trade receivables pay 2 months after sale, Luke should consider to tighten its credit policy
Maybe the business is a new business and Luke has only one supplier. It appears that Luke does not have
much bargaining power as he has to pay within one month following the purchases and is not allowed any
cash discount.
Keeping too much inventory may have negative impact on cash flow.
Chapter 15
263
Income statement for the three-month period ending 30 June 2018
$
Revenue [(5 000 + 8 000 + $4 000) units @$64]
Cost of sales
Purchases ($360 000 + $240 000 + $140 000)
740 000
Closing inventory [1 500 units (W 1) × $4]
(60 000)
Gross profit
Expenses
Discount allowed Current month sales × 20% × 1.5%
3 264
Depreciation [($48 000 ÷ 60 months) × 3]
2 400
Other operating expenses [($43 000  $800) × 3]
126 600
Profit for the period
Budgeting
(d)
$
1 088 000
(680 000)
408 000
132 264
275 736
QUESTION 17
MAY 2018 P31 & P33 Q5
(a)
Advantages:

Budgetary control coordinates activities across departments.

Budgetary control translates strategic plans into action. It specifies the resources, revenues, and
activities required to carry out the strategic plan for the coming year.

Budgetary control provides an excellent record of organizational activities.

Budgetary control improves communication with employees.

Budgetary control improves resources allocation, because all requests are clarified and justified.
Disadvantages

The major problem occurs when budgetary control is applied mechanically and rigidly.

Budgetary control can de-motivate employees because of lack of participation. If the budgets are
arbitrarily imposed top down, employees will not understand the reason for budgeted
expenditures, and will not be committed to them.

A rigid budgetary control reduces initiative and innovation at lower levels, making it impossible to
obtain money for new ideas.

Budgets could be inaccurate
(b)
Production budget (units) for each of the four months from January to April 2019
Jan
Feb
Mar
Units of sales
3 500
4 000
4 750
Closing inventory (Following month sales × 10%) or 450 whichever is higher
400
450
375
3 900
4 450
5 125
Opening inventory (Current month sales × 10%) or 450 whichever is higher
(350)
(400)
(450)
Units of production
3 550
4 050
4 675
Purchases budget for each of the four months from January to April 2019
Jan
Feb
Mar
Units of production (‘b’ part)
3 550
4 050
4 675
Direct materials required per unit
×3
×3
×3
Direct material to be used in production
10 650 12 150 14 025
Add Closing Inventory of direct material (200 × 110%) ; (220 × 110%)
200
220
242
10 850 12 370 14 267
Less Opening Inventory of direct material (200 × 110%) ; (220 × 110%)
(200)
(200)
(220)
10 650 12 170 14 047
Purchase price per unit ($)
×2
×2
×2
Budgeted purchases ($)
21 300 24 340 28 094
Apr
3 750
425
4 175
(375)
3 800
(c)
Apr
3 800
×3
11 400
242
11 642
(242)
11 400
×2
22 800
Chapter 15
264
(d)
Storage cost for inventory of February if maximum storage capacity is 500 units (475  10)
Storage cost for inventory of February if maximum storage capacity is 450 units (450  10)
Increase in holding cost
(e)
Advantages
The return on directors’ investment more likely to be above the market rate.
The company may pay finance charges on directors’ loan below the rate of bank finance charges
Disadvantages
Directors may not have sufficient liquid funds
Company may not have sufficient funds to pay the directors interest at market rate.
Budgeting
$
4 750
(4 500)
250
Chapter 16
265
Standard Costing
CHAPTER 16
STANDARD COSTING
QUESTION 1
MAY 2012 P41 Q3 (a to d)
Aston Manufacturing Company has recently implemented a new standard costing system.
(a)
Explain the purpose of standard costing.
[4]
Budgeted data for the month of April 2012 was:
Sales and production
Materials per unit
Materials cost per kilogram
Labour per unit
Labour cost per hour
Overheads per unit
5000 units
8 kilograms
$6
3 hours
$7.50
3 hours at $3.50 per hour
The standard selling price gives a standard profit margin of 19%.
REQUIRED
(b)
Calculate the standard selling price per unit.
Additional information:
The actual results for April 2012 were:
Production
Sales
Sales revenue
Materials used
Materials cost
Labour hours
Labour cost
[7]
5 300 units
5 100 units
$522 750
43 460 kilograms
$271 625
15 500 hours
$120 125
REQUIRED
(c)
Calculate the following variances, stating clearly whether the variance is adverse or favourable.
(i)
Sales price
(ii)
Sales volume
(iii)
Material price
(iv)
Material usage
(v)
Labour rate
(vi)
Labour efficiency
(d)
Suggest a possible reason for each of the variances.
QUESTION 2
Lourien Ltd operates a standard costing system. Its budget for the month was
NOVEMBER 2012 P42 Q3
$
Sales (22 000 units at $21)
Direct materials (28 600 kilos at $2)
Direct labour (48 400 hours at $6)
Contribution
Actual results for the month were
57 200
290 400
$
Sales (21 400 units at $20.80)
Direct materials (28 400 kilos at $2.05)
Direct labour (47 200 hours at $5.90)
Contribution
[4]
[2]
[2]
[2]
[2]
[2]
[6]
58 220
278 480
$
462 000
347 600
114 400
$
445 120
336 700
108 420
Chapter 16
266
Standard Costing
REQUIRED
(a)
Calculate the following variances
(i)
sales volume
[2]
(ii)
sales price
[2]
(iii)
total sales
[2]
(iv)
direct materials usage
[2]
(v)
direct materials price
[2]
(vi)
total direct materials
[2]
(vii)
labour efficiency
[2]
(viii)
labour rate
[2]
(ix)
total labour
[2]
(b)
A company operates a standard costing system. State with reasons what effects might be
observed if:
(i)
raw material is of a higher quality than usual.
[6]
(ii)
direct labour has a lower skill level than usual.
[6]
(c)
State which costing method is best suited to the following situations:
(i)
a company wishes to calculate a break-even point.
(ii)
a customer requires a quote for the manufacture of a large, one-off item.
(iii)
goods are produced in a sequence of continuous manufacturing operations.
(iv)
production costs need to contain an element of the costs of support or service departments.
(v)
a price is needed for one item out of a set of identical items.
QUESTION 3
Gladwall Ltd makes one product. Budgeted information is as follows:
[2]
[2]
[2]
[2]
[2]
MAY 2013 P42 Q1
Honeybush Limited operates a standard costing system. Monthly standard data is as follows.
Sales are 6 000 units with a selling price of $26 per unit
Each unit requires 2.4 kilos of raw material costing $3 per kilo
Each unit requires 1.5 hours of direct labour time costing $7 an hour
REQUIRED
(a)
Calculate the expected monthly contribution per unit and in total.
[8]
(b)
Calculate the quantity of raw materials in kilos normally purchased each month. Assume inventory levels
remain constant.
[2]
Early in 2013 a new supplier entered the market, selling the required raw material at $1.80 per kilo. In April
Honeybush Limited bought all its raw material from this new supplier.
This raw material was more difficult to work with. Therefore each unit required 2.6 kilos and labour took 40% longer
than usual to produce each unit. Overtime premiums caused the average wage rate to rise to $7.80 an hour.
Honeybush Limited managed to produce and sell the usual 6000 units. The selling price had risen by $0.50 per unit.
REQUIRED
(c)
Calculate the following variances for April 2013:
(i)
Sales price
(ii)
Direct materials usage
(iii)
Direct materials price
(iv)
Total direct materials
(v)
Direct labour efficiency
(vi)
Direct labour rate
(vii)
Total direct labour
[14]
Chapter 16
(d)
(e)
(f)
267
Standard Costing
Starting with the original expected total contribution from (a) use these variances to calculate the actual
total contribution.
[7]
Calculate the change in contribution for Honeybush Limited arising from its decision to change supplier.
[5]
Explain what is meant by the expression ‘flexing a budget’.
[4]
QUESTION 4
Gladwall Ltd makes one product. Budgeted information is as follows:
Per unit
Selling price
$55
Direct materials
4 kilos at $5 per kilo
Direct labour
2 hours at $9 per hour
MAY 2013 P43 Q3(a to d)
During April 10 000 units were produced and sold. The following variances arose from the production and sales:
$
Sales price variance
20 000 favourable
Materials price variance
8 400 Favourable
Materials usage variance
10 000 Adverse
Labour rate variance
2 050 Adverse
Labour efficiency variance
4 500 Adverse
REQUIRED
(a)
State the formula used to calculate each of these five variances.
[5]
(b)
Calculate, for April, the actual:
(i)
selling price per unit
[2]
(ii)
quantity of materials used in total
[2]
(iii)
material price per kilo
[3]
(iv)
number of labour hours worked in total
[2]
(v)
labour rate paid per hour.
[3]
(c)
Starting with the original total budgeted contribution, calculate the actual total contribution for the month.
[7]
(d)
For each event listed below identify which variance would be affected and give one example of a variance
which might arise. State whether the effect would be favourable or adverse.
(i)
Theft of raw materials
(ii)
Changing suppliers making raw materials more expensive
(iii)
Giving sales discounts for bulk buying
(iv)
Investment in more reliable machinery
(v)
Use of higher grade raw materials
(vi)
Decrease in overtime hours.
[12]
QUESTION 5
NOVEMBER 2015 P41 Q3
In April Amit introduced a new standard costing system.
He produces and sells one item. The standard production is 5 000 units. Amit does not have any opening inventory.
Closing inventory is valued at full standard cost.
The standard costs per unit were as follows:
Direct materials
3 kilos at $5 per kilo
Direct labour
4 hours at $8 per hour
Overheads
2 hours at $3.50 per hour
The selling price will allow Amit a profit on the full standard cost of 17.5%.
REQUIRED
(a)
Calculate the standard selling price per unit.
[3]
Chapter 16
268
Additional information
The actual results for April were:
Production
Sales
Direct material is used
Direct material cost
Direct labour hours
Direct labour cost
Overhead variance
Standard Costing
5 100 units
5 040 units @$65.25 each
15 450 kilos
$78 795
20 250
$172 125
$300 adverse
REQUIRED
(b)
Calculate the following variances for April, clearly identifying which variance you have calculated.
(i)
Sales price
(ii)
Sales volume
(iii)
Total sales
(iv)
Direct material price
(v)
Direct material usage
(vi)
Total material
(vii)
Direct labour rate
(viii)
Direct labour efficiency
(ix)
Total labour
[18]
(c)
Explain how the direct labour variances may have arisen during April.
[5]
(d)
Calculate the actual profit for April.
[4]
(e)
Calculate the budgeted profit for the actual units sold for April.
[3]
(f)
Prepare a statement reconciling the budgeted profit with actual profit. Start your statement with your
answer is part (e).
[7]
QUESTION 6
Peter Parfitt produces a single product and operates a standard costing system.
REQUIRED
(a)
Explain what is meant by a standard costing system.
NOVEMBER 2015 P42 Q3
[4]
Additional information
The standard selling price per unit is $52.
Budgeted monthly production and sales for October were 800 units.
The standard costs per unit were as follows:
Direct materials
Direct labour
Overheads
The actual results for October were as follows:
Inventory
Sales
Direct materials used
Direct material cost
Direct labour hours
Direct labour cost
Overheads
2 kilos at $7 per kilo
3.5 hours at $6 per hour
2 hours at $4.50 per hour
No opening or closing inventory
815 units at $51 each
1580 kilos
$12 000
2 900
$18 100
$200 greater than standard
REQUIRED
(b)
Prepare the income statement for Peter Parfitt for the month of October.
[3]
Chapter 16
(c)
(d)
(e)
(f)
269
Standard Costing
Calculate the following variances for October clearly identifying which variance you have calculated.
(i)
Sales price
(ii)
Sales volume
(iii)
Total sales
(iv)
Material price
(v)
Material usage
(vi)
Total material
(vii)
Labour rate
(viii)
Labour efficiency
(ix)
Total labour
Calculate the total budgeted gross profit for October.
Prepare a statement reconciling the total budgeted gross profit with the actual profit.
Describe how standard costing would be useful to Peter Parfitt.
[18]
[3]
[8]
[4]
QUESTION 7
NOVEMBER 2015 P43 Q3
Ayanda Limited manufactures one product. The company keeps no inventory of raw materials or finished goods.
The following budgeted information for a standard month is provided.
Sales
1000 units at $130 each
Raw materials
600 kilos at $18 per kilo
Production labour
1500 hours at $7.50 per hour
Variable overheads
$28 000
Fixed overheads
$34 000
Variable overheads arise from selling and distribution activities. Fixed overheads include both production and other
overheads.
REQUIRED
(a)
Prepare the budget for a standard month, showing total contribution and profit.
[4]
Additional information
Actual results for March were as follows.
Sales
Raw materials
Production labour
Variable overheads
Fixed overheads
(b)
(c)
(d)
1200 units at $132 each
780 kilos at $14 per kilo
2050 hours at $8.50 per hour
$35 100
$34 100
Prepare the flexed budget for March, showing total contribution and profit.
[6]
Calculate the actual total contribution and profit for March.
[4]
Prepare a statement reconciling the total of actual direct production costs in (c) with the total of direct
production costs from the flexed budget in (b). Start your answer with the actual costs. Your answer should
involve four relevant variances.
[12]
Additional information
In March the company bought raw materials which were of a lower quality than usual.
REQUIRED
(e)
Explain how the purchase of lower quality raw materials had affected the variances in your reconciliation in
(d).
[8]
(f)
Advise the directors whether this purchase of lower quality materials has benefitted the business.
[6]
QUESTION 8
Aziz Manufacturing Limited produces one product.
The budgeted costs and revenues are as follows.
SPECIMEN 2016 P3 Q6
Chapter 16
270
Units produced and sold
Standard selling price
Standard direct materials
Standard direct labour
Standard Costing
800 per month
$100 per unit
4 kilos at $6 per kilo
3 hours at $12 per hour
All overheads are fixed.
In April 850 units were produced and sold. Selling price was maintained at $100 per unit. Actual costs were as follows.
Direct materials
Direct labour
3485 kilos costing $19 516 in total
2720 hours costing $35 360 in total
REQUIRED
(a)
Prepare the original budget & the flexed budget for April to show total budgeted contribution.
[8]
(b)
Calculate the actual total contribution achieved in April.
[1]
(c)
Prepare a statement to reconcile the contribution from the flexed budget in (a) with the actual contribution
from (b).
[10]
(d)
Suggest one reason why each of the following variances had arisen.
(i)
Material usage variance
[2]
(ii)
Labour rate variance
[2]
(e)
State two similarities in use between standard costing and activity based costing.
[2]
QUESTION 9
Khalid owns a business making blankets. He currently uses a standard costing system.
REQUIRED
(a)
Explain the term standard costing.
MAY 2016 P32 Q6
[2]
Additional information

For the year ending 31 August 2015 Khalid budgeted to sell 2 700 blankets at $40 each.

Each blanket requires 1.5 metres of material at $10 per metre and 30 minutes of labour. All of his workforce
are employed full time and paid $14 per hour.

For the year ended 31 August 2015 his actual sales were 2 700 blankets. He used 4 320 metres of material
at a cost of $34 560 and 2 025 hours of labour were required at a cost of $24 300.
REQUIRED
(b)
Calculate the following variances for the year ended 31 August 2015:
(i)
the material price and material usage variances
(ii)
the labour rate and labour efficiency variances.
[8]
(c)
Prepare a statement reconciling the budgeted costs with the actual costs for the year ended 31 August 2015.
[4]
(d)
Discuss possible reasons why Khalid’s actual costs are different to the budgeted costs.
[6]
Additional information
In an attempt to control costs, Khalid is considering to:
1
Stop the quality assurance checks usually made during the production process.
2
Find a cheaper supplier for materials to make the blankets.
3
Keep the selling price at $40 per blanket.
REQUIRED
(e)
Recommend to Khalid which option or options he should choose. Justify your answer.
[5]
QUESTION 10
NOVEMBER 2016 P31 Q5
Billyjo makes a single product. His business operates a standard costing system. All goods produced in the month
are sold and no inventories are held.
REQUIRED
(a)
Explain what is meant by ‘standard costing’.
[2]
Chapter 16
271
Standard Costing
Additional information
1
Budgeted monthly production and sales for April 2016 were 3 500 units.
2
The standard costs per unit were as follows:
Direct material
Direct labour
Overheads
3 kilos at $1.40 per kilo
0.5 hours at $4.60 per hour
1 hour at $2.80 per hour
3
The actual results for April were as follows:
Production and Sales
Materials used
Materials cost
Labour hours
Labour cost
REQUIRED
(b)
Calculate the following variances:
(i)
Material price variance
(ii)
Material usage variance
(iii)
Labour rate variance
(iv)
Labour efficiency variance
(c)
3 750 units
10 950 kilo
$15 768
1 930
$8 492
[8]
Analyse possible reasons for the variances calculated in (b).
[8]
Additional information
The standard selling price per unit is $12. A 2% discount was given to all customers in April.
Actual overhead rate was 10% above standard.
REQUIRED
(d)
Calculate the actual profit made by Billyjo for April.
(e)
Recommend how Billyjo can improve the performance of his business.
[4]
[3]
QUESTION 11
MAY 2017 P31 & P33 Q5
EF plc manufactures a single product. No inventories of materials or finished goods are maintained.
The following budgeted information is available for March:
Production and sales
Unit revenue and costs
Selling price
Direct material
Direct labour
Variable overhead
Fixed overhead
1 000 units
$150
4 kilos at $6 per kilo
6 hours at $10 per hour
$2 per direct labour hour
$14 per unit
In March the company actually made and sold 800 units.
REQUIRED
(a)
State two reasons why a business prepares a flexed budget.
(b)
Prepare a statement to show the budgeted profit for the month of March.
[2]
[6]
Additional information
The actual cost of direct labour in March was $50 176. Staff had been paid at the rate of $9.80 per hour.
REQUIRED
(c)
Calculate the following variances for March:
(i)
direct labour rate
(ii)
direct labour efficiency
(iii)
total direct labour
[2]
[2]
[1]
Chapter 16
272
Standard Costing
Additional information
In April the staff continued to be paid at $9.80 per hour. The variances for April were calculated as follows:
direct labour rate
$1 620 favourable
direct labour efficiency $18 000 adverse
REQUIRED
(d)
Calculate
(i)
the number of hours actually worked in April
(ii)
the number of units actually made and sold in April.
(e)
Suggest two possible reasons why the efficiency variance was adverse in April.
[2]
[5]
[2]
Additional information
The management of the company is evaluating a plan to retrain the existing workers to improve their efficiency.
REQUIRED
(f)
Discuss the disadvantages to EF plc if they proceed with this plan.
[3]
QUESTION 12
MAY 2017 P32 Q5
SM Limited makes a single product. In a normal month 1 000 units are made and sold for $150 each. Standard costs
are as follows:
$
Direct labour (4 000 hours at $10.50)
42 000
Direct materials (3 000 kilos at $12.20)
36 600
Variable overheads
10 000
Fixed overheads
19 300
In April the company received an order for the supply of 800 units in addition to the usual production and sales.
REQUIRED
(a)
Prepare the flexed budget for April showing total budgeted profit.
[6]
Additional information
During April the employees were required to work extra hours to meet increased production. The inclusion of
overtime rates caused the average wage to rise to $13.10 per hour.
Staff worked 7 300 hours in total and used 5 500 kilos of raw material which had been purchased for $11.50 per kilo.
The raw materials were of the usual quality.
REQUIRED
(b)
Calculate the following variances for the month of April.
(i)
labour efficiency
(ii)
labour rate
(iii)
materials usage
(iv)
materials price
(c)
Suggest one cause for each of the materials usage and materials price variances.
[2]
[2]
[2]
[2]
[2]
Additional information
One of the directors stated that new staff should have been employed. This would have resulted in fewer overtime
payments although extra training costs would have been incurred.
The director believed that 7 800 hours would have been worked at a cost of $10.80 per hour.
REQUIRED
(d)
Advise the directors whether or not they should have taken this action. Support your answer with
calculations where appropriate.
[6]
(e)
State three advantages to the company of operating a standard costing system.
[3]
[Total: 25]
Chapter 16
273
Standard Costing
QUESTION 13
NOVEMBER 2017 P31 Q5
WT Limited manufactures a single product. The following information is available from its master budget for the
month of December:
Monthly sales
1000 units
Selling price per unit
$90
Direct materials per unit
4 kilos costing $5.10 per kilo
Direct labour per unit
3 hours costing $10 per hour
Total monthly fixed costs
$33 000
Competing businesses charge a selling price between $85 and $90 for the same product.
The directors are proposing to reduce the selling price to $80 per unit. They believe that monthly sales would
increase to 1 500 units. The change in demand would cause material costs to fall to $5.02 per kilo and labour costs
to rise to $12 per hour. Total monthly fixed costs would remain unchanged.
REQUIRED
(a)
Suggest reasons why the cost per unit could change with the increase in sales for:
(i)
direct material
(ii)
direct labour.
[4]
(b)
Calculate:
(i)
the total budgeted profit and budgeted profit per unit for December
[3]
(ii)
the total profit and profit per unit if the directors’ proposal is adopted for December
[3]
(iii)
the increase or decrease in profit which would arise if the directors’ proposal is adopted.
[1]
(c)
Calculate the following variances which would arise if the directors’ proposal is adopted:
(i)
sales price
(ii)
sales volume
(iii)
materials price
(iv)
labour rate.
[8]
(d)
Explain why total of variances calculated in part (c) does not equal the change in profit in part (b)(iii). [3]
(e)
Advise the directors whether or not they should go ahead with the proposal. Justify your answer.
[3]
QUESTION 14
NOVEMBER 2017 P33 Q5 (a to d)
S Limited makes perfume. Budgeted data for the month of July is as follows:
Units produced and sold
15 000 bottles
Standard direct materials (liquids)
0.25 litres at $15 per litre
Standard direct materials (packaging)
1 bottle at $0.80 per bottle
Standard direct labour
6 minutes at $9 per hour
Fixed production overheads for July were budgeted to be $26 250 and are absorbed on a direct labour hour basis.
In July 16 000 bottles were produced and sold. Actual costs were as follows:
Direct materials (liquids)
3 725 litres costing $62 875
Direct materials (packaging)
16 000 bottles costing $12 800
Direct labour
1 700 hours costing $16 320
Fixed production overheads
$31 375
REQUIRED
(a)
Calculate the total standard cost of the actual production for July.
(b)
Calculate the total actual cost of production for July.
(c)
Calculate the following variances.
(i)
Direct labour rate
(ii)
Direct labour efficiency
(iii)
Fixed overhead expenditure
(iv)
Fixed overhead volume
Additional information
The direct materials (liquids) price variance for the month has been calculated as $7 000 adverse.
[6]
[3]
[8]
Chapter 16
274
Standard Costing
The direct materials (liquids) usage variance was $4 125 favourable.
There was no direct materials (packaging) price or usage variance.
REQUIRED
(d)
Prepare a statement to reconcile the total standard cost of actual production for July with the total actual
cost of production. (Your statement should start with the total standard cost of actual production.)
[4]
QUESTION 15
MAY 2018 P32 Q6
C Limited produces tables. Each table requires the following:
raw materials
3 metres of wood at $80 per metre
direct labour
12 hours at $30 per hour
fixed production
overhead $10 per direct labour hour
Budgeted production is 5 000 tables.
Actual production was 4 800.
Actual production costs were:
$
direct materials
15 360 metres
1 190 400
direct labour
55 200 hours
1 766 400
fixed production overhead
579 600
All tables produced were sold.
REQUIRED
(a)
State two limitations of a standard costing system.
(b)
Calculate the following variances:
(i)
direct materials price
(ii)
direct materials usage
(iii)
direct labour rate
(iv)
direct labour efficiency
(v)
fixed overhead expenditure
(vi)
fixed overhead volume
(c)
Prepare a statement reconciling the budgeted cost of producing 4800 tables with the actual cost.
[12]
[8]
Additional information
The directors are considering using higher quality wood and increasing the selling price.
(d)
Advise the directors whether or not they should make these changes. Justify your answer.
[3]
[2]
Chapter 16
275
Standard Costing
SOLUTION
CHAPTER 16
QUESTION 1
MAY 2012 P41 Q3 (a to d)
(a)
The purpose of standard costing is to improve business efficiency by helping the management in the planning
and control of the business and to facilitate the preparation of budgets. It provides a ‘yardstick’ against which
actual performance may be measured and identifies areas where savings could be made. It enable areas of
inefficiency/efficacy to be identified and quantified by means of variance analysis.
(b)
Calculation of standard selling price per unit
$
Materials (8 kilos @ $6)
48.00
Labour (3 hours @ $7.50)
22.50
Overheads (3 hours @ $3.50)
10.50
Total Cost
81.00
Margin ($81 × 19/81)
19.00
Selling Price
100.00
(c)
(i)
(ii)
(iii)
(iv)
Actual volume
5 100
×
×
(d)
$102.5 (
)
5 100
×
×
Standard price
$100.0
Actual volume
5 100
Budgeted volume
5 000
Sales volume variance (favourable)
×
×
×
×
Standard price
$100.0
Standard price
$100.0
Actual material quantity
43 460
Standard material quantity
(5 300 × 8)
Material usage variance (adverse)
Actual material price
×
×
×
×
Standard material rate
$6.0
Standard material rate
$6.0
×
×
Actual material quantity
43 460
×
×
Actual material quantity
43 460
×
×
×
×
Standard labour rate
$7.50
Standard labour rate
$7.50
×
Actual labour rate
15 500
×
$7.75 (
Actual labour hours
15 500
Labour Rate Variance (adverse)
×
×
Standard labour rate
$7.50
$6.25 (
(vi)
$
$522 750
Actual volume
5 100
Sales price variance (favourable)
$271 625
(v)
Actual price
43 460
)
Standard material price
$6.0
Material Price variance (adverse)
Actual labour hours
15 500
Standard labour hours
5 300 × 3
Labour Efficiency Variance (favourable)
Actual labour hours
510 000
12 750
510 000
500 000
10 000
$120 125
15 500
522 750
)
Sales volume – Increased demand for product
Sales Price – increase in sales price because of increased demand or change in market conditions
260 760
254 400
6 360
271 625
260 760
10 865
116 250
119 250
3 000
120 125
116 250
3 875
Chapter 16
276
Standard Costing
Material price – Buying superior quality material than planned
Material usage – greater rate of scrap (wastage) than expected
Labour rate - Hiring of higher grade (skill) of workers than planned
Labour efficiency - Hiring of higher grade (skill) of workers than planned
QUESTION 2
(a)
(i)
(ii)
(iii)
(iv)
Actual volume
21 400
Standard volume
22 000
×
×
×
×
NOVEMBER 2012 P42 Q3)
Standard price
$
$21
449 400
Standard price
$21
462 000
Sales volume variance (adverse)
Actual volume
21 400
Actual volume
21 400
Sales price variance (adverse)
×
×
×
×
Actual price
$20.8
Standard price
$21
Actual volume
21 400
Standard volume
22 000
Total Sales variance (adverse)
×
×
×
×
Actual price
$20.8
Standard price
$21
Actual material quantity
28 400
Standard material quantity
×
×
×
Standard material rate
$2.00
Standard material rate
56 800
27 820 (
)
22 000
Material usage variance (adverse)
×
$2.00
55 640
Actual material price
$2.05
Standard material price
$2.00
Material Price variance (adverse)
×
×
×
×
Actual material quantity
28 400
Actual material quantity
28 400
Actual material quantity
28 400
Standard material quantity
×
×
×
Actual material rate
$2.05
Standard material rate
58 220
×
$2.00
55 640
28 600 ×21 400
(v)
(vi)
27 820 (
28 600 ×21 400
22 000
)
12 600
Actual labour hours
47 200
Standard labour hours
47 080 (
48 400 ×21 400
22 000
)
Actual labour hours
47 200
Actual labour hours
47 200
Labour Rate Variance (favourable)
445 120
462 000
16 880
58 220
56 800
1 420
2 580
×
×
×
Standard labour rate
$6.00
Standard labour rate
$
283 200
×
$6.00
282 480
Labour Efficiency Variance (adverse)
(viii)
449 400
4 280
1 160
Total Material Variance (adverse)
(vii)
445 120
720
×
×
×
×
Actual labour rate
5.90
Standard labour rate
$6.00
$
278 480
283 200
4 720
Chapter 16
277
(ix)
Standard Costing
Actual labour hours
47 200
Standard labour hours
47 080 (
48 400 ×21 400
22 000
)
×
×
×
Actual labour rate
5.90
Standard labour rate
278 480
×
$6.00
282 480
Total Labour Variance (favourable)
(b)
(c)
4 000
(i)
Due to purchase of better quality material, the material price variance is likely to be adverse due
to purchases at higher rate. However, as better quality of materials would result in less wastage &
spoilage so material usage variance is likely to be favourable. In addition, due to use of better
quality material, labour efficiency may improve resulting in favourable efficiency variance.
(ii)
The use of low skilled labour would be cheaper resulting in favourable labour rate variance.
However, the Labour efficiency and Material usage variances are likely to be adverse due to slow
speed, improper handling of production facilities and by making more mistakes in using material.
(i)
(ii)
(iii)
(iv)
(v)
Marginal costing
Absorption costing
Job costing
Batch or unit costing
Process costing
QUESTION 3
(a)
MAY 2013 P42 Q1
Calculation of per unit and total expected monthly contribution
$
Sales per unit
Variable Costs per unit
Direct material (2.4 x 3)
Direct labour(1.5 x 7)
Per unit Contribution
×
Number of Units sold
Total Contribution
(b)
(c)
Budgeted Quantity of Raw Material Purchases
(i)
(ii)
(iii)
(7.20)
(10.50)
=
=
$
26.00
(17.70)
(8.30)
6 000
49 800
6 000 units x 2.4
14 400 kg
Actual volume
6 000
Actual volume
6 000
Sales price variance (favourable)
×
×
×
×
Actual price
$26.50
Standard price
$26.00
Actual material quantity
15 600 (6 000 units x 2.6)
Standard material quantity
14 400 (6 000 units x 2.4)
Material usage variance (adverse)
×
×
×
×
Standard material rate
$3.00
Standard material rate
$3.00
Actual material price
$1.80
Standard material price
$3.00
Material Price variance (favourable)
×
×
×
×
Actual material quantity
15 600 (6 000 units x 2.6)
Actual material quantity
15 600 (6 000 units x 2.6)
$
159 000
156 000
3 000
46 800
43 200
3 600
28 080
46 800
18 720
Chapter 16
278
(iv)
(v)
(vi)
(vii)
Standard Costing
Actual material quantity
15 600 (6 000 units x 2.6)
Standard material quantity
14 400 (6 000 units x 2.4)
Total material variance (favourable)
×
×
×
×
Actual material price
$1.80
Standard material rate
$3.00
Actual labour hours
12 600 (9 000 × 1.4)
Standard labour hours
9 000 (6 000 × 1.5)
Labour efficiency variance (adverse)
×
×
×
×
Standard labour rate
$7.00
Standard labour rate
$7.00
Actual labour hours
12 600
Actual labour hours
12 600
Labour rate variance (adverse)
×
×
×
×
Actual labour rate
$7.80
Standard labour rate
$7.00
Actual labour hours
12 600
Standard labour hours
9 000 (6 000 × 1.5)
Total labour variance (adverse)
×
×
×
×
Actual labour rate
$7.80
Standard labour rate
$7.00
(d)
$
28 080
43 200
15 120
88 200
63 000
25 200
98 280
88 200
10 080
98 280
63 000
35 280
Calculation of Actual Total contribution
$
Original budgeted contribution
Sales price variance
Material usage variance
Material price variance
Total material variance
Labour efficiency variance
Labour rate variance
Total labour variance
Actual contribution
(e)
(3 600)
18 720
15 120
(25 200)
(10 080)
(35 280)
32 640
Calculation of change in contribution due to change in supplier
$
32 640
(49 800)
(17 160)
(3 000)
20 160
Actual contribution
Less
Original budgeted contribution
Difference in contribution
Add
Change due to increase in selling price
Loss due to change in supplier
(f)
$
49 800
3 000
When actual activity level is different from budgeted activity level then budgets are flexed to adjust original
budgeted figures according to actual activity level. This is done to have a proper comparison between actual
and budgeted values.
QUESTION 4
(a)
Sales price variance
Materials price variance
MAY 2013 P43 Q3 (a to d)
=
=
(Actual Quantity × Actual Price )
(Actual Quantity × Actual Price)
–
–
(Actual Quantity × Standard Price)
(Actual Quantity × Standard Price)
Chapter 16
279
Materials usage variance
Labour rate variance
Labour efficiency variance
(b)
(i)
(ii)
=
=
=
(Actual Quantity × St. Price )
(Actual Quantity × Actual Rate)
(Actual Quantity × St. Rate )
(iv)
(c)
(Standard Quantity × St. Price)
(Actual Quantity × Standard Rate)
(Standard Quantity × St. Rate)
×
Actual price
10 000 units
×
$57 (
Actual sales volume
10 000 units
Sales price variance (favourable)
×
×
Standard price
$55
Actual material quantity
×
Standard material price
$𝟐𝟏𝟎 𝟎𝟎𝟎
)
$𝟓𝟕𝟎 𝟎𝟎𝟎
𝟏𝟎 𝟎𝟎𝟎
$
)
550 000
20 000
×
$5.00
×
×
Standard material price
$5.00
Actual material quantity
×
Actual material price
$𝟓.𝟎𝟎
$4.80 (
210 000
$𝟐𝟎𝟏 𝟔𝟎𝟎
)
42 000
×
×
×
Standard material price
$5.00
Actual labour hours
×
Standard labour rate
×
$9.00
Standard labour hours
(10 000 × 2)
Labour Efficiency Variance (adverse)
×
×
Standard labour rate
$9.00
Actual labour hours
×
Actual labour rate
20 500 hours
×
$9.10 (
Actual labour hours
20 500 hours
Labour Rate Variance (adverse)
×
×
$𝟏𝟖𝟒 𝟓𝟎𝟎
$𝟗.𝟎𝟎
)
𝟒𝟐 𝟎𝟎𝟎
200 000
10 000
$
Actual material quantity
42 000
Material price variance (favourable)
201 600
210 000
8 400
184 500
$𝟏𝟖𝟔 𝟓𝟓𝟎
𝟐𝟎 𝟓𝟎𝟎
)
Standard labour rate
$9.00
180 000
4 500
186 550
184 500
2 050
Calculation of Actual Contribution
$
Actual sales (10 000 at $57)
Actual variable costs
Material (42 000 kilos at $4.8 per kilo)
Labour (20 500 hours at $9.1 per hour)
Actual contribution
(d)
570 000
Standard material quantity
(10 000 × 4)
Material usage variance (adverse)
20 500 hours (
(v)
–
–
–
Actual sales volume
42 000 (
(iii)
Standard Costing
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Materials usage variance
Materials price variance
Sales price variance
Labour efficiency variance
OR Materials usage variance
Materials price variance
OR Materials usage variance
Labour rate variance
201 600
186 550
Adverse
Adverse
Adverse
Favourable
Favourable
Adverse
Favourable
Favourable
$
570 000
388 150
181 850
Chapter 16
QUESTION 5
(a)
280
Standard Costing
NOVEMBER 2015 P41 Q3
Calculation of selling price per unit
$
54.00
9.45
63.45
Total costs [(3 kilos @ $5) + (4 hours @ $8) +(2 hours @ $3.50)]
Add
Profit ($54 × $17.5%)
Selling price per unit
(b)
(i)
(ii)
(iii)
(iv)
Actual volume
5 040
Budgeted volume
5 000
Sales volume variance (favourable)
×
×
×
×
Standard price
$63.45
Standard price
$63.45
Actual volume
5 040
Actual volume
5 040
Sales price variance (favourable)
×
×
×
×
Actual price
$65.25
Standard price
$63.45
Actual volume
5 040
Budgeted volume
5 000
Total sales variance (favourable)
×
×
×
×
Actual price
$65.25
Standard price
$63.45
Actual material price
×
×
×
×
Actual material quantity
15 450 kilos
Actual material quantity
15 450 kilos
Actual material quantity
15 450 kilos
Standard material quantity
5 100 × 3
Material usage variance (adverse)
×
×
×
×
Standard material rate
$5.00
Standard material rate
$5.00
Actual material quantity
15 450 kilos
Standard material quantity
5 100 × 3
Total material variance (adverse)
×
×
×
×
Actual material price
Actual labour hours
20 250 hours
Actual labour hours
20 250 hours
Labour rate variance (adverse)
×
×
×
×
Standard labour rate
$8.00
Actual labour hours
20 250 hours
Standard labour hours
(5 100 × 4) hours
Labour efficiency variance (favourable)
×
×
×
×
Standard labour rate
$8.00
Standard labour rate
$8.00
Standard material price
$5.00
Material Price variance (adverse)
(v)
(vi)
(vii)
(viii)
$
319 788
317 250
2 538
328 860
319 788
9 072
328 860
317 250
11 610
78 795
77 250
1 545
77 250
76 500
750
78 795
Standard material rate
$5.00
Actual labour rate
76 500
2 295
$
172 125
162 000
10 125
162 000
163 200
1 200
Chapter 16
(ix)
(c)
281
Actual labour hours
20 250 hours
Standard labour hours
(5 100 × 4) hours
Total labour variance (adverse)
Standard Costing
×
×
×
×
Actual labour rate
$
172 125
Standard labour rate
$8.00
163 200
8 925
The labour was paid at a higher rate (adverse) showing increase in labour cost than expectation. This may
be due to a more highly skilled workforce.
Labour produced 5 100 units in 20 250 hours which were 150 hours (20 400  20 250) less than the hours
allowed for the same output. This may be due to the more highly skilled workforce or better quality material
The total labour variance is adverse due to higher adverse rate variance than the favourable efficiency rate
variance.
(d)
Calculation of Profit for the year
$
Sales (5 040 units @ $65.25)
Cost of sales
Cost of Production: Materials (given in question)
Labour (given in question)
Overheads [(5 100 × 7) + $300]
Less Closing inventory [(5 100 units  $5 040) × $54 (‘a’ part)]
Profit for the year
(e)
$
328 860
78 795
172 125
36 000
286 920
(3 240)
Calculation of budgeted profit for 5040 items sold
$
319 788
272 160
47 628
Sales (5 040 × $63.45)
Cost of sales (5 040 × $54)
Standard profit
(f)
(283 680)
45 180
Statement reconciling actual and budgeted profit for April
$
47 628
9 072
1 200
(1 545)
(750)
(10 125)
(300)
45 180
Standard profit for 5 040 units
Add: sales price variance
Add: labour efficiency variance
Less: material price variance
Less: material usage variance
Less: labour rate variance
Less: overhead variance
Actual profit
F
F
A
A
A
A
QUESTION 6
November 2015 P42 Q3
(a)
The purpose of standard costing is to help management in the planning and control of the business and
links with the budgetary control system. It provides a benchmark to measure actual performance 1 and
identifies areas where savings could be made.
(b)
Income statement for October (based on actual value)
$
Sales (815 units × $51)
Cost of sales
Materials (as given)
Labour (as given)
Overheads [(815 units × 2) hours @ $4.5] + $200
Gross profit
12 000
18 100
7 535
$
41 565
37 635
3 930
Chapter 16
(c)
(i)
(ii)
(iii)
(iv)
282
Actual volume
815
Budgeted volume
800
Sales volume variance (favourable)
×
×
×
×
Standard price
$52.00
Standard price
$52.00
Actual volume
815
Actual volume
815
Sales price variance (adverse)
×
×
×
×
Actual price
$51.00
Standard price
$52.00
Actual volume
815
Budgeted volume
800
Total sales variance (adverse)
×
×
×
×
Actual price
$51.00
Standard price
$52.00
Actual material price
×
×
×
×
Actual material quantity
1 580 kilos
Actual material quantity
1 580 kilos
Actual material quantity
1 580 kilos
Standard material quantity
(815 × 2) kilos
Material usage variance (favourable)
×
×
×
×
Standard material rate
$7.00
Standard material rate
$7.00
Actual material quantity
1 580 kilos
Standard material quantity
(815 × 2) kilos
Total material variance (adverse)
×
×
×
×
Actual material price
Actual labour hours
2 900 hours
Actual labour hours
2 900 hours
Labour rate variance (adverse)
×
×
×
×
Standard labour rate
$6.00
Actual labour hours
2 900 hours
Standard labour hours
(815 × 3.5) hours
Labour efficiency variance (adverse)
×
×
×
×
Standard labour rate
$6.00
Standard labour rate
$6.00
Actual labour hours
2 900 hours
Standard labour hours
(815 × 3.5) hours
Total labour variance (adverse)
×
×
×
×
Actual labour rate
Standard material price
$7.00
Material Price variance (adverse)
(v)
(vi)
(vii)
(viii)
(ix)
(d)
Standard Costing
$
42 380
41 600
780
41 565
42 380
815
41 565
41 600
35
12 000
11 060
940
11 060
11 410
350
12 000
Standard material rate
$7.00
11 410
590
Actual labour rate
18 100
17 400
700
17 400
17 115
285
18 100
Standard labour rate
$6.00
Statement to calculate Budgeted Gross profit for October
17 115
985
Chapter 16
283
Standard Costing
$
Budgeted Sales (815 units × $52)
Budgeted cost of sales
Materials (815 units × 2) kilos @ $7
Labour (815 units × 3.5) hours @ $6
Overheads (815 units × 2) hours @ $4.5
Budgeted total gross profit
(e)
11 410
17 115
7 335
$
42 380
(35 860)
6 520
Statement reconciling budgeted and actual profit for April
$
6 520
(815)
(940)
350
(700)
(285)
(200)
3 930
Budgeted gross profit (as per ‘d’ part)
Sales variances : Price
Material variances : Price
Usage
Labour variances :
Rate
Efficiency
Overhead variance
Actual gross profit
(f)
The following are the advantages of using standard costing
 Standard costing helps management in the planning and control of the business.
 It makes budgets easier to prepare
 It makes budgets more realistic
 It aids setting of selling price.
 It aids decision making
 It helps with controlling resources.
 It provides a benchmark to measure actual performance
 It identifies areas where savings could be made.
 It enables the use of responsibility accounting.
QUESTION 7
(a)
NOVEMBER 2015 P43 Q3
Original budget for a standard month
$
Sales (1 000 units @ $130)
Variable costs
Direct material (600 kilos @$18)
Direct labour (1 500 hours @$7.5)
Variable overheads
Contribution
Fixed overheads
Standard Profit
(b)
(A)
(A)
(F)
(A)
(A)
(A)
10 800
11 250
28 000
$
130 000
(50 050)
79 950
34 000
45 950
Flexed budget for March
$
Sales (1 200 units @ $130)
Variable Costs
$600 × 1 200
) kilos @ $18
1 000
$1 500 × 1 200
Direct labour (
) hours @ $7.5
1 000
$28 000 × 1 200
Variable overheads (
)
1 000
Direct material (
Contribution
Fixed overheads
Profit
$
156 000
12 960
13 500
33 600
(60 060)
95 940
(34 000)
61 940
Chapter 16
284
(c)
Standard Costing
Calculation of Actual profit for March
$
Sales (1 200 units @$132)
Variable Costs
Direct material (780 kilos × 14)
Direct labour (2 050 hours × 8.5)
Variable overheads
Contribution
Fixed overheads
Actual profit for March
(d)
$
158 400
10 920
17 425
35 100
(63 445)
94 955
(34 100)
60 855
Direct Production Statement to reconcile standard and actual direct production costs
$
28 345
3 120
(1 080)
(2 050)
(1 875)
26 460
Actual costs ($10 920 + $17 425)
Material price variance [ 780 kilos × ($18  $14)]
Material usage variance [(780 720) kilos × $18]
Labour rate variance (2 050 hours × ($8.5 – $7.5)
Labour efficiency variance (2 050 – 1 800) hours × $7.5
Budgeted costs ($12 960 + $13 500)
F
A
A
A
(e)
Purchase of lower quality materials will result in lower purchase prices. This will lead to favourable material
price variance.
Material usage variance was adverse as
Due to use of lower quality more materials have been used than was planned with more wastage resulting
in adverse material usage variance.
Labour efficiency variance was adverse as due to lower quality materials labour found it harder to work
with and completed the task in more hours.
Labour rate variance was adverse as the increase in hours worked resulted in more hours being paid at
higher overtime rates
(f)
The material price variance was favourable ($3 120) but material usage variance was adverse ($1 080).
However, in total, material variance was favourable ($2 040).
The effect on total direct costs was adverse as actual total direct costs were higher than the budgeted total
costs. As a result, actual contribution was lower than budgeted contribution.
Business was able to pass on the increased direct costs to customers through the increased selling price.
Despite increase in sales price, the number of units sold also increased showing positive impact of change
in material quality on sales output.
Profit; however was slightly less than budget so doesn’t look like as a good option, provided there was no
change in any variable other than change in material quality. Lastly, directors might have to buy the cheap
quality material due to non-availability of the usual material.
QUESTION 8
(a)
Revenue
Direct materials
Direct labour
Total budgeted contribution
(b)
$30 124 (1)
Original budget
$
80 000 (1)
19 200 (1)
28 800 (1)
32 000 (1)
SPECIMEN 2016 P3 Q6
Flexed budget
$
85 000 (1)
20 400 (1)
30 600 (1)
34 000 (1)
Chapter 16
285
Standard Costing
(c)
Statement to reconcile the contribution from the flexed budget with the actual contribution
$
$
$
Contribution from flexed budget
34 000 (1of)
Variances
Favourable
Adverse
Material price variance
1 394 (2)
Material usage variance
510 (2)
Labour rate variance
2 720 (2)
Labour efficiency variance
2 040 (2)
1 394
5 270
(3 876)
Actual contribution
30 124 (1of)
(d)
(i)
Materials usage variance
Example:
Materials usage variance – cheaper materials led to more wastage
Developed reason (2 marks)
Basic reason (1 mark)
[2]
Labour rate variance
Example:
Labour rate variance – increased hours led to overtime premium being paid
Developed reason (2 marks)
Basic reason (1 mark)
[2]
State two similarities in use between standard costing and activity based costing.
[2]
(ii)
(e)
Responses could include:
•
both seek to control costs
•
both can help set selling prices.
(1 mark) × two valid points
QUESTION 9
MAY 2016 P32 Q6
(a)
In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and
evaluating cost management performance through variance analysis.
(b)
(i)
(ii)
(iii)
(iv)
Variances for the year ended 31 August 2015
Actual usage
×
Actual price
4 320
×
8.0
Actual usage
×
Standard price
4 320
×
10.0
Material Price Variance (favourable)
Actual usage
4 320
Standard usage
(2 700 × 1.5)
Material Usage Variance (adverse)
×
×
×
×
Standard cost per kg
10.0
Standard cost per kg
10.0
Actual hours
2 025
Actual hours
2 025
Labour Rate Variance (favourable)
×
×
×
×
Actual rate
12.00
Standard rate
14.00
Actual hours
2 025
Standard hours
(2 700 × 0.5)
Labour Efficiency Variance (adverse)
×
×
×
×
Standard rate
14.00
Standard rate
14.00
$
34 560
43 200
8 640
43 200
40 500
2 700
24 300
28 350
4 050
28 350
18 900
9 450
Chapter 16
286
(c)
Standard Costing
Statement reconciling the budgeted costs with the actual costs
$
Budgeted costs [(2 700 × 1.5 meters × 10) + (2 700 × 0.5 hours × 14)]
material variances : Price
Usage
labour variances : Rate
Efficiency
Actual costs ($34 560 + $24 300)
8 640F
2 700A
4 050F
9 450A
$
59 400
5 940 F
5 400 A
58 860
(d)
Favourable material price variance indicates decrease in material price than expected. This may be due to
change in supplier or purchase of low quality materials. The cheap quality of materials resulted in a greater
usage of material per blanket leading to adverse usage variance. At the same time, it negatively affected the
efficiency of the workforce which may also be due to use of low skilled labour. The less skilled labour may
also account for the greater usage of materials. The favourable labour rate variance indicates that labour is
paid less per hour than expected which may be due to their low skill as they have used more hours.
(e)
If business stops the quality assurance checks usually made during the production process then cost may
reduce but it may affect quality of product resulting in ultimate reduction of sales and profits. This would
then be supplemented by more skilled labour force as long as the cost does not exceed the benefit.
Cheap or low quality materials may lead to adverse material and labour efficiency variance and will reduce
sales/profit. Reputation of the business may also suffer.
Keeping the selling price at $40 per blanket will not have a direct effect on costs
QUESTION 10
NOVEMBER 2016 P31 Q5
(a)
Standard costing system is a tool for planning budgets, managing and controlling costs. It
evaluates cost management performance through variance analysis.
(b)
(i)
(ii)
(iii)
(iv)
(c)
Actual material price
$1.44
Standard material price
$1.40
Material Price variance (adverse)
×
×
×
×
Actual material quantity
10 950 kilo
Actual material quantity
10 950 kilo
Actual material quantity
10 950 kilo
Standard material quantity
11 250 kilos (3 750 × 3)
Material usage variance (favourable)
×
×
×
×
Standard material rate
$1.40
Standard material rate
$1.40
Actual labour hours
1 930 hours
Actual labour hours
1 930 hours
Labour rate variance (favourable)
×
×
×
×
Actual labour rate
$4.40
Standard labour rate
$4.60
Actual labour hours
1 930 hours
Standard labour hours
1 875 hours (3 750 × 0.5)
Labour efficiency variance (adverse)
×
×
×
×
Standard labour rate
$4.60
Standard labour rate
$4.60
Adverse material price variance:

unpredictable increase of market prices;

change of supplier with worse terms;

buying superior quality than planned;
$
15 768
15 330
438
15 330
15 750
420
8 492
8 878
386
8 878
8 625
253
Chapter 16
287
Standard Costing
Favourable material usage variance:

Use of superior quality than planned

change in production techniques

lower rate of scrap (wastage) than expected

hire of higher grade (skill) of workers
Favourable labour rate variance

hiring of lower grade (skill) of workers than planned

unplanned decrease in overtime or bonus payments

unexpected decrease in wage rates may be due to market conditions
Adverse labour efficiency variance

Use of low grade (skill) of labour

use of superior or inferior material

poor supervision

change in production process (techniques)
(d)
Statement to calculate actual profit for the year
$
Sales (3 750 units @ $12 × 98%)
Expenses
Materials
Labour
Overheads [(3 750 × 1 × $2.80) × 110%]
Actual profit for the year
(e)
$
44 100
15 768
8 492
11 550
(35 810)
8 290
The business may contract for cheaper supplies of material of the same quality
The workforce may be trained to improve efficiency
Overheads should be controlled by following streamlined procedures
QUESTION 11
MAY 2017 P31 & P33 Q5
(a)
Flexible budget recognises the existences of fixed, variable and mixed (semi-fixed, semi variable) costs. A
company sets a budget for a certain level of output. If the actual level of activity is higher or lower than the
original estimate. The flexible budget adjusts to changes in activity level by flexing the data of original budget
in accordance with the actual level.
(b)
EF plc
Budgeted profit for March
$
Revenue (800 units @ $150)
Variable costs
Direct material [(800 × 4) kilos @ $6]
Direct labour [(800 × 6) hours @ $10]
Variable overhead [(800 × 6) hours @ $2]
Contribution
Fixed overhead (1 000 units @ $14)
Profit
(c)
(i)
Actual hours
5 120 (
$50 176
$9.80
)
Actual hours
5 120
Labour Rate Variance (favourable)
19 200
48 000
9 600
×
Actual rate
×
9.80
×
×
Standard rate
10.00
$
120 000
(76 800)
43 200
(14 000)
29 200
$
50 176
51 200
1 024
Chapter 16
288
(ii)
(iii)
(d)
(i)
(ii)
Actual hours
5 120
Standard hours
4 800 (800  6)
Labour Efficiency Variance (adverse)
Standard Costing
×
×
×
×
Actual hours
5 120
Standard hours
4 800 (800  6)
Total Labour Variance (adverse)
Standard rate
10.00
Standard rate
10.00
×
×
×
×
Labour Rate Variance
1 620 (favourable)
=
=
Actual hours
=
Actual hours
=
8 100 hours
Labour eff. Variance
18 000 (adverse)
Actual units × 6
Actual units × 6
=
=
=
=
Standard rate
10.00
Actual hours
Actual hours
1 620
48 000
3 200
Actual rate
9.80
Standard rate
10.00
50 176
48 000
2 176
×
×
(Actual rate  Standard rate)
($10.00  $9.80)
×
×
(Actual hours  Standard hours)
[$8 100  (Actual units × 6)
0.20
$8 100  ($18 000 / $10)
6 300
=
=
6 300
6
1 050 units
(e)





Lack of staff training
Lower skill level of workers
Low quality materials
Poor supervision
Machine breakdown
(f)




Once fully trained, staff may leave for better paid jobs
Financial cost of training may be high
Work time is lost when staff are being trained
Quality of training must be high for it to have a positive effect
QUESTION 12
(a)
$
51 200
MAY 2017 P32 Q5
Flexed budget for April
$
Sales
Variable costs
Direct labour [4 000 × (
1 800
)] hours@ $10.50
75 600
)] kg @ $12.20
65 880
1 000
1 800
Direct materials [3 000 × (
1 000
1 800
Variable overheads [10 000 × (
)]
1 000
Contribution
Fixed overheads
Profit
(b)
(i)
18 000
1 800
1 000
(159 480)
110 520
(19 300)
91 220
Actual labour hours
7 300 hours
Standard labour hours
7 200 hours [4 000 × (
$
270 000
)]
Labour efficiency variance (adverse)
×
×
×
Standard labour rate
$10.50
Standard labour rate
76 650
×
$10.50
75 600
1 050
Chapter 16
(ii)
(iii)
289
Standard Costing
Actual labour hours
7 300 hours
Actual labour hours
7 300 hours
Labour rate variance (adverse)
×
×
×
×
Actual labour rate
$13.10
Standard labour rate
$10.50
Actual material quantity
5 500 kg
Standard material quantity
×
×
×
×
Standard material rate
$12.20
Standard material rate
67 100
$12.20
65 880
5 400 kgs [(3 000 ×
1 800
1 000
)]
Material usage variance (adverse)
(iv)
Actual material price
$11.50
Standard material price
$12.20
Material Price variance (favourable)
$
95 630
76 650
18 980
1 220
×
×
×
×
Actual material quantity
5 500 kg
Actual material quantity
5 500 kg
63 250
67 100
3 850
(c)
Material Price Variance:

standard price set unrealistically;

losing trade (quantity) discounts by paying in smaller quantities;

change in market conditions e.g. inflation, increase in duties like import duties, change in interest
rates etc
Material Usage Variance:

Use of superior or inferior quality than planned

change in production techniques

greater or lower rate of scrap (wastage) than expected
(d)
The suggestion to hire new staff seems to be a profitable option because the actual labour costs of $95 630
are higher than the suggested labour costs of $84 240. However there are both advantages and limitations
of hiring new staff which are discussed below.
Advantages

Passionate to work: New fresh staff will be much active and vigorous to work when compared to
the experienced employees.

Optimists: The new staff with open mind will accept the assigned roles and responsibilities
because they do not have experience to urge for a particular role.

High Productivity: The new staff will try to excel and will try to impress with their initial results.
This will improve the productivity of organization.

Easy to manage: It is easy to manage new staff. They are bound to each policy designed by the
organization.

Versatility: One cannot grow with same old way of techniques, there should be a change in
process. The new staff may lack experience but not lack of knowledge.

Cost to company is low: The hiring of new staff will reduce labour cost. Few companies enforce
security deposit, in the event the employee does not complete the prohibition period, the total
training cost will be recovered from that amount.
Disadvantages

Lack of Stability: Many of the young employees join for a company and once they find any other
good opportunity they will switch to other companies. Since the effort and time invested in
providing benefits and training will be a huge loss for the employers

Lack of skills: For some specific roles the organisations need experienced staff so that they can
handle the task in a professional manner. The new inexperienced staff may cause damage to the
company’s resources resulting in adverse efficiency variance.
Chapter 16
290




(e)









Standard Costing
Discipline Issues: Not all, but most of them are unaware of work culture environment. They do not
turn up on time, they do not strictly follow the HR rules. Many of them try to take leaves more
than they are provided with. They may damage the work force environment due to lack of maturity
about work culture.
Frustration: The new staff may lose patience and get frustrate when something went wrong. In
critical times, the older employees would manage it perfectly because of their experience in
particular field.
Lack of experience: They do not have much awareness about business. Every situation is new to
them, they may have bookish knowledge but when coming to practical it needs experience. So the
burden automatically increases, since they have no idea of what consequences occur to the
organization.
They find difficulty to accept feedback: There will be heap of instructions and guidelines for the
new employees. Most of them receive negative feedback, they find it difficult to accept it. This is
also one of the cons of hiring them.
Standard costing makes budgets easier to prepare
It makes budgets more realistic
It aids setting of selling price.
It aids decision making
It helps with controlling resources.
It provides a benchmark to measure actual performance
It provides a ‘yardstick’ against which actual performance may be measured.
It identifies areas where savings could be made.
It enables the use of responsibility accountingby allocating responsibility for variances to different
managers.
It facilitates the preparation of budgets.

QUESTION 13
NOVEMBER 2017 P31 Q5
(a)
Direct material costs per units usually decreases with the increase in the units of sales and production due
to bulk buying discount, reduction in carriage costs on per unit basis.
Direct labour cost per unit may increase due to increase in the units of production due to increase in
overtime cost or non-availability of labour with required skill at current labour rate.
(b)
(i)
Total Profit
=
=
=
Profit per unit
=
=
(ii)
Total Profit
=
=
=
Profit per unit
=
=
(iii)
Change in profit
=
=
=
Contribution
1 000 units × [$90  {(4 kilos × 5.1) + (3 hours × $10)}]
$6 600


Fixed Costs
$33 000


Fixed Costs
$33 000
Total profit
Total units
$6 600
1 000 units
= $6.60 per unit
Contribution
1 500 units × [$80  {(4 kilos × 5.02) + (3 hours × $12)}]
$2 880
Total profit
Total units
$2 880
1 500 units
= $1.92 per unit
Existing profit
$6 600
$3 720 decrease


Proposed profit
$2 880
Chapter 16
(c)
291
(i)
(ii)
(iii)
(iv)
Standard Costing
Revised price
$80
Original price
$90
Sales Price variance (adverse)
×
×
×
×
Revised volume
1 500
Revised volume
1 500
Revised volume
1 500
Budgeted volume
1 000
Sales volume variance (favourable)
×
×
×
×
Original price
$90
Original price
$90
Revised material price
$5.02
Original material price
$5.10
Material Price variance (favourable)
×
×
×
×
Revised material quantity
6 000 (1500 × 4)
Revised material quantity
6 000 (1500 × 4)
Revised labour hours
4 500 (1500 × 3)
Revised labour hours
4 500 (1500 × 3)
Labour rate variance (adverse)
×
×
×
×
Revised labour rate
$12.00
Original labour rate
$10.00
$
120 000
135 000
15 000
135 000
90 000
45 000
30 120
30 600
480
54 000
45 000
9 000
(d)
Variances are calculated through comparing a flexed budget and actual data. However, the sales volume
variance is determined through comparing the original budget with the flexed budget. As a result, the total
of variances including sales volume variance does not equal the change in the flexed budgeted profits and
actual profits.
(e)
If directors’ proposal is implemented then it will increase the market share of the company but it would
reduce the overall profits by $3 720. Moreover, as the competitors are selling at a price between $85 and
$90 for the same product so price cutting approach may start a new price war.
The price cutting policy could be damaging for the whole industry so it is not advisable to reduce the selling
price.
QUESTION 14
(a)
NOVEMBER 2017 P33 Q5 (a to d)
Statement to calculate the total standard cost of the actual production for July
$
60 000
Direct materials - liquid (16 000  0.25  $15)
12 800
Direct materials - packaging (16 000  $0.80)
14 400
Direct labour [(16 000  6/60) hours @ $9]
6
28 000
Fixed production overheads [(16 000  /60) hours @ 17.50]
Total standard cost for 16 000 units
115 200
(b)
Statement to calculate the total actual cost of production for July
Direct materials - liquid (3 725 litres)
Direct materials - packaging (16 000 bottles)
Direct labour (1 700 hours)
Fixed production overheads
Total actual cost for 16 000 units
$
62 875
12 800
16 320
31 375
123 370
Chapter 16
(c)
292
(i)
Actual labour hours
(ii)
(iii)
(iv)
Standard Costing
×
Actual labour rate
$9.6 (
$16 320
)
1 700 hours
×
Actual labour hours
1 700 hours
Labour rate variance (adverse)
×
×
Standard labour rate
$9.00
Actual labour hours
1 700 hours
Standard labour hours
(16 000  6/60) hours
Labour efficiency variance (adverse)
×
×
×
×
Standard labour rate
$9.00
Standard labour rate
$9.00
Actual hours
1 700
Original budgeted hours
×
×
×
Actual rate per hour
Standard rate per hour
(15 000  6/60) hours
Fixed overhead expenditure variance (adverse)
×
$17.50 (
Flexed budgeted hours
(16 000  6/60) hours
Original budgeted hours
(15 000  6/60) hours
Fixed overhead volume variance (favourable)
×
×
×
×
1 700 hours
$
16 320
15 300
1 020
15 300
14 400
900
31 375
$26 250
1 500 hours
)
26 250
5 125
Standard rate per hour
$17.50
Standard rate per hour
$17.50
28 000
26 250
1 750
(d)
Statement to reconcile total standard cost of actual production with the total actual cost of production
$
$
$
Standard cost of actual production (‘a’ part)
115 200
Favourable
Adverse
Direct materials (liquids) price variance (as given)
7 000
Direct materials (liquids) usage variance (as given)
4 125
Direct labour rate variance
1 020
Direct labour efficiency variance
900
Fixed overhead expenditure variance
5 125
Fixed overhead volume variance
1 750
_____
Total variances
5 875
14 045
8 170
Actual cost of actual production
123 370
QUESTION 15
(a)
MAY 2018 P32 Q6

The fixing of standard requires a high degree of technical skill. Therefore it is costly.

The conditions of the business are ever changing so fixing of standard requires the revision at frequent
intervals which is a tedious process.

The industries liable for frequent technological changes will not be suitable for standard costing system.

Under standard costing system, the employees cannot work at their wishes. Hence, the freedom of
work of employees is curtailed and there is no possibility of developing innovative idea.

Sometimes it creates adverse psychological effects. If the standard is set at a high level its nonachievement results in frustration and builds up resistance. It acts as a discouragement rather than
incentive for better efficiency.

