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Financial Accounting (International)

Time allowed: 2 hours ALL FIFTY questions are compulsory and MUST be attempted.

Paper F3 (INT)

Fundamentals Pilot Paper – Knowledge module

Do NOT open this paper until instructed by the supervisor. This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

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ALL 50 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.

1

Should details of material adjusting or material non-adjusting events after the balance sheet date be disclosed in the notes to financial statements according to IAS 10 Events After the Balance Sheet Date?



A

Adjusting events

B Non-Adjusting events

(1 mark)

2

At 30 June 2005 a company’s allowance for receivables was $39,000. At 30 June 2006 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the equivalent of 5 per cent of the trade receivables based on past events.



What figure should appear in the income statement for the year ended 30 June 2006 for these items?



A

$61,000

B

$22,000



C

$24,000

D $23,850

(2 marks)

3

In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset values and profit?



A

Asset values and profit both understated



B

Asset values and profit both overstated



C

Asset values understated and profit overstated

D Asset values overstated and profit understated.

(2 marks)

4

The IASB’s Framework for the preparation and presentation of financial statements gives qualitative characteristics that make financial information reliable.



Which of the following are examples of those qualitative characteristics?



A

Faithful Representation, neutrality and prudence



B

Neutrality, comparability and true and fair view



C

Prudence, comparability and accruals

D Neutrality, accruals and going concern

(2 marks)

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5

The following bank reconciliation statement has been prepared by a trainee accountant:

Overdraft per bank statement less: Outstanding cheques add: Deposits credited after date Cash at bank as calculated above

$ 3,860 9,160 5,300 16,690 21,990



What should be the correct balance per the cash book?



A

$21,990 balance at bank as stated



B

$3,670 balance at bank



C

$11,390 balance at bank

D $3,670 overdrawn.

(2 marks)

6

Which of the following calculates a trader’s net profit for a period?



A

Closing net assets + drawings – capital introduced – opening net assets



B

Closing net assets – drawings + capital introduced – opening net assets



C

Closing net assets – drawings – capital introduced – opening net assets

D Closing net assets + drawings + capital introduced – opening net assets.

7

(2 marks)

A sole trader took some goods costing $800 from inventory for his own use. The normal selling price of the goods is $1,600.

Which of the following journal entries would correctly record this? Dr Cr $ $ A Drawings account 800 Inventory account 800 B

Drawings account Purchases account

C Sales account Drawings account



800

800

1,600

1,600 (1 mark)

8

The debit side of a company’s trial balance totals $800 more than the credit side.



Which one of the following errors would fully account for the difference? A

$400 paid for plant maintenance has been correctly entered in the cash book and credited to the plant asset account.

B

Discount received $400 has been debited to discount allowed account

C

A receipt of $800 for commission receivable has been omitted from the records

D The petty cash balance of $800 has been omitted from the trial balance.

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(2 marks)

9

A company’s income statement for the year ended 31 December 2005 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the company’s policy to depreciate motor vans at 25 per cent per year on the straight line basis, with a full year’s charge in the year of acquisition.



What would the net profit be after adjusting for this error?



A

$106,100



B

$70,100



C

$97,100

D $101,600

(2 marks)

10 Should dividends paid appear on the face of a company’s income statement?

A

Yes

B No

(1 mark)

11 The following control account has been prepared by a trainee accountant: Receivables ledger control account $ Opening balance 308,600 Cash received from credit customers Credit sales 154,200 Discounts allowed to credit customers Cash sales 88,100 Interest charged on overdue accounts Contras against credit balances in payables ledger 4,600 Bad debts written off Allowance for receivables Closing balance 555,500

$ 147,200 1,400 2,400 4,900 2,800 396,800 555,500



What should the closing balance be when all the errors made in preparing the receivables ledger control account have been corrected?



A

$395,200



B

$304,300



C

$309,500

D $307,100

(2 marks)

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12 At 31 December 2004 Q, a limited liability company, owned a building that cost $800,000 on 1 January 1995. It was being depreciated at two per cent per year.

On 1 January 2005 a revaluation to $1,000,000 was recognised. At this date the building had a remaining useful life of 40 years.



What is the depreciation charge for the year ended 31 December 2005 and the revaluation reserve balance as at 1 January 2005?

Depreciation charge for year ended 31 December 2005 $ A 25,000

Revaluation reserve as at 1 January 2005 $ 200,000



B

25,000



360,000



C

20,000



200,000

20,000



360,000

D

(2 marks)

13 P and Q are in partnership, sharing profits equally.

On 30 June 2005, R joined the partnership and it was agreed that from that date all three partners should share equally in the profit.