It is partly determined on the basis of past experience and partly on the basis of forecast of future
expenses. Thus uncertainties are around standard and determination of correct standard is very
difficult.
Chapter 16
(b)
(i)
293
Actual material price
×
×
×
×
Actual material quantity
15 360
Actual material quantity
15 360
Actual material quantity
15 360
Standard material quantity
(4 800 × 3)
Material usage variance (adverse)
×
×
×
×
Standard material rate
80
Standard material rate
$80
Actual labour hours
55 200 hours
Actual labour hours
55 200 hours
Labour rate variance (adverse)
×
×
×
×
Actual labour rate
Standard labour rate
$30
Actual labour hours
55 200 hours
Standard labour hours
(4 800 × 12)
Labour efficiency variance (favourable)
×
×
×
×
Standard labour rate
$30
Standard labour rate
$30
Standard material price
$80
Material Price variance (favourable)
(ii)
(iii)
(iv)
(v)
(vi)
(c)
Standard Costing
Actual hours
×
55 200 hours
×
Original Budgeted hours
×
(5 000 × 12) hours
×
Fixed overhead expenditure variance (favourable)
Flexed budgeted hours
(4 800 × 12) hours
Original budgeted hours
(5 000 × 12) hours
Fixed overhead volume variance (adverse)
×
×
×
×
1 228 800
38 400
1 228 800
1 152 000
76 800
1 766 400
1 656 000
110 400
1 656 000
1 728 000
72 000
Actual OH rate
579 600
Budgeted OH rate
$10
Budgeted OH rate
$10
Budgeted OH rate
$10
600 000
20 400
576 000
600 000
24 000
Statement to reconcile the budgeted cost of producing 4800 tables with the actual cost
Budgeted production cost for 4 800 units (W1)
Direct material price variance (favourable)
Direct material usage variance (adverse)
Direct labour rate variance (adverse)
Direct labour efficiency variance(favourable)
Fixed OH expenditure variance (favourable)
Fixed OH volume variance (adverse)
Actual production cost for 4 800 units
WOIRKINGS
(W 1)
$
1 190 400
$
3 456 000
(38 400)
76 800
110 400
(72 000)
(20 400)
24 000
3 536 400
Calculation of Budgeted Cost for 4 800 units
Direct materials [(4 800 @ 3) metre) × $80]
Direct labour [(4 800 @ 12) hours × $30]
Production overhead [(4 800 @ 12) hours × $10]
Budgeted production cost for 4 800 units
$
1 152 000
1 728 000
576 000
3 456 000
Chapter 16
(d)
294
Standard Costing
If directors choose higher quality material then it will l adversely affect the material price variance but may
improve material usage variance and labour efficiency variance.
Increase in selling price may lose existing customers but improved reputation and high quality products
would attract new customers.
Chapter 17
295
CHAPTER 17
Capital Investment Appraisal
CAPITAL INVESTMENT APPRAISAL
QUESTION 1
NOVEMBER 2011 P43 Q3
Bradley Ltd is considering investing in a project which requires an initial outlay of $800 000.
A net cash inflow of $235 000 is expected at the end of the first year and this is expected to rise by 10% annually
until the end of year 4. The project is fully complete and has no residual value at the end of year 5 and the anticipated
net cash inflow at this time is just 20% of the initial investment.
The company’s cost of capital is 8%.
Extracts from present value tables for $1
Year
1
2
3
4
5
8%
0.926
0.857
0.794
0.735
0.681
15%
0.870
0.756
0.658
0.572
0.497
REQUIRED
(a)
Calculate the net present value (NPV) of the project at the company’s cost of capital and advise the directors
whether the project is acceptable.
[13]
(b)
Determine the discounted payback period.
[7]
(c)
Explain briefly what you understand by the internal rate of return (IRR) of a project.
[2]
(d)
Calculate the IRR of the project.
[14]
(e)
Identify four other factors other than NPV which may be used to determine the acceptability of the project.
[4]
QUESTION 2
MAY 2012 P43 Q3
The directors of a clothing company are proposing to manufacture coats. They anticipate that the coats would stay
in fashion for the next 4 years.
This would require the purchase of additional equipment at a cost of $250 000 which would be scrapped after 4
years.
Sales are expected to be 4000 coats in year 1. In years 2 and 3 the expected number of coats sold will increase by
10% on the previous year but will fall to 3500 in year 4.
The selling price of the coats will be $80 in year 1, $90 in years 2 and 3 and $75 in the final year.
Variable costs will be $65 per coat for years 1 and 2, rising to $70 for years 3 and 4.
The company’s cost of capital is 10%. The discount factors are:
Year 1
Year 2
Year 3
Year 4
0.909
0.826
0.751
0.683
REQUIRED
(a)
Calculate the net cash flows for each year.
(b)
Calculate the accounting rate of return.
(c)
Calculate the net present value of the proposal.
(d)
Advise the directors whether they should proceed with the proposal.
(e)
(i)
Explain what you understand by the internal rate of return (IRR).
(ii)
Identify how IRR could be used to appraise this proposal.
[13]
[7]
[11]
[4]
[2]
[3]
QUESTION 3
MAY 2014 P41 Q3, MAY 2014 P42 Q3
The directors of Drake plc wish to invest in a new production plant, and must choose between Project Utopia and
Project Sylvania.
Chapter 17
296
Capital Investment Appraisal
In each case the investment will be financed with a bank loan for the full amount. This will be received in full on the
day the plant is purchased. The loan will be repaid in full in a single payment at the end of year five, however interest
is payable throughout the useful life of the plant at 10% per annum.
The useful life of the plant will be 5 years, and it will then be scrapped with no sale proceeds.
The following information is available for Project Utopia:
Cost of production plant
$200 000
Cost of capital
10%
Depreciation rate
30% reducing balance
Revenue in year 1
$110 000
Direct costs in year 1
$40 000
Revenue each year will be 5% higher than the year before.
Costs each year will be 3% higher than the year before.
Discount factors showing net present value of $1
Year
10%
40%
1
0.909
0.714
2
0.826
0.510
3
0.751
0.364
4
0.683
0.260
5
0.621
0.186
REQUIRED
(a)
Complete the table from the information given to calculate the net cash flow for each year and in total for
Project Utopia.
[7]
(b)
Calculate the net present value for Project Utopia.
[7]
(c)
Calculate the accounting rate of return (ARR).
[5]
(d)
Calculate the internal rate of return (IRR).
[7]
Additional information
The following information has also been calculated for Project Sylvania.
Net present value
Accounting rate of return (ARR)
Internal rate of return (IRR)
$41 680
19.48%
17.29%
REQUIRED
(e)
State, with reasons, in which project the directors of Drake plc should invest.
[4]
Additional information
The directors of Drake plc could finance the new project by issuing new ordinary shares and not using a bank loan.
REQUIRED
(f)
Explain how financing the new project from the proceeds of issuing new ordinary shares would affect the
accounting rate of return (ARR).
[6]
(g)
State and explain two other sources of finance for the project.
[4]
QUESTION 4
NOVEMBER 2014 P42 Q2(a to f)
The directors of Ragley Limited are considering a new business opportunity. This involves the purchase of machinery
costing $600 000.
Units produced by the machine are expected to have a selling price of $50 each and the variable costs of production
are expected to be $31.10 per unit. Fixed costs are expected to be $120 000 per annum excluding depreciation.
The machinery is expected to lose its value evenly over four years and then be scrapped.
The directors expect to produce and sell 20 000 units a year.
Chapter 17
297
Capital Investment Appraisal
REQUIRED
(a)
Calculate the following expected annual values. Label each answer.
(i)
Total contribution
(ii)
Net cash flow
(iii)
Profit
[6]
(b)
[5]
Calculate the expected annual breakeven level of production, both in units and sales revenue.
Additional information
Ragley Limited has a cost of capital of 10%. Discount factors are as follows.
Year 1
Year 2
Year 3
Year 4
0.909
0.826
0.751
0.683
3.169
The directors provide the following incorrect net present value calculation as an aid to decision making.
Annual surplus
$108 000
x Discount factor for four years
3.169
Net present value
$342 252
REQUIRED
(c)
Explain why the directors’ net present value calculation is incorrect.
(d)
Calculate the correct net present value of the machinery.
(e)
Calculate the sensitivity of the project to changes in the cost of the machinery.
(f)
Calculate the sensitivity of the project to changes in the selling price.
[4]
[6]
[4]
[9]
QUESTION 5
NOVEMBER 2014 P43 Q3(c to f)
The summarised financial statements of Firgo plc for the year ended 31 December 2013 showed the following.
Income statement for the year ended 31 December 2013
Revenue
Revenue expenditure excluding depreciation
Depreciation
$000
6 000
5 600
300
The directors consider that, without expansion plans, these costs and revenues will remain constant in future years.
Additional information
The directors believe they can improve profitability if they start manufacture of a new product.
This would involve the purchase of new machinery costing $400 000 on 31 December 2014. The total annual revenue
of the company would then be expected to increase to:
2015
2016
2017
2018
$000
6 500
6 700
7 100
6 300
The annual running costs of the new machinery are expected to be:
2015
2016
2017
2018
$000
300
490
740
610
Chapter 17
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Capital Investment Appraisal
On 31 December 2018 the machinery would be scrapped. There would be no residual value.
Firgo plc has a cost of capital of 10%. Discount factors are as follows.
Year 1
Year 2
Year 3
Year 4
0.909
0.826
0.751
0.683
REQUIRED
(c)
Calculate the net present value of the machinery. Assume all cash flows arise on the last day of the
year.
[15]
Additional information
Using a cost of capital of 15% the net present value of the machinery is $ (7 830).
REQUIRED
(d)
Calculate the internal rate of return.
(e)
Calculate the accounting rate of return of the machinery correct to one decimal place.
(f)
Advise the directors on the proposed purchase of machinery.
[5]
[6]
[6]
QUESTION 6
MAY 2015 P41 & P42 Q3(a to d)
Abdul has a taxi business and is considering investing in an additional taxi, the London or the Paris.
The useful life of the taxi is expected to be 5 years, and it will then be scrapped with no sale proceeds. Depreciation
will be provided on the straight-line basis.
The following information is available about the London taxi.
Cost of vehicle
Additional revenue in year 1
Annual rate of increase in revenue
Additional direct costs in year 1
Annual rate of increase of direct costs
Annual fixed costs
Cost of capital
$20 000
$10 000
5%
$2 000
3%
$1 600
8%
Discounting factors showing net present value of $1
Year
8%
25%
1
0.926
0.800
2
0.857
0.640
3
0.794
0.512
4
0.735
0.410
5
0.681
0.328
REQUIRED
(a)
Calculate the net present value of the investment in the London taxi using a rate of 8%.
[12]
(b)
(i)
Calculate the net present value of the investment in the London taxi using a discount factor of 25%.
[6]
(ii)
Calculate the internal rate of return (IRR) on the investment in the London taxi.
Show your workings in detail and give your answer to two decimal places.
[4]
Additional information
The following information is available for the Paris taxi.
Net present value
Internal rate of return
Average accounting rate of return
REQUIRED
(c)
Calculate the accounting rate of return for the London taxi.
(d)
State, with reasons, which of the two makes of taxi Abdul should buy.
$7489
24.56%
30.10%
[6]
[4]
Chapter 17
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Capital Investment Appraisal
QUESTION 7
Harko runs a successful retail business. His typical annual results have been as follows:
Revenue
Cost of sales
Gross profit
Variable selling and administrative expenses
Fixed expenses
Profit for the year
SPECIMEN 2016 P3 Q5
$
210 000
115 500
94 500
48 000
19 500
27 000
Harko is now considering building an extension to his premises.
The following information is available:
1
The building cost would be $265 000.
2
Because of the increase in floor space he anticipates that sales volume would increase by 40%.
3
The gross profit margin would be maintained.
4
The inventory level would need to be increased by $10 000 in year 1 only.
5
The existing variable expenses would increase by 30%.
6
The business would in future have to rent garage space for the vehicle at a cost of $2000 a year.
7
Harko intends to retire at the end of year 4 and sell the business as a going concern. He expects the purchase
consideration for the business (including inventory) to be $600 000 without the extension or $910 000 if he
proceeds with the extension.
REQUIRED
(a)
Calculate the annual cash flows arising from the building of the extension.
[8]
Additional information
Harko’s cost of capital is 10%. Discount factors are as follows.
Year
0
1
2
3
4
Discount factor
1.000
0.909
0.826
0.751
0.683
REQUIRED
(b)
Calculate the net present value (NPV) of building the extension. Round calculations to the nearest dollar ($)
[8]
(c)
Advise Harko whether he should proceed with the extension, based on your figures from (b).
[2]
(d)
Outline why Harko might have doubts about proceeding with the extension, based on the NPV.
[3]
(e)
Explain why Harko chose to use net present value as a basis for his decision rather than the payback method.
[4]
QUESTION 8
MAY 2016 P31 Q6
One of the assembly machines at Artem Limited needs to be replaced.
A replacement machine will cost $300 000, which will be paid on purchase. The replacement machine is expected to
last for three years. It will need complete maintenance check-up in year 2 at a cost of $75 000.
The existing machine assembles 4000 units per year.
The number of units assembled by the replacement machine is expected to be 35% lower in year 1 than the existing
machine due to the time lost during installation and testing.
In year 2 it is expected that 4 500 units will be assembled and this will increase by 20% each year compared to the
previous year.
The replacement machine will produce units at a cost of $24 each. From year 2 this will increase by 25% each year
compared to the previous year.
The selling price will be $45 per unit. This will increase by 30% each year compared to the previous year.
Chapter 17
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Capital Investment Appraisal
The cost of capital is 14%.
The following is an extract from the present value tables for $1.
Year 1
Year 2
Year 3
14%
0.877
0.769
0.675
It is assumed that all production will be sold.
REQUIRED
(a)
Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b)
Calculate the expected net cash flows for each year for the replacement machine.
[8]
(c)
Calculate the payback period for the replacement machine.
[2]
(d)
Calculate the net present value for the replacement machine. Assume that revenues are received and costs
are paid at the end of each year.
[6]
(e)
(i)
Analyse the benefits to the business of purchasing the replacement machine.
[3]
(ii)
Recommend whether or not the managers of Artem Limited should purchase the replacement
machine. Justify your answer.
[2]
QUESTION 9
NOVEMBER 2016 P31 Q6
Alexander intends to start a new project producing either Product X or Product Y. Each product will require an
additional capital cost of $50 000. Both products are expected to last 4 years.
The following information is available on Product X:
1
Sales volume in year 1 would be 10 000 units with a selling price of $7.
2
The volume would rise by 5% in year 2 and by another 5% in year 3.
3
Popularity is then expected to fall in year 4 and there would be a 20% fall in volume.
4
The selling price would not change.
5
The variable costs will be $3 per unit in year 1, will rise to $4 in year 2 and will then remain unchanged.
6
Annual fixed costs payable will be $11 000 and will remain unchanged.
REQUIRED
(a)
Calculate the net cash flows for each year and in total for Product X.
[8]
Additional information
Alexander’s cost of capital is 10% and the discount factors are:
Year 1
Year 2
Year 3
Year 4
REQUIRED
(b)
0.909
0.826
0.751
0.683
Calculate the net present value of Product X.
[7]
Additional information
Alexander has carried out the same calculations for Product Y. He has calculated the net present value of Product Y
as $30 400.
REQUIRED
(c)
Advise Alexander which product he should make based solely on the net present value.
Justify your answer.
[2]
(d)
State one advantage & one disadvantage of using net present value for investment appraisal.
[2]
(e)
Explain why Alexander may or may not use the payback method of investment appraisal.
[3]
(f)
State three non-financial factors Alexander should consider when choosing between Product X and Product
Y.
[3]
Chapter 17
301
Capital Investment Appraisal
QUESTION 10
NOVEMBER 2016 P33 Q5
N Limited is planning a new project, which has an initial cost of $225 000. If the project runs for four years the
marginal revenues and costs will be as follows:
Year
Revenues
$
100 000
110 000
125 000
90 000
1
2
3
4
Costs
$
31 000
40 000
59 000
48 000
The directors have two options.
Option 1
To stop the project at the end of year 2 when the scrap value of the project’s assets will amount
to $175 000.
Option 2
To continue with the project until the end of year 4 when the scrap value of the assets will be
$75 000.
The company’s cost of capital is 10%. Discount factors for this cost of capital are as follows:
Year
1
2
3
4
Discount factor
0.909
0.826
0.751
0.683
REQUIRED
(a)
Calculate the net present value (NPV) of each option.
(b)
Advise the directors which option they should choose. Justify your answer.
[10]
[2]
Additional information
Before the directors make a decision, the finance director wishes to have further data on the project.
REQUIRED
(c)
Calculate, to two decimal places, the sensitivity of the option selected in your answer to (b) to changes in
the initial cost of the project.
[3]
(d)
Calculate, to two decimal places, the accounting rate of return (ARR) of the option selected in your answer
to (b). (Add scrap value to cost when calculating average investment.)
[6]
(e)
Explain to the directors which is the more valid method of investment appraisal. Give reasons.
[4]
QUESTION 11
MAY 2017 P32 Q6
Tisha is considering buying a new machine for her factory. The machine will cost $125 000. At the end of Year 5 the
machine will be sold for $65 000. The machine will be used to manufacture one of Tisha’s existing products.
The following information is available:
1
The current annual sales volume of the existing product is 10 000 units. This will remain constant over the
5-year period.
2
The selling price per unit is currently $12. Tisha plans to increase this to $13 per unit to help cover her costs
of the new machine.
3
The variable cost is currently $5 per unit. This is expected to fall to $3 per unit by using the new machine.
4
The maintenance cost for the new machine will increase the annual fixed costs by $5 000.
5
At the end of Year 1, Tisha will have to pay a one-off service fee of $1 000.
REQUIRED
(a)
Prepare one table which shows the change in cash flows for each of the Years 0 to 5 that arise as a result
of the purchase of the machine.
[5]
(b)
Calculate the payback period for the machine.
[2]
(c)
State three reasons why payback may be a useful investment appraisal technique.
[3]
Chapter 17
302
Capital Investment Appraisal
Additional information
Tisha’s cost of capital is 10%. Discount factors are as follows:
Year
0
1
2
3
4
5
Discount factor
1.000
0.909
0.826
0.751
0.683
0.621
REQUIRED
(d)
Calculate the Net Present Value (NPV) of buying the machine.
[3]
Additional information
When using a discount factor of 20%, the machine had a negative NPV of $24 953.
REQUIRED
(e)
Calculate the Internal Rate of Return (IRR) of the machine to three decimal places.
[4]
Additional information
Tisha has recently discovered an alternative machine that would also be suitable for producing the same product.
This also has an expected life of 5 years. Tisha has a limited amount of capital available and only needs one machine.
The following information has been calculated for the alternative machine:
Capital outlay
$
135 000
NPV
$
10 350
IRR
%
9.597
Payback period
4 years 6 months
REQUIRED
(f)
Recommend, with reasons, which machine Tisha should buy.
[4]
(g)
Discuss which factors, other than those you have considered in (f), Tisha should consider when making her
decision.
[4]
QUESTION 12
NOVEMBER 2017 P32 Q5
Wong Ho owns a small factory. A machine has started to break down regularly and needs to be replaced.
A replacement machine is expected to cost $55 000. It is expected to last 5 years and will be depreciated using the
straight-line method of depreciation. At the end of the period the machine will be scrapped with no residual value.
The following information is available for the replacement machine:
1
The selling price for each unit produced by the machine is expected to be $40 for years 1 and 2.
This is expected to increase by 25% for year 3.
There is no expected change for year 4.
However, the selling price is expected to increase by a further 10% for year 5.
2
The cost of production for each unit produced is expected to be $20 for years 1 and 2. This will increase by
25% for year 3 and then remain unchanged.
3
The present value for the net cash flows for the years 1 to 5 have been calculated as follows:
Year
1
2
3
4
5
Discount factor 14%
0.877
0.769
0.675
0.592
0.519
Present value $
3 683.40
6 536.50
9 483.75
14 977.60
21 019.50
Chapter 17
303
Capital Investment Appraisal
REQUIRED
(a)
Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b)
Calculate the expected net present value for the replacement machine.
[1]
(c)
(i)
Calculate the annual net cash flows for years 1 to 5 for the replacement machine.
[5]
(ii)
Calculate the payback period for the replacement machine.
[2]
(iii)
Calculate the number of units for each year that Wong Ho expects to produce with the
replacement machine.
[8]
(d)
Recommend whether or not Wong Ho should purchase replacement machine. Justify your answer.
[5]
QUESTION 13
MAY 2018 P32 Q5
Jason is considering investing in building a property in order to receive rental income.
He could buy the land now (year 0) for $100 000. Construction costs of $180 000 would be paid in year 1.
The building would have ten flats and each would have an annual rental of $5 000. Jason thinks that he could rent
out flats as follows:
Year
Number of flats rented out
1
Nil
2
7
3
8
4
10
Total annual maintenance and management charges for the flats would cost $12 000 plus 10% of the rent received.
At the end of the year 4 he would sell the building. Jason has consulted two different property dealers, Alan and
Bob. Alan estimates the building could be sold for $290 000. Bob estimates it could be sold for $315 000.
Jason’s cost of capital is 10%. The discount factors to be used to account for this are as follows.
Year 1
2
3
4
0.909
0.826
0.751
0.683
All cash flows are assumed to take place on the last day of the year.
REQUIRED
(a)
(i)
(b)
(c)
(d)
Calculate the net present value (NPV) of investing in the building, using Alan’s estimation of the
sale proceeds.
[12]
(ii)
Calculate the net present value (NPV) of investing in the building, using Bob’s estimation of the sale
proceeds.
[3]
Calculate the sales proceeds at the end of year 4 which would result in a net present value of zero.
[3]
Advise Jason whether or not he should proceed with investing in the building. Justify your answer.
[5]
State two reasons why the calculation of the payback period is a less useful investment appraisal technique
than the calculation of net present value (NPV).
[2]
Chapter 17
304
Capital Investment Appraisal
SOLUTION
CHAPTER 17
QUESTION 1
(a)
Calculation of Net Present Value (NPV)
Year
Cash flow ($)
Present value of $1 @ 8%
0
(800 000)
1.000
1
235 000
0.926
2
258 500 (W 1)
0.857
3
284 350 (W 2)
0.794
4
312 785 (W 3)
0.735
5
160 000 (W 4)
0.681
Net Present Value @ 8%
(b)
Discounted Payback period
=
3 years +
$135 081 (W 5)
$229 897(W 5)
NOVEMBER 2011 P43 Q3
Present value of Cash Flows ($)
(800 000)
217 610
221 535
225 774
229 897
108 960
203 776
× 365
=
3 years & 214 days
(c)
The internal rate of return is the discount rate at which net present value of the project is zero. If a project
has a discount rate below IRR then it will be a viable project and vice versa.
(d)
(e)
Internal Rate of Return




8% +
=
17.0%
Year
0
1
2
3
4
5
$203 776−$45 411 (W 6)
× 7%
Environmental issues.
Compatibility with existing projects
Reliability of project’s forecast in long run
Quality of output
WORKINGS
(W 1) $235 000 × 110% = $258 500
(W 2) $258 500 × 110% = $284 350
(W 3) $284 350 × 110% = $312 785
(W 4) $800 000 × 20% = $160 000
(W 5)
Year
Discounted Cash Flows ($)
0
(800 000)
1
217 610
2
221 535
3
225 774
4
229 897
5
108 960
(W 6)
$203 776 (a part)
=
Net Discounted Cash Flows ($)
(800 000)
(582 390)
(360 855)
(135 081)
94 816
203 776
Calculation of Net Present Value @15%
Cash flow ($)
Discount factor
(800 000)
1.000
235 000
0.870
258 500
0.756
284 350
0.658
312 785
0.572
160 000
0.497
Net Present Value @ 15%
Present value of cash flows ($)
(800 000)
204 450
195 426
187 102
178 913
79 520
45 411
Chapter 17
305
Capital Investment Appraisal
QUESTION 2
(a)
Calculation of Annual Net Cash Flows
Year
Cash Inflows ($)
−
Cash Outflows ($)
(4 000 × $80)
(4 000 × $65)
1
−
2
[(4 000 × 110%) × $90]
−
[(4 000 × 110%) × $65]
3
[(4 400 × 110%) × $90]
−
[(4 400 × 110%) × $70]
4
(3 500 × $75)
−
(3 500 × $70)
(b)
Accounting Rate of Return (ARR)
=
=
=
WORKINGS
(W 1)
Average Profit
=
=
=
=
(W 2)
Average Investment
=
=
=
MAY 2012 P43 Q3
=
=
=
=
=
Net Cash Inflows ($)
60 000
110 000
96 800
17 500
Average Profit ×100
Average Investment
$8 575 (W 1) ×100
$125 000 (W 2)
6.86%
Total Profits
Total life (years)
Total Net cash Inflows − Total Depreciation
Total life (years)
$284 300−$250 000
4 years
$8 575
Original Cost+Scrap Value
2
$250 000+Nil
2
$125 000
(c)
Year
0
1
2
3
4
Calculation of Net Present Value (NPV)
Net Cash flows ($)
Present Value of $1 @10%
Present value of cash flows @10%
(250 000)
1.000
(250 000)
60 000
0.909
54 540
110 000
0.826
90 860
96 800
0.751
72 697
17 500
0.683
11 953
Net Present Value @10%
(19 950)
(d)
As the project yields negative net present value so the directors should not proceed with the
proposal. In addition the accounting rate of return (ARR) seems to be quite low and is even below
the cost of capital. Management should also consider other non-financial factors.
(e)
(i)
The internal rate of return is the discount rate at which net present value is zero. In other words it
is the discount rate at which present value of inflows is equal to present value of outflows.
(ii)
If cost of capital is lower than the internal rate of return then the proposal should be rejected and
vice versa. The negative NPV reveals that the IRR is lower than the cost of capital.
QUESTION 3
(a)
Year
0
1
2
3
4
5
Total
MAY 2014 P41 Q3, MAY 2014 P42 Q3
Revenue ($)
(200 000)
110 000
115 500
121 275
127 339
133 706
407 820
Calculation of Net Cash flows
Costs ($)
(40 000)
(41 200)
(42 436)
(43 709)
(45 020)
(212 365)
Interest ($)
(20 000)
(20 000)
(20 000)
(20 000)
(20 000)
(100 000)
Net cash flows ($)
(200 000)
50 000
54 300
58 839
63 630
68 686
95 455
Chapter 17
306
Capital Investment Appraisal
(b)
Calculation of Net Present Value
Year
Net cash flows
10% Factor
0
(200 000)
1.000
1
50 000
0.909
2
54 300
0.826
3
58 839
0.751
4
63 630
0.683
5
68 686
0.621
Net present value
(c)
Accounting rate of return
=
=
=
=
(d)
Year
0
1
2
3
4
5
Total
Net cash flow
(200 000)
50 000
54 300
58 839
63 630
68 686
Net present value
Internal rate of return (IRR)
Net present value
(200 000)
45 450
44 852
44 188
43 459
42 654
20 603
Average Profit
Average Investment
$95 455 / 5
($200 000+zero)/2
$19 091
$100 000
× 100
× 100
× 100
19.09%
Discounted value of $1 @40%
1.000
0.714
0.510
0.364
0.260
0.186
Discounted Cash flows @40% ($)
(200 000)
35 700
27 693
21 417
16 544
12 775
(85 871)
10% + (
=
15.81%
$20 603
=
) × 30%
$20 603−(−$85 871)
(e)
Drake should invest in Project Sylvania, because the accounting rate of return is greater, the net present
value is greater, and the internal rate of return is greater than Project Utopia.
(f)
If project is not financed through loan then interest would not be charged to the project, therefore the
profits should be higher. This will result in a higher accounting rate of return as calculated below.
Accounting rate of return
=
=
=
=
(g)
Average Profit
Average Investment
($95 455+$100 000)/ 5
($200 000+zero)/2
$39 091
$100 000
× 100
× 100
× 100
39.09%
Preference shares: Preference dividends are paid at fixed rate. Preference dividend and capital amounts
are paid in priority to ordinary shareholders. Preference dividend on redeemable preference shares is a
chargeable expense against profits for tax purposes.
Debentures: These are usually secured on the asset. Interest charged may be at a lower rate than on the
bank loan. Interest is charged before dividend is paid to ordinary and preference shareholders. Interest is
also a chargeable expense against profits for tax purposes.
QUESTION 4
(a)
Contribution
Units of sales
20 000 units
$378 000
×
×
NOVEMBER 2014 P42 Q2(a to f)
Per unit contribution
($50 – $31.1)
Chapter 17
(b)
307
Net cash flow
Contribution
$378 000
$258 000
–
–
Fixed costs excluding depreciation
$120 000
Profit
Net cash flow
$258 000
$108 000
–
–
Depreciation
$150 000 ($600 000/4)
Break-even (units)
=
=
Break-even (value)
(c)
Capital Investment Appraisal
Total Fixed costs
Contribution per unit[a(i)]
$120 000 +$150 000
$50 – $31.1
=
14 286 units
=
=
=
Break even units × Per unit selling price
14 286 × $50
$714 300
The cash outflow on purchase of machinery was not included in the calculation.
The cash outflow on purchase of machinery should had been subtracted from present value of cash inflows.
Calculation was based on profits whereas for calculating Net Present Value cash flows should have been
considered.
The annual cash flows should not include depreciation as depreciation does not involve any outlay of cash.
(d)
Year
0
1–4
(e)
Cash flow
(600 000)
258 000
Discount factor @10%
1.000
3.169
Net Present Value
Sensitivity to changes in machine cost
Net Present value
=
Orignal Cost of Machine
217 602
=
600 000
=
(f)
Sensitivity to changes in selling price
Net Present value
× 100 = 36.27
20 000 units ×$50 ×3.169
=
Internal Rate of Return (IRR)
× 100
Present value of sales
217 602
=
(d)
× 100 = 36.27
36.27%
=
QUESTION 5
(c)
Year
Additional Revenues Additional Payments
($000)
($000)
0 (2014)
1 (2015)
300
6 500  6 000 =500
2 (2016)
490
6 700  6 000 =700
3 (2017)
740
7 100  6 000 = 1 100
4 (2018)
610
6 300  6 000 = 300
Net Present Value (NPV)
Discounted cash flow @10% ($)
(600 000)
817 602
217 602
× 100
6.87%
NOVEMBER 2014 P43 Q3(c to f)
Net Cash
flows ($000)
(400)
200
210
360
(310)
=
10% + [(
=
13.20%
$13 890
$13 890+$7 830
PV of $1
@10%
1.000
0.909
0.826
0.751
0.683
) × 5%]
Net cash flow ($)
(400 000)
181 800
173 460
270 360
(211 730)
13 890
Chapter 17
(e)
308
Accounting Rate of Return (ARR)
=
=
=
(W 1)
Average profit
=
=
=
(W 2)
Average Investment
=
=
=
(f)
Capital Investment Appraisal
Average Profits
Average Investments
$15 000 (W 1)
$200 000 (W 2)
× 100
× 100
7.5%
Net Cash Inflow −Depreciation
4
(200 000 +$210 000 +$360 000 −$310 000)− $400 000
4
15 000 per annum
Orignal Cost+Scrap Value
42
$400 000+ Zero
2
$200 000
The directors should purchase the machinery. The machine has a positive Net Present Value of $13 890.
The Internal Rate of Return is also greater than cost of capital.
As there is a loss and negative cash flows in the fourth & final year of asset’s life so it might be good for the
business to close the project at the end of year 3. This would not only help the business to avoid the losses
expected in year 4 but may also realise some amount on disposal of asset.
QUESTION 6
(a)
Year
Revenue ($)
0
1
2
3
4
5
(b)
10 000
10 500
11 025
11 576
12 155
(i)
Year
0
1
2
3
4
5
(ii)
(c)
MAY 2015 P41 & P42 Q3 (a to d)
Calculation of Net Present Value
Direct
Fixed
Net cash
costs($)
costs($)
flows($)
20 000
(20 000)
2 000
1 600
6 400
2 060
1 600
6 840
2 121
1 600
7 304
2 185
1 600
7 791
2 251
1 600
8 304
8% discount
factor
1.000
0.926
0.857
0.794
0.735
0.681
Net present value
Calculation of Net Present Value @25%
Net cash
25% discount
Flows ($)
Factor
(20 000)
1.000
6 400
0.800
6 840
0.640
7 304
0.512
7 791
0.410
8 304
0.328
Net present value
Internal rate of return
Accounting rate of return
0.25−0.08
Present value of cash flows
@25% ($)
(20 000)
5 120
4 377
3 740
3 194
2 724
(845)
=
0.08 + (
=
0.2354 0r 23.54% approximately
=
=
=
Average Profit
$10 000 (W.2)
33.28%
) × $8 968
$8 968−(−$845)
Average Investment
$3 328 (W 1)
× 100
Present value of
cash flows($)
(20 000)
5 926
5 862
5 799
5 726
5 655
8 968
× 100
Chapter 17
309
WORKINGS
(W.1)
Calculation of Average Profits
=
=
=
(W.2)
Average Investment
=
=
=
(d)
Capital Investment Appraisal
Total profit over the entire life
Estimated life (in years)
$6 400+$6 840+7 304+$7 791+$8 304 −$20 000
5 years
$3 328
Original cost+Scrap Value
=
2
$20 000 + Nil
2
$10 000
The London taxi has higher Net Present Value and higher Accounting Rate of Return. The Internal Rate of
Return is however lower for the London taxi. Amongst all methods, NPV is a better measure as it takes into
account time value of money and cash flows over the entire life. Abdul, therefore, should buy the London
taxi
QUESTION 7
(a)
Outlay
Inventory
Sales
Purchases
Expenses
Parking
Purchase Consideration
Total
(b)
Cash flow
Discount factor
Discounted cash flow
Net present value (1)
SPECIMEN 2016 P3 Q5
Year 0
$
(265 000)
(265 000)
Cash inflows
Year 1
Year 2
$
$
Year 3
$
(10 000)
84 000
(46 200)
(14 400)
(2 000)
84 000
(46 200)
(14 400)
(2 000)
84 000
(46 200)
(14 400)
(2 000)
11 400
21 400
21 400
Calculation of net present value (NPV)
Year 0
Year 1
Year 2
Year 3
$
$
$
$
(265 000)
11 400
21 400
21 400
1
0.909
0.826
0.751
(265 000)
10 363
17 676
16 071
Year 4
$
84 000
(46 200)
(14 400)
(2 000)
310 000
331 400
Year 4
$
331 400
0.683
226 346
(1)
(1)
(1) all
(1) all
(1) all
(1) all
(1)
(1of) all
Total
$
(1of)
(1of) for each
5456 (1of)
(c)
NPV is positive (1of). Therefore he should proceed (1of). (1 mark) × two valid points
(d)
Responses could include:
•
NPV is very small in relation to the outlay
•
The outcome is very sensitive to small differences between anticipated and actual costs and
revenues.
Credit for correct use of terminology, for example ‘sensitive’.
Developed explanation (2–3 marks)
Basic explanation (1 mark)
(e)
Responses could include:
•
NPV is considered the investment appraisal method giving the most accurate results
•
Payback does not consider the time value of money whereas NPV takes into account the
discounted value of money.
•
Payback does not take into account cash flows arising after the payback period
Chapter 17
310
Capital Investment Appraisal
Accept any reasonable alternative.
Developed explanation (3–4 marks)
Basic explanation (1–2 marks)
QUESTION 8
MAY 2016 P31 Q6
(a)
Payback does not consider the time value of money whereas net present value is based on time value of
money.
Payback ignores all cash flows which arise after the payback period whereas net present value considers
cash flows over the entire life of the project.
Payback is easy to calculate and understand whereas NPV involves complex calculations
(b)
years
1
2
3
(c)
Calculation of annual net cash flows
Revenue per
Net revenue
Cost per unit
Units of sale
unit (cash
(inflow) per
(cash outflow)
Inflow)
unit
2 600 (4000 × 65%) 45.0
24.0
21.00
4 500
58.5 (45 × 130%)
30.0 (24 × 125%)
28.50
5 400 (4500×120%) 76.05 (58.5×130%) 37.5 (30 × 125%)
38.55
Payback period
WORKINGS
(W 1)
Year
0
1
2
3
(d)
0
1
2
3
(e)
54 600
128 250 – 75000 = 53250
208170
$192 150
=
2 years +
=
=
2.923 years
2 years and 337 days
$208 170
Cash Flows
$
(300 000)
54 600
53 250
208 170
Calculation of Net Present Value (NPV)
Cash flow (
Present value of $1 @ 14%
$
(300 000)
1.000
54 600
0.877
53 250
0.769
208 170
0.675
Net Present Value @ 14%
Year
net cash flows (units of
sales × per unit net inflow)
Net Cash Flows
$
(300 000)
(245 400)
(192 150)
16 020
Present value of Cash Flows
$
(300 000)
47 884
40 949
140 515
(70 652)
(i)
The net cash flow generated over the 3 years is $16 020 ($54 600 + $53 250 + $208 170  $300
000). The positive net cash inflow can be used for other projects within the business.
There is also an increase in production output by 35% i.e. from 4000 units to 5400 units.
This will help the business to increase its market share and improve its profit potential.
(ii)
As the project yields negative net present value so the managers of Artem Ltd should not proceed
with the proposal of purchasing the machine. Though payback is within the life of the machine
however discounted net cash flows do not cover the cost of investment and the present values
generated are not enough to cover the initial cost of the investment.
Chapter 17
311
QUESTION 9
(a)
Year
NOVEMBER 2016 P31 Q6
Calculation of Net Cash flows of Product X
Inflows
Outflows
Capital cost
Variable Costs
$
$
$
(50 000)
70 000 (10 000 × 7)
30 000 (10 000 × 3)
73 500 (70 000 × 105%)
42 000 (10 000×105%× 4)
77 175 (73 500 × 105%)
44 100 (42 000 × 105%)
61 740 (71 175 × 80%)
35 280 (44 100 × 80%)
0
1
2
3
4
(b)
Year
0
1
2
3
4
Capital Investment Appraisal
Fixed Costs
$
11 000
11 000
11 000
11 000
Net Cash
Flow
$
(50 000)
29 000
20 500
22 075
15 460
37 035
Calculation of Net present value of Product X
Present value of $1 @10%
Present Value of cash flows ($)
Net Cash flows ($)
(50 000)
1.000
(50 000)
29 000
0.909
26 361
20 500
0.826
16 933
22 075
0.751
16 578
15 460
0.683
10 559
Net Present Value
20 431
(c)
Alexander should choose Product Y because it generates a higher net present value
(d)
Advantages

time value of money used

easy to understand

greater importance given to earlier cash flows
Disadvantages

difficult to predict cash flow

length of project difficult to predict

cost of capital may change during project
(e)
Advantages

Easy to calculate and understand

Based on cash flows (more objective than profits)

Useful for risky proposals (shorter payback is preferred)

Useful in liquidity crises
Disadvantages

Ignores the time value of money unless discounted payback is calculated

Ignores all cash flows which arise after the payback period

Ignores the size of investment and its overall cost/benefit
(f)










Delivery and installation time of assets to be bought.
Can quality of output be maintained or not.
Whether or not the workforce would need training to use the assets.
New assets may be dangerous to use.
Environmental issues.
Compatibility with existing projects
Reliability of project’s forecast in long run
Workers availability with required skills
Political stability
Current economic conditions
Chapter 17
312
Capital Investment Appraisal
QUESTION 10
(a)
NOVEMBER 2016 P33 Q5
Cash flow
Year
Option 1 ($)
Option 2 ($)
0
(225 000)
(225 000)
1
69 000
69 000
2
245 000
70 000
3
66 000
4
117 000
Net Present Value
Working
(W 1)
Year
0
1
2
3
4
Option 1
Outflows

($)
225 000

100 000
31 000

(110 000 + 175 000)
40 000

Inflows ($)
Discount factor of
$1 @10%
Discounted cash flow
Option 1 ($)
Option 2 ($)
(225 000)
(225 000)
62 721
62 721
202 370
57 820
49 566
______
79 911
40 091
25 018
0.909
0.826
0.751
0.683
Net Cash
flow ($)
(225 000)
69 000
245 000
Option 2
 Outflows
($)
225 000

100 000
31 000

110 000
40 000

125 000
59 000

(90 000 + 75 000) 
48 000
Inflows ($)
(b)
The directors should adopt option 1 because it has the higher Net present value.
(c)
Sensitivity of option 1 to changes in the initial cost
=
=
(d)
Accounting rate of return =
=
=
(e)
Average profit
=
=
(W.2)
$200 000
 100
17.82%
× 100
 100
22.25%
Net present value as it takes account of time value and money. It is based on cash flow which
objective than accounting profit. Moreover it takes account of the cost of capital.
WORKINGS
(W 1)
Average Profits (W.1)
Average Investments (W.2)
$44 500
$40 091
$225 000
Average Investment
=
=
QUESTION 11
(a)
Net Cash
flow ($)
(225 000)
69 000
70 000
66 000
117 000
is
more
$210 000 (revenue)−$71 000(cash exp)−$50 000 (Depn)
2
$44 500
$225 000 + $175 000
2
$200 000
MAY 2017 P32 Q6
Statement to show cash flows in each year of asset’s life
Year 0
Year 1
Year2
Year 3 Year 4 Year 5
Initial outlay (purchase price of machine)
(125 000)
Scrap value
65 000
10 000
10 000 10 000 10 000 10 000
Increase in sales revenue [10 000 × ($13  $12)]
20 000
20 000 20 000 20 000 20 000
Decrease in variable cost [10 000 × ($5  $3)
One-off service fee
(1 000)
Maintenance costs
---------- (5 000)
(5 000) (5 000) (5 000) (5 000)
Total cash flows
(125 000) 24 000
25 000 25 000 25 000 90 000
Chapter 17
313
(b)
Year
0
1
2
3
4
5
Payback period
(c)




Capital Investment Appraisal
Calculation of payback period
Annual cash inflow ($)
(125 000)
24 000
25 000
25 000
25 000
90 000
Net cash flow ($)
(125 000)
(101 000)
(76 000)
(51 000)
(26 000)
64 000
$26 000
=
4 years +
=
4 years and 3.46 months
$90 000
Easy to calculate and understand
Based on cash flows (more objective than profits)
Useful for risky proposals (shorter payback is preferred)
Useful in liquidity crises
(d)
Statement to calculate the Net Present Value (NPV)
Year
Total cash flows
Discount factor
0
(125 000)
1.000
1
24 000
0.909
2
25 000
0.826
3
25 000
0.751
4
25 000
0.683
5
90 000
0.621
Net Present Value
(e)
Internal Rate of Return
$9 206 (d part)
=
10% +
=
12.695%
$9 206 −(−$24 953)
Discounted cash flow
(125 000)
21 816
20 650
18 775
17 075
55 890
9 206
× 10%
(f)
Both machines have positive NPV but alternative machine has the better NPV however it also has higher
outlay. The first machine has the better IRR which is good as it adds more profit to the business. Moreover
the first machine has shorter payback period. In view of lower outlay, better payback and IRR, first machine
should be chosen.
(g)










QUESTION 12
(a)



Delivery and installation time of assets to be bought.
Can quality of output be maintained or not.
Whether or not the workforce would need training to use the assets.
New assets may be dangerous to use.
Environmental issues.
Compatibility with existing projects
Reliability of project’s forecast in long run
Workers availability with required skills
Political stability
Current economic conditions
NOVEMBER 2017 P32 Q5
Payback does not consider the time value of money whereas net present value does
Payback considers the net cash flow within the payback period only whereas net present value
considers the cash flow for the whole life of the project.
Payback ignores timings of cash flows but Net present value does.
Chapter 17
314
(b)
Capital Investment Appraisal
Calculation of net present value for the replacement machine
Present value of inflows ($3 683.40 + $6 536.50 + $9 483.75 + $14 977.60 + $21 019.50)
Present value of outflows (cost)
Net present value
(c)
(i)
Statement to calculate the annual net cash flows for the replacement machine
Present value ($)
Discount factor
Net cash flows ($)
[PV/discount factor]
3 683.40
0.877
4 200
6 536.50
0.769
8 500
9 483.75
0.675
14 050
14 977.60
0.592
25 300
21 019.50
0.519
40 500
Year
1
2
3
4
5
(ii)
(W 1)
Year
0
1
2
3
4
5
(iii)
Year
1
2
3
4
5
(d)
$
55 700.75
(55 000.00)
700.75
Payback
$2 950 (W 1) × 365
=
4 years & (
=
4 years & 27 days
Net cash flows ($)
(55 000)
4 200
8 500
14 050
25 300
40 500
$40 500 (W 1)
)
Cumulative Cash Flows
(55 000)
(50 800)
(42 300)
(28 250)
(2 950)
37 550
Statement to calculate the number of units for each year
Net cash flow From (c)(i)
Contribution per unit
=
÷
4 200
÷
($40 – $20)
=
8 500
÷
($40 – $20)
=
14 050
÷
($50 – $25)
=
25 300
÷
($50 – $25)
=
40 500
÷
($55 – $25)
=
Units
210
425
562
1 012
1 350
The machine has a very low net present value, but still it is positive. The payback is very lengthy as cost is
expected to be recovered in the final year of asset’s life.
Due to very small net present value and lengthy payback, Wong Ho should not purchase the machine. As
all calculations are based on estimated data so any negative change in estimated contribution per unit, life
expectancy, cost of capital etc may turn the small positive net present value into negative NPV. Likewise,
the payback may exceed life span of the machine. There could be additional non-financial factors like
availability of spare parts, training costs, quality of output etc which need to be considered.
QUESTION 13
MAY 2018 P32 Q5
(a)
(i)
Calculation of Net Present Value using Alan’s estimation of the sale proceeds
Year
Net cash flow (W 1)
Discounted value of $1 @10%
Discounted cash flows
0
(100 000)
1.000
(100 000)
1
(180 000)
0.909
(163 620)
2
19 500
0.826
16 107
3
24 000
0.751
18 024
4
323 000
0.683
220 609
Net Present value
(8 880)
Chapter 17
315
Capital Investment Appraisal
(a)
(ii)
Calculation of Net Present Value using Bob’s estimation of the sale proceeds
Year
Net cash flow (W 1)
Discounted value of $1 @10%
Discounted cash flows
0
(100 000)
1.000
(100 000)
1
(180 000)
0.909
(163 620)
2
19 500
0.826
16 107
3
24 000
0.751
18 024
4
348 000 (W 2)
0.683
237 684
Net Present value
8 195
(b)
Total Cash inflow in year 4 to have zero NPV =
$100 000+$163 620 −$16 107 −$18 024
0.683
= $336 001
Sales proceeds to make NPV equal to zero = $336 001  [(10 × 5 000)  (12 000 + 5 000)]
= $303 001
WORKINGS
(W 1)
Inflows
Outflows
Year
Rental
Sale
Total
Purchase Construction Maintenance &
Total
income
proceeds inflows
price
cost
management
outflows
0
100 000
(100 000)
1
180 000
(180 000)
2
(7 × 5 000)
35 000
(12 000 + 3 500)
15 500
3
(8 × 5 000)
40 000
(12 000 + 4 000)
16 000
4
(10 × 5 000) 290 000 340 000
(12 000 + 5 000)
17 000
(W 2)
Operating Cash inflows at end of year 4
Rental income
 Maintenance & Management outflow +
(10 × 5 000)

(12 000 + 5 000)
+
Net cash
flow
(100 000)
(180 000)
19 500
24 000
323 000
Sale proceeds
=
Net inflow
315 000
=
348 000
(c)
Net present values in both situations are not significant so difficult to make a decision on this ground. The
project under both proposals would only be able to recover cash flows (payback) in final year of project’s
life. Operating cash flows are not very significant so decision is mainly based on final sale proceeds of the
building. The calculations assume that annual rent of each flat will be $5 000 and there will be no increment.
There are lot of assumptions in the calculation to achieve a meager NPV like amount of annual rent,
occupancy of flats, amount of final proceeds etc. On the financial grounds, the project seems to be risky so
should not be undertaken. Jason should also consider to sell the building immediately.
(d)
Payback method ignores the time value of money
Payback does not consider cash flows over the entire life of a project
Payback ignores cash flows arising after the payback period
Chapter 18
316
CHAPTER 18
Activity Based Costing
ACTIVITY BASED COSTING
QUESTION 1
MAY 2016 P31 Q5
Chetna runs a business printing logos on sweatshirts. The sweatshirts come in two types, Standard and Superior. The
selling price is set at cost plus 30%.
The following information is available for the year.
Number of sweatshirts sold
Purchase cost per sweatshirt
Printing materials per sweatshirt
Labour time to print each sweatshirt
Standard
22 500
$5
$0.50
5 minutes
Superior
9 000
$8
$0.50
5 minutes
Overheads were as follows:
Machine set up costs
Other production overheads
Selling and administration
Total
REQUIRED
(a)
Calculate an overhead absorption rate based on labour hours.
$
18 900
5 850
17 250
42 000
[2]
Additional information
Staff printing the logos are paid $10 an hour.
REQUIRED
(b)
(i)
(ii)
Calculate the total cost allocated to each type of sweatshirt.
Calculate the selling price for each sweatshirt.
[4]
[2]
Additional information
Chetna has suggested that it would be better to allocate the machine set up cost to each product based on the
number of times the machine is set up. The machine has to be set up each time there is a different logo.
During the year the machine was set up 600 times for Standard sweatshirts and 975 times for Superior sweatshirts.
Other overheads are still allocated on the basis of labour hours.
REQUIRED
(c)
(i)
(d)
(e)
Calculate the total costs allocated to each type of sweatshirt when machine set up costs are
allocated using the number of set up times.
[4]
(ii)
Calculate the revised selling price for each type of sweatshirt.
[2]
(iii)
Calculate the change in selling price for each type of sweatshirt.
[2]
Explain three differences between activity based costing and absorption costing.
[6]
Advise Chetna which method she should use. Justify your answer.
[3]
QUESTION 2
MAY 2016 P32 Q5
Explorer Limited produces two products, Y and Z, and has always used absorption costing to allocate overheads to
each product. The directors are now considering adopting activity based costing (ABC).
REQUIRED
(a)
Compare how overheads are apportioned using absorption costing and ABC.
[4]
Chapter 18
317
Activity Based Costing
Additional information
The budgeted data for the two products for the year ending 31 December 2017 is as follows:
Y
Z
Raw materials used (kilo)
2
3
Direct labour hours
0.75
1
Unit selling price
$19
$25
Annual production and sale
2 500
4 000
The cost of raw materials is $2.50 per kilo and the labour force are paid $8 per hour.
Annual overheads are as follows:
$
Machine maintenance overheads
8 500
Purchasing overheads
17 000
Selling and distribution overheads
18 750
REQUIRED
(b)
Calculate the cost per unit for each product using absorption costing.
[7]
Additional information
Number of production runs
Number of purchase orders
Number of sales deliveries
Y
20
55
85
Z
16
65
160
REQUIRED
(c)
Calculate the cost per unit for each product using ABC.
(d)
(i)
Compare the total profit per product using absorption costing and ABC.
(ii)
Comment on the results.
(e)
Advise the directors whether or not ABC should be adopted. Justify your answer.
[7]
[4]
[1]
[2]
[Total: 25]
QUESTION 3
NOVEMBER 2016 P32 Q5
“The idea behind this method of costing is that it is the cause of a cost which is important and not whether it is fixed
or variable.”
REQUIRED
(a)
Identify the costing method described in the quotation.
[1]
Additional information
Haruka Limited produces a single product.
The factory is operational 5 days a week for 50 weeks a year. It produces one batch of 200 units each day.
Overheads amount to $79 000 a year.
REQUIRED
(b)
Calculate the overhead cost per unit to two decimal places.
[2]
Additional information
These overheads comprised:
$
Machine set-up costs
Production quality inspections
Production stoppage costs
Machine maintenance
Machine running costs
2 000
5 000
4 000
8 000
60 000
Chapter 18
318
Activity Based Costing
The machines were set up at the start of each working day.
There was a quality inspection every week.
The machines were maintained each day.
Production was stopped on average once every 4 weeks for unexpected maintenance.
Samir, the finance director, asks Sara, the factory accountant, to analyse the overhead cost per unit across each of
the five overheads incurred.
REQUIRED
(c)
Prepare an analysis showing how the total overhead cost per unit (from part b) is split between each of the
individual overheads.
[12]
Additional information
Sara has complained to Samir that producing this analysis is not worthwhile.
REQUIRED
(d)
Advise Samir whether or not he should continue to ask for this analysis in the future years. Justify your
answer by considering the benefits and drawbacks of this costing method.
[10]
QUESTION 4
MAY 2017 P31 & P33 Q6
Ahmed manufactures two products. He has recently started using Activity Based Costing (ABC) for allocating the
overhead costs to these products. The budgeted data for one month is available as follows:
Demand (units)
Number of orders
Number of production runs
Direct labour hours
Machine hours
Direct costs ($)
Total factory overhead costs
Machine maintenance costs
Ordering costs
Production run costs
Product X
10 000
20
12
Product X
Per unit
0.75
2.5
100
Product Y
14 000
60
36
Product Y
Per unit
1.5
0.5
50
$
264 000
54 000
24 000
342 000
REQUIRED
(a)
Calculate the full cost per unit for Product X and Product Y using ABC.
[10]
Additional information
Ahmed previously used direct labour hours as a basis to charge overheads to each product.
REQUIRED
(b)
Calculate the overhead charged to each product using the direct labour hour rate.
[3]
(c)
Explain the effect that changing the method has had on the overhead cost of each
product.
[4]
Additional information
A customer requires 50 units of Product X and has offered to pay Ahmed a total of $8 450 for them. Ahmed uses
40% mark-up on all his products.
REQUIRED
(d)
Recommend whether or not Ahmed should accept the offer. Justify your decision sing appropriate
calculations and considering both financial and non-financial factors.
[6]
(e)
State two reasons why a business may use ABC for allocating overhead costs.
[2]
Chapter 18
319
Activity Based Costing
QUESTION 5
NOVEMBER 2017 P31 Q6
PMW Limited produces and sells two products, A and B. It provided the following information for a year:
Product A
Product B
Sales
20 000 units
18 000 units
Selling price per unit
$12
$20
Direct material per unit
$3.20
$4.90
Direct labour per unit
$1.80
$2.10
Total overheads amounted to $300 000. These are currently apportioned to the two products on the basis of total
sales value.
REQUIRED
(a)
Calculate the value of overheads apportioned to each product.
[3]
(b)
Calculate the profit or loss per unit for each product.
[5]
Additional information
Beryl, the accountant, has analysed the overheads. She discovered that the total of $300 000 included costs for
delivery to customers and order processing costs. The following information was available.
1
Analysis of orders received
Product A
Product B
Total
Orders received for more than 100 units
17
23
40
Orders received for 100 units or fewer
664
446
1 110
Total orders received
681
469
1 150
2
Costs of delivery amounted to $30 per order for orders received for more than 100 units, and $20 per order
for orders of 100 units or fewer.
3
Order processing costs amounted to $25 per order irrespective of size.
4
Remaining overheads should now be apportioned to sales units.
REQUIRED
(c)
Calculate total overheads apportioned to each product in accordance with the accountant’s analysis. [5]
(d)
Calculate the revised profit or loss per unit for each product.
[5]
Additional information
Beryl believes that her method of apportioning overheads is more realistic than the current method. She has
recommended to the directors that the method be changed in the future.
REQUIRED
(e)
Discuss whether or not the directors should change the method of apportioning overheads.
Justify your answer using both financial and non-financial factors.
(f)
State what is meant by the terms ‘cost driver’ and ‘cost pool’.
[5]
[2]
QUESTION 6
NOVEMBER 2017 P33 Q5 (e)
The directors of S Limited are considering using production units rather than direct labour hours as the basis of
absorbing fixed overheads.
REQUIRED
Advise the directors whether or not they are correct to absorb fixed overheads on the basis of direct labour hours.
Justify your answer.
[4]
QUESTION 7
MAY 2018 P31 & P33 Q6
B Limited manufactures two products Alpha and Omega. The following budgeted figures are available.
Alpha
Omega
Budgeted production and sales units
20 000
8 000
Direct materials used per unit
5 kilo
11 kilo
Direct materials cost per kilo
$20
$11
Labour hours per unit
2
1
Direct labour cost per hour
$12
$6
Chapter 18
320
The fixed overheads are forecast as $396 000 and are allocated on the basis of labour hours.
(a)
Calculate for each product:
(i)
the total production costs
(ii)
the production cost per unit
Additional information
The sales price per unit is calculated by adding 50% to the cost.
(b)
Calculate the selling price per unit for each product.
Activity Based Costing
[3]
[1]
[2]
Additional information
The directors of the company have been advised that they should adopt activity based costing to allocate the
production overheads. They have identified the four major activities involved in the production cycle as machine
set-up, materials handling, maintenance of machinery and production inspection and packing. The costs of each
activity have been established and the overheads apportioned between the activities as follows:
Production Overheads
Alpha
Omega
$
Machine set-up
90 000
15 times
10 times
Materials handling
80 000
6 receipts
14 receipts
Machine maintenance
46 000
130 hours
100 hours
Inspection and packing
180 000
40 hours
20 hours
396 000
(c)
State two disadvantages to a business of adopting activity based costing.
[2]
(d)
Calculate the total production overhead to be allocated to each product using activity based costing. [4]
(e)
Recalculate the cost per unit and selling price of each product maintaining the 50% mark-up.
[3]
(f)
Explain three reasons why B Limited should change the method of allocating overheads to using activity
based costing.
[6]
Additional information
It has been suggested that customers will not accept the increase in price of Omega. The directors are therefore
considering changing the profit margins to 60% on Alpha and 30% on Omega.
(g)
(i)
Calculate the new total profit for each product if this change is adopted.
[2]
(ii)
Give two reasons why B Limited should adopt this change.
[2]
Chapter 18
321
Activity Based Costing
SOLUTION
CHAPTER 18
QUESTION 1
(a)
Overhead absorption rate
=
=
MAY 2016 P31 Q5
Total Overheads for the year
Number of labour hours
$42 000
2 625 Labour hours (W 1)
=
$16 per direct labour hour
(W 1)
Calculation of Number of Direct Labour Hours
Standard [(22 500 × 5) minutes] ÷ 60
Superior [(9 000 × 5) minutes] ÷ 60
Total labour hours
(b)
(i)
Calculation of total cost allocated to each type of sweatshirt
Standard
$
Direct materials [22 500 × (5 + 0.5)] : [9 000 × (8 + 0.5)]
123 750
Direct labour [(22 500×5/60) hours×10] ; [(9 000×5/60)hours×10]
18 750
Overheads [(22 500×5/60) hours×16] ; [(9 000×5/60)hours×16]
30 000
Total costs
172 500
(ii)
Superior
$
76 500
7 500
12 000
96 000
Calculation of selling price of each type of sweatshirt
Per unit cost(
$172 500
22 500 units
); (
$96 000
)
9 000 units
Profit ($7.67 × 30%); ($10.67 × 30%)
Per unit selling price
(c)
1 875 hours
750 hours
2 625 hours
Standard
$
Superior
$
7.67
10.67
2.30
9.97
3.20
13.87
(i)
Calculation of total cost allocated to each type of sweatshirt
Standard
$
Direct materials
123 750
Direct labour
18 750
Set up costs [600 × 12 (W 2)] ; [(975 × 12 (W 2)]
7 200
Other overheads (1 875 hrs × 8.8 (W 3)] ; [750 hrs × 8.8(W 3)]
16 500
Total costs
166 200
(W 2)
Machine setup rate
=
=
Total setup costs for the year
Number of machine setups
$18 900
(600+975) set ups
=
(W 3)
Overhead rate
=
$12 per set up
Total Production,selling and administration OHs
$5 850+$17 250
=
Number of labour hours
2 625 Labour hours (W 1)
=
$8.8 per direct labour hour
Calculation of revised selling price of each type of sweatshirt
Standard
(ii)
$166 200
Superior
)
7.39
11.37
Profit ($7.39 × 30%) ; ($11.36 × 30%)
Per unit selling price
2.21
9.60
3.41
14.78
Per unit cost(
22 500 units
); (
$102 300
Superior
$
76 500
7 500
11 700
6 600
102 300
9 000 units
Chapter 18
322
(iii)
Activity Based Costing
Calculation of Change in selling price
Standard
9.60
9.97
(0.37)
Revised per unit selling price
Original per unit selling price
Per unit selling price
Superior
14.78
13.87
0.91
(d)
Activity based costing identifies relevant activities before producing products whereas absorption costing
identifies relevant costs before producing products.
Activity based costing overhead costs uses cost centre or cost pools whereas absorption costing uses
production and service departments.
In ABC, there is no need to allocate and re- distribution of overhead of service departments to production
departments in contrast to absorption costing.
In ABC there is separate overhead rate for each activity whereas in absorption costing, a single overhead
rate is used for the whole department.
Activity based costing is expensive to set up whereas absorption costing is easy to set up.
(e)
Product Variety and Process Complexity also create problems as a result hard-to-make products show big
profits and easy-to-make products show losses. Though change in selling price is not significant in either
case. However, the reduction in the selling price of Standard may increase the number of units sold and
vice versa for Superior. As a result, activity based costing should be used to show and earn realistic profit.
QUESTION 2
MAY 2016 P32 Q5
(a)
The traditional method of costing relied on the arbitrary addition of a proportion of overhead costs on to
direct costs to attain a total product cost. The traditional approach to cost allocation relies on three basic
steps.
1. Accumulate costs within a production or non-production department.
2. Allocate non-production costs to production departments.
3. Allocate the resulting production department costs to various products, services or customers.
In contrast to traditional cost accounting systems, ABC systems first accumulate overheads for each
organisational activity. Costs are then collected into cost pools. They then assign these costs to products,
services or customers (referred to as cost objects) causing that activity.
(b)
Overheads absorption rate (B)
=
=
=
Total estimated overheads
Total Direct labour hours
$8 500 + $17 000 + $18 750
[(2 500 ×0.75)+(4 000 ×1)] hours
$7.53 per direct labour hour
Raw materials (2 kilos × $2.50) ; (3 kilos × $2.50)
Direct labour (0.75 hours × $8) ; (1 hour × $8)
Overheads (0.75 hours × $7.53) ; (1 hour × $7.53)
Total cost per unit
(c)
Y
5.00
6.00
5.65
16.65
Z
7.50
8.00
7.53
23.03
Y
5.00
6.00
7.61
18.61
Z
7.50
8.00
6.31
21.81
Statement to calculate the cost per unit for each product using ABC
Raw materials (2 kilos × $2.50) ; (3 kilos × $2.50)
Direct labour (0.75 hours × $8) ; (1 hour × $8)
Overheads (see workings)
Chapter 18
323
Working
Allocation of overheads:
Activity Based Costing
Y
Z
Total
4 722
3 778
8 500
7 792
9 208
17 000
Selling & distribution overheads ((85+160)deliveries) × 85 ; 160
6 505
12 245
18 750
Total overheads under ABC
19 019
25 231
44 250
$7.61
$6.31
$8 500
Machine maintenance overheads ((20+16)production
$17 000
Purchasing overheads ((55+65)purchase
Overhead cost per unit under ABC (
(d)
runs
) × 20 ;16
) × 55 ; 65
orders
$18 750
$19 019
);(
2 500 units
$25 231
4 000 units
)
(i)
Total profit using absorption costing[2500 × ($19.016.65)] ; [4000 × (25.023.03)]
Total profit using ABC [2500 × ($19.018.61)] ; [4000 × (25.021.81)]
Difference in profits
Y
5 875
975
4 900
Z
7 880
12 760
4 880
(d)
(ii)
The results show different levels of profits due to different mechanisms used in the allocation of
overheads to the products.
(e)
Traditional costing system faces problems with cost allocations due to lack of commonality in overhead
costs. Product Variety and Process Complexity also create problems as a result hard-to-make products show
big profits and easy-to-make products show losses. In view of this, the directors should adopt activity based
costing.
QUESTION 3
(a)
Activity Based Costing
(b)
Overheads absorption rate (B)
NOVEMBER 2016 P32 Q5
=
=
=
(c)
Total estimated overheads
Total Direct output (units)
$79 000
[(200 ×5 ×50)] units
$1.58 per unit
Calculation of total overhead cost per unit
Per unit ($)
$2 000
Machine set up costs (
) ÷ 200 units
(5×50)set up days
$5 000
Production quality inspections [((
)] ÷ 200 units
5×50) days
$4 000
Machine stoppage costs (
) ÷ 200 units
(5×50) days
$8 000
Machine maintenance (
) ÷ 200 units
(5×50) days
$60 000
Machine running costs(
) ÷ 200 units
(5×50) days
Total overhead cost per unit
(d)
0.04
0.10
0.08
0.16
1.20
1.58
Advantages
 Allows the company or the business institution to have the most accurate costing of the
products/services, thereby allowing the company to have known the cost which is friendly to both
the manufacturer and to the consumer.
Chapter 18





324
Activity Based Costing
Easier to be understood. This method or approach does not require a deeper way of understanding. It
is never hard to be understood since this is focusing on the reality how the process is being
undertaken.
The unit cost is properly utilize rather than its total cost.
Is helpful in the integration of continues improvement programs for the company.
Benchmarking is being facilitated.
Performance management and scorecards are being supported.
Limitations
 If the overhead costs are high for reasons such as volume, there are very limited benefits to be
reaped from activity based costing.
 It also is not very efficient if the overhead costs of the business only represent a very small portion of
the costs.
 ABC method of costs may not be best if the overhead waste is perceived to be relatively low. This is
because it can be very costly to implement activity based costing into a business. Experts must be
brought in for an extended period of time, and other measures may be necessary for the ABC to be
effective.
 There is a long time period that is involved in using an activity based costing in a business.
 ABC requires many different departments and individuals to collect and input data. Even the smallest
flaw in this information can damage the entire process and the outcome would be tainted. This is one
of the biggest risks that are taken on when using this method.
QUESTION 4
MAY 2017 P31 & P33 Q6
(a)
Statement to calculate the full cost per unit for Product X and Product Y using ABC
Product X
Product Y
$
$
Machine maintenance [(10 000 × 2.5) ; (14 000 × 0.5)] hours @ $8.25(W 1)
206 250
57 750
Ordering costs (20 ; 60) orders @ $675 each (W 2)
13 500
40 500
Production run costs (12 ; 36) production runs @ $500 each (W 3)
6 000
18 000
225 750
116 250
÷ Number of units
÷ 10 000
÷ 14 000
Factory overhead cost per unit
22.58
8.30
Direct costs per unit
100.00
50.00
Full cost per unit
122.58
58.30
(b)
Calculation of total overheads per unit for Product X and Product Y
Product X
$
Total overheads [(10 000 × 0.75) ; (14 000 × 1.5)] hours @ $12.00 (W 4)
90 000
÷ Number of units
÷ 10 000
Factory overhead cost per unit
$9.00
WORKINGS
Overhead costs
(W 1)
Machine maintenance costs
(W 2)
Ordering costs
(W 3)
Production run costs
(W 4)
Total OHs per labour hour
Product Y
$
252 000
÷ 14 000
$18.00
OH rate per cost driver
$264 000
[(10 000 ×2.5)+(14 000 ×0.5)] hours
$54 000
(20+60) orders
$24 000
(12+36) production runs
$342 000
[(10 000 × 0.75) ; (14 000 × 1.5)] hours
=
$8.25 per machine hour
=
$675 per order
=
500 per production run
=
$12.00 per labour hour
Chapter 18
(c)
325
Activity Based Costing
If Ahmed uses ABC as overhead allocation method then the overhead cost of X will increase and the cost of
Y will decrease. Ahmed was previously using ‘direct labour hours’ for overheads allocation. As product X
uses 0.75 (one half) labour hours compared to 1.5 labour hours of product Y therefore product X has half
share of overhead costs on per unit basis.
Under ABC overheads are allocated on the basis of activities consumed by different products. Product X has
less set ups and orders than Y so takes less share of ordering costs. On the other hand, product X has more
machine hours than Y so takes larger portion of machine based overheads. Product X has five times more
machine hours per unit than Y so gets the largest portion
Of machine maintenance costs.
(d)
Calculation of selling price based on usual mark-up
$
122.58
49.03
171.61
8 580.50
Full cost per unit under ABC (‘a’ part)
Add
Profit ($122.58 × 40%)
Selling price per unit
Selling price for the complete order price (50 units × $171.61)
On financial grounds, Ahmed should reject the offer as the offer price ($8 450) is less than his required price ($8
580.50) based on usual mark up. However if capacity permits and relationships with other customers are not affected
then offer may be accepted as Ahmed will still make a profit. Moreover, he may be able to build relationship with
customer.
(e)

ABC allows the company or the business institution to have the most accurate costing of the
products/services, thereby allowing the company to have known the cost which is friendly to both
the manufacturer and to the consumer.
ABC is easier to be understood. This method or approach does not require a deeper way of
understanding. It is never hard to be understood since this is focusing on the reality how the
process is being undertaken.
ABC is helpful in the integration of continues improvement programs for the company.
Performance management and scorecards are being supported.



QUESTION 5
(a)
NOVEMBER 2017 P31 Q6
Statement to calculate the value of overheads apportioned to each product
Product A
Product B
$300 000 × $240 000
Overheads (
$300 000 × $360 000
) ; ((20 000 ×12)+(18 000 ×20))
(20 000 ×12)+(18 000 ×20)
$120 000
$180 000
(b)
Statement to calculate the profit or loss per unit for each product
Product A ($) Product B ($)
Selling price
12
20
Direct cost ($3.2 + $1.8) ; ($4.9 + $2.1)
(5)
(7)
Overheads ($120 000 ÷ 20 000 units); ($180 000 ÷ 18 000 units)
(6)
(10)
Profit per unit
1
3
(c)
Calculation of total overheads apportioned to each product as per accountant’s analysis
A ($)
B ($)
Total ($)
Delivery costs – large orders (17 orders × $30) ; (23 orders × $30)
510
690
Delivery costs – small orders (664 orders × $20) ; (446 orders × $20)
13 280
8 920
13 790
9 610
Order processing (681 orders @ $25) ; (469 orders @ $25)
17 025
11 725
30 815
21 335
52 150
$300 000−$52 150
$300 000−$52 150
38 000 units
38 000 units
Other overheads (
Total overheads
) × 20 000 ; (
) × 18 000 130 447
117 403
247 850
161 262
138 738
300 000
Chapter 18
326
Activity Based Costing
(d)
Statement to calculate the revised profit or loss per unit for each product
Product A
Product B
$
$
Selling price
12.00
20.00
Direct cost ($3.2 + $1.8) ; ($4.9 + $2.1)
(5.00)
(7.00)
Overheads ($161 262 ÷ 20 000 units); ($138 738 ÷ 18 000 units)
(8.06)
(7.71)
Profit per unit
(1.06)
5.29
(e)
If method for apportioning overheads is changed to Activity based costing then there would be a loss of
$1.06 on per unit basis despite the product has a positive contribution towards fixed costs. On the other
hand profit per unit for B has increased.
The change of method doesn’t seem to solve the issue. The company should consider increase in the selling
price of product A. another option could have been to charge delivery charges separately as an addition to
the unit price.
The method suggested by accountant looks more accurate to have meaningful allocation of overhead costs
and uses multiple cost drivers so recognises complexity of operations.
On the other hand it would require many different departments and individuals to collect and input data.
Even the smallest flaw in this information can damage the entire process and the outcome would be tainted.
This is one of the biggest risks that are taken on when using this method.
(f)
Cost drivers are commonly used for the allocation of production overhead to units of production, as
required by several accounting frameworks.
A cost pool is a grouping of individual costs, typically by department or service center.
QUESTION 6
NOVEMBER 2017 P33 Q5 (e)
Units of production base may be appropriate in this case as company is producing only one type of product which is
identical in nature. Moreover, Production is not labour intensive so company may switch from labour hours base to
units of production base provided change in method is expected to calculate more accurate value of production
overheads.
QUESTION 7
(a)
(i)
MAY 2018 P31 & P33 Q6
Calculation of Total Production Cost
Direct materials (20 000  5 × 20) ; (8 000 × 11 × 11)
Direct labour (20 000 × 2 × 12) ; (8 000 × 1 × 6)
Overheads [20 000 × 2 × 8.25 (W 1)] ; (8 000 × 1 × 8.25 (W 1)]
Total production costs
(ii)
Production cost per unit
=
Alpha
=
=
Omega
=
=
WORKINGS
(W 1)
Overhead rate per hour
=
=
=
Total Production Cost
Total Units
$2 810 000
20 000 units
$140.50 per unit
$1 082 000
8 000 units
$135.25 per unit
Total Fixed Overheads
Total Labour hours
$396 000
[(20 000 ×2)+(8 000 ×1] ℎ𝑜𝑢𝑟𝑠
$8.25 per labour hour
Alpha
$000
2 000
480
330
2 810
Omega
$000
968
48
66
1 082
Chapter 18
327
Activity Based Costing
(b)
Alpha
$
140.50
70.25
210.75
Cost per unit
Add profit per unit (Cost per unit × 50%)
Selling price per unit
(c)