In the year ended 31 December 2005 the profit amounted to $300,000, accruing evenly over the year, after charging a bad debt of $30,000 which it was agreed should be borne equally by P and Q only.



What should P’s total profit share be for the year ended 31 December 2005? A $ 95,000



B $122,500



C $125,000

D $110,000

(2 marks)

14 A company has made a material change to an accounting policy in preparing its current financial statements.

Which of the following disclosures are required by IAS 8 Accounting policies, changes in accounting estimates and errors in the financial statements?



1 2 3

The reasons for the change. The amount of the adjustment in the current period and in comparative information for prior periods. An estimate of the effect of the change on the next five accounting periods.



A

1 and 2 only



B

1 and 3 only



C

2 and 3 only

D 1, 2 and 3

(2 marks)

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15 According to IAS 2 Inventories, which of the following costs should be included in valuing the inventories of a manufacturing company?

(1) Carriage inwards



(2) Carriage outwards



(3) Depreciation of factory plant



(4) General administrative overheads



A

All four items



B

1, 2 and 4 only



C

2 and 3 only

D 1 and 3 only

(2 marks)

16 Part of a company’s cash flow statement is shown below: Operating profit Depreciation charges Increase in inventory Increase in accounts payable



$’000 8,640 (2,160) (330) 440



The following criticisms of the extract have been made:



(1) Depreciation charges should have been added, not deducted.



(2) Increase in inventory should have been added, not deducted.



(3) Increase in accounts payable should have been deducted, not added.



Which of the criticisms are valid?



A

2 and 3 only



B

1 only



C

1 and 3 only

D 2 only

(2 marks)

17 Which of the following explains the imprest system of operating petty cash?

A

Weekly expenditure cannot exceed a set amount.



B

The exact amount of expenditure is reimbursed at intervals to maintain a fixed float.



C

All expenditure out of the petty cash must be properly authorised.

D Regular equal amounts of cash are transferred into petty cash at intervals.

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(2 marks)

18 Which of the following are differences between sole traders and limited liability companies? (1) A sole traders’ financial statements are private; a company’s financial statements are sent to shareholders and may be publicly filed (2) Only companies have capital invested into the business (3) A sole trader is fully and personally liable for any losses that the business might make; a company’s shareholders are not personally liable for any losses that the company might make.

A

1 and 2 only



B

2 and 3 only



C

1 and 3 only

D 1, 2 and 3

(2 marks)

19 Which of the following documents should accompany a payment made to a supplier?

A

Supplier statement



B

Remittance advice

C Purchase invoice

(1 mark)

20 Goodwill should never be shown on the balance sheet of a partnership.

Is this statement true or false?



A

False

B True

(1 mark)

21 Which of the following journal entries are correct, according to their narratives? Dr CR $ $ 1 Suspense account 18,000 Rent received account 18,000 Correction of error in posting $24,000 cash received for rent to the rent received account as $42,000 2

Share premium account 400,000 Share capital account 1 for 3 bonus issue on share capital of 1,200,000 50c shares

3

Trade investment in X 750,000 Share capital account 250,000 Share premium account 500,000 500,000 50c shares issued at $1.50 per share in exchange for shares in X



A

1 and 2



B

2 and 3



C

1 only

400,000

D 3 only

(2 marks)

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22 The plant and machinery account (at cost) of a business for the year ended 31 December 2005 was as follows: Plant and machinery – cost 2005 2005 $ 1 Jan Balance 240,000 31 March Transfer disposal account 30 June Cash – purchase of plant 160,000 31 Dec Balance 400,000



$ 60,000 340,000 400,000



The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal.



What should be the depreciation charge for the year ended 31 December 2005?



A

$68,000

B

$64,000



C

$61,000

D $55,000

(2 marks)

23 Which of the following should appear in a company’s statement of changes in equity?

1 2 3

Profit for the financial year Amortisation of capitalised development costs Surplus on revaluation of non-current assets



A

All three items



B

2 and 3 only



C

1 and 3 only

D 1 and 2 only

(2 marks)

24 Which of the following statements are correct?

(1) Capitalised development expenditure must be amortised over a period not exceeding five years.



(2) Capitalised development costs are shown in the balance sheet under the heading of Non-current Assets



(3) If certain criteria are met, research expenditure must be recognised as an intangible asset.