Omega
$
135.25
67.63
202.88
ABC is often of little benefit if there is only one product because the overhead cost per unit will be the
same.
It is not possible to attribute all costs to activities.
There are still cost pools that are not caused by one particular cost driver but by several e.g.
marketing
It takes additional costs as usually specialist employees are required or extensive training may be
required.
The costs for implementing such a system for a small business often outweigh the benefits
The level of accuracy may be immaterial for management decisions
(d)
Statement to calculate total production overhead to be allocated to each product using ABC
Overhead
Alpha
Omega
Total
$
$
$
$90 000
) × 15 ; 10
(15+10)set ups
$80 000
Materials handling (
) × 6 ; 14
(6 +14) receipts
$46 000
Machine maintenance (
) × 130 ; 100
(130 +100) hours
$180 000
Product inspection (
) × 40 ; 20
(40 +20) hours
Machine set-up (
Total overheads per unit
(e)
36 000
90 000
24 000
56 000
80 000
26 000
20 000
46 000
120 000
60 000
180 000
224 000
172 000
396 000
Alpha
$
2 000 000
480 000
224 000
2 704 000
÷20 000
135.20
67.60
202.80
Omega
$
968 000
48 000
172 000
1 188 000
÷ 8 000
148.50
74.25
222.75
Statement to calculate Cost & selling price per unit using ABC
Materials [as in a(i)]
Labour [as in a(i)]
Production overheads (‘d’ part)
Total cost
÷
Number of units produced
Cost per unit
Add
Profit per unit (Cost per unit × 50%)
Selling Price per unit
(f)
54 000
The application of ABC usually results in more accurate costs and more realistic sales price due to the use
of multiple cost drivers for multiple levels.
Under the existing method of overheads apportionment Alpha absorbed a higher amount of overheads
resulting in an unrealistic higher selling price.
On the other hand, under the existing method Omega absorbed lower overheads resulting in an unrealistic
lower selling price.
Use of ABC would be helpful in fixing the cost of a product or service. The more accurate cost estimates help
in better planning, preparing more reliable budgets, making pricing decisions and making quotations.
Chapter 18
(g)
328
(i)
Statement to calculate TOTAL PROFITS per unit using ABC
Cost per unit (as in e)
Add
Profit per unit ($135.20 × 60%) ; ($148.50 × 30%)
×
Sales (Units)
Total profits per unit
(ii)
Activity Based Costing
Alpha
$
135.20
81.12
× 20 000
1 622 400
Omega
$
148.50
44.55
× 8 000
356 400
As a result of profit adjustment, the actual total profit will rise from $1 946 000 [(20 000 × $67.6) +
(8 000 × $74.25)] to $1 978 800 ($1 622 400 + $356 400) so there will be an increase of $32 800.
Due to adjustment, the price of Alpha will decrease whereas it will rise for Omega. The new prices
will not only increase overall profits but will also be closer to the original prices.
The high demand of Alpha, use of higher labour work by the labour force with higher machining
activities justifies increase in price for Alpha and decrease in price for Omega which does not
require specialist workforce as the rate of labour is lower with relatively lower machining activities.
Specimen 2016
329
Paper 3
SPECIMEN 2016
PAPER 03
QUESTION 1
Ayanda and Bola have been in partnership for many years, sharing profits in the ratio of 3 : 2 respectively. The annual
profit has been $60 000 for some years.
On 1 June 2013 the partnership books of account showed the following balances.
Capital account
Current account
Ayanda
Bola
Ayanda
Bola
Bank
Trade payables
$
40 000
25 000
17 000 Cr
2 500 Dr
3 500 Dr
4 000
On that date the business was sold to Hetl Limited for a purchase consideration of $140 000.
This consisted of 50 000 $1 ordinary shares in Hetl Limited with a market value of $1.80, to be shared equally, and
the balance in cash. Hetl Limited took over all the assets and liabilities of the business with the exception of the bank
account and the trade payables.
REQUIRED
(a)
Calculate the gain on realisation arising from the sale of the partnership.
(b)
Calculate the amount in cash due to each partner on the sale of the partnership.
(c)
Prepare the partnership bank account showing the entries to close the account.
[5]
[5]
[5]
Additional information
Bola thinks it is unfair that Ayanda received more cash than she did.
REQUIRED
(d)
Give four reasons why it is fair that Ayanda received more cash than Bola.
[4]
Additional information
Hetl Limited pays a dividend of $0.25 per share each year. Surplus funds can be put on deposit in a bank and earn
6% interest a year.
Ayanda has accepted a job with Hetl Limited at a salary of $20 000 a year.
REQUIRED
(e)
Compare Ayanda’s current income with his earnings as a partner.
(f)
Suggest one non-financial reason why Ayanda might prefer to be an employee rather than a partner.
[5]
[1]
QUESTION 2
Lee started a business in Indonesia on 1 January 2013 selling lawn mowers.
During the first year of trading Lee bought 1000 lawn mowers at $50 each. He shipped 400 of these to Albert, his
agent in Jamaica. Lee also sold 550 lawn mowers in Indonesia.
The following additional information is available.
Freight charges paid by Lee
Landing duties paid by Albert
Rate of commission paid to Albert
Cash remitted by Albert to Lee
Lee’s income statement for the year ended 31 December 2013 included the following.
$3 600
$400
10%
$19 000
Specimen 2016
330
Gross profit
Consignment profit
Selling, distribution and administration costs (arising in Indonesia)
Paper 3
$
22 000
6 720
17 600
Lee’s statement of financial position at 31 December 2013 included the following inventory.
$
4 800
2 500
7 300
Jamaica
Indonesia
Total inventory
REQUIRED
(a)
Prepare the consignment account in the books of Lee for the year ended 31 December 2013.
(b)
Prepare Albert’s account in the books of Lee for the year ended 31 December 2013.
(c)
Calculate the number of unsold lawn mowers Albert was holding on 31 December 2013.
[8]
[6]
[5]
Additional information
Lee is considering whether to concentrate his efforts on sales in Indonesia or in Jamaica.
REQUIRED
(d)
Advise Lee where to concentrate his sales effort. Support your answer with calculations.
[6]
QUESTION 3
The following information is available about Whittlesford plc on 31 December 2011.
500 000 ordinary shares of $1 each
Share premium
General reserve
Retained earnings
$
500 000
200 000
70 000
298 300
Further information is as follows:
1
The draft profit for the year ended 31 December 2012 was $122 800.
2
On 1 January 2012 property was revalued from $520 000 to $780 000.
3
On 31 January 2012 a rights issue of 1 share for every 5 held was made at a premium of $0.25 each.
4
On 30 June 2012 an interim dividend of $0.08 per share was paid.
5
On 31 October 2012 a bonus issue of shares of 1 for every 4 held was made. The directors decided to keep
the reserves in their most flexible form.
6
On 31 December 2012 $40 000 was transferred to general reserve and a final dividend of $0.12 per share
was proposed.
7
On 5 January 2013 it was discovered that a customer who had owed $4200 at the year end had been
declared bankrupt. It was also discovered that goods in inventory at the year end, with a cost of $3000, had
been water damaged and could now only be sold for $600.
8
On 17 January 2013 a burglary at the business premises resulted in the loss of computer equipment, $15
700.
REQUIRED
(a)
Explain what is meant by keeping reserves in their most flexible form.
[3]
(b)
Prepare the statement of changes in equity for Whittlesford plc for the year ended 31 December
2012.
[13]
(c)
Explain whether the event on 17 January 2013 was an adjusting or a non-adjusting event.
[2]
(d)
State three characteristics of an auditor’s report.
[3]
Specimen 2016
331
Paper 3
Additional information
The auditor’s report for Whittlesford plc did not give an unqualified opinion on the financial statements because
$150 000 of investments included in non-current assets have become worthless but have not been written off.
REQUIRED
(e)
Assess the effect that this auditor’s report will have on shareholders.
[4]
QUESTION 4
Five friends each have $20 000 to invest and are considering whether to invest in ABC plc or
DEF plc. The following information is available from the latest financial statements of ABC plc.
Summarised income statement
$
4 700 000
2 115 000
2 585 000
1 645 000
940 000
50 000
890 000
Revenue
Cost of sales
Gross profit
Expenses
Profit from operations
Debenture interest
Profit for the year
Summarised statement of financial position
$
Non-current assets
Current assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets
1 000 000 ordinary shares of $1 each
Share premium
Revaluation reserve
Retained earnings
Non-current liabilities – debentures
Current liabilities – trade payables
880 000
480 000
10 000
1 000 000
400 000
800 000
450 000
$
2 100 000
1 370 000
3 470 000
2 650 000
500 000
320 000
3 470 000
Other information about ABC plc is as follows:
1
The dividends paid in the year amounted to $440 000.
2
All sales and purchases are made on credit.
3
The value of inventory has remained stable over several years.
4
The market value of one share is $5.60.
The following information is also available about DEF plc.
Earnings per share
Dividend per share
Gearing ratio
Income gearing
Trade payables payment period
Price earnings ratio
Dividend cover
Dividend yield
Par value of one share
The five friends all have different criteria for their investment decision.
Jazgul is an ethical investor and is concerned that suppliers get their money in good time.
$0.57
$0.48
43.4%
17.7%
97 days
7.18
1.19 times
11.7%
$1
Specimen 2016
332
Paper 3
Jackson needs a good cash flow and seeks a high return in terms of cash in the short term.
Khan seeks capital growth.
Madge wishes to be confident in a company’s ability to maintain earnings in the future.
Bernard is risk averse and wants to invest in a company which is on a sound financial footing.
REQUIRED
(a)
Identify and calculate for each potential investor the ratio for ABC plc which would particularly interest him
or her.
[10]
(b)
Explain what the ratio you have calculated for each investor shows the investor.
[10]
(c)
Decide which is the most suitable investment for each investor.
[5]
QUESTION 5
Harko runs a successful retail business. His typical annual results have been as follows:
Revenue
Cost of sales
Gross profit
Variable selling and administrative expenses
Fixed expenses
Profit for the year
$
210 000
115 500
94 500
48 000
19 500
27 000
Harko is now considering building an extension to his premises.
The following information is available:
1
The building cost would be $265 000.
2
Because of the increase in floor space he anticipates that sales volume would increase by 40%.
3
The gross profit margin would be maintained.
4
The inventory level would need to be increased by $10 000 in year 1 only.
5
The existing variable expenses would increase by 30%.
6
The business would in future have to rent garage space for the vehicle at a cost of $2000 a year.
7
Harko intends to retire at the end of year 4 and sell the business as a going concern. He expects the purchase
consideration for the business (including inventory) to be
$600 000 without the extension or $910 000 if he proceeds with the extension.
REQUIRED
(a)
Calculate the annual cash flows arising from the building of the extension.
[8]
Additional information
Harko’s cost of capital is 10%. Discount factors are as follows.
Year
0
1
2
3
4
Discount factor
1.000
0.909
0.826
0.751
0.683
REQUIRED
(b)
Calculate the net present value (NPV) of building the extension. Round calculations to the nearest dollar ($)
[8]
(c)
Advise Harko whether he should proceed with the extension, based on your figures from (b).
[2]
(d)
Outline why Harko might have doubts about proceeding with the extension, based on the NPV.
[3]
(e)
Explain why Harko chose to use net present value as a basis for his decision rather than the payback method.
[4]
Specimen 2016
333
Paper 3
QUESTION 6
Aziz Manufacturing Limited produces one product.
The budgeted costs and revenues are as follows.
Units produced and sold
Standard selling price
Standard direct materials
Standard direct labour
800 per month
$100 per unit
4 kilos at $6 per kilo
3 hours at $12 per hour
All overheads are fixed.
In April 850 units were produced and sold. Selling price was maintained at $100 per unit. Actual costs were as follows.
Direct materials
Direct labour
3485 kilos costing $19 516 in total
2720 hours costing $35 360 in total
REQUIRED
(a)
Prepare the original budget & the flexed budget for April to show total budgeted contribution.
[8]
(b)
Calculate the actual total contribution achieved in April.
[1]
(c)
Prepare a statement to reconcile the contribution from the flexed budget in (a) with the actual contribution
from (b).
[10]
(d)
Suggest one reason why each of the following variances had arisen.
(i)
Material usage variance
[2]
(ii)
Labour rate variance
[2]
(e)
State two similarities in use between standard costing and activity based costing.
[2]
2016 May
334
Paper 31 & 33
2016 May PAPER 31 & 33
QUESTION 1
The Pavey Sports and Social Club is a not for profit organisation. Accounts are prepared annually to 31 March. The
membership has been constant for some years at
350 members paying an annual subscription of $100.
A life membership scheme was introduced to try to boost membership. On 1 April 2015, there were 25 new members
who joined under this scheme, each paying $750. It was agreed that the life membership fund would be transferred
to the income and expenditure account over 15 years.
The following receipts and payments account was prepared for the year ended 31 March 2016.
Receipts
Balance b/d
Annual subscriptions
Life membership
Donations
Restaurant takings
Balance b/d
$
12 120
34 000
18 750
8 500
17 450
90 820
Payments
Purchase of fixtures and fittings
Payments to restaurant suppliers
Restaurant wages
Administrative expenses
Balance c/d
$
34 500
6 950
5 450
4 750
39 170
90 820
The following information is available for the year ended 31 March 2016.
1
Subscriptions in advance
Subscriptions in arrears
2
Restaurant suppliers owing
Restaurant wages owing
Administrative expenses owing
Administrative expenses prepaid
3
4
5
6
1 April 2015
Number of members
4
10
1 April 2015
$
845
–
–
–
31 March 2016
Number of members
3
?
31 March 2016
$
955
280
350
200
No inventories of restaurant supplies were held.
Fixtures and fittings acquired on 1 April 2013 had cost $20 000. Depreciation is charged at 20% per annum
using the reducing balance method. A full year’s depreciation is charged in the year of acquisition.
All donations are capitalised.
The opening balance on the accumulated fund at 1 April 2016 was $24 675.
REQUIRED
(a)
Distinguish between the terms ‘capital’ and ‘accumulated fund’.
[2]
(b)
Prepare the income and expenditure account for the year ended 31 March 2016, clearly identifying the
profit or loss from the restaurant within the account.
[14]
(c)
Explain why a club may capitalise donations received from its members.
[2]
Additional information
The club is considering modernising the pavilion which will cost $75 000.
REQUIRED
(d)
(i)
(ii)
Compare and contrast two sources of finance which the club could use.
[4]
Advise the club members which source of finance would be most appropriate. Justify your answer.
[3]
2016 May
335
Paper 31 & 33
QUESTION 2
Ahmed and Bashmir have separate garage businesses and have agreed to form a joint venture to buy and sell second
hand cars.
They have agreed to share the profits and losses as two thirds to Ahmed and one third to Bashmir.
They record purchases and sales of cars in their own books of account.
The following financial information is available for the period of the joint venture.
Credit purchases
Expenses
Commissions received
Discount received
Cash sales
Credit sales
Returns inwards
Irrecoverable debts
Ahmed
$
24 500
3 200
1 000
500
6 000
32 000
4 500
Bashmir
$
17 600
2 300
100
4 800
50 700
300
It was agreed that Bashmir would take over the inventory of unsold cars at the end of the venture. Bashmir has
advised that he has an inventory of unsold cars at the end of the venture valued at $6 500.
REQUIRED
(a)
Prepare the memorandum joint venture account.
[9]
(b)
Prepare the joint venture account in the books of Ahmed and show the balance due to or from Bashmir.
[8]
(c)
State the heading under which the balance due will be shown in Ahmed’s statement of financial
position.
[1]
Additional information
Ahmed has discovered that Bashmir did not hold any inventory but had sold the closing inventory of cars for $12 500.
REQUIRED
(d)
Calculate:
(i)
the correct total profit for the joint venture. Start your calculation with your answer from (a). [3]
(ii)
the extra profit due to Ahmed from the joint venture.
[1]
(e)
Evaluate whether or not Ahmed should have entered into the joint venture with Bashmir. Justify your
answer.
[3]
QUESTION 3
ACM plc provided the following information about its non-current assets.
Accumulated depn
Cost at
at1 January 2015
1 January 2015
$
$
Property
17 000
200 000
Plant and machinery
210 000
258 000
Delivery vans
10 000
23 000
Cost at
31 December 2015
$
200 000
310 000
23 000
Additional information
1
Half of the value of property relates to land. Property is depreciated at the rate of 1% per annum using the
straight-line method.
2
Plant and machinery is depreciated at the rate of 10% per annum using the straight-line method. A full year’s
depreciation is provided in the year of purchase and none in the year of disposal.
2016 May
3
336
Paper 31 & 33
On 1 June 2015 a machine, bought on 10 July 2007, was sold for $17 800. This resulted in a profit on disposal
of $13 000.
The delivery vans are depreciated at the rate of 25% per annum on the reducing balance basis.
REQUIRED
(a)
Prepare the disposal of machinery account for the year ended 31 December2015.
[6]
(b)
Prepare the non-current assets schedule for inclusion in the published financial statements of the company
for the year ended 31 December 2015 in accordance with International Accounting Standards.
[8]
(c)
Explain why a business depreciates its non-current assets.
[3]
Additional information
The Return on Capital Employed (ROCE) of the company was 9.81%. This was lower than the industry average and
the directors wished to find a way to increase it.
Some of the machinery was 10 years old at the start of January 2016 and it had become unreliable and unproductive.
The marketing director suggested that it should be scrapped and replaced at a cost of $120 000, to be financed by
the issue of 8% debentures. This would increase production. Annual sales and costs would be as follows:
$
62 000
39 000
3 000
Revenue
Prime costs
Selling and distribution costs
He calculated that the return from the new machinery would be 62 000 / 120 000 or 51.67%, which, being higher
than the existing 9.81%, would cause the Return on Capital Employed (ROCE) to increase.
REQUIRED
(d)
Evaluate the marketing director’s proposal. Support your answer with calculations.
[8]
QUESTION 4
Winter bottom plc and Ramsey plc are two similar trading companies which have been successfully trading for many
years. Their financial statements prepared for internal purposes are shown below:
Income statements for the year ended 30 June 2015
Winterbottom
Ramsey
$000
$000
Revenue
6 279
4 527
Cost of sales
(2 075)
(1 254)
Gross profit
4 204
3 273
Depreciation
(1 285)
(720)
Other expenses
(1 227)
(992)
Profit on disposal of non-current assets
28
15
Profit from operations
1 720
1 576
Finance charges
(300)
(180)
Profit before taxation
1 420
1 396
Taxation
(317)
(312)
Retained profit for the year
1 103
1 084
Statements of financial positions at 30 June 2015
Assets
Non-current assets
Current assets
Inventories
Winter bottom
$000
9 864
782
Ramsey
$000
6 192
451
2016 May
337
Trade receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Ordinary share capital ($1 each)
Share premium
Retained earnings
Paper 31 & 33
1 362
135
2 279
12 143
4 500
200
1 447
6 147
Current liabilities
Trade payables
Taxation
Non-current liabilities
6% Debentures (2024)
Total equity and liabilities
742
98
1 291
7 483
2 500
–
1 244
3 744
679
317
996
427
312
739
5 000
12 143
3 000
7 483
Additional information
1
Neither company has paid an interim dividend during the year ended 30 June 2015.
2
The directors of Winterbottom plc propose a dividend of $0.20 per share and those of Ramsey plc $0.35 per
share for the year ended 30 June 2015.
3
At 30 June 2015, the market value of an ordinary share in Winterbottom plc is $3.50 and in Ramsey plc
$2.75.
REQUIRED
(a)
Calculate the following ratios for both companies to two decimal places.
(i)
Income gearing
(ii)
Earnings per share
(iii)
Price earnings ratio
(iv)
Dividend yield
(v)
Dividend cover
[10]
Additional information
Alfredo is considering investing in one of the companies but is uncertain which will offer the best return.
Recent industry averages were as follows:
Income gearing
Earnings per share
Price earnings ratio
Dividend yield
Dividend cover
20.25%
$0.33
12.50
10.45%
1.20 times
REQUIRED
(b)
Analyse the performance of both companies compared to the industry averages.
(c)
Advise Alfredo which company he should invest in. Justify your answer.
[10]
[5]
Section B: Cost and Management Accounting
QUESTION 5
Chetna runs a business printing logos on sweatshirts. The sweatshirts come in two types, Standard and Superior. The
selling price is set at cost plus 30%.
The following information is available for the year.
2016 May
338
Number of sweatshirts sold
Purchase cost per sweatshirt
Printing materials per sweatshirt
Labour time to print each sweatshirt
Paper 31 & 33
Standard
22 500
$5
$0.50
5 minutes
Superior
9 000
$8
$0.50
5 minutes
Overheads were as follows:
Machine set up costs
Other production overheads
Selling and administration
Total
$
18 900
5 850
17 250
42 000
REQUIRED
(a)
Calculate an overhead absorption rate based on labour hours.
[2]
Additional information
Staff printing the logos are paid $10 an hour.
REQUIRED
(b)
(i)
Calculate the total cost allocated to each type of sweatshirt.
(ii)
Calculate the selling price for each sweatshirt.
[4]
[2]
Additional information
Chetna has suggested that it would be better to allocate the machine set up cost to each product based on the
number of times the machine is set up. The machine has to be set up each time there is a different logo.
During the year the machine was set up 600 times for Standard sweatshirts and 975 times for Superior sweatshirts.
Other overheads are still allocated on the basis of labour hours.
REQUIRED
(c)
(i)
(d)
(e)
Calculate the total costs allocated to each type of sweatshirt when machine set up costs are
allocated using the number of set up times.
[4]
(ii)
Calculate the revised selling price for each type of sweatshirt.
[2]
(iii)
Calculate the change in selling price for each type of sweatshirt.
[2]
Explain three differences between activity based costing and absorption costing.
[6]
Advise Chetna which method she should use. Justify your answer.
[3]
QUESTION 6
One of the assembly machines at Artem Limited needs to be replaced.
A replacement machine will cost $300 000, which will be paid on purchase. The replacement machine is expected to
last for three years. It will need complete maintenance check-up in year 2 at a cost of $75 000.
The existing machine assembles 4000 units per year.
The number of units assembled by the replacement machine is expected to be 35% lower in year 1 than the existing
machine due to the time lost during installation and testing.
In year 2 it is expected that 4 500 units will be assembled and this will increase by 20% each year compared to the
previous year.
The replacement machine will produce units at a cost of $24 each. From year 2 this will increase by 25% each year
compared to the previous year.
2016 May
339
Paper 31 & 33
The selling price will be $45 per unit. This will increase by 30% each year compared to the previous year.
The cost of capital is 14%.
The following is an extract from the present value tables for $1.
14%
Year 1
0.877
Year 2
0.769
Year 3
0.675
It is assumed that all production will be sold.
REQUIRED
(a)
Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b)
Calculate the expected net cash flows for each year for the replacement machine.
[8]
(c)
Calculate the payback period for the replacement machine.
[2]
(d)
Calculate the net present value for the replacement machine. Assume that revenues are received and costs
are paid at the end of each year.
[6]
(e)
(i)
Analyse the benefits to the business of purchasing the replacement machine.
[3]
(ii)
Recommend whether or not the managers of Artem Limited should purchase the replacement
machine. Justify your answer.
[2]
2016 May
340
Paper 32
2016 May PAPER 32
Section A: Financial Accounting
QUESTION 1
The Seagulls Boating Club is a small not for profit organisation which generates income from members’ subscriptions
and a café.
REQUIRED
(a)
State two differences between the financial statements of a not for profit organisation and those of a limited
company.
[2]
Additional information
The following information is available for the café for the year ended 31 March 2016.
1
The café takings were $25 750 and $8 850 was paid to suppliers.
2
An assistant received monthly wages of $600. On 31 March 2016, the assistant also received a bonus of 10%
of the annual café takings.
3
The following balances were available:
Café inventory
Café trade payables
1 April 2015
$
3 875
2 831
31 March 2016
$
3 423
2 952
REQUIRED
(b)
Prepare the café trading account for the year ended 31 March 2016.
[5]
Additional information
The club has 310 members who pay an annual subscription of $80.
The following information was available for members’ subscriptions.
Subscriptions in advance
Subscriptions in arrears
1 April 2015
Number of members
4
9
31 March 2016
Number of members
3
12
REQUIRED
(c)
Prepare the subscriptions account for the year ended 31 March 2016.
[4]
Additional information
The following information is also available for the year ended 31 March 2016.
1
General expenses of $2 500 were incurred which included a paid insurance invoice for the period from 1
March 2016 to 31 May 2016 for $180.
2
Fixtures and fittings were acquired on 1 April 2013 at a cost of $16 000 and are depreciated at 25% using
the reducing balance method.
REQUIRED
(d)
Prepare the income and expenditure account for the year ended 31 March 2016.
[5]
Additional information
The treasurer currently maintains the records using a manual book-keeping system and is now considering
transferring the records to a computerised accounting system.
2016 May
341
Paper 32
REQUIRED
(e)
Recommend to the treasurer whether or not he should introduce a computerised accounting system. Justify
your answer analysing both benefits and limitations to the club.
[9]
QUESTION 2
Kempes Limited is a company which manufactures a single product. Finished goods are transferred from the factory
at production cost plus 15%. Unsold goods are stored in the warehouse.
Selected balances extracted from the trial balance for the year ended 30 September 2015 were as follows:
$
1 845 000
794 750
4 250
382 500
64 000
115 000
78 000
Revenue
Purchases of raw materials
Carriage inwards
Factory production wages
Factory supervisory wages
Administrative wages
General expenses
Depreciation:
Factory plant and machinery
Office fixtures and fittings
55 000
37 500
Additional information
1
At 30 September 2015, there were accrued general expenses of $5 000 and prepaid general expenses of $3
000. 65% of the general expenses relate to the factory.
2
Details of inventories were as follows.
Raw materials
Work in progress
Finished goods at transfer price
1 October 2014
$
110 000
17 500
19 550
30 September 2015
$
125 000
14 000
21 505
REQUIRED
(a)
Prepare the manufacturing account for the year ended 30 September 2015.
(b)
Prepare the income statement for the year ended 30 September 2015.
(c)
Explain why a business might create a provision for unrealised profit.
Additional information
The budgeted closing inventory value of finished goods at transfer price at 31 October 2015 was $18 400.
[9]
[6]
[3]
REQUIRED
(d)
Analyse the effect on the budgeted profit for the month of October 2015 due to the changes in the provision
for unrealised profit.
[2]
Additional information
The price at which the product could be bought from an outside supplier is expected to increase.
It is now proposed to transfer finished goods at production cost plus 20%.
REQUIRED
(e)
Advise the directors whether or not the mark-up should be increased. Justify your answer.
QUESTION 3
Anjali and Bailey trade as partners. They share profits and losses in the ratio 3 : 2.
[5]
2016 May
342
Paper 32
At 30 April 2016 the statement of financial position of the partnership was as follows:
Assets
Non-current assets
Premises
Machinery
Vehicles
$
115 000
40 000
78 000
233 000
Current assets
Inventory
Trade receivables
15 000
4 000
19 000
252 000
Total assets
Capital and liabilities
Capital
Anjali
Bailey
130 000
110 000
240 000
Current liabilities
Trade payables
Cash and cash equivalents
7 500
4 500
12 000
252 000
Total capital and liabilities
The partners agreed to form a limited company, XY Limited, to take over their business.
Additional information
The following information relates to the partnership.
1
Two vehicles were taken over by the partners at the following valuations.
Anjali
Bailey
$
15 000
12 500
2
The remaining assets were transferred to XY Limited at the following agreed values.
$
Premises
170 000
Machinery
30 000
The remaining vehicles
35 000
Inventory
9 000
3
4
5
6
Cash collected from trade receivables was $3 900.
Trade payables accepted $7 100 in full settlement of amounts due to them.
Costs involved in dissolving the partnership were $3 800.
The purchase consideration for the partnership of Anjali and Bailey was $255 000. This was made as
follows:
60 000 7% preference shares of $1 each distributed in profit-sharing ratios.
The balance as ordinary shares of $1 at a premium of $0.25 per share distributed to the partners in
proportion to their capital account balances at 30 April 2016.
Anjali and Bailey agreed to pay into the business bank account sufficient money to cover any deficit on their
capital accounts after the shares had been issued.
7
2016 May
343
Paper 32
REQUIRED
(a)
(i)
Prepare the realisation account for Anjali and Bailey.
[7]
(ii)
Prepare the capital accounts of Anjali and Bailey on the realisation of the partnership.
[7]
(iii)
Calculate the total amount of share premium payable to Anjali and Bailey.
[2]
(b)
Assess the effect for Anjali and Bailey if the ordinary shares have been distributed in the profit sharing ratio
rather than in proportion to their capital balances.
[4]
(c)
Explain whether or not Anjali and Bailey made the correct decision to form a limited company. Justify your
answer.
[5]
QUESTION 4
The directors of Corim plc are using accounting ratios to analyse the performance of the company.
REQUIRED
(a)
Explain two benefits of using accounting ratios.
[4]
Additional information
All sales and purchases of Corim plc are on credit.
The following are the income statement and statement of financial position for Corim plc.
Income Statement
For the year ended 31 December 2015
$
843 000
(425 800)
417 200
(321 000)
96 200
(66 000)
30 200
Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Finance costs
Profit for the year
Statement of Financial Position
As at 31 December 2015
Assets
Non-current assets
Plant and equipment
Current assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Ordinary share capital (of $2 each)
Retained earnings
Total equity
Non-current liabilities
12% loan
Current liabilities
Trade payables
Total equity and liabilities
$
884 000
88 800
132 400
14 800
236 000
1 120 000
400 000
77 000
477 000
550 000
93 000
1 120 000
2016 May
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Paper 32
Additional information
1
Inventory at 1 January 2015 was $76 000.
2
The market price of one ordinary share at 31 December 2015 was $2.60.
REQUIRED
(b)
Calculate the following ratios for Corim plc:
(i)
return on capital employed
(ii)
gearing
(iii)
income gearing
(iv)
working capital cycle (in days)
(v)
price earnings.
Calculation should be to two decimal places where appropriate.
[14]
Additional information
Takie plc is the major competitor of Corim plc. Takie plc’s capital employed was $1 025 000 at 31 December 2015
including a 8% loan of $100 000.
Some of its comparative ratios are:
Return on capital employed
Gearing
Income gearing
9.32%
9.76%
8.38%
REQUIRED
(c)
Compare each company’s gearing and income gearing ratios.
[4]
Additional information
Chen has surplus fund and is considering whether or not to invest in the shares of either Takie plc or Corim plc.
REQUIRED
(d)
Identify which company Chen should invest in. Justify your answer.
[3]
[Total: 25]
Section B: Cost and Management Accounting
QUESTION 5
Explorer Limited produces two products, Y and Z, and has always used absorption costing to allocate overheads to
each product. The directors are now considering adopting activity based costing (ABC).
REQUIRED
(a)
Compare how overheads are apportioned using absorption costing and ABC.
Additional information
The budgeted data for the two products for the year ending 31 December 2017 is as follows:
Y
Z
Raw materials used (kilo)
2
3
Direct labour hours
0.75
1
Unit selling price
$19
$25
Annual production and sale
2 500
4 000
The cost of raw materials is $2.50 per kilo and the labour force are paid $8 per hour.
Annual overheads are as follows:
$
Machine maintenance overheads
8 500
[4]
2016 May
345
Purchasing overheads
Selling and distribution overheads
Paper 32
17 000
18 750
REQUIRED
(b)
Calculate the cost per unit for each product using absorption costing.
[7]
Additional information
Number of production runs
Number of purchase orders
Number of sales deliveries
Y
20
55
85
Z
16
65
160
REQUIRED
(c)
Calculate the cost per unit for each product using ABC.
(d)
(i)
Compare the total profit per product using absorption costing and ABC.
(ii)
Comment on the results.
(e)
Advise the directors whether or not ABC should be adopted. Justify your answer.
[7]
[4]
[1]
[2]
QUESTION 6
Khalid owns a business making blankets. He currently uses a standard costing system.
REQUIRED
(a)
Explain the term standard costing.
[2]
Additional information

For the year ending 31 August 2015 Khalid budgeted to sell 2 700 blankets at $40 each.

Each blanket requires 1.5 metres of material at $10 per metre and 30 minutes of labour. All of his workforce
are employed full time and paid $14 per hour.

For the year ended 31 August 2015 his actual sales were 2 700 blankets. He used 4 320 metres of material
at a cost of $34 560 and 2 025 hours of labour were required at a cost of $24 300.
REQUIRED
(b)
Calculate the following variances for the year ended 31 August 2015:
(i)
the material price and material usage variances
(ii)
the labour rate and labour efficiency variances.
[8]
(c)
Prepare a statement reconciling the budgeted costs with the actual costs for the year ended 31 August 2015.
[4]
(d)
Discuss possible reasons why Khalid’s actual costs are different to the budgeted costs.
[6]
Additional information
In an attempt to control costs, Khalid is considering to:
1
Stop the quality assurance checks usually made during the production process.
2
Find a cheaper supplier for materials to make the blankets.
3
Keep the selling price at $40 per blanket.
REQUIRED
(e)
Recommend to Khalid which option or options he should choose. Justify your answer.
[5]
[Total: 25]
November 2016
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Paper 31
NOVEMBER 2016 - PAPER 31
QUESTION 1
International Dancing is a dance club charging an annual subscription of $500 per member.
A summary of its subscriptions account for the year ended 31 December 2015 was as follows:
2015
Jan 1
Dec 31
Balance b/d
Income and expenditure a/c
Balance c/d
Subscriptions account
$
2015
2 000 Jan 1
106 500 Dec 31
2 500
111 000
Balance b/d
Bank
Balance c/d
$
1 500
105 500
4 000
111 000
Additional information
1
The club’s only other receipts came from the sale of music CDs to members. These receipts amounted to
$5 800 for the year.
2
Payments for the year were as follows:
Rent
Staff costs
Insurance and administration
Purchase of music CDs for resale
Purchase of equipment
Purchase of CDs for club use
3
4
5
6
7
$
15 000
61 000
4 200
2 600
11 700
4 000
The bank balance at 1 January 2015 was $13 500 debit. All receipts and payments are made through the
bank.
CDs purchased for club use are not considered to have a useful life of more than 12 months.
The club maintains an inventory of CDs for resale. This amounted to $180 at 1 January 2015 and $280 at 31
December 2015.
Equipment was valued at $17 200 at 1 January 2015 and $21 300 at the end of the year.
At 31 December 2015 prepaid insurance was $300 and accrued administration costs were $50.
REQUIRED
(a)
Prepare the club’s income and expenditure account for the year ended 31 December 2015.
[9]
Additional information
In 2016 the club is given the opportunity to buy its premises for $142 000. If it is agreed that this purchase should go
ahead, three sources of finance would be used.
1
Half the balance at bank on 31 December 2015 would be used.
2
Life membership of the club would be introduced. The life membership fee would be $5 000 per person
and this would be credited to the income and expenditure account in equal instalments over a 10-year
period. It is expected that 10 existing members of the club would take up life membership, and the funds
raised would be used in the purchase.
3
A 5-year bank loan, at 10% interest per annum, would finance the balance of the purchase price.
REQUIRED
(b)
(i)
Calculate the bank balance at 31 December 2015.
[2]
(ii)
Calculate the amount of the loan which would be taken out.
[3]
(c)
Assess the effect the purchase of the premises would have on annual cash flows in future years.
[4]
(d)
Recommend to the managing committee of the club whether or not they should proceed with the purchase
of the premises. Justify your answer by discussing both advantages and disadvantages of the purchase. [7]
November 2016
347
Paper 31
QUESTION 2
The directors of Hank Limited provide the following statements of financial position at 31 March:
Assets
Non-current assets (net book value)
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
Equity and Liabilities
Equity
Share capital
Share premium
Retained earnings
Non-current liabilities
Bank loan (repayable 2020)
Current liabilities
Trade payables
Bank overdraft
Other payables – taxation
Total equity and liabilities
2016
$000
259
2015
$000
224
128
132
–
260
519
102
118
14
234
458
210
15
107
332
180
–
131
311
42
20
102
23
20
145
519
109
–
18
127
458
Additional information
The following information relates to the year ended 31 March 2016:
1
The profit from operations was $30 000.
2
During the year non-current assets with a cost of $24 000 and accumulated depreciation of $19 000 were
sold for $8 000.
3
The depreciation charge for the year was $12 000. All non-current assets held at the end of the financial
year are depreciated over 25 years using the straight-line method.
4
Interest paid for the year was $9 000.
5
Dividends paid during the year were $25 000. A dividend of $30 000 had been proposed at the end of the
year.
6
The taxation charge was $20 000.
REQUIRED
(a)
Explain the difference between a statement of cash flows and a cash budget.
[2]
(b)
Prepare a statement of cash flows for Hank Limited for the year ended 31 March 2016 in accordance with
IAS 7.
[10]
(c)
Explain with reference to the statement of cash flows whether Hank Limited has a strong or a weak cash
position.
[4]
(d)
Prepare a summarised schedule of non-current assets as it would appear as a note in the published accounts
for the year ended 31 March 2016.
[5]
(e)
Advise the directors whether or not they should apply the International Accounting Standards when
preparing the published accounts. Justify your answer.
[4]
QUESTION 3
Alpha plc and Beta plc both operate in the same industry. Both have the same annual sales revenue. Neither have
any preference shares in issue.
November 2016
348
Paper 31
The following additional information is provided:
Profit for the year
Profit margin
Finance charges
Profit from operations
Income gearing
Number of ordinary shares
Earnings per share
Price earnings ratio
Market value of one share
Dividend per share
Dividend yield
Total dividend paid
Dividend cover
Alpha plc
$160 000
?
$16 000
?
?
400 000
?
?
$1.20
$0.07
?
?
?
Beta plc
$100 000
10%
?
?
20%
?
$0.20
4.2
$0.84
?
7.14%
?
?
REQUIRED
(a)
Calculate for Alpha plc:
(i)
Profit margin
(ii)
Income gearing
(iii)
Earnings per share
(iv)
Price earnings ratio
(v)
Dividend yield
(vi)
Total dividend paid
(vii)
Dividend cover
Clearly label each answer and show your workings.
Suggest one reason for the difference between the two companies for each of the following:
(i)
Profit margin
(ii)
Income gearing
(iii)
Earnings per share
(iv)
Price earnings ratio
(v)
Dividend yield
(vi)
Market value of one share
Additional information
Amit is considering purchasing shares in either Alpha plc or Beta plc.
[14]
(b)
REQUIRED
(c)
Suggest, with reasons, in which company Amit should invest.
[6]
[5]
QUESTION 4
Scrumpton plc has been trading successfully for many years. The company required additional finance to renew its
plant.
The following selected balances are available at 1 October 2015:
Property, plant and equipment
Ordinary share capital
Share premium
Retained earnings
$
400 000
1 200 000
300 000
125 000
A draft profit of $167 500 was recorded for the year ended 30 September 2016 before making the following
adjustments:
November 2016
1
2
3
4
5
349
Paper 31
Property, plant and equipment with a net book value of $200 000 was sold for $180 000 and replaced by
new items at a cost of $250 000.
Depreciation is charged at 15% using the reducing balance method. A full year’s depreciation is charged in
the year of acquisition and none in the year of disposal.
A trade receivable owing $15 000 was declared bankrupt.
Distribution costs of $7 500 were still owing at the year-end.
The nominal value of the ordinary share capital is $1 each. The final dividend of $0.02 per share for the year
ended 30 September 2015 was paid on shares held at that date.
During the year ended 30 September 2016 there was a rights issue of one share for every four held. The
shares were issued at $1.20 each and were fully taken up.
REQUIRED
(a)
Explain what is meant by a ‘rights issue’.
(b)
Prepare the statement of changes in equity for the year ended 30 September 2016.
(c)
State how a proposed dividend would be treated in the financial statements.
[3]
[10]
[2]
Additional information
Before the financial statements for 30 September 2016 were approved, the directors were made aware that another
trade receivable owing $10 000 at 30 September 2016 had been made bankrupt.
REQUIRED
(d)
(i)
(ii)
Explain the difference between an adjusting event and a non-adjusting event.
[4]
Explain, with reference to IAS 10, how this event should be dealt with in the financial
statements.
[2]
Additional information
An impairment review was carried out and revealed that an item of plant with a carrying value of
$100 000 could be sold for $65 000. Its value in use was $70 000. The directors are uncertain how this should be
treated in the financial statements.
REQUIRED
(e)
Calculate the effect on the profit for the year of the impairment review.
[4]
QUESTION 5
Billyjo makes a single product. His business operates a standard costing system. All goods produced in the month
are sold and no inventories are held.
REQUIRED
(a)
Explain what is meant by ‘standard costing’.
[2]
Additional information
1
Budgeted monthly production and sales for April 2016 were 3 500 units.
2
The standard costs per unit were as follows:
Direct material
Direct labour
Overheads
The actual results for April were as follows:
Production and Sales
Materials used
Materials cost
Labour hours
Labour cost
REQUIRED
(b)
Calculate the following variances:
3 kilos at $1.40 per kilo
0.5 hours at $4.60 per hour
1 hour at $2.80 per hour
3
3 750 units
10 950 kilo
$15 768
1 930
$8 492
November 2016
(i)
(ii)
(iii)
(iv)
(c)
350
Material price variance
Material usage variance
Labour rate variance
Labour efficiency variance
Analyse possible reasons for the variances calculated in (b).
Paper 31
[8]
[8]
Additional information
The standard selling price per unit is $12. A 2% discount was given to all customers in April.
Actual overhead rate was 10% above standard.
REQUIRED
(d)
Calculate the actual profit made by Billyjo for April.
(e)
Recommend how Billyjo can improve the performance of his business.
[4]
[3]
QUESTION 6
Alexander intends to start a new project producing either Product X or Product Y. Each product will require an
additional capital cost of $50 000. Both products are expected to last 4 years.
The following information is available on Product X:
1
Sales volume in year 1 would be 10 000 units with a selling price of $7.
2
The volume would rise by 5% in year 2 and by another 5% in year 3.
3
Popularity is then expected to fall in year 4 and there would be a 20% fall in volume.
4
The selling price would not change.
5
The variable costs will be $3 per unit in year 1, will rise to $4 in year 2 and will then remain unchanged.
6
Annual fixed costs payable will be $11 000 and will remain unchanged.
REQUIRED
(a)
Calculate the net cash flows for each year and in total for Product X.
[8]
Additional information
Alexander’s cost of capital is 10% and the discount factors are:
Year 1
Year 2
Year 3
Year 4
REQUIRED
(b)
0.909
0.826
0.751
0.683
Calculate the net present value of Product X.
[7]
Additional information
Alexander has carried out the same calculations for Product Y. He has calculated the net present value of Product Y
as $30 400.
REQUIRED
(c)
Advise Alexander which product he should make based solely on the net present value.
Justify your answer.
[2]
(d)
State one advantage & one disadvantage of using net present value for investment appraisal.
[2]
(e)
Explain why Alexander may or may not use the payback method of investment appraisal.
[3]
(f)
State three non-financial factors Alexander should consider when choosing between Product X and Product
Y.
[3]
November 2016
351
Paper 32
NOVEMBER 2016 - PAPER 32
QUESTION 1
Sunshine Social Club runs a gift shop. Goods are sold only to members at a discount. Selected balances relating to
the gift shop at 31 December are as follows:
2015
$
Net book value of shop equipment
Shop inventory
Shop trade payables
Insurance prepaid
Shopkeeper wages prepaid
Accrued expenses – water and electricity
– shopkeeper wages
?
18 600
64 300
1 660
3 200
2 000
–
2014
$
55 000
24 000
54 500
1 400
–
2 700
3 450
Summarised receipts and payments account of the club for the year ended 31 December 2015 is as follows:
Balance b/d
Annual subscriptions
Life membership subscriptions
Annual ball tickets
Shop takings
$
124 000
345 000
60 000
68 000
124 200
Shop suppliers
Purchases of shop equipment
Shopkeeper wages
Insurance
Water and electricity
Club administration
Hire of ballroom & band for annual ball
Food for annual ball
_______ Balance c/d
721 200
$
74 500
4 000
30 400
9 460
14 800
361 400
48 000
36 000
142 640
721 200
Additional information
1
Expenses are allocated to the shop as follows:
Water and electricity
Insurance
2
40%
25%
Shop equipment is depreciated at 20% per annum using the reducing balance method. Equipment is
depreciated in the year of purchase but not in the year of sale.
REQUIRED
(a)
State three differences between a donation and a member subscription received by a not-for-profit
organisation.
[3]
(b)
Prepare the club’s shop trading account for the year ended 31 December 2015.
[15]
Additional information
After reviewing the trading account of the gift shop, the chairman is not satisfied with the performance.
REQUIRED
(c)
Discuss two ways to improve the performance of the gift shop.
[4]
Additional information
The chairman of the club undertook to cover 50% of the deficit arising from the 2015 annual ball.
The demand for payment was issued to the chairman on 31 December 2015.
REQUIRED
(d)
Calculate the amount the chairman had to contribute to the club to cover the deficit.
[3]
November 2016
352
Paper 32
QUESTION 2
Alpha Limited is a manufacturing business making a single product. Each year it produces and sells 1 000 units and
the only inventory it keeps is that of raw materials.
It provides the following information for the year ended 30 April 2016:
$
Revenue
95 000
Inventory of raw materials at 1 May 2015
1 000
Inventory of raw materials at 30 April 2016
3 100
Purchases of raw materials
12 200
Carriage inwards
1 100
Factory workers’ wages
17 500
Factory supervisor’s salary
8 200
Office salaries
8 500
Rent
8 000
Factory overheads
9 700
General office expenses
10 000
Additional information
1
Rent is allocated 75% to the factory and 25% to the offices.
2
Production is transferred to finished goods at cost plus 25%.
REQUIRED
(a)
Prepare, for the year ended 30 April 2016,
(i)
the manufacturing account
(ii)
the income statement.
[8]
[7]
Additional information
Management has discovered that general office expenses are 50% fixed and 50% variable with the level of sales.
At the start of May 2016 management expected that in the next year the business would only be able to sell 900
units. There are no expected changes to the selling price or costs per unit.
There were two options.
Option 1
To continue to produce 1000 units and have an inventory of finished goods at the next year end.
Option 2
To reduce production to 900 units and continue to have no inventory of finished goods.
REQUIRED
(b)
Calculate the expected annual profit if option 1 is implemented. Start your calculation with your profit from
(a) and adjust as appropriate.
[5]
Additional information
The annual profit expected from option 2 was known to be $15 100.
REQUIRED
(c)
Advise the management which of the two options it should implement. Justify your answer.
[5]
QUESTION 3
Husna had been a sole trader for many years and has decided to retire. Her statement of financial position at 30
June 2016 was as follows:
Statement of Financial Position at 30 June 2016
Assets
$
Non-current assets
Premises
120 000
Equipment
14 600
134 600
November 2016
353
Paper 32
Current assets
Inventory
Trade receivables
Cash & Cash equivalents
Total assets
Capital and liabilities
Opening capital
Profit for the year
$
29 500
17 200
46 700
181 300
162 100
41 600
203 700
36 000
167 700
Drawings
Closing capital
Current liabilities
Bank
Trade payables
2 000
11 600
13 600
181 300
Total capital and liabilities
On 30 June 2016 Husna sold her business to FLF Limited.
The statement of financial position of FLF Limited at 30 June 2016 before the sale was as follows:
Statement of Financial Position at 30 June 2016
Assets
Non-current assets
Premises
Equipment
Vehicles
$
815 100
190 900
81 500
1 087 500
Current assets
Inventory
Trade and other receivables
Cash and cash equivalents
103 600
99 400
7 100
210 100
1 297 600
$
Total assets
Equity and liabilities
Equity
800 000 ordinary shares of $1 each
Retained earnings
General reserve
Total equity
Current liabilities
Trade and other payables
Total equity and liabilities
800 000
322 500
80 000
1 202 500
95 100
1 297 600
For the sale of the business, Husna’s premises were revalued at $280 000 and trade receivables balances of $1 200
were written off.
FLF Limited took over all the assets and liabilities of Husna’s business except the bank account.
The total purchase consideration was $440 000. This was made up as follows:
Cash
8% debentures (2025)
$1 ordinary shares issued at a premium
$70 000
$120 000
100 000 shares
At the same time as the business purchase, the directors of FLF Limited decided to have their own premises revalued.
The premises were revalued at $1 000 000.
November 2016
354
Paper 32
REQUIRED
(a)
Prepare the statement of financial position of FLF Limited on 1 July 2016 immediately after the purchase of
Husna’s business.
[16]
Additional information
FLF Limited’s dividend yield is 3%. A bank deposit account pays interest of 4%.
Husna’s young nephew is disappointed with his aunt’s decision to sell the business. He says that if she wanted to
retire she could have appointed him to manage the business at an annual salary of $20 000.
REQUIRED
(b)
Assess whether Husna made the right decision in selling the business. Support your answer with
calculations.
[9]
QUESTION 4
The turnover of Soames Limited has been increasing and the directors have been advised that they must now
produce audited accounts. They are therefore required to appoint an auditor to provide the company with an audit
report.
REQUIRED
(a)
List five duties which the auditor would carry out during an audit.
[5]
Additional information
The first audit report was qualified. Included in current assets was inventory valued at cost of $1 million. This had
become damaged and now could only be sold for $750 000 after repairs costing $200 000.
REQUIRED
(b)
Explain what is meant by a qualified audit report.
[2]
(c)
Explain, with reference to the relevant International Accounting Standard, the necessary adjustment that
must be made to the financial statements.
[8]
(d)
Analyse the importance to the shareholders of Soames Limited of the auditors providing a true and fair view
of the company’s accounts.
[6]
Additional information
The audit report was signed by Aamir, the brother of the finance director of Soames Limited. Aamir was an
unqualified auditor.
(e)
Evaluate the validity of this audit report.
[4]
QUESTION 5
“The idea behind this method of costing is that it is the cause of a cost which is important and not whether it is fixed
or variable.”
REQUIRED
(a)
Identify the costing method described in the quotation.
[1]
Additional information
Haruka Limited produces a single product.
The factory is operational 5 days a week for 50 weeks a year. It produces one batch of 200 units each day.
Overheads amount to $79 000 a year.
REQUIRED
(b)
Calculate the overhead cost per unit to two decimal places.
[2]
Additional information
These overheads comprised:
Machine set-up costs
$
2 000
November 2016
355
Production quality inspections
Production stoppage costs
Machine maintenance
Machine running costs
Paper 32
5 000
4 000
8 000
60 000
The machines were set up at the start of each working day.
There was a quality inspection every week.
The machines were maintained each day.
Production was stopped on average once every 4 weeks for unexpected maintenance.
Samir, the finance director, asks Sara, the factory accountant, to analyse the overhead cost per unit across each of
the five overheads incurred.
REQUIRED
(c)
Prepare an analysis showing how the total overhead cost per unit (from part b) is split between each of the
individual overheads.
[12]
Additional information
Sara has complained to Samir that producing this analysis is not worthwhile.
REQUIRED
(d)
Advise Samir whether or not he should continue to ask for this analysis in the future years. Justify your
answer by considering the benefits and drawbacks of this costing method.
[10]
QUESTION 6
The directors of Slanting Stores Limited have prepared a cash budget.
REQUIRED
(a)
(i)
State one difference between a cash budget and a statement of cash flows.
(ii)
State two benefits of preparing a cash budget.
[1]
[2]
Additional information
Slanting Stores Limited makes all its sales on credit. Half of all credit customers pay in the month of sale, receiving a
cash discount for early payment. The remainder pay in the following month. Purchases for resale are paid for in the
month after purchase.
The cash budget for the three months ending 31 March 2017 is as follows:
Cash budget for the three months ending 31 March 2017
January
February
March
$
$
$
Opening balance
17 800
17 300
(1 600)
Receipts – month of sale
28 500
26 125
30 875
Receipts – month following sale
40 000
30 000
27 500
Payments to suppliers
(44 000)
(33 000)
(35 750)
Wages
(10 000)
(10 125)
(8 575)
Other expenses
(15 000)
(14 800)
(12 200)
Dividend paid
–
(8 000)
–
Purchase of non-current asset
–
(9 100)
–
Closing balance
17 300
(1 600)
250
REQUIRED
(b)
Calculate
(i)
the value of sales for each of the three months January to March 2017,
[3]
(ii)
the value of cash discount for each of the three months January to March 2017,
[3]
(iii)
the rate of cash discount given.
[1]
(c)
Prepare the trade receivables budget for each of the three months January to March 2017. Trade
receivables at 1 January 2017 are expected to be $40 000.
[8]
November 2016
356
Paper 32
Additional information
The directors wish to eliminate the expected deficit in cash at the end of February. They are considering paying $15
000 in January for an advertising campaign which is expected to increase sales from February onwards.
REQUIRED
(d)
Calculate the required increase in February’s sales, after the advertising campaign, needed to avoid the
negative cash balance.
[5]
(e)
Suggest two possible actions the directors could take, other than the advertising campaign, to improve the
cash flow.
[2]
November 2016
357
Paper 33
NOVEMBER 2016 - PAPER 33
QUESTION 1
M Limited manufactures a single product. The following balances have been extracted from the ledgers for the year
ended 31 December 2015:
Debit
$
Inventories at cost at 1 January 2015
Raw materials
Work-in-progress
Finished goods at transfer price
Purchases of raw materials
Carriage inwards
Carriage outwards
Direct wages
Indirect wages
Rent
Heat, light and power
General expenses
Office salaries
Revenue
Provision for unrealised profit at 1 January 2015
Plant and machinery at cost
Office equipment at cost
Motor vehicles used by salesmen
Provision for depreciation:$2 484
plant and machinery
office equipment
motor vehicles
Credit
$
10 400
12 600
14 904
146 200
3 160
2 790
249 400
54 650
49 000
28 600
12 600
24 780
742 490
2 484
200 000
15 000
25 000
60 000
4 600
5 740
Additional information
1
Inventories at 31 December 2015
Raw materials at cost
Work-in-progress at cost
Finished goods at transfer price
$
11 750
14 670
15 750
2
Expenses are to be apportioned to the production department as follows:
4
Rent
/5
4
Heat, light and power /5
3
General expenses
/4
3
4
5
6
Rent has been prepaid by $4 000 at 31 December 2015.
Heat, light and power is in arrears by $3 500 at 31 December 2015.
Completed goods are transferred at a mark-up on factory cost of 20%.
Depreciation is to be provided as follows:
Plant and machinery 10% per annum on cost
Motor vehicles 25% per annum on cost
Office equipment 15% on the net book value
REQUIRED
(a)
Prepare the manufacturing account for the year ended 31 December 2015.
[9]
November 2016
(b)
(c)
358
Prepare the income statement for the year ended 31 December 2015.
Explain what is meant by the term transfer price.
Paper 33
[10]
[2]
Additional information
10 000 units of the product were manufactured in the year, which is the maximum that can be produced. A supplier
has offered to supply the product to M Limited for $60 per unit in the future.
REQUIRED
(d)
Advise the directors of M Limited whether or not they should accept this offer. Justify your answer on
financial grounds.
[4]
QUESTION 2
AB Cricket Club is a not-for-profit organisation.
REQUIRED
(a)
State two reasons why the members of a not profit organisation do not receive a dividend. [2]
Additional information
The treasurer of AB Cricket Club provided the following financial information:
1
At 1 September 2015 the assets and liabilities were:
$
7 800
490
270
1 500
265
420
7 825
Equipment at net book value
Subscriptions in advance
Subscriptions in arrears
Life membership fund
Trade payables for refreshments
Inventory of refreshments
Accumulated fund
2
The receipts and payments account for the year ended 31 August 2016 was as follows:
Bank balance b/d
Subscriptions
Sale of equipment
Match ticket sales
Refreshments
Life membership
Donation
3
4
5
6
7
8
Receipts and payments account
$
1 590 Groundsman’s wages
11 200 Repairs to clubhouse
4 000 Purchase of equipment
6 400 Cost of refreshments
2 500 Awards to players
800 Administration expenses
3 500 Bank balance c/d
_____ Savings account c/d
29 990
$
7 500
700
2 500
1 700
1 450
760
11 880
3 500
29 990
At 31 August 2016, the balances were:
$
Subscriptions in advance
295
Subscriptions in arrears
165
Trade payables for refreshments
315
Inventory of refreshments
390
The donation of $3 500 is to be used for the purchase of a new clubhouse. It had been invested in a new
savings account and is to be capitalised.
The club depreciates its equipment at 10% on the net book value. A full year’s depreciation is charged in
the year of purchase. No depreciation is charged in the year of sale.
Equipment sold had a net book value of $3 640.
The life membership fund is transferred to the income and expenditure account over 10 years in equal
instalments.
For the year ended 31 August 2016 the club made a profit of $720 on the sale of refreshments.
November 2016
359
Paper 33
REQUIRED
(b)
Prepare the income and expenditure account for the year ended 31 August 2016.
[11]
(c)
Prepare the statement of financial position at 31 August 2016.
[8]
(d)
Explain why the club transfers life membership fund to the income and expenditure accounts over 10 years.
[4]
QUESTION 3
XY Limited has been trading for many years.
Before the end of year audit, the chairman made the following statement:
‘I am pleased to report that the profit for the year ended 31 March 2016 has increased from $86 000 to $174 000.
These results have been achieved through careful cost control and concentrating on those areas which offer the
greatest return.’
However during the end of year audit the auditors discovered the following:
1
Equipment with a net book value of $180 000 had become obsolete during the year but had not been
written off. The directors believed that the buildings have increased in value by $200 000, which cancelled
out any loss on the obsolete equipment. So no adjustment had been made.
2
The method of inventory valuation had been changed at the end of the year from AVCO to FIFO. The AVCO
valuation had been $142 000 whereas the FIFO valuation was $184 000.
3
At 31 March 2016 the trade receivables amounted to $675 000. During the year a debt for $81000 had been
written off. However, a cheque for 75% of this amount had been discovered during the audit. The cheque
had not been recorded in the books of account but is expected to clear the bank.
REQUIRED
(a)
Explain the term stewardship.
[2]
(b)
Explain the purpose of an end of year audit.
[2]
(c)
State whether the published audit report will be qualified or not.
[1]
(d)
(i)
Describe the correct accounting treatment of points 1, 2 and 3 with reference to the relevant
accounting standards.
[9]
(ii)
Analyse the effects of any correction on the profit for the year ended 31 March 2016.
[6]
(e)
Assess the implications of a qualified audit report.
[5]
QUESTION 4
Hamid and Patel trade regularly with each other. Patel is based in India and Hamid is based in Scotland.
On 15 November 2014 Hamid sent 100 cases of goods to Patel costing $12 000. The commission on sales was agreed
at 5% of the gross sales.
On the same day Hamid paid delivery charges of $610 and insurance of $110.
Hamid’s financial year ended on 31 March 2015.
At that date Patel provided the following information:
1
70% of the goods had been sold for $10 600.
2
$7 475 had been sent to Hamid.
3
There was an irrecoverable debt of $120.
4
Storage charges of $350 and selling expenses of $245 had been paid by Patel.
Patel paid the balance due on 31 March 2015.
Hamid incurred bank charges of $12 for processing this payment.
REQUIRED
(a)
Prepare in the books of Hamid the following accounts at 31 March 2015:
(i)
the goods sent on consignment account
[1]
(ii)
the consignment to Patel account
[11]
(iii)
Patel account
[7]
(b)
Analyse the effect on profit of the irrecoverable debt incurred during the year.
[2]
Additional information
Hamid and Patel are now considering forming a partnership rather than continuing to trade on a consignment basis.
November 2016
360
Paper 33
REQUIRED
(c)
Advise whether or not Hamid and Patel should enter into a partnership with each other. Justify your answer.
[4]
QUESTION 5
N Limited is planning a new project, which has an initial cost of $225 000. If the project runs for four years the
marginal revenues and costs will be as follows:
Year
Revenues
$
100 000
110 000
125 000
90 000
1
2
3
4
Costs
$
31 000
40 000
59 000
48 000
The directors have two options.
Option 1
To stop the project at the end of year 2 when the scrap value of the project’s assets will amount
to $175 000.
Option 2
To continue with the project until the end of year 4 when the scrap value of the assets will be
$75 000.
The company’s cost of capital is 10%. Discount factors for this cost of capital are as follows:
Year
1
2
3
4
Discount factor
0.909
0.826
0.751
0.683
REQUIRED
(a)
Calculate the net present value (NPV) of each option.
(b)
Advise the directors which option they should choose. Justify your answer.
[10]
[2]
Additional information
Before the directors make a decision, the finance director wishes to have further data on the project.
REQUIRED
(c)
Calculate, to two decimal places, the sensitivity of the option selected in your answer to (b) to changes in
the initial cost of the project.
[3]
(d)
Calculate, to two decimal places, the accounting rate of return (ARR) of the option selected in your answer
to (b). (Add scrap value to cost when calculating average investment.)
[6]
(e)
Explain to the directors which is the more valid method of investment appraisal. Give reasons.
[4]
QUESTION 6
Sunil is preparing the annual budgets for his manufacturing business.
REQUIRED
(a)
Explain what is meant by a master budget.
[2]
Additional information
The finished goods inventory held at 1 January 2017 is expected to be 200 units. This is expected to increase by 20
units each month until 31 March 2017.
Unit sales from December 2016 to April 2017 are expected to be:
November 2016
December
350
361
January
370
Paper 33
February
410
March
380
REQUIRED
(b)
Prepare a production budget for each of the four months from January to April 2017.
April
430
[4]
Additional information
1
Goods will be sold on credit with a selling price of $30 per unit. One third is expected to be received in the
month of sale with the balance being received in the following month.
2
Other income will arise from the interest received on an investment of $50 000 at 4% per annum. Interest
will be received quarterly starting 1 January 2017.
3
Unit product costs are expected to be as follows:
$
7
5
6
18
Direct materials will be purchased to meet the current month’s production. Half the amount due will be
paid by cash in the month of production and the balance will be paid in the following month. The number
of units produced in December 2016 is expected to be 340.
Direct labour will be paid in the month that the cost is incurred.
Four-fifths of the overheads will be paid in the month in which they are incurred with the balance being
paid in the following month.
Some new equipment is expected to be acquired on 1 January 2017 at a cost of $12 000. A 50% deposit will
be paid on delivery, with the remainder being paid on 1 April 2017. This equipment will be depreciated at
10% using the straight-line method.
The bank account balance at 1 January 2017 is expected to be overdrawn by $10 450.
Direct materials
Direct labour
Overheads
4
5
6
7
8
REQUIRED
(c)
Prepare a cash budget for each of the three months from January to March 2017.
[10]
(d)
Analyse the options available to Sunil to avoid using a bank overdraft.
[6]
(e)
Advise Sunil whether or not he should apply for a loan rather than maintain an overdraft. Justify your
answer.
[3]
2017 May
362
Paper 31 & Paper 33
MAY 2017 - PAPER 31 & 33
QUESTION 1
The following balances were extracted from the books of XY plc on 31 January 2017.
Land and buildings - at cost
Equipment - at cost
Motor vehicles - at cost
Accumulated depreciation
Land and buildings
Equipment
Motor vehicles
Ordinary shares of $5 each
Share premium
Retained earnings at 1 February 2016
Inventory at 1 February 2016
Trade receivables
8% Loan
Provision for doubtful debts
Revenue
Purchases
Administrative expenses
Distribution costs
Interim dividend paid
$
700 000
320 000
230 000
100 000
186 000
96 000
500 000
120 000
125 000
37 100
102 000
150 000
2 100
985 000
428 000
346 000
144 000
20 000
Additional information
1
Inventories at 31 January 2017 included 100 units of damaged items. These items, with a unit cost of $80,
were all sold on 2 February 2017 for $65 each.
At 31 January 2017 all other inventories were valued at cost, $36 000, and had a net realisable value of $85
400.
2
The administrative expenses include an amount of $30 000 for a machine purchased on 1 February 2016.
The machine has a useful life of three years and will then be scrapped with nil proceeds. Any costs related
to the machine should be charged to the cost of sales.
3
The figure for land and buildings (at cost) includes land which had cost $300 000.
4
During the year, XY plc purchased a motor vehicle which cost $60 000. This was settled by a payment of $40
000 from the bank and the part exchange of an old vehicle. This old vehicle had originally cost $75 000 and
had been depreciated by $27 000. Only the bank payment had been recorded in the books of account.
5
Depreciation is to be charged on the following basis:
Land
not depreciated
Buildings
straight-line method over 25 years, charged to cost of sales
Equipment
straight-line method over 5 years, charged to administrative expenses
Motor vehicles
reducing balance method at 20% per annum, charged to distribution costs
The company policy is to charge a full year’s depreciation in the year of purchase and none in the year of
sale.
6
Trade receivables included an irrecoverable debt of $8 800. A provision for doubtful debts of 4% is to be
maintained. These items need to be included in administrative expenses.
7
The loan was obtained on 1 September 2016.
REQUIRED
(a)
State two objectives of financial statements of a limited company.
(b)
Prepare the income statement for the year ended 31 January 2017.
[2]
[15]
2017 May
363
Paper 31 & Paper 33
Additional information
In October 2016 XY plc made a bonus issue of 1 ordinary share for every 10 ordinary shares held. No entry had
been made in the books of account.
REQUIRED
(c)
Prepare the statement of changes in equity for the year ended 31 January 2017. (A total column is not
required.)
[4]
Additional information
The directors are considering making a further issue of bonus shares rather than paying a cash dividend.
REQUIRED
(d)
Advise the directors which course of action they should take. Justify your answer.
[4]
[Total: 25]
QUESTION 2
The directors of G Limited prepared the following draft statement of financial position at 31 December 2016:
G Limited
Statement of Financial Position at 31 December 2016
$
Non-current assets
642 000
Current assets
Inventory
78 000
Trade receivables
189 000
Other receivables
3 000
Cash and cash equivalents
54 000
324 000
Total assets
966 000
Equity and liabilities
Equity
Ordinary shares of $1 each
550 000
Retained earnings
235 000
785 000
Current liabilities
Trade payables
171 000
Other payables
10 000
181 000
Total equity and liabilities
966 000
The auditor brings the following items to the attention of the directors:
1
G Limited entered into an 18-month rental agreement for a warehouse on 1 May 2016. The following
payments totalling $220 000 were made and charged as an expense in the draft income statement:
$20 000 rental deposit which is refundable at the end of the lease period; and $200 000 total rent covering
the period from 1 May 2016 to 28 February 2017.
2
After an inspection of G Limited’s office premises by the local authority in December 2016, it was found
that the fire exits did not meet the safety specifications. A penalty of $27 000 is probable and G Limited will
incur a cost of $47 000 to rebuild the fire exits. No accounting entries had been made for this.
3
A customer who owed $12 000 at 31 December 2016 was declared bankrupt on 12 January 2017. It is
probable that only 20% of the debt is recoverable. No accounting entries had been made for this.
REQUIRED
(a)
Prepare the revised statement of financial position at 31 December 2016.
[10]
(b)
Explain how each of items 1 and 2 should be treated in the financial statements.
[5]
(c)
Explain the role of an external auditor.
[4]
2017 May
(d)
364
Paper 31 & Paper 33
Explain why the audit report of a limited company is addressed to the company’s shareholders and not its
directors.
[2]
Additional information
G Limited adopted the Weighted Average Cost (AVCO) method to ascertain the value of inventories in 2016. The
purchase price has been increasing over recent years. The directors are now considering changing to First in, First
out (FIFO) method to value inventory in 2017.
REQUIRED
(e)
Advise the directors whether or not the method of valuing inventory should be changed.
Justify your answer.
[4]
[Total: 25]
QUESTION 3
Greaves and Hurst participated in a joint venture sharing profits and losses in the ratio 2 : 1.
Greaves provided goods valued at $15 000 and incurred costs of $900.
Hurst provided goods valued at $10 000 and incurred costs of $800.
Greaves sold all of the goods for $35 000.
It was agreed that a commission of 10% of the sales value would be paid to the person making the sale.
The joint venture was then dissolved.
REQUIRED
(a)
Explain two benefits to Greaves and Hurst of forming a joint venture.
(b)
Calculate the share of profit made by Greaves and Hurst from the joint venture.
[4]
[6]
Additional information
A separate set of books of account are maintained to record the transactions of the joint venture.
Greaves and Hurst kept their own transactions with the joint venture in their own books.
REQUIRED
(c)
Prepare the following ledger accounts:
(i)
Greaves account with the joint venture
(ii)
Hurst account with the joint venture
[9]
Additional information
Following the closure of the joint venture, Greaves and Hurst have received more orders and are considering forming
a partnership.
REQUIRED
(d)
Advise Greaves and Hurst whether or not they should form a partnership. Justify your answer by discussing
advantages and disadvantages of forming the partnership.
[6]
[Total: 25]
QUESTION 4
James has recently retired and received some cash which he wishes to invest in a company.
There are two options. He could invest in either LM plc or AB plc.
The summarised information for the two companies extracted from their financial statements at 31 March 2017 is
as follows:
LM plc
AB plc
$
$
Ordinary share capital
300 000 500 000
4% non-redeemable preference shares of $1 each 100 000 150 000
Retained earnings 1 April 2016
50 000 125 000
10% debentures (2025)
150 000
50 000
Profit for the year
125 000 175 000
The nominal value of the ordinary shares of LM plc is $0.50 and of AB plc $1.
2017 May
365
Paper 31 & Paper 33
The market price of the ordinary shares at 31 March 2016 of both companies was $2.
At 31 March 2017, this had fallen by 10% for LM plc but increased by 10% for AB plc.
Both companies paid a dividend per share of $0.10 for the year ended 31 March 2017.
REQUIRED
(a)
Calculate the following ratios for both companies. Give your answers to two decimal places.
(i)
Earnings per share
(ii)
Price earnings
(iii)
Dividend yield
(iv)
Dividend cover
(b)
Evaluate the performance of each company using each of the ratios calculated in part (a).
[4]
[8]
Additional information
The industry average gearing ratio is 25%.
REQUIRED
(c)
(i)
Explain what you understand by gearing.
(ii)
Calculate the gearing ratio for both companies to two decimal places.
(iii)
Analyse the gearing ratios of LM plc and AB plc.
(d)
Advise James which company he should invest in. Give reasons for your answer.
[2]
[2]
[5]
[4]
[Total: 25]
QUESTION 5
EF plc manufactures a single product. No inventories of materials or finished goods are maintained.
The following budgeted information is available for March:
Production and sales
Unit revenue and costs
Selling price
Direct material
Direct labour
Variable overhead
Fixed overhead
1 000 units
$150
4 kilos at $6 per kilo
6 hours at $10 per hour
$2 per direct labour hour
$14 per unit
In March the company actually made and sold 800 units.
REQUIRED
(a)
State two reasons why a business prepares a flexed budget.
(b)
Prepare a statement to show the budgeted profit for the month of March.
[2]
[6]
Additional information
The actual cost of direct labour in March was $50 176. Staff had been paid at the rate of $9.80 per hour.
REQUIRED
(c)
Calculate the following variances for March:
(i)
direct labour rate
(ii)
direct labour efficiency
(iii)
total direct labour
Additional information
In April the staff continued to be paid at $9.80 per hour. The variances for April were calculated as follows:
direct labour rate
$1 620 favourable
direct labour efficiency $18 000 adverse
REQUIRED
(d)
Calculate
(i)
the number of hours actually worked in April
(ii)
the number of units actually made and sold in April.
[2]
[2]
[1]
[2]
[5]
2017 May
(e)
366
Paper 31 & Paper 33
Suggest two possible reasons why the efficiency variance was adverse in April.
[2]
Additional information
The management of the company is evaluating a plan to retrain the existing workers to improve their efficiency.
REQUIRED
(f)
Discuss the disadvantages to EF plc if they proceed with this plan.
[3]
[Total: 25]
QUESTION 6
Ahmed manufactures two products. He has recently started using Activity Based Costing (ABC) for allocating the
overhead costs to these products. The budgeted data for one month is available as follows:
Demand (units)
Number of orders
Number of production runs
Direct labour hours
Machine hours
Direct costs ($)
Total factory overhead costs
Machine maintenance costs
Ordering costs
Production run costs
Product X
10 000
20
12
Product X
Per unit
0.75
2.5
100
Product Y
14 000
60
36
Product Y
Per unit
1.5
0.5
50
$
264 000
54 000
24 000
342 000
REQUIRED
(a)
Calculate the full cost per unit for Product X and Product Y using ABC.
[10]
Additional information
Ahmed previously used direct labour hours as a basis to charge overheads to each product.
REQUIRED
(b)
Calculate the overhead charged to each product using the direct labour hour rate.
(c)
Explain the effect that changing the method has had on the overhead cost of each product.
[3]
[4]
Additional information
A customer requires 50 units of Product X and has offered to pay Ahmed a total of $8 450 for them. Ahmed uses
40% mark-up on all his products.
REQUIRED
(d)
Recommend whether or not Ahmed should accept the offer. Justify your decision sing appropriate
calculations and considering both financial and non-financial factors.
[6]
(e)
State two reasons why a business may use ABC for allocating overhead costs.
[2]
May 2017
367
Paper 32
MAY 2017 - PAPER 32
QUESTION 1