A

2 only



B

2 and 3



C

1 only

D 1 and 3

(2 marks)

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25 A fire on 30 September destroyed some of a company’s inventory and its inventory records. The following information is available: Inventory 1 September Sales for September Purchases for September Inventory in good condition at 30 September

$ 318,000 612,000 412,000 214,000



Standard gross profit percentage on sales is 25%



Based on this information, what is the value of the inventory lost?



A

$96,000

B

$271,000



C

$26,400

D $57,000

(2 marks)

26 At 31 December 2004 a company’s capital structure was as follows: Ordinary share capital (500,000 shares of 25c each) Share premium account

$

125,000 100,000



In the year ended 31 December 2005 the company made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the share premium account for the purpose.



What was the company’s capital structure at 31 December 2005?

Ordinary share capital $ A 450,000

B

225,000



C

225,000

D 212,500



Share premium account $ 125,000 250,000



325,000

262,500 (2 marks)

27 The inventory value for the financial statements of Q for the year ended 31 May 2006 was based on an inventory count on 4 June 2006, which gave a total inventory value of $836,200.

Between 31 May and 4 June 2006, the following transactions took place:

Purchases of goods Sales of goods (profit margin 30% on sales) Goods returned by Q to supplier



$ 8,600 14,000 700



What adjusted figure should be included in the financial statements for inventories at 31 May 2006?



A

$838,100



B

$853,900



C

$818,500

D $834,300

(2 marks)

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28 In preparing a company’s bank reconciliation statement at March 2006, the following items are causing the difference between the cash book balance and the bank statement balance: (1) Bank charges $380

(2) Error by bank $1,000 (cheque incorrectly debited to the account)



(3) Lodgements not credited $4,580



(4) Outstanding cheques $1,475



(5) Direct debit $350



(6) Cheque paid in by the company and dishonoured $400.



Which of these items will require an entry in the cash book?



A

2, 4 and 6



B

1, 5 and 6



C

3, 4 and 5

D 1, 2 and 3

(2 marks)

29 At 31 December 2005 the following require inclusion in a company’s financial statements: (1) On 1 January 2005 the company made a loan of $12,000 to an employee, repayable on 1 January 2006, charging interest at 2 per cent per year. On the due date she repaid the loan and paid the whole of the interest due on the loan to that date. (2) The company has paid insurance $9,000 in 2005, covering the year ending 31 August 2006. (3) In January 2006 the company received rent from a tenant $4,000 covering the six months to 31 December 2005.

For these items, what total figures should be included in the company’s balance sheet at 31 December 2005?

A

Current assets $ 10,000

Current liabilities $ 12,240



B

22,240

nil



C

10,240

nil

D 16,240

6,000 (2 marks)

30 How should a contingent liability be included in a company’s financial statements if the likelihood of a transfer of economic benefits to settle it is remote?

A

Disclosed by note with no provision being made

B No disclosure or provision is required

(1 mark)

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31 Which of the following material events after the balance sheet date and before the financial statements are approved are adjusting events? (1) A valuation of property providing evidence of impairment in value at the balance sheet date.

(2) Sale of inventory held at the balance sheet date for less than cost.



(3) Discovery of fraud or error affecting the financial statements.



(4) The insolvency of a customer with a debt owing at the balance sheet date which is still outstanding.



A

1, 2, 3 and 4



B

1, 2 and 4 only



C

3 and 4 only

D 1, 2 and 3 only.

(2 marks)

32 Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alpha’s payables ledger account for Beta shows a balance due to Beta of $4,140.

Investigation reveals the following:



(1) Cash paid to Beta $4,080 has not been allowed for by Beta (2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta.



What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?



A

$690



B

$770



C

$9,850

D $9,930

(2 marks)

33 The business entity concept requires that a business is treated as being separate from its owners.

Is this statement true or false?



A

True

B False

(1 mark)

34 Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premises quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year until 30 June 2005. It was increased from that date to $96,000 per year.

What rent expense and end of year prepayment should be included in the financial statements for the year ended 30 April 2006?

A

Expense Prepayment $93,000 $8,000



B

$93,000

$16,000



C

$94,000

$8,000

D $94,000

$16,000 (2 marks)

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35 Which of the following items could appear in a company’s cash flow statement?

(1) Surplus on revaluation of non-current assets



(2) Proceeds of issue of shares



(3) Proposed dividend



(4) Dividends received



A

1 and 2



B

3 and 4



C

1 and 3

D 2 and 4

(2 marks)

36 What is the role of the International Financial Reporting Interpretations Committee?

A

To create a set of global accounting standards

B To issue guidance on the application of International Financial Reporting Standards

(1 mark)

37 Q’s trial balance failed to agree and a suspense account was opened for the difference. Q does not keep receivables and payables control accounts. The following errors were found in Q’s accounting records: (1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capital account as $330,000 (2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant asset account (3) The petty cash book balance $500 had been omitted from the trial balance (4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as $87,400.

Which of the errors will require an entry to the suspense account to correct them?



A

1, 2 and 4 only



B

1, 2, 3 and 4



C

1 and 4 only

D 2 and 3 only

(2 marks)

38 Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain and a further 5% settlement discount if goods are paid for within 14 days. Hill bought goods with a list price of $200,000 from Mountain. Sales tax is at 17.5%.

What amount should be included in Mountain’s receivables ledger for this transaction?



A

$235,000



B

$211,500



C

$200,925

D $209,925

(2 marks)

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39 A computerised accounting system operates using the principle of double entry accounting.

Is this statement true or false?



A

False

B True

(1 mark)

40 A company receives rent from a large number of properties. The total received in the year ended 30 April 2006 was $481,200. The following were the amounts of rent in advance and in arrears at 30 April 2005 and 2006: 30 April 2005 3 0 April 2006 $ $ Rent received in advance 28,700 31,200 Rent in arrears (all subsequently received) 21,200 18,400

What amount of rental income should appear in the company’s income statement for the year ended 30 April 2006?



A

$486,500

B

$460,900



C

$501,500

D $475,900

(2 marks)

41 Annie is a sole trader who does not keep full accounting records. The following details relate to her transactions with credit customers and suppliers for the year ended 30 June 2006: $ Trade receivables, 1 July 2005 130,000 Trade payables, 1 July 2005 60,000 Cash received from customers 686,400 Cash paid to suppliers 302,800 Discounts allowed 1,400 Discounts received 2,960 Contra between payables and receivables ledgers 2,000 Trade receivables, 30 June 2006 181,000 Trade payables, 30 June 2006 84,000

What figure should appear in Annie’s income statement for the year ended 30 June 2006 for purchases?



A

$331,760



B

$740,800



C

$283,760

D $330,200

(2 marks)

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42 The bookkeeper of Field made the following mistakes:

Discounts allowed $3,840 was credited to the discounts received account



Discounts received $2,960 was debited to the discounts allowed account



Which journal entry will correct the errors?

A Discounts allowed Discounts received Suspense account

DR $7,680

$5,920 $1,760

B

Discounts allowed $880 Discounts received $880 Suspense account

$1,760

C

Discounts allowed $6,800 Discounts received

$6,800

D Discounts allowed Discounts received Suspense account

$3,840

CR

$2,960 $880 (2 marks)

43 Which of the following statements are correct? (1) Materiality means that only items having a physical existence may be recognised as assets. (2) The substance over form convention means that the legal form of a transaction must always be shown in financial statements even if this differs from the commercial effect. (3) The money measurement concept is that only items capable of being measured in monetary terms can be recognised in financial statements.

A

2 only



B

1, 2 and 3



C

1 only

D 3 only

(2 marks)

44 The total of the list of balances in Valley’s payables ledger was $438,900 at 30 June 2006. This balance did not agree with Valley’s payables ledger control account balance. The following errors were discovered:

1 2 3

A contra entry of $980 was recorded in the payables ledger control account, but not in the payables ledger. The total of the purchase returns daybook was undercast by $1,000. An invoice for $4,344 was posted to the supplier’s account as $4,434.



What amount should Valley report in its balance sheet as accounts payable at 30 June 2006?



A

$436,830

B

$438,010



C

$439,790

D $437,830

(2 marks)

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45 Which of the following statements are correct? (1) A cash flow statement prepared using the direct method produces a different figure for operating cash flow from that produced if the indirect method is used. (2) Rights issues of shares do not feature in cash flow statements. (3) A surplus on revaluation of a non-current asset will not appear as an item in a cash flow statement (4) A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing Activities in a cash flow statement.

A

1 and 4

B

2 and 3



C

3 only

D 2 and 4

(2 marks)

46 Gareth, a sales tax registered trader purchased a computer for use in his business. The invoice for the computer showed the following costs related to the purchase: $ Computer 890 Additional memory 95 Delivery 10 Installation 20 Maintenance (1 year) 25 1,040 Sales tax (17.5%) 182 Total 1,222

How much should Gareth capitalise as a non-current asset in relation to the purchase?