Richard Ang is a sole proprietor manufacturing one type of sofa bed. The following balances are extracted from his
books of account at 31 July 2016.
$
986 000
207 600
6 800
17 500
12 000
Revenue
Purchases of direct materials
Carriage inwards
Carriage outwards
Returns inwards
Factory wages
Direct
Indirect
Overheads
Factory
Office
168 000
51 400
155 000
194 000
Additional information
1
Richard maintains a provision for unrealised profit account. Completed products are transferred from the
factory at a mark-up of 20%.
2
Inventories at 31 July 2015 were:
$
Raw materials
Work in progress
Finished goods (at cost)
3
Inventories at 31 July 2016 were:
Raw materials
Work in progress
Finished goods (at transfer price)
4
5
14 800
23 500
32 000
$
16 400
20 200
54 000
Unpaid direct wages at 31 July 2016 amounted to $3 500.
Rent had been allocated to factory overheads and office overheads at $24 000 and $16 000 respectively.
The allocation should have been in the ratio of 3 : 1 respectively.
REQUIRED
(a)
Prepare the manufacturing account for the year ended 31 July 2016.
(b)
Prepare an income statement for the year ended 31 July 2016.
[7]
[7]
Additional information
Richard Ang thought of taking some of the finished goods inventory at 31 July 2016 to help his sister set up a furniture
business on the same day.
REQUIRED
(c)
Prepare an extract from the statement of financial position of Richard Ang’s business at 31 July 2016 to
show how inventories are recorded.
[3]
(d)
Explain why it is important for Richard to create a provision for unrealised profit.
[4]
(e)
State two advantages and two disadvantages to Richard Ang of helping his sister set up her
business.
[4]
May 2017
368
Paper 32
QUESTION 2
The summarised statement of financial position of M plc at 31 December 2016 was as follows:
Non-current assets
Net current assets
Share capital and reserves
Ordinary shares of $5 each
Share premium
Retained earnings
$000
4 220
2 080
6 300
5 000
500
800
6 300
Retained earnings for the year ended 31 December 2016 were $160 000, after the payment of dividends which
represented 60% of the profit for the year.
The market price of one ordinary share was $6.40 on 31 December 2016.
REQUIRED
(a)
Calculate to two decimal places the following ratios at 31 December 2016:
(i)
Return on capital employed
(ii)
Earnings per share
(iii)
Price earnings ratio
(iv)
Dividend cover
(v)
Dividend yield
[8]
Additional information
It is estimated that the profit for the year ending 31 December 2017 will be same as 2016. The capital employed will
also remain unchanged.
On 1 January 2017, M plc has the opportunity to invest $1 200 000 in a project which will bring an additional annual
profit of $185 000. The directors are considering an issue of ordinary shares at a premium of 20% to finance this
project. The rate of dividend paid is expected to remain at 60% of the profit for the year.
REQUIRED
(b)
Prepare a statement to show the forecast share capital and reserves at 31 December 2017.
[6]
(c)
Calculate to two decimal places the following expected ratios for the year ending 31 December 2017:
(i)
Return on capital employed
(ii)
Earnings per share
[6]
(d)
Advise the directors whether or not M plc should invest in the project. Justify your answer.
[5]
QUESTION 3
Lushan and Samson are the directors of Z Limited which was newly formed on 1 January 2016. They understand that
they are legally obliged to prepare financial statements in accordance with International Accounting Standards.
REQUIRED
(a)
State four reasons why the business should comply with International Accounting Standards when financial
statements are being prepared.
[4]
(b)
Explain what is meant by stewardship with regard to the role of the directors.
[2]
Additional information
The directors prepared the following draft statement of financial position at 31 December 2016:
Z Limited
Statement of financial position at 31 December 2016
May 2017
369
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Ordinary shares of $1 each
Retained earnings
Total equity
Current liabilities
Trade payables
Taxation
Total equity and liabilities
Paper 32
$
478 000
124 000
217 000
132 000
473 000
951 000
500 000
210 000
710 000
188 000
53 000
241 000
951 000
Julia is the auditor of Z Limited. During the course of conducting her audit she was provided with the following
information.
1
On 31 December 2016, Z Limited had been sued for an amount of $29 000. Legal advice indicated that Z
Limited had a 90% chance of losing the case.
2
Included in the trade receivables was a debt of $30 000 owed by P Limited which was in financial difficulty.
The directors of Z Limited had accepted office equipment from P Limited on 31 December 2016 to settle
70% of P Limited’s debt. They were of the opinion that the recovery of the remaining debt was highly
improbable.
3
A piece of machinery had been purchased on 1 January 2016 for $50 000. The machinery had been
depreciated at an annual rate of 20% by using the straight-line method. At 31 December 2016, it had an
estimated fair value of $32 500 and the estimated value in use was $19 500.
REQUIRED
(c)
Prepare a revised draft statement of financial position at 31 December 2016 after considering the
information provided to Julia.
[8]
(d)
Explain the adjustments you have made to the statement of financial position in (c).
[6]
Additional information
Jack, Julia's brother, is the sole trader of a small business. He has asked his sister if his accounts should be audited.
REQUIRED
(e)
Discuss the advantages and disadvantages to Jack of having his accounts audited.
[5]
QUESTION 4
Alex and Brown were in partnership sharing profits and losses in the ratio of 3 : 2 respectively.
They provided the following information at 31 October 2016:
$
$
Land and buildings
Plant and machinery
Motor vehicles
Inventory
Trade receivables
Cash and cash equivalents
Trade payables
$
320 000
135 000
110 000
38 000
54 000
19 000
(39 000)
637 000
May 2017
370
Capital accounts
Current accounts
Balance at 1 November 2015
Partners’ salaries
Interest on capital
Share of residual profit
Drawings
Balance at 31 October 2016
Paper 32
Alex
300 000
Brown
200 000
72 000
30 000
15 000
36 000
(77 000)
76 000
57 000
45 000
10 000
24 000
(75 000)
61 000
500 000
137 000
637 000
C Limited purchased this partnership business on 1 November 2016. They took over all the assets and liabilities with
the exception of:
Cash and cash equivalents
One motor vehicle which was taken over by Alex at an agreed value of $28 000.
The remaining assets taken over by C Limited had the following values:
$
Land and buildings
450 000
Plant and machinery
120 000
Motor vehicles
60 000
Inventory
49 000
Trade receivables
52 000
The purchase consideration was five times the partnership profit for the year ended 31 October 2016.
This purchase consideration was settled by C Limited as follows:
1
$127 500 cash was paid into the partnership bank account.
2
Alex and Brown were issued an amount of 8% debentures. Both will continue to receive the same amount
of interest as they had received from the interest on capital.
3
The balance of the purchase consideration was settled by an issue of $1 ordinary shares at a price of $1.80
each. The shares were distributed between the partners in their profit and loss sharing ratios.
REQUIRED
(a)
State what is meant by ‘goodwill’.
(b)
Calculate the value of goodwill paid for by C Limited.
(c)
Calculate the total profit on realisation due to the partners.
(d)
Prepare the partners’ capital accounts to close their business.
[1]
[4]
[4]
[11]
Additional information
The capital employed of C Limited at 31 October 2016 before purchasing the partnership business was as follows:
Ordinary shares of $1 each
Share premium
Retained earnings
$
3 400 000
300 000
816 000
4 516 000
The company made a profit for the year ended 31 October 2016 of $352 000.
The directors of C Limited estimate that the profit for the coming year after purchasing the partnership business will
be increased to $540 000.
REQUIRED
(e)
Discuss the advantages to C Limited, other than increase in the profit, of purchasing Alex and Brown’s
business.
[5]
May 2017
371
Paper 32
QUESTION 5
SM Limited makes a single product. In a normal month 1 000 units are made and sold for $150 each. Standard costs
are as follows:
$
Direct labour (4 000 hours at $10.50)
42 000
Direct materials (3 000 kilos at $12.20)
36 600
Variable overheads
10 000
Fixed overheads
19 300
In April the company received an order for the supply of 800 units in addition to the usual production and sales.
REQUIRED
(a)
Prepare the flexed budget for April showing total budgeted profit.
[6]
Additional information
During April the employees were required to work extra hours to meet increased production. The inclusion of
overtime rates caused the average wage to rise to $13.10 per hour.
Staff worked 7 300 hours in total and used 5 500 kilos of raw material which had been purchased for $11.50 per kilo.
The raw materials were of the usual quality.
REQUIRED
(b)
Calculate the following variances for the month of April.
(i)
labour efficiency
(ii)
labour rate
(iii)
materials usage
(iv)
materials price
(c)
Suggest one cause for each of the materials usage and materials price variances.
[2]
[2]
[2]
[2]
[2]
Additional information
One of the directors stated that new staff should have been employed. This would have resulted in fewer overtime
payments although extra training costs would have been incurred.
The director believed that 7 800 hours would have been worked at a cost of $10.80 per hour.
REQUIRED
(d)
Advise the directors whether or not they should have taken this action. Support your answer with
calculations where appropriate.
[6]
(e)
State three advantages to the company of operating a standard costing system.
[3]
[Total: 25]
QUESTION 6
Tisha is considering buying a new machine for her factory. The machine will cost $125 000. At the end of Year 5 the
machine will be sold for $65 000. The machine will be used to manufacture one of Tisha’s existing products.
The following information is available:
1
The current annual sales volume of the existing product is 10 000 units. This will remain constant over the
5-year period.
2
The selling price per unit is currently $12. Tisha plans to increase this to $13 per unit to help cover her costs
of the new machine.
3
The variable cost is currently $5 per unit. This is expected to fall to $3 per unit by using the new machine.
4
The maintenance cost for the new machine will increase the annual fixed costs by $5 000.
5
At the end of Year 1, Tisha will have to pay a one-off service fee of $1 000.
REQUIRED
(a)
Prepare one table which shows the change in cash flows for each of the Years 0 to 5 that arise as a result
of the purchase of the machine.
[5]
May 2017
(b)
(c)
372
Paper 32
Calculate the payback period for the machine.
State three reasons why payback may be a useful investment appraisal technique.
[2]
[3]
Additional information
Tisha’s cost of capital is 10%. Discount factors are as follows:
Year
0
1
2
3
4
5
Discount factor
1.000
0.909
0.826
0.751
0.683
0.621
REQUIRED
(d)
Calculate the Net Present Value (NPV) of buying the machine.
[3]
Additional information
When using a discount factor of 20%, the machine had a negative NPV of $24 953.
REQUIRED
(e)
Calculate the Internal Rate of Return (IRR) of the machine to three decimal places.
[4]
Additional information
Tisha has recently discovered an alternative machine that would also be suitable for producing the same product.
This also has an expected life of 5 years. Tisha has a limited amount of capital available and only needs one machine.
The following information has been calculated for the alternative machine:
Capital outlay
$
135 000
NPV
$
10 350
IRR
%
9.597
Payback period
4 years 6 months
REQUIRED
(f)
Recommend, with reasons, which machine Tisha should buy.
[4]
(g)
Discuss which factors, other than those you have considered in (f), Tisha should consider when making her
decision.
[4]
November 2017
373
Paper 31
NOVEMBER 2017 - PAPER 31
QUESTION 1
Ted is the owner of a manufacturing business.
The following information is available for the year ended 31 December 2016:
Factory machinery – at cost
Office equipment – at cost
Provision for depreciation at 1 January 2016
Factory machinery
Office equipment
Inventory at 1 January 2016
Raw materials
Work in progress
Finished goods (at cost)
Revenue
Purchases of raw materials
Factory direct wages
Factory indirect wages
Office salaries
Carriage inwards
Carriage outwards
Direct expenses
Factory overheads
General office expenses
Insurance and rates
Rent
Heat and light
$
330 000
142 000
276 000
67 000
52 000
97 000
122 000
4 268 000
484 000
626 000
132 000
548 000
21 000
87 600
120 000
510 900
276 000
92 000
440 000
178 000
Additional information
1
Goods are transferred from the factory at a mark-up of 20%. Increase in provision for unrealised profit at
31 December 2016 amounted to $15 840.
2
Inventory at 31 December 2016:
$
Raw materials
67 000
Work in progress
102 000
Finished goods
?
3
Non-current assets are depreciated at 15% per annum using the reducing balance method.
4
At 31 December 2016:
$
Rent owing
40 000
Insurance and rates prepaid
6 000
Insurance and rates, rent and heat and light are apportioned 3/4 factory and 1/4 general office.
5
Production for the year ended 31 December 2016 was 80 000 units.
REQUIRED
(a)
Explain why a mark-up is added to the factory cost of production.
[3]
(b)
Prepare the manufacturing account for the year ended 31 December 2016.
[10]
(c)
Prepare the trading section of the income statement to show the gross profit for the year ended 31
December 2016.
[6]
(d)
Prepare an extract from the statement of financial position to show the value of finished goods inventory
at 31 December 2016.
[2]
November 2017
374
Paper 31
Additional information
In February 2017, Ted was approached by an existing customer for an extra order of 5000 units.
The budgeted production for 2017 was already set at the maximum production capacity. Ted considered whether
or not to source the extra 5000 units from an external supplier at a cost of $28 per unit.
REQUIRED
(e)
Advise Ted whether or not he should have accepted the extra order. Justify your answer.
[4]
QUESTION 2
The EF Tennis Club generates revenue from member subscriptions by selling tickets for matches and operating a
club shop. It also receives income from renting out their catering facility.
The treasurer has provided the following figures for the year ended 31 December 2016:
2016
Jan 01
Dec 31
2017
Jan 1
Balance b/d
Shop sales
Match tickets
Sale of old equipment
Rent of catering facilities
Subscriptions
Donation
Balance b/d
Receipts and Payments Account
$
2016
1 546 Dec 31 New equipment
8 960 Dec 31 Shop purchases
2 740 Dec 31 Printing & advertising for matches
1 760 Dec 31 Ground staff wages
2 600 Dec 31 Shop staff wages
3 600 Dec 31 Balance c/d
5 000
26 206
$
1 400
5 720
3 765
4 210
2 200
8 911
_____
26 206
8 911
Other balances are:
Shop inventory
Equipment at net book value
Shop trade payables
1 January 2016
$
975
14 760
1 210
31 December 2016
$
826
?
1 450
REQUIRED
(a)
Distinguish between the capital of a sole trader and the accumulated fund of a non-profit-making club or
society.
[2]
(b)
Prepare the shop income statement for the year ended 31 December 2016.
[4]
Additional information
1
Equipment is depreciated at 10% of net book value at the year end. Equipment which was sold had a net
book value of $1 900.
2
The rent received for the catering facility is $200 per month and commenced on 1 January 2016.
3
The annual subscription for the year ended 31 December 2016 was $9 per member. On 1 January 2017 it
was increased to $10 per member.
At 1 January 2016:
20 members had paid their subscription in advance for 2016.
There were 6 members in arrears for 2015. Their membership has been withdrawn and the amount
they owed is to be written off as a bad debt.
At 31 December 2016:
26 members paid their subscription in advance for 2017.
10 members were in arrears for 2016 and they had until 30 June 2017 to pay.
4
The donation of $5 000 was received specifically to start a new fund for a club-house. The treasurer would
like to invest this in a separate long-term savings account.
November 2017
375
Paper 31
REQUIRED
(c)
Prepare the income and expenditure account for the year ended 31 December 2016.
[10]
(d)
Prepare an extract from statement of financial position at 31 December 2016 to show the current assets
and current liabilities of the club.
[4]
(e)
Discuss whether or not the treasurer should invest the fund for the club-house in a separate long-term
savings account. Justify your answer.
[5]
QUESTION 3
The following information has been extracted from the books of account of M plc at 31 December 2016:
$
Profit for the year
550 000
Ordinary shares ($1)
900 000
6% Preference shares (non-redeemable)
200 000
5% Debentures (2025)
100 000
The market price of one ordinary share at 31 December 2016 was $1.75.
Dividends of $0.08 per ordinary share have been paid during the year ended 31 December 2016.
REQUIRED
(a)
State two advantages of ratio analysis to a user of the financial statements.
(b)
Calculate the following ratios at 31 December 2016 to two decimal places:
(i)
earnings per share
(ii)
price earnings ratio
(iii)
dividend yield
(iv)
dividend cover.
[2]
[5]
Additional information
For the year ended 31 December 2016:
1
The profit for the year was 10% greater than the previous year.
2
There had been a share issue of 300 000 ordinary shares.
3
The dividend per share had fallen by 20%.
REQUIRED
(c)
Calculate the same four ratios as in part (b) at 31 December 2015 to two decimal places.
The market price of one ordinary share at 31 December 2015 was $1.50.
[4]
Additional information
An investor, Bevin, is considering acquiring ordinary shares in M plc. He has been advised that the directors intend
to raise extra funds by issuing a further 5% debenture (repayable 2027).
REQUIRED
(d)
(i)
Analyse the performance of M plc over the two years 2015 and 2016 using the ratios calculated in
parts (b) and (c).
[8]
(ii)
Advise Bevin whether or not he should make the intended investment. Justify your answer. [6]
QUESTION 4
Armfield and Bonetti are sole traders. Their statements of financial position at 31 December 2016 are shown below:
Armfield
Bonetti
Assets
$
$
Non-current assets
85 000
135 000
Current assets
Inventories
8 000
12 000
Trade receivables
6 000
9 000
Cash and cash equivalents
4 000
5 000
18 000
26 000
Total assets
103 000
161 000
November 2017
Capital and liabilities
Capital accounts
Current liabilities
Trade payables
376
Paper 31
Armfield
100 000
Bonetti
150 000
3 000
103 000
11 000
161 000
They have decided to merge their two businesses into a partnership on 1 January 2017. All assets and liabilities, with
the exception of cash and cash equivalents, were transferred to the new partnership at the following agreed values:
Armfield ($)
Bonetti ($)
Non-current assets
80 000
145 000
Inventories
7 000
11 000
Trade receivables
5 000
8 000
Trade payables
3 000
11 000
REQUIRED
(a)
State the meaning of the term ‘capital account’.
(b)
Prepare the capital accounts of Armfield and Bonetti to close their existing businesses.
Transfer the balances on their capital accounts to new partnership capital accounts.
[2]
[6]
Additional information
Each partner will either invest or withdraw cash to achieve a balance of $125 000 to carry forward on their
partnership capital account.
REQUIRED
(c)
Prepare the partnership capital accounts clearly showing each partner’s adjustment for cash.
(d)
Prepare the opening statement of financial position for the partnership at 1 January 2017.
[3]
[5]
Additional information
Profit for the year ended 31 December 2016 of Armfield was $80 000 and Bonetti was $120 000.
The profit for the year of the partnership for the year ending 31 December 2017 is expected to be $200 000. The
partners agreed to share the profits and losses equally.
REQUIRED
(e)
Discuss whether or not the merger of the two businesses has been beneficial to each partner.
[5]
Additional information
After the first year’s successful trading as a partnership the partners were advised to consider incorporating their
business. Both partners are close to retirement age and have family.
(f)
Discuss two advantages to the partners of incorporating their business.
[4]
QUESTION 5
WT Limited manufactures a single product. The following information is available from its master budget for the
month of December:
Monthly sales
1000 units
Selling price per unit
$90
Direct materials per unit
4 kilos costing $5.10 per kilo
Direct labour per unit
3 hours costing $10 per hour
Total monthly fixed costs
$33 000
Competing businesses charge a selling price between $85 and $90 for the same product.
The directors are proposing to reduce the selling price to $80 per unit. They believe that monthly sales would
increase to 1 500 units. The change in demand would cause material costs to fall to $5.02 per kilo and labour costs
to rise to $12 per hour. Total monthly fixed costs would remain unchanged.
REQUIRED
(a)
Suggest reasons why the cost per unit could change with the increase in sales for:
(i)
direct material
(ii)
direct labour.
[4]
November 2017
(b)
(c)
(d)
(e)
377
Paper 31
Calculate:
(i)
the total budgeted profit and budgeted profit per unit for December
(ii)
the total profit and profit per unit if the directors’ proposal is adopted for December
(iii)
the increase or decrease in profit which would arise if the directors’ proposal is adopted.
Calculate the following variances which would arise if the directors’ proposal is adopted:
(i)
sales price
(ii)
sales volume
(iii)
materials price
(iv)
labour rate.
Explain why total of variances calculated in part (c) does not equal the change in profit in part (b)(iii).
Advise the directors whether or not they should go ahead with the proposal. Justify your answer.
[3]
[3]
[1]
[8]
[3]
[3]
QUESTION 6
PMW Limited produces and sells two products, A and B. It provided the following information for a year:
Product A
Product B
Sales
20 000 units
18 000 units
Selling price per unit
$12
$20
Direct material per unit
$3.20
$4.90
Direct labour per unit
$1.80
$2.10
Total overheads amounted to $300 000. These are currently apportioned to the two products on the basis of total
sales value.
REQUIRED
(a)
Calculate the value of overheads apportioned to each product.
[3]
(b)
Calculate the profit or loss per unit for each product.
[5]
Additional information
Beryl, the accountant, has analysed the overheads. She discovered that the total of $300 000 included costs for
delivery to customers and order processing costs. The following information was available.
1
Analysis of orders received
Product A
Product B
Total
Orders received for more than 100 units
17
23
40
Orders received for 100 units or fewer
664
446
1 110
Total orders received
681
469
1 150
2
Costs of delivery amounted to $30 per order for orders received for more than 100 units, and $20 per order
for orders of 100 units or fewer.
3
Order processing costs amounted to $25 per order irrespective of size.
4
Remaining overheads should now be apportioned to sales units.
REQUIRED
(c)
Calculate total overheads apportioned to each product in accordance with the accountant’s analysis. [5]
(d)
Calculate the revised profit or loss per unit for each product.
[5]
Additional information
Beryl believes that her method of apportioning overheads is more realistic than the current method. She has
recommended to the directors that the method be changed in the future.
REQUIRED
(e)
Discuss whether or not the directors should change the method of apportioning overheads.
Justify your answer using both financial and non-financial factors.
(f)
State what is meant by the terms ‘cost driver’ and ‘cost pool’.
[5]
[2]
November 2017
378
Paper 32
NOVEMBER 2017 - PAPER 32
QUESTION 1
The GT Boating Club is a not-for-profit organisation which collects funds by subscriptions paid annually.
At 1 January 2016 the following assets and liabilities were held by the club:
$
Boathouse
240 000
Fixtures and fittings
Cost
15 000
Accumulated depreciation
10 000
Trade payables
1 750
Total inventory
1 100
Bank
6 150 debit
Insurance paid in advance
1 100
Electricity owing
450
Subscriptions in arrears
600
Subscriptions in advance
400
Additional information
1
The club runs a restaurant for the exclusive use of members and their guests. During the year ended 31
December 2016 the revenue of the restaurant was $45 000.
2
The opening restaurant inventory was 75% of the total club inventory. The closing restaurant inventory had
doubled at 31 December 2016.
3
During the year ended 31 December 2016 the club paid $28 350 for restaurant purchases.
All the club’s trade payables at 1 January 2016 related to the restaurant suppliers. This had risen by 20% at
31 December 2016.
4
The club paid insurance for the year of $4 800 and electricity of $2 000. Half of these costs are charged to
the restaurant.
At 31 December 2016 the club still owed $950 for insurance.
REQUIRED
(a)
Prepare a statement to calculate the restaurant profit for the year ended 31 December 2016.
The statement should also clearly show the gross profit.
[10]
Additional information
Another local boating club runs a similar restaurant. Its latest accounts showed that the restaurant had achieved a
gross margin of 45%.
REQUIRED
(b)
(i)
(ii)
Calculate the difference between the gross margins of both restaurants.
Discuss three actions which the club could take to improve the gross margin.
[2]
[6]
Additional information
The club is now considering the introduction of a life membership subscription.
The annual subscription is $100 and the proposed life subscription would be $1 000.
Gurmukh, a retired gentleman, is considering joining the club and seeks your advice on whether or not he should
pay an annual subscription or the life membership.
REQUIRED
(c)
Explain the accounting treatment of the life subscriptions.
(d)
Advise Gurmukh whether or not he should become a life member. Justify your advice.
[2]
[5]
[Total: 25]
November 2017
379
Paper 32
QUESTION 2
FS plc’s statement of financial position on 1 January 2016 showed the following:
$000
Ordinary share capital (shares of $1 each)
1000
Share premium
300
General reserve
100
Retained earnings
220
During the year ended 31 December 2016 the following took place:
1
On 30 June 2016, an interim dividend of $55 000 was paid.
2
On 1 October 2016, an issue of 700 000 ordinary shares was made at $1.80 per share. All the funds raised
from this share issue were used to buy a second factory on 7 January 2017.
3
On 1 November 2016, a bonus issue of shares was made with 3 new shares being issued for every 10 held.
Reserves were maintained in their most flexible form.
4
For the year ended 31 December 2016, the company made a profit from operations of $288 000. Finance
charges of $52 000 had been paid. The directors provided $41 000 for the tax liability for the year.
5
At 31 December 2016, $40 000 was transferred to general reserve and a final dividend of $75 000 was
proposed.
REQUIRED
(a)
Prepare the statement of changes in equity for the year ended 31 December 2016 (a total column is not
required).
[12]
(b)
Explain how the proposed final dividend should be treated in the financial statements for the year ended
31 December 2016.
[2]
(c)
Explain the treatment in the financial statements for the year ended 31 December 2016 of the purchase of
the second factory on 7 January 2017.
[3]
Additional information
A shareholder at the Annual General Meeting said that the purchase of the new factory would cause non-current
asset turnover to fall, with an adverse effect on shareholder confidence.
REQUIRED
(d)
Advise the directors whether or not they should be concerned about the shareholder’s comment. Justify
your answer.
[5]
(e)
State how an upward revaluation of an existing non-current asset is recorded in the financial statements of
a company.
[3]
QUESTION 3
LS Limited has completed its first year of trading. The company has four directors, of whom two are not shareholders.
The auditors are currently carrying out the end of year audit.
REQUIRED
(a)
(i)
(ii)
(iii)
Explain the term ‘stewardship’.
Explain how directors carry out their role of stewardship within a limited company.
Explain the purpose of an end of year audit.
Additional information
The draft financial statements for the year showed the following:
$
Sales
182 000
Sales returns
8 000
Purchases
154 000
Purchases returns
12 000
All sales were at a mark-up of 150%.
[2]
[2]
[2]
November 2017
380
Paper 32
During the audit the auditors discovered that included in the sales records was a sales invoice for $6 000 which had
been prepared for a customer but not yet been sent. The customer had received the inventory on a sale or return
basis, but had yet to decide whether or not to keep the inventory.
REQUIRED
(b)
(i)
(ii)
Calculate what should have been the value of the closing inventory.
Calculate the gross profit for the year.
[5]
[1]
Additional information
During the year the warehouse manager had been absent from work for a long period of time.
There had been little control over the movement of inventory. Staff had valued the inventory actually in the
warehouse at the end of the year at $24 000.
REQUIRED
(c)
Calculate the percentage change in gross profit if the inventory valuation from the warehouse had been
used.
[3]
(d)
Discuss three possible reasons for the difference between the warehouse inventory valuation and the
calculated value of inventory.
[6]
(e)
Discuss whether the directors should use the warehouse inventory valuation or the amount from the
accounting records as the inventory figure in the financial statements. Justify your answer.
[4]
[Total: 25]
QUESTION 4
Summarised financial information for E Limited for the year ended 31 August 2016 is as follows:
Summarised Income Statement
$000
8 800
5 045
3 755
2 175
1 580
235
1 345
Revenue
Cost of sales
Gross profit
Expenses
Profit from operations
Finance costs
Profit for the year
Summarised Statement of Financial Position
Assets
Non-current assets
Current assets
Total assets
$000
4 815
3 210
8 025
3 000 000 ordinary shares of $0.50 each
Share premium
Retained earnings
1 500
500
2 540
4 540
Non-current liabilities – 8% debentures repayable 2020
Current liabilities – trade payables
2 935
550
8 025
Additional information
1
The market value of one ordinary share at 31 August 2016 was $1.55.
2
Dividends paid for the year ended 31 August 2016 were $325 000.
November 2017
381
Paper 32
REQUIRED
(a)
Calculate the following ratios to two decimal places:
(i)
income gearing
(ii)
gearing
(iii)
dividend cover
(iv)
price earnings
[5]
Additional information
The directors of E Limited had expansion plans and on 1 September 2016 raised $2 000 000 by issuing 10%
debentures repayable in 2026. The profit from operations for the year ended 31 August 2017 was $1 600 000 and
the market price of one ordinary share on that date was $1.30. Dividends paid for the year were $275 000.
REQUIRED
(b)
(i)
(c)
(d)
Prepare an extract from the income statement for the year ended 31 August 2017, starting with
the profit from operations.
[2]
(ii)
Prepare the equity and non-current liabilities section of statement of financial position at 31
August 2017.
[2]
(i)
Calculate the same ratios as in part (a) at 31 August 2017 to two decimal places.
[4]
(ii)
Assess the effect of the new debenture issue on these ratios.
[8]
Discuss two disadvantages to the company of the issue of the debentures.
[4]
[Total: 25]
QUESTION 5
Wong Ho owns a small factory. A machine has started to break down regularly and needs to be replaced.
A replacement machine is expected to cost $55 000. It is expected to last 5 years and will be depreciated using the
straight-line method of depreciation. At the end of the period the machine will be scrapped with no residual value.
The following information is available for the replacement machine:
1
The selling price for each unit produced by the machine is expected to be $40 for years 1 and 2.
This is expected to increase by 25% for year 3.
There is no expected change for year 4.
However, the selling price is expected to increase by a further 10% for year 5.
2
The cost of production for each unit produced is expected to be $20 for years 1 and 2. This will increase by
25% for year 3 and then remain unchanged.
3
The present value for the net cash flows for the years 1 to 5 have been calculated as follows:
Year
1
2
3
4
5
Discount factor 14%
0.877
0.769
0.675
0.592
0.519
Present value $
3 683.40
6 536.50
9 483.75
14 977.60
21 019.50
REQUIRED
(a)
Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b)
Calculate the expected net present value for the replacement machine.
[1]
(c)
(i)
Calculate the annual net cash flows for years 1 to 5 for the replacement machine.
[5]
(ii)
Calculate the payback period for the replacement machine.
[2]
(iii)
Calculate the number of units for each year that Wong Ho expects to produce with the
replacement machine.
[8]
(d)
Recommend whether or not Wong Ho should purchase replacement machine. Justify your answer.
[5]
QUESTION 6
J Limited sells a single product at a mark-up of 25%. The following information is available:
November 2017
1
382
Paper 32
Sales revenue:
$
2
3
4
5
6
2017
November
December
150 000
180 000
2018
January
February
March
April
200 000
210 000
225 000
240 000
All sales are on credit and customers have a credit period of 2 months.
All purchases are on credit and suppliers are paid in the month following purchases.
Inventory level at the end of each month will be maintained at 25% of the sales volume in the following
month.
Monthly operating costs are expected to be $18 000, which includes $3 000 depreciation.
Balance at bank at 1 January 2018 is expected to be $4 500.
REQUIRED
(a)
Prepare the cash budget for each of the three months from January to March 2018.
[9]
(b)
Prepare a budgeted income statement for the three-month period ending 31 March 2018.
[3]
(c)
Prepare a reconciliation of the profit from operations for the three-month period ending 31 March 2018 to
the net cash at 31 March 2018.
[8]
Additional information
The directors are considering investing $60 000 in a new computer system to improve inventory control. According
to the payment terms, 50% is payable in March 2018 and the remaining 50% in the following month.
REQUIRED
(d)
Advise the directors whether or not they should purchase the new computer. Justify your answer.
[5]
[Total: 25]
November 2017
383
Paper 33
NOVEMBER 2017 - PAPER 33
QUESTION 1
The RS Rowing Club is a not-for-profit organisation.
A summary of the club’s receipts and payments account for the year ended 31 March 2017 is as follows:
Balance b/d
Members’ subscriptions
Sales of sports equipment
Entry fees for annual boat race
Receipts and payments account
$
4 370 Purchases of sports equipment
10 300 Rent of boathouse
1 850 General expenses
4 200 Wages
Prizes for annual boat race
Expenses of annual boat race
_____ Balance c/d
20 720
$
1 624
2 800
1 379
3 500
325
2 456
8 636
20 720
Additional information
1
The club owns boats which had originally cost $24 000. Accumulated depreciation at 1 April 2016 was $11
200. The depreciation policy is to charge 10% per annum using the reducing balance method.
2
The club also sells sports equipment to its members. Inventory of sports equipment was as follows:
3
1 April 2016
31 March 2017
Members’ subscriptions in arrears and paid in advance were as follows:
Members’ subscriptions in arrears
Members’ subscriptions in advance
4
$
364
429
1 April 2016
$
700
350
31 March 2017
$
650
450
The balance on the accumulated fund on 1 April 2016 was $40 614.
REQUIRED
(a)
Identify four terms used only in the financial statements of a not-for-profit organisation with the
corresponding terms used in the financial statements of a profit-making business.
[4]
(b)
Prepare the income and expenditure account for the year ended 31 March 2017.
[8]
(c)
Prepare an extract from the statement of financial position at 31 March 2017 showing the accumulated
fund of the club at that date.
[2]
Additional information
The club has decided to introduce a scheme offering life membership for payment of $400. Annual subscription fees
are currently $50. The club members think that the life membership fees should be credited in full to the income
and expenditure account when received. The treasurer has suggested that the life membership payments should be
credited to income and expenditure account over a number of years.
REQUIRED
(d)
Discuss the correct accounting treatment for the life membership.
[4]
Additional information
A former member has donated $35 000 to the club. The funds are to be invested and the investment income used
to encourage young people to train for national competitions. The club is considering two investment options.
1
Invest for 3 years at an annual fixed interest rate of 7.5%.
2
Use the funds to build its own boathouse. Part of the new boathouse could be rented to another local group
at an annual rent of $1250.
November 2017
384
Paper 33
REQUIRED
(e)
Recommend which option the club should select. Support your answer with reasons and relevant
calculations.
[7]
QUESTION 2
Wembo and Bob are in partnership. They share profits and losses in the ratio 3 : 2.
Another business, C Limited, has been trading for many years.
At 31 March 2017 the summarised statements of financial position of both businesses were as follows:
Wembo
C Limited
and Bob
$
$
Premises
80 000
282 000
Machinery
45 000
112 000
Vehicles
28 000
–
Inventory
15 000
49 000
Trade receivables
6 000
36 000
174 000
479 000
Capital accounts
Wembo
Bob
100 000
60 000
Equity and reserves
Ordinary shares of $1 each
Share premium
Revaluation reserve
Retained earnings
Trade payables
Bank overdraft
REQUIRED
(a)
State what is meant by the term ‘revaluation reserve’.
9 000
5 000
174 000
300 000
75 000
25 000
40 000
440 000
26 000
13 000
479 000
[1]
Additional information
The directors of C Limited have decided to purchase Wembo and Bob’s partnership on 31 March 2017.
The following information relates to the purchase of Wembo and Bob’s partnership.
1
Two vehicles were taken over by the partners at the following agreed values:
$
Wembo
11 000
Bob
12 500
2
The following partnership assets, excluding the partnership overdraft, were transferred to C Limited at the
following agreed values:
$
Premises
90 000
Machinery
36 000
Other vehicles
3 500
Inventory
13 000
3
Cash collected from trade receivables was $4 900.
4
Trade payables accepted $8 100 in full settlement of amounts due to them.
5
Costs involved in dissolving the partnership were $3 800.
November 2017
6
385
Paper 33
The purchase consideration for the partnership was $155 000. This was made up as follows:
$60 000 was from the issue of 7% cumulative preference shares of $1 each distributed in profit-sharing
ratio.
The balance was by the issue of ordinary shares of $1 at a premium of $0.25 per share. These shares were
distributed to the partners in proportion to their capital account balances at 31 March 2017.
REQUIRED
(b)
Prepare the partners’ capital accounts at 31 March 2017 to show the closing entries for the
partnership.
[16]
(c)
Prepare the equity and reserves section of the statement of financial position for C Limited at 31 March
2017 immediately after the purchase of the partnership.
[4]
(d)
Explain one benefit to Wembo and Bob of receiving:
(i)
ordinary shares
(ii)
cumulative preference shares.
[4]
QUESTION 3
Aleksander is a trader with a financial year end of 30 June. He buys containers of sunflower seeds for $100 each.
Some of these he ships to his agent Benji in northern Europe. He pays Benji a commission of 10% of sales value.
The following information is available:
1
On 2 April 2017 Aleksander sent 200 containers to Benji. Aleksander paid packing costs of $120 and freight
costs of $6 080.
2
Benji paid additional freight costs of $1 600 for transport from the port to his warehouse.
3
In the period to 30 June 2017 Benji sold 160 containers for $170 each. He remitted $21 000 to Aleksander
on 14 June.
REQUIRED
(a)
Prepare the following ledger accounts in the books of Aleksander for the 3 months ended 30 June 2017.
(i)
goods on consignment account
[2]
(ii)
consignment account
[12]
(iii)
Benji account
[5]
Additional information
The government in Benji’s country decided to introduce import duties from 1 July 2017 which amount to $20 per
container.
REQUIRED
(b)
Explain how Aleksander might have dealt with this increase in cost. Support your answer by considering the
effect on the profit per container.
[4]
(c)
State why an advertising campaign paid for by an agent would not be included in the valuation of inventory.
[2]
QUESTION 4
W Limited has been trading for several years. The company is now in a position to expand operations and trade
abroad. A new warehouse is required for this expansion, which will cost $550 000.
An extract from the statement of financial position at 31 March 2016 showed the following:
$
Ordinary shares of $1 each
400 000
Revaluation reserve
150 000
Share premium
50 000
Retained earnings
350 000
REQUIRED
(a)
Explain how share premium arises.
[2]
November 2017
386
Paper 33
Additional information
The directors believe that the purchase of the new warehouse can be financed by:
A rights issue of ordinary shares on the basis of one share for every share currently held and any remaining balance
by an issue of a 5% debenture.
The directors expect that 60% of the ordinary shareholders will take up the rights issue of ordinary shares at $1.75
per share.
REQUIRED
(b)
Calculate the amount of finance that will need to be raised by the issue of the debenture.
[3]
Additional information
The following information is available for the year ended 31 March 2017:
On 1 October 2016
An interim dividend of $0.02 was paid on the ordinary shares held at that date.
On 1 January 2017
The company made the planned rights issue on the ordinary shares. These were taken up as expected. A
5% debenture was also issued.
On 31 March 2017
The profit from operations for the year was $245 000.
Finance charges were $70 000 excluding any debenture interest.
A taxation charge of 20% was to be provided.
A final dividend of $0.04 was proposed on all the ordinary shares held at that date.
REQUIRED
(c)
(i)
(ii)
Prepare the statement of changes in equity for the year ended 31 March 2017 (total column is not
required)
[9]
Prepare any supporting note to the financial statements in respect of the proposed dividend. [2]
Additional information
Profits have been constant for a number of years.
At the Annual General Meeting, the directors were confident that following the expansion next year the ordinary
shareholders will see an increase in dividends as profits for the year were expected to increase by 20%.
However, one of the ordinary shareholders expressed concerns that the Earnings Per Share would fall following the
rights issue on 1 January 2017. He proposed that a further expansion planned for two years’ time should be financed
by a long-term loan instead.
REQUIRED
(d)
Recommend whether the directors should finance the future expansion with loans or rights issues. Justify
your choice using relevant calculations.
[9]
QUESTION 5
S Limited makes perfume. Budgeted data for the month of July is as follows:
Units produced and sold
15 000 bottles
Standard direct materials (liquids)
0.25 litres at $15 per litre
Standard direct materials (packaging)
1 bottle at $0.80 per bottle
Standard direct labour
6 minutes at $9 per hour
Fixed production overheads for July were budgeted to be $26 250 and are absorbed on a direct labour hour basis.
In July 16 000 bottles were produced and sold. Actual costs were as follows:
Direct materials (liquids)
Direct materials (packaging)
Direct labour
Fixed production overheads
3 725 litres costing $62 875
16 000 bottles costing $12 800
1 700 hours costing $16 320
$31 375
November 2017
387
Paper 33
REQUIRED
(a)
Calculate the total standard cost of the actual production for July.
(b)
Calculate the total actual cost of production for July.
(c)
Calculate the following variances.
(i)
Direct labour rate
(ii)
Direct labour efficiency
(iii)
Fixed overhead expenditure
(iv)
Fixed overhead volume
[6]
[3]
[8]
Additional information
The direct materials (liquids) price variance for the month has been calculated as $7 000 adverse.
The direct materials (liquids) usage variance was $4 125 favourable.