A

$1,222



B

$1,040



C

$890

D $1,015

(2 marks)

47 A and B are in partnership sharing profits and losses in the ratio 3:2 respectively. Profit for the year was $86,500. The partners’ capital and current account balances at the beginning of the year were as follows: A B $ $ Current accounts 5,750CR 1,200CR Capital accounts 10,000CR 8,000CR

A’s drawings during the year were $4,300, and B’s were $2,430.



What should A’s current account balance be at the end of the year?



A

$57,650



B

$51,900



C

$61,950

D $53,350

(2 marks)

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48 What is the correct double entry to record the depreciation charge for a period? A DR Depreciation expense CR Accumulated depreciation B DR Accumulated depreciation CR Depreciation expense

(1 mark)

49 A company values its inventory using the first in, first out (FIFO) method. At 1 May 2005 the company had 700 engines in inventory, valued at $190 each.

During the year ended 30 April 2006 the following transactions took place:



2005 1 July 1 November

Purchased 500 engines at $220 each Sold 400 engines for $160,000



2006 1 February 15 April

Purchased Sold



What is the value of the company’s closing inventory of engines at 30 April 2006?



A

$188,500



B

$195,500



C

$166,000

300 engines at $230 each 250 engines for $125,000

D $106,000

(2 marks)

50 A company’s motor vehicles at cost account at 30 June 2006 is as follows:

Motor vehicles – cost

Balance b/f Additions



$ 35,800 Disposal 12,950 Balance c/f 48,750



$ 12,000 36,750



48,750



What opening balance should be included in the following period’s trial balance for motor vehicles – cost at 1 July 2006?



A

$36,750 DR



B

$48,750 DR



C

$36,750 CR

D $48,750 CR

(2 marks)

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Answers

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Pilot Paper F3 (INT) Financial Accounting (International)

Answers

1 B 2 B 37,000 + ((517,000 – 37,000)*5%) – 39,000) = 22,000 3 C 4 A 5 B -3,860 – 9,160 + 16,690 = 3,670 6 A 7 B 8 B 9 C 83,600 +18,000 – (18,000*25%) = 97,100 10 B 11 D Receivables ledger control account $ Opening balance 308,600 Contras Credit sales 154,200 Cash received Interest charged 2,400 Discounts allowed Bad debts Closing balance 465,200 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

B B A D B B C B A D D C A D B

$ 4,600 147,200 1,400 4,900 307,100 465,200

1,000,000/40years = 25,000; 1,000,000 – (800,000 – (800,000*2%*10years)) = 360,000 ((300,000 + 30,000) / 2 * ½ ) + (300,000 + 30,000) / 2 * 1/3) – (30,000 * ½ ) = 122,500

(240,000*20%) + (6/12*160,000*20%) – (9/12*60,000*20%) = 55,000 (318,000 + 412,000 – 214,000) – (612,000*75%) = 57,000 125,000 + (500,000*1/2*25c) + (750,000*1/5*25c) = 225,000; 100,000 + (500,000*1/2*75c) – (750,000*1/5*25c) = 250,000 836,200 – 8,600 + (14,000*70%) + 700 = 838,100

27 A 28 B 29 B 12,000 + (12,000*2%) + (9,000*8/12) + 4,000 = 22,240 30 B 31 A 32 A (8,950 – 4,080) – (4,140 + 40) = 690 33 A 34 D (84,000*2/12) + (96,000*10/12) = 94,000; 96,000*2/12 = 16,000 35 D 36 B 37 B 38 D List Price 200,000 Trade discount (20,000) 180,000 Sales tax (17.5%*95%*180,000) 29,925 209,925 39 B 40 D Rent receivable $ O/Balance 21,200 O/Balance Income statement 475,900 Disposal C/Balance 31,200 C/Balance 528,300

$ 28,700 481,200 18,400 528,300

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41 A Payables ledger $ Cash paid 302,800 O/balance Discounts received 2,960 Purchases Contra 2,000 C/balance 84,000 391,760 42 B 43 D 44 D 438,900 – 980-90 = 437,830 45 C 46 D 890 + 95 + 10 + 20 = 1,015 47 D 5,750 + (86,500*3/5) – 4,300 = 53,350 48 A 49 A ([email protected]) + ([email protected]) + ([email protected]) = 188,500 50 A



$ 60,000 331,760

391,760

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(International Stream) PART 1 THURSDAY 6 DECEMBER 2001

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered Section B ALL FIVE questions are compulsory and MUST be answered

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL TWENTY-FIVE questions are compulsory and MUST be attempted Please use the answer sheet provided to indicate your choice in each question Each question within this section is worth 2 marks 1

The trial balance totals of Gamma at 30 September 2001 are: Debit Credit

$992,640 $1,026,480

Which TWO of the following possible errors could, when corrected, cause the trial balance to agree?

2

1. 2. 3. 4.

An item in the cash book $6,160 for payment of rent has not been entered in the rent payable account. The balance on the motor expenses account $27,680 has incorrectly been listed in the trial balance as a credit. $6,160 proceeds of sale of a motor vehicle has been posted to the debit of motor vehicles asset account. The balance of $21,520 on the rent receivable account has been omitted from the trial balance.

A B C D

1 and 2 2 and 3 2 and 4 3 and 4

The trial balance of Delta, a limited liability company, did not agree and a suspense account was opened for the difference. The following errors were subsequently found: 1. 2. 3. 4. 5.

A cash refund due to customer A was correctly treated in the cash book and then credited to the accounts receivable ledger account of customer B. The sale of goods to a director for $300 was recorded by debiting sales revenue account and crediting the director’s current account. The total of the discount received column in the cash book had been credited in error to the discount allowed account. Some of the cash received from customers had been used to pay sundry expenses before banking the money. $5,800 paid for plant repairs was correctly treated in the cash book and then credited to plant and equipment asset account.

Which of the above errors would require an entry to the suspense account as part of the process of correcting them? A B C D

3

1, 3 and 5 1, 2 and 5 1 and 5 3 and 4

Beta purchased some plant and equipment on 1 July 2001 for $40,000. The estimated scrap value of the plant in ten years’ time is estimated to be $4,000. Beta’s policy is to charge depreciation on the straight line basis, with a proportionate charge in the period of acquisition. What should the depreciation charge for the plant be in Beta’s accounting period of twelve months to 30 September 2001? A B C D

$720 $600 $900 $675

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1D INTAD Paper 1.1(INT)

4

Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its premises quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year until 30 June 2000. It was increased from that date to $96,000 per year. What rent expense and end of year prepayment should be included in the financial statements for the year ended 30 April 2001? A B C D

5

Expense $93,000 $93,000 $94,000 $94,000

Prepayment $8,000 $16,000 $8,000 $16,000

At 30 September 2000, the following balances existed in the records of Lambda: $ 860,000 397,000

Plant and equipment: Cost Accumulated depreciation

During the year ended 30 September 2001, plant with a written down value of $37,000 was sold for $49,000. The plant had originally cost $80,000. Plant purchased during the year cost $180,000. It is the company’s policy to charge a full year’s depreciation in the year of acquisition of an asset and none in the year of sale, using a rate of 10% on the straight line basis. What net amount should appear in Lambda’s balance sheet at 30 September 2001 for plant and equipment? A B C D

6

$563,000 $467,000 $510,000 $606,000

At 30 September 2000, Z Ltd had a provision for doubtful debts of $37,000. During the year ended 30 September 2001 the company wrote off debts totalling $18,000, and at the end of the year it is decided that the provision for doubtful debts should be $20,000. What should be included in the income statement for bad and doubtful debts? A B C D

7

$35,000 debit $1,000 debit $38,000 debit $1,000 credit

Which of the following best explains the imprest system of petty cash control? A B C D

Weekly expenditure cannot exceed a set amount. The exact amount of expenditure is reimbursed at intervals to maintain a fixed float. All expenditure out of the petty cash must be properly authorised. Regular equal amounts of cash are transferred into petty cash at intervals.

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[P.T.O.

1D INTAH Paper 1.1(INT)

8

9

In reconciling a business cash book with the bank statement, which of the following items could require a subsequent entry in the cash book? 1. 2. 3. 4. 5. 6.

Cheques presented after date. A cheque from a customer which was dishonoured. An error by the bank. Bank charges. Deposits credited after date. Standing order entered in bank statement.

A B C D

2, 3, 4 and 6 1, 2, 5 and 6 2, 4 and 6 1, 3 and 5

The following bank reconciliation statement has been prepared for Omega by a junior clerk: Overdraft per bank statement Add: Deposits not credited

$ 68,100 141,200

Less outstanding cheques

209,300 41,800

Overdraft per cash book

167,500

Which of the following should be the correct balance per the cash book? A B C D

$167,500 overdrawn as stated. $31,300 overdrawn $31,300 cash at bank $114,900 overdrawn

10 X and Y are in partnership, sharing profits equally and preparing their accounts to 31 December each year. On 1 July 2000, Z joined the partnership, and from that date profits are shared X 40%, Y 40% and Z 20%. In the year ended 31 December 2000, profits were: 6 months to 31 June 2000 6 months to 31 December 2000

$ 200,000 300,000

It was agreed that X and Y only should bear equally the expense for a bad debt of $40,000 written off in the six months to 31 December 2000 in arriving at the $300,000 profit. Which of the following correctly states X’s profit share for the year?

A B C D

Profit share X $ 216,000 200,000 220,000 224,000

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11 S and T are in partnership and prepare their accounts to 31 December each year. On 1 July 2000, U joined the partnership. Profit sharing arrangements are: Salary

S

Share of balance of profit

S T U

6 months to 30 June 2000 6 months to 31December 2000 $15,000 $25,000 60% 40%

40% 40% 20%

The partnership profit for the year ended 31 December 2000 was $350,000 accruing evenly over the year. What are the partners’ total profit shares for the year ended 31 December 2000?

A B C D

S $000 196 217 155 175

T $000 124 108 130 145

U $000 30 25 65 35

12 Which of the following four statements about accounting concepts or principles are correct? 1. 2. 3. 4.

The money measurement concept is that items in accounts are initially measured at their historical cost. In order to achieve comparability it may sometimes be necessary to override the prudence concept. To facilitate comparisons between different entities it is helpful if accounting policies and changes in them are disclosed. To comply with the law, the legal form of a transaction must always be reflected in financial statements.

A B C D

1 and 3 1 and 4 3 only 2 and 3

13 The closing inventory of Epsilon amounted to $284,000 at 30 September 2001, the balance sheet date. This total includes two inventory lines about which the inventory taker is uncertain. 1.

2.

500 items which had cost $15 each and which were included at $7,500. These items were found to have been defective at the balance sheet date. Remedial work after the balance sheet date cost $1,800 and they were then sold for $20 each. Selling expenses were $400. 100 items which had cost $10 each. After the balance sheet date they were sold for $8 each, with selling expenses of $150.

What figure should appear in Epsilon’s balance sheet for inventory? A B C D

$283,650 $283,800 $292,150 $283,950

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14 Which of these statements about research and development expenditure are correct? 1. 2. 3. 4.

5. A B C D

If certain conditions are satisfied, research and development expenditure must be capitalised. One of the conditions to be satisfied if development expenditure is to be capitalised is that the technical feasibility of the project is reasonably assured. If capitalised, development expenditure must be amortised over a period not exceeding five years. The amount of capitalised development expenditure for each project should be reviewed each year. If circumstances no longer justify the capitalisation, the balance should be written off over a period not exceeding five years. Development expenditure may only be capitalised if it can be shown that adequate resources will be available to finance the completion of the project. 2 and 5 3, 4 and 5 2, 3 and 5 1, 2 and 3

15 On 30 September 2001 part of the inventory of a company was completely destroyed by fire. The following information is available: – – – – –

Inventory at 1 September 2001 at cost $49,800 Purchases for September 2001 $88,600 Sales for September 2001 $130,000 Inventory at 30 September 2001 – undamaged items $32,000 Standard gross profit percentage on sales 30%

Based on this information, what is the cost of the inventory destroyed? A B C D

$17,800 $47,400 $15,400 $6,400

16 At 1 July 2000 the share capital and share premium account of a company were as follows: $ 75,000 200,000

Share capital – 300,000 ordinary shares of 25c each Share premium account During the year ended 30 June 2001 the following events took place: 1. 2.

On 1 January 2001 the company made a rights issue of one share for every five held, at $1·20 per share. On 1 April 2001 the company made a bonus (capitalisation) issue of one share for every three in issue at that time, using the share premium account to do so.

What are the correct balances on the company’s share capital and share premium accounts at 30 June 2001? A B C D

Share capital $460,000 $480,000 $120,000 $120,000

Share premium account $287,000 $137,000 $137,000 $227,000

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17 In relation to cash flow statements, which, if any, of the following are correct? 1. 2. 3. A B C D

The direct method of calculating net cash from operating activities leads to a different figure from that produced by the indirect method, but this is balanced elsewhere in the cash flow statement. A company making high profits must necessarily have a net cash inflow from operating activities. Profits and losses on disposals of non-current assets appear as items under cash flows from investing activities in the cash flow statement or a note to it. Item 1 only Item 2 only Item 3 only None of the items.

18 A cash flow statement prepared in accordance with IAS7 Cash Flow Statements opens with the calculation of cash flows from operating activities from the net profit before taxation. Which of the following lists of items consists only of items that would be ADDED to net profit before taxation in that calculation? A B C D

Decrease in inventories, depreciation, profit on sale of non-current assets. Increase in trade payables, decrease in trade receivables, profit on sale of non-current assets. Loss on sale of non-current assets, depreciation, increase in trade receivables. Decrease in trade receivables, increase in trade payables, loss on sale of non-current assets.

19 IAS 10 Events after the Balance Sheet Date defines the extent to which events after the balance sheet date should be reflected in financial statements. Five such events are listed below. 1 2 3 4 5

Merger with another company. Insolvency of a customer. Destruction of a major non-current asset. Sale of inventory held at the balance sheet date for less than cost. Discovery of fraud.

Which three of the listed items are, according to IAS 10, normally to be classified as adjusting? A B C D

1, 2 and 3 2, 4 and 5 1, 2 and 5 1, 4 and 5

20 In preparing the financial statements of a company, the following items have to be considered: 1. 2. 3.

The company offers a one year warranty to purchasers, undertaking to replace an item if a defect occurs. Past experience suggests that claims under the warranty will probably arise. The company has an action pending against it for damages for wrongful dismissal of a director. The company’s legal advisor considers it improbable that the action will be successful. The company has guaranteed the overdraft of a subsidiary. The subsidiary is trading profitably and the probability of a liability arising is remote.

How should these items be reflected in the financial statements, if at all? A B C D

All three should be disclosed by note. A provision should be created for the best estimate of the liability in 1, and items 2 and 3 should be disclosed by note. A provision should be created for the best estimate of the liability in 1, item 2 should be disclosed by note and item 3 not disclosed at all. A provision should be created for the best estimate of the liabilities in 1 and 2 and item 3 should be disclosed by note. 7 FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

[P.T.O.

1D INTAU Paper 1.1(INT)

21 The analysis of a company’s financial statements revealed that the number of days’ sales in inventory was 80 days. The average for companies in the same industry was 35 days. Which one of the following is LEAST likely to account for the high level of 80 days? A B C D

The company’s trade is seasonal Poor inventory control A large purchase was made just before the balance sheet date An increase in the company’s sales in the three months before the balance sheet date.

The following data relates to Questions 22 and 23. Extracts from a company’s financial statements for the year ended 30 September 2001 are given below. Balance sheet Issued share capital Reserves Accumulated profit Non-current liabilities: 10% loan notes

Income statement $000 500 200

Operating profit Finance cost

$000 300 100

800

Profit before tax

200

1,000

22 What is the return on shareholders’ equity as a percentage, based on these figures? A B C D

40% 20% 13·3% 12%

23 What is the return on total capital employed as a percentage, based on these figures? A B C D

12% 8% 13·3% 20%

24 Which of the following correctly states items which should be disclosed in the statement of changes in equity required by IAS 1 Presentation of Financial Statements? A B C D

Net profit for the period, surplus on revaluation of non-current assets, dividends paid, proceeds of issue of shares. Proceeds of issue of shares, loan notes issued or repaid, retained profit for the period, surplus on revaluation of non-current assets. Profit on ordinary activities, income tax expense, extraordinary items. Accumulated profits, reserves, issued share capital.

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25 Which of the following statements about financial statements are in accordance with IAS 1? 1. 2. 3. 4. 5. A B C D

Extraordinary items must be disclosed on the face of the income statement as additions to or deductions from profit before tax. The authorised share capital of the company must be disclosed by note or on the face of the balance sheet. The total of staff costs for the period must be disclosed by note or on the face of the income statement. The accounting policies adopted by the company must be disclosed but only if they do not comply with accounting standards. Proposed ordinary dividends should not be recognised as liabilities unless they have been proposed or declared before the balance sheet date. 1, 2, 3 and 4 1, 2, 3 and 5 2, 3 and 5 1, 4 and 5

(50 marks)

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[P.T.O.

Section B – ALL FIVE questions are compulsory and MUST be attempted 1

The following is an extract from the trial balance of Tafford, a limited liability company, at 30 September 2001: Warehouse machinery: Cost: Accumulated depreciation at 1 October 2000 Motor vehicles: Cost Accumulated depreciation at 1 October 2000 Inventory at 1 October 2000 Sales revenue Purchases Distribution costs Administrative expenses Allowance for doubtful debts, 1 October 2000 Bad debts written off 10% loan notes (issued 1999) Interest paid on loan notes