There was no direct materials (packaging) price or usage variance.
REQUIRED
(d)
Prepare a statement to reconcile the total standard cost of actual production for July with the total actual
cost of production. (Your statement should start with the total standard cost of actual production.)
[4]
Additional information
The directors of S Limited are considering using production units rather than direct labour hours as the basis of
absorbing fixed overheads.
REQUIRED
(e)
Advise the directors whether or not they are correct to absorb fixed overheads on the basis of direct labour
hours. Justify your answer.
[4]
QUESTION 6
Luke’s business is due to start on 1 April 2018, selling a single product obtained from a sole supplier.
The purchase price is $40 per unit and Luke will sell each unit at a mark-up of 60%.
He also wants to maintain inventory at a level sufficient to cover 50% of the next month’s sales.
Budgeted unit sales for the first four months of trading are as follows:
April
5 000
May
8 000
June
4 000
July
3 000
The following information is also available:
1
Luke will introduce $150 000 capital into the business bank account on 1 April 2018. On the same day,
equipment costing $48 000 will be purchased by cheque.
2
Equipment will be depreciated over a period of 60 months with no residual value.
3
All purchases are expected to be paid one month after the purchases are made.
4
All sales will be on credit.
20% of customers are expected to take a cash discount of 11/2% and pay in the month of sale.
30% of customers are expected to pay one month after the sales are made.
The remaining customers are expected to pay two months after the sales are made.
5
Monthly operating expenses will be paid in the month they are incurred. They are expected to be $43 000
including depreciation.
REQUIRED
(a)
State two benefits of preparing a cash budget.
(b)
Prepare the cash budget for each of the three months April, May and June 2018.
(c)
Comment on Luke’s working capital management.
(d)
Prepare a budgeted income statement for the three-month period ending 30 June 2018.
[2]
[11]
[6]
[6]
May 2018
388
Paper 31 & 33
MAY 2018 - PAPER 31 & 33
QUESTION 1
JH Limited is a manufacturing business producing a single product. The transfer price of finished goods to the income
statement is cost plus a fixed percentage for factory profit. This percentage has remained unchanged for many years.
The following information is available for the year ended 31 October 2017.
$
Prime cost
252 000
Work in progress
at 1 November 2016
28 000
at 31 October 2017
32 000
Inventory of finished goods at transfer price
at 1 November 2016
108 000
at 31 October 2017
96 000
Revenue
1 860 000
Factory overheads
461 000
Distribution costs
216 000
Administrative expenses
412 000
Finance charges
28 000
Provision for unrealised profit
at 1 November 2016
18 000
The following information is also available.
1
2
Included in the distribution costs are:
$
Carriage inwards
18 000
Carriage outwards
34 000
Administrative expenses include an amount for buildings insurance of $60 000.
The following items relating to building insurance have not been adjusted:
an outstanding unpaid invoice of $3 000 for the year ended 31 October 2017
a payment in advance of $1 000 brought forward from the year ended 31 October 2016
the allocation of 75% of the total amount to the factory.
REQUIRED
(a)
Explain why a manufacturing business might prepare a manufacturing account as part of its financial
statements.
[4]
(b)
Prepare the manufacturing account for the year ended 31 October 2017 in as much detail as possible. [5]
(c)
Prepare the income statement for the year ended 31 October 2017.
[9]
Additional information
The selling price of one unit is based on the transfer price from the factory plus a mark-up.
Bob, the financial director of JH Limited, has been notified that their main competitor has increased prices. He wishes
to increase the fixed percentage of the transfer price by 5%. The other directors are concerned that this will affect
profit.
(d)
Advise the directors whether or not they should increase the transfer price. Justify your answer using any
relevant calculations.
[7]
QUESTION 2
The directors of D plc are preparing the end of year financial statements including the notes to the accounts.
The following information is available at 1 January 2017:
$
Ordinary share capital (shares of $2 each)
2 000 000
Share premium
300 000
May 2018
389
Paper 31 & 33
Revaluation reserve
400 000
General reserve
100 000
Retained earnings
1 500 000
During the year ended 31 December 2017 the following took place:
1
On 1 June an interim dividend of $0.20 per ordinary share was paid.
2
On 1 October an issue of 500 000 ordinary shares was made at $2.40 per share to raise money to
purchase an additional factory.
3
On 1 November there was a rights issue of 2 shares for every 5 currently held at $2.25.
The rights issue was necessary to fund the unexpected costs on the purchase of the factory. The issue was
fully subscribed.
4
On 1 December there was a bonus issue of 4 shares for every 10 held on that date. The reserves were
maintained in their most flexible form.
On 31 December 2017 the finance director informed the other directors that:
1
The profit from operations for the year was $520 000.
2
Finance charges of $64 000 had been paid during the year.
3
The end of year tax liability on profits had been calculated as $93 000.
4
There had been a transfer to the general reserve of $47 000.
5
A final dividend of $0.10 per ordinary share had been proposed.
REQUIRED
(a)
State three uses of the notes to the accounts within the financial statements.
[3]
(b)
Prepare the statement of changes in equity for the year ended 31 December 2017. A total column is not
required.
[15]
Additional information
After the share issues there was a decrease in the market price of one ordinary share to $2.10. One of the
shareholders at the Annual General Meeting (AGM) stated that instead of the share issues the directors should have
carried out the following:
1
Financed the purchase of the new factory through a loan of $2 200 000 repayable over 5 years with total
interest payable of $68 000.
2
Paid the shareholders an extra $0.50 per share in their final dividend rather than a bonus issue of shares.
REQUIRED
(c)
Advise whether or not the directors acted in the best interests of the shareholders. Justify your answer with
relevant calculations.
[7]
QUESTION 3
The directors of K Limited provided information on the following balances at 31 December 2017:
$
Plant and machinery at net book value
654 000
Human asset (see note 1)
116 000
Inventory
146 000
Trade receivables
182 000
Cash and cash equivalents
56 000
$1 Ordinary shares
600 000
Retained earnings at 1 January 2017
215 000
Profit for the year
98 000
Trade payables
166 000
Other payables
75 000
During the course of the year-end audit, the external auditor obtained the following information from the directors
(notes 1 to 3).
1
During the year, K Limited paid a deposit of $70 000 for a 6-month training programme commencing on 1
November 2017. The balance of $50 000 will be paid on completion of the programme. This had been
included in ‘other payables’.
May 2018
2
3
390
Paper 31 & 33
The directors believed that the training would benefit the company for 5 years. The total payments were
regarded as an intangible asset and recorded as a ‘human asset’. Amortisation of $4 000 had been provided.
Inventory at 31 December 2017 included some obsolete goods. These had been included in the inventory
at their original cost of $12 000. They could only be sold at half of the normal selling price which was 25%
above cost.
On 1 July 2017, K Limited paid $60 000 for acquiring the right to use computer software for three years. The
full amount had been charged as an expense in the income statement.
REQUIRED
(a)
Explain the role of an external auditor.
[2]
(b)
Explain the correct accounting treatment of the items in notes 1 and 2.
[5]
(c)
Calculate the revised profit for the year ended 31 December 2017 after taking into account notes 1, 2 and
3.
[8]
(d)
State the values at which the following should be included in the statement of financial position at 31
December 2017.
(i)
Software licence
[2]
(ii)
Inventory
[1]
(iii)
Retained earnings
[1]
(iv)
Other payables
[1]
Additional information
K Limited needs additional computer software. The directors are considering whether to buy the computer software
or acquire the right to use the new software for three years.
(e)
Evaluate whether the directors should buy the computer software or acquire the right to use it for three
years. Justify your answer.
[5]
QUESTION 4
A Social Club provides activities for the elderly. It also provides them with meals and organises coach trips.
The ledger accounts of the club for the year ended 31 December 2017 included the following:
Subscription account
Details
$
Details
$
Balance b/d
400 Balance b/d
100
Income and expenditure account
26 300 Bank
25 800
Balance c/d
50 Irrecoverable debts
250
_____ Balance c/d
600
26 750
26 750
Details
Balance b/d
Bank
Details
Balance c/d
Fixtures and fittings account
$
12 000 Balance c/d
3 300
15 300
Details
Provision for depreciation of fixtures and fittings account
$
Details
3 930 Balance b/d
____ Income and expenditure
3 930
$
15 300
_____
15 300
$
2 400
1 530
3 930
The following information was also available.
1
The club owned its own premises which had an original cost of $100 000. These were not depreciated.
2
On 1 January 2017 the bank account had a debit balance of $4 700 and the accumulated fund amounted to
$114 850.
May 2018
3
4
5
6
391
Paper 31 & 33
The sale of meals to members during the year amounted to $21 500 and made a profit of $2 600. Inventory
of food remained constant at $250. No purchases of food were made on a credit basis. All receipts and
payments for meals were made through the bank account.
The club organised two coach trips every month. For each trip it hired a 50-seater coach (with driver) at a
cost of $1 000. During 2017 the club sold 620 coach trip tickets for $25 each.
All receipts and payments for trips were made through the bank account.
Other running costs paid during the year totalled $18 100. These included staff costs.
Staff costs of $200 were accrued at the end of the year.
REQUIRED
(a)
State two differences between a club and a limited company.
(b)
Prepare the income and expenditure account for the year ended 31 December 2017.
(c)
Prepare the statement of financial position at 31 December 2017.
[4]
[7]
[10]
Additional information
The management committee of the club is considering increasing the price of the coach trip tickets to members.
(d)
Advise the management committee whether or not it should increase the price of the coach trip tickets.
Justify your answer.
[4]
QUESTION 5
C Limited is a small manufacturing company which operates a budgetary control system.
The following information is available:
1
The budgeted sales in units for the first five months of 2019 are expected to be:
Jan
Feb
Mar
Apr
May
3 500 4 000 4 750 3 750 4 250
2
The inventory of finished goods at 1 January 2019 is expected to be 10% of the budgeted January sales.
The monthly closing inventory of finished goods is to be maintained at the same percentage of the following
month’s budgeted sales.
3
There is a maximum inventory holding of 450 units.
REQUIRED
(a)
State three advantages and two disadvantages of operating a budgetary control system.
(b)
Prepare the production budget in units for each of the four months from January to April 2019.
[5]
[6]
Additional information
Each unit produced requires 3 kilos of raw material which is expected to cost $2 per kilo.
The opening inventory of raw material at 1 January 2019 is expected to be 200 kilos. The closing inventory of raw
material is expected to remain the same for January. It is then expected to increase by 10% for February and a further
10% for March. After that it will remain unchanged.
(c)
Prepare the purchases budget in both kilos and dollars for each of the four months from January to April
2019.
[6]
Additional information
The directors are expecting an increase in demand later in the year and are considering a proposal to increase the
storage capacity of the warehouse. The proposal will be beneficial to the company as it will allow an increase in the
maximum inventory of finished goods holding to 500 units. The cost associated with the storage of each unit (holding
cost) is $10.
(d)
Calculate for the month of February the difference between the current holding cost for the closing
inventory of finished goods and the holding cost if the proposal is accepted.
[4]
Additional information
The cost of increasing the storage capacity is expected to be $20 000. A cash budget which includes this proposed
cost has been prepared. This shows an overdrawn bank balance of $18 000 at the end of February.
May 2018
392
Paper 31 & 33
However, the bank has refused to give the business an overdraft. The directors are now considering investing their
own money as a loan to the business to finance the proposal.
(e)
Discuss the advantages and disadvantages to the directors of investing their own funds into the
business.
[4]
QUESTION 6
B Limited manufactures two products Alpha and Omega. The following budgeted figures are available.
Alpha
Omega
Budgeted production and sales units
20 000
8 000
Direct materials used per unit
5 kilo
11 kilo
Direct materials cost per kilo
$20
$11
Labour hours per unit
2
1
Direct labour cost per hour
$12
$6
The fixed overheads are forecast as $396 000 and are allocated on the basis of labour hours.
(a)
Calculate for each product:
(i)
the total production costs
(ii)
the production cost per unit
Additional information
The sales price per unit is calculated by adding 50% to the cost.
(b)
Calculate the selling price per unit for each product.
[3]
[1]
[2]
Additional information
The directors of the company have been advised that they should adopt activity based costing to allocate the
production overheads. They have identified the four major activities involved in the production cycle as machine
set-up, materials handling, maintenance of machinery and production inspection and packing. The costs of each
activity have been established and the overheads apportioned between the activities as follows:
Production Overheads Alpha
Omega
$
Machine set-up
90 000
15 times
10 times
Materials handling
80 000
6 receipts
14 receipts
Machine maintenance
46 000
130 hours
100 hours
Inspection and packing
180 000
40 hours
20 hours
396 000
(c)
State two disadvantages to a business of adopting activity based costing.
[2]
(d)
Calculate the total production overhead to be allocated to each product using activity based costing. [4]
(e)
Recalculate the cost per unit and selling price of each product maintaining the 50% mark-up.
[3]
(f)
Explain three reasons why B Limited should change the method of allocating overheads to using activity
based costing.
[6]
Additional information
It has been suggested that customers will not accept the increase in price of Omega. The directors are therefore
considering changing the profit margins to 60% on Alpha and 30% on Omega.
(g)
(i)
Calculate the new total profit for each product if this change is adopted.
[2]
(ii)
Give two reasons why B Limited should adopt this change.
[2]
May 2018
393
Paper 32
MAY 2018 - PAPER 32
QUESTION 1
YGP Traders Limited has been trading for several years and has a year end of 31 December. It buys and sells a single
product and makes all its transactions on a credit basis. It has a large bank overdraft and the directors are concerned
about the working capital position of the business.
The following information is available for 2017:
1
Every month 1 000 units were sold at a selling price of $80 each.
2
Payment for half of all credit sales was received in the month following sale. The other half was
received two months after sale.
3
The company purchased 14 000 units during the year.
4
The purchase price has been $50 per unit for some years.
5
At 31 December, 3 500 units were in inventory.
6
Trade payables at the end of the year amounted to $62 000.
REQUIRED
(a)
Calculate for 2017:
(i)
revenue for the year
[1]
(ii)
cost of sales for the year
[1]
(iii)
trade receivables at the year end
[1]
(iv)
average inventory at cost price
[3]
(b)
State what is measured by the working capital cycle.
[2]
(c)
Calculate the working capital cycle for the year.
[7]
Additional information
The directors of the business are considering a new strategy of increasing the selling price to $90 per unit and offering
10% cash discount for payment in the month following sale. The directors believe that demand will be unchanged
and that all customers will take the discount offered.
(d)
Calculate a revised working capital cycle for 2017 if this strategy had been implemented from the start of
the year.
[5]
(e)
Advise the directors whether or not they should proceed with this strategy. Justify your answer.
[5]
QUESTION 2
The trial balance of N plc at 31 December 2017 was as follows:
Land and buildings: cost
provision for depreciation 1 January 2017
Equipment:
cost
provision for depreciation 1 January 2017
Revenue
Purchases
Administrative expenses
Distribution costs
Finance charges
Inventory 1 January 2017
Trade receivables
Trade payables
Cash and cash equivalent
Ordinary share capital
Share premium
6% debentures (2021)
Retained earnings
$
600 000
$
72 000
278 000
112 000
2 354 000
1 322 000
674 000
296 000
9 000
241 000
456 000
394 000
62 000
________
3 938 000
600 000
140 000
200 000
66 000
3 938 000
May 2018
394
Paper 32
The following information is also available.
1
Revenue included a deposit of $6 000 from a customer for the goods to be delivered in March 2018.
2
Total inventory at 31 December 2017 cost $265 000. Of this the goods costing $24 600 had a net realisable
value of $18 800.
3
Land and buildings were acquired in 2008. On 1 January 2017 they were revalued at $720 000 of which twothirds was allocated to land and one-third to buildings. N plc had not recorded this revaluation.
4
During the year, a new photocopier was purchased for $80 000. The purchase consideration was settled by
an exchange for a fully depreciated old photocopier with a trade-in value of $10 000. The old photocopier
had been purchased in 2011 for $40 000. The balance of the purchase had been paid by cheque. N plc had
recorded only the bank payment transaction. There was no other purchase or sale of non-current asset
during the year.
5
Depreciation is to be charged as follows:
Land
Nil
Buildings
over the useful life of 25 years
Equipment
25% per annum on cost
A full year’s depreciation is charged in the year of purchase and none in the year of disposal.
All depreciation charged is to be included in administrative expenses.
6
An interim dividend of $30 000 was paid on 1 October 2017 and included in administrative expenses.
7
Interest for 3 months on the debentures had not been recorded.
REQUIRED
(a)
Prepare the income statement for the year ended 31 December 2017.
[15]
(b)
Calculate the balance on the revaluation reserve account at 1 January 2017 following the revaluation. [5]
Additional information
There was a water leak in the company’s printing room in January 2018. This destroyed the new photocopier which
was not insured.
(c)
State how this should be treated in both 2017 financial statements and 2018 financial statements.
[3]
(d)
State what is meant by impairment loss in respect of non-current assets.
[2]
QUESTION 3
Y Limited is based in Mauritius and has recently sent a consignment of goods to Mahood who lives in Egypt. They
agreed the following terms:
1
Mahood has to make an advance payment before the goods are delivered to him.
2
Mahood is entitled to a commission of 5% on all sales made by him. The commission is calculated on the
sales value after the deductions of the commission.
The following transactions took place during the year ended 31 December 2017.
Y Limited:
sent 1000 units to Mahood and invoiced him at $175 each
paid freight of $15 400 and insurance of $3 200.
Mahood:
made an advance payment of $55 000 to Y Limited
made cash sales of 480 units at $257.50 each
made credit sales of 320 units at $270 each
paid the following:
$
import duty
1 600
Advertising
9 700
carriage inwards
2 800
carriage outwards
3 300
All customers who bought on credit from Mahood settled their accounts in full at 31 December 2017 except a
customer who bought 16 units. It was confirmed that nothing will be recovered from this customer.
May 2018
395
Paper 32
At the year-end 60 units with minor faults were discovered by Mahood. Their net realisable value was $150 each.
Mahood paid the balance owing to Y Limited by cheque.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a)
Calculate the cost per unit to be used when valuing inventory.
(b)
Prepare the consignment account in the books of Y Limited for the year ended 31 December 2017.
(c)
Prepare Mahood’s account in the books of Y Limited for the year ended 31 December 2017.
[2]
[13]
[5]
Additional information
The directors of Y Limited are thinking of opening a branch overseas to sell its goods rather than having a
consignment agreement with Mahood.
(d)
Suggest whether Y Limited should continue consigning goods to Mahood or open a branch overseas. Justify
your answer.
[5]
QUESTION 4
Ephraim and Fikriyah are sole traders. They agreed to merge their two businesses into a partnership on 1 October
2017 sharing profits and losses equally.
Ephraim and Fikriyah’s statements of financial position at 30 September 2017 were as follows:
Ephraim
$
45 000
Fikriyah
$
110 000
7 500
9 000
6 500
23 000
68 000
11 500
15 500
1 000
28 000
138 000
60 000
120 000
8 000
68 000
18 000
138 000
The agreed valuations for the merger were:
Ephraim
$
Non-current assets
55 000
Inventories
8 000
Goodwill
10 000
Fikriyah
$
115 000
10 500
6 000
Non-current assets
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
Capital
Current liabilities
Trade payables
All other assets and liabilities were transferred at their book value.
Goodwill was not to be retained in the books of account.
REQUIRED
(a)
Prepare the opening statement of financial position for the partnership at 1 October 2017.
[13]
Additional information
The average annual profit earned by Ephraim for the past three years was $60 000.
The average annual profit earned by Fikriyah for the past three years was $40 000.
The budgeted profit for the partnership for its first year’s trading is expected to be $100 000. In each of the
following three years it is expected to be 10% less than the previous year. This is as a result of the increasing
competition.
(b)
Discuss the benefits and limitations of the merger to each partner. Justify your answer using both financial
and non-financial factors.
[12]
May 2018
396
Paper 32
QUESTION 5
Jason is considering investing in building a property in order to receive rental income.
He could buy the land now (year 0) for $100 000. Construction costs of $180 000 would be paid in year 1.
The building would have ten flats and each would have an annual rental of $5 000. Jason thinks that he could rent
out flats as follows:
Year
Number of flats rented out
1
Nil
2
7
3
8
4
10
Total annual maintenance and management charges for the flats would cost $12 000 plus 10% of the rent received.
At the end of the year 4 he would sell the building. Jason has consulted two different property dealers, Alan and
Bob. Alan estimates the building could be sold for $290 000. Bob estimates it could be sold for $315 000.
Jason’s cost of capital is 10%. The discount factors to be used to account for this are as follows.
Year 1
0.909
2
0.826
3
0.751
4
0.683
All cash flows are assumed to take place on the last day of the year.
REQUIRED
(a)
(i)
(b)
(c)
(d)
Calculate the net present value (NPV) of investing in the building, using Alan’s estimation of the
sale proceeds.
[12]
(ii)
Calculate the net present value (NPV) of investing in the building, using Bob’s estimation of the
sale proceeds.
[3]
Calculate the sales proceeds at the end of year 4 which would result in a net present value (NPV) of
zero.
[3]
Advise Jason whether or not he should proceed with investing in the building. Justify your answer.
[5]
State two reasons why the calculation of the payback period is a less useful investment appraisal technique
than the calculation of net present value (NPV).
[2]
QUESTION 6
C Limited produces tables. Each table requires the following:
raw materials
3 metres of wood at $80 per metre
direct labour
12 hours at $30 per hour
fixed production
overhead $10 per direct labour hour
Budgeted production is 5 000 tables.
Actual production was 4 800.
Actual production costs were:
direct materials
direct labour
fixed production overhead
All tables produced were sold.
15 360 metres
55 200 hours
REQUIRED
(a)
State two limitations of a standard costing system.
(b)
Calculate the following variances:
(i)
direct materials price
(ii)
direct materials usage
(iii)
direct labour rate
$
1 190 400
1 766 400
579 600
[2]
May 2018
(c)
397
(iv)
direct labour efficiency
(v)
fixed overhead expenditure
(vi)
fixed overhead volume
Prepare a statement reconciling the budgeted cost of producing 4800 tables with the actual cost.
Additional information
The directors are considering using higher quality wood and increasing the selling price.
(d)
Advise the directors whether or not they should make these changes. Justify your answer.
Paper 32
[12]
[8]
[3]
Appendix
398
Index (Yearly)
INDEX (Yearly)
2011 May P21
Q2 ........................................................................... 14, 27
2011 May P41
Q3 ....................................................................... 230, 245
2011 May P42
Q1 (a & b) ........................................................... 177, 188
Q1 (c) .................................................................. 111, 115
Q2 (a to c) ............................................................... 14, 28
Q2 (d)...................................................................... 83, 96
2011 May P43
Q1 ........................................................................... 83, 96
Q3 ....................................................................... 231, 245
2011 Nov P23
Q2(B) ...................................................................... 15, 29
2011 Nov P41
Q2 ....................................................................... 143, 159
2011 Nov P42
Q2 ........................................................................... 83, 97
Q3 ....................................................................... 231, 246
2011 Nov P43
Q1 (a) ...................................................................... 67, 75
Q1(b & c) ............................................................ 144, 160
Q2 (a & b) ........................................................... 177, 189
Q2 (c & d) ........................................................... 144, 161
Q3 ....................................................................... 295, 304
2012 May P22
Q1 ....................................................................... 196, 211
2012 May P41
Q1 (a & b) ........................................................... 179, 189
Q1 (c & d) ............................................................... 84, 98
Q3 (a to d) .......................................................... 265, 275
2012 May P42
Q1 (a & b) ........................................................... 197, 211
Q1 (c & d) ........................................................... 120, 127
Q3 (a, b, c , e & f) ................................................ 232, 247
2012 May P43
Q1 (a & b) ........................................................... 180, 190
Q2 (a & b) ............................................................... 68, 75
Q2 (c) .................................................................. 111, 115
Q3 ....................................................................... 295, 305
2012 Nov P21
Q2 ........................................................................... 16, 29
2012 Nov P23
Q1 ....................................................................... 197, 212
2012 Nov P41
Q1(c to g) ............................................................ 120, 127
Q2 ....................................................................... 145, 161
2012 Nov P42
Q1 ....................................................................... 146, 162
Q3 .............................................................................. 276
2012 Nov P43
Q1 ...................................................................... 198, 213
Q2 (a &.b)........................................................... 180, 190
Q2(c) .................................................................. 147, 164
Q2(d) .................................................................. 111, 115
Q3 ...................................................................... 227, 228
2013 May P21
Q1 .......................................................................... 16, 30
2013 May P23
Q1 ...................................................................... 199, 215
2013 May P41
Q1(d) .................................................................. 111, 115
Q2 .......................................................................... 84, 98
Q3 ...................................................................... 233, 248
2013 May P42
Q1 ...................................................................... 266, 277
Q3 ...................................................................... 233, 249
2013 May P43
Q1(a & f) ............................................................ 111, 115
Q2 (d & e) ........................................................... 148, 164
Q2(a to c) ........................................................... 181, 191
Q3 (a to d) .......................................................... 267, 278
Q3(e) .................................................................. 121, 128
2013 Nov P41
Q1 (a &.b)........................................................... 182, 192
Q1 (a to d) .............................................................. 53, 60
Q1 (c) ................................................................... 85, 100
2013 Nov P42
Q1 .......................................................................... 53, 60
Q2(a & b)............................................................ 184, 192
Q2(c) .................................................................. 121, 128
Q3(e) .................................................................... 86, 100
2013 Nov P43
Q3(a & b)............................................................ 234, 250
Q3(c & d) ............................................................ 148, 164
2014 May P21
Q1(b & c) ............................................................ 200, 216
2014 May P23
Q1 .......................................................................... 17, 31
2014 May P41
Q2(a to c) ............................................................. 86, 101
Q2(d) .................................................................. 111, 116
Q3 ...................................................................... 295, 305
2014 May P42
Q2(a to c) ............................................................. 86, 101
Q2(d) .................................................................. 111, 116
Q3 ...................................................................... 295, 305
2014 May P43
Q1 .......................................................................... 69, 76
Appendix
Q1(d to f) ................................................................ 71, 78
Q1(f) ................................................................... 121, 128
Q3 ....................................................................... 235, 252
2014 Nov P22
Q1 ....................................................................... 201, 216
2014 Nov P41
Q1 (a to c) ............................................................... 54, 61
Q1(d & e) ............................................................ 121, 128
Q2 ....................................................................... 149, 165
2014 Nov P42
Q1(a to d) ........................................................... 112, 116
Q1(e)................................................................... 121, 128
Q1(g) ................................................................... 122, 129
Q2(a to f) ............................................................ 296, 306
Q3 ....................................................................... 236, 253
2014 Nov P43
Q1(a & b) .............................................................. 87, 102
Q2 ....................................................................... 237, 254
Q3(c & d) ............................................................ 185, 193
Q3(c to f) ............................................................ 297, 307
Q3(e)................................................................... 122, 129
2015 May P23
Q1 ....................................................................... 202, 217
2015 May P41
Q1 ....................................................................... 238, 256
Q3(a to d) ........................................................... 298, 308
Q3(e & f) ............................................................... 87, 102
2015 May P42
Q1 ....................................................................... 238, 256
Q3(a to d) ........................................................... 298, 308
Q3(e & f) ............................................................... 87, 102
2015 May P43
Q1(a to c) .............................................................. 88, 102
Q1(d) .................................................................. 122, 129
Q2(c) ................................................................... 112, 117
Q2(d & e) ............................................................ 149, 166
2015 Nov P41
Q1 (a & b) ............................................................ 89, 103
Q1 (c) .................................................................. 122, 129
Q3 ....................................................................... 267, 280
2015 Nov P42
Q1 ....................................................................... 203, 218
Q2 (a) .................................................................. 240, 258
Q2 (b & c) ........................................................... 122, 129
Q3 ....................................................................... 268, 281
2015 Nov P43
Q1 (a & b) ............................................................. 90, 105
Q1 (c to e) ........................................................... 123, 129
Q3 ....................................................................... 269, 283
2016 May P31
Q1 ........................................................................... 18, 33
Q2 ........................................................................... 49, 51
Q3 (a to c) ............................................................. 91, 106
Q3 (d).................................................................. 151, 168
399
Index (Yearly)
Q4 ...................................................................... 152, 168
Q5 ...................................................................... 316, 321
Q6 ...................................................................... 299, 310
2016 May P32
Q1 (a to d) .............................................................. 19, 34
Q1 (e) ................................................................. 141, 142
Q2 ...................................................................... 204, 220
Q3 .......................................................................... 56, 63
Q4 ...................................................................... 153, 169
Q5 ...................................................................... 316, 322
Q6 ...................................................................... 270, 285
2016 May P33
Q1 .......................................................................... 18, 33
Q2 .......................................................................... 49, 51
Q3 (a to c) ............................................................ 91, 106
Q3 (d) ................................................................. 151, 168
Q4 ...................................................................... 152, 168
Q5 ...................................................................... 316, 321
Q6 ...................................................................... 299, 310
2016 Nov P31
Q1 .......................................................................... 20, 34
Q2 (a to d) .......................................................... 186, 194
Q2 (e) ................................................................. 123, 130
Q3 ...................................................................... 154, 170
Q4 (a to c) ............................................................ 91, 107
Q4 (d & e) ........................................................... 123, 130
Q5 ...................................................................... 270, 286
Q6 ...................................................................... 300, 311
2016 Nov P32
Q1 .......................................................................... 21, 36
Q2 ...................................................................... 205, 221
Q3 .......................................................................... 71, 78
Q4 ...................................................................... 134, 137
Q5 ...................................................................... 317, 323
Q6 ...................................................................... 240, 258
2016 Nov P33
Q1 ...................................................................... 206, 222
Q2 .......................................................................... 22, 36
Q3 (a to c & e) .................................................... 134, 138
Q3 (d) ................................................................. 123, 130
Q4 .......................................................................... 42, 45
Q5 ...................................................................... 301, 312
Q6 ...................................................................... 241, 259
2016 Specimen P3
Q1 .......................................................................... 55, 62
Q2 .......................................................................... 42, 45
Q3 (a to c) .......................................................... 112, 117
Q3 (d & e) ........................................................... 134, 137
Q4 ...................................................................... 150, 167
Q5 ...................................................................... 299, 309
Q6 ...................................................................... 269, 284
2017 May P31
Q1 ........................................................................ 92, 108
Q2 (a, b & e) ....................................................... 124, 131
Q2 (c & d) ........................................................... 135, 138
Q3 .......................................................................... 49, 52
Appendix
Q4 ....................................................................... 155, 171
Q5 ....................................................................... 271, 287
Q6 ....................................................................... 318, 324
2017 May P32
Q1 ....................................................................... 207, 223
Q2 ....................................................................... 156, 172
Q3 (a, c & d) ........................................................ 125, 131
Q3 (b & e) ........................................................... 135, 139
Q4 ........................................................................... 72, 79
Q6 ....................................................................... 301, 312
2017 May P33
Q1 ......................................................................... 92, 108
Q2 (a, b & e) ....................................................... 124, 131
Q2 (c & d) ........................................................... 135, 138
Q3 ........................................................................... 49, 52
Q4 ........................................................................... 26, 40
Q5 ....................................................................... 271, 287
Q6 ....................................................................... 318, 324
2017 Nov P31
Q1 ....................................................................... 208, 224
Q2 ........................................................................... 23, 37
Q3 ....................................................................... 156, 173
Q4(a to d) ............................................................... 58, 65
Q4(e & f) ................................................................. 74, 80
Q5 ....................................................................... 273, 290
Q6 ....................................................................... 319, 325
2017 Nov P32
Q1 ........................................................................... 24, 38
Q2 ....................................................................... 113, 118
Q3 ....................................................................... 135, 139
Q4 ....................................................................... 157, 174
Q5 ....................................................................... 302, 313
Q6 (a to c) ........................................................... 242, 260
Q6 (d).................................................................. 141, 142
400
Index (Yearly)
2017 Nov P33
Q1 .......................................................................... 25, 39
Q2 .......................................................................... 57, 64
Q3 .......................................................................... 43, 46
Q4 ...................................................................... 114, 118
Q5 (a to d) .......................................................... 273, 291
Q5 (e) ................................................................. 319, 326
Q6 ...................................................................... 242, 261
2018 May P31
Q1 ...................................................................... 209, 225
Q2 ........................................................................ 93, 109
Q3 (a) ................................................................. 136, 140
Q3 (b to d) .......................................................... 125, 133
Q3 (e) ................................................................. 141, 142
Q4 .......................................................................... 26, 40
Q5 ...................................................................... 243, 263
Q6 ...................................................................... 319, 326
2018 May P32
Q1 ...................................................................... 158, 175
Q2 (a & b) ............................................................ 94, 110
Q2 (c & d) ........................................................... 126, 133
Q3 .......................................................................... 43, 47
Q4 .......................................................................... 74, 81
Q5 ...................................................................... 303, 314
Q6 ...................................................................... 274, 292
2018 May P33
Q1 ...................................................................... 209, 225
Q2 ........................................................................ 93, 109
Q3 (a) ................................................................. 136, 140
Q3 (b to d) .......................................................... 125, 133
Q3 (e) ................................................................. 141, 142
Q4 ...................................................................... 155, 171
Q5 ...................................................................... 243, 263
Q6 ...................................................................... 319, 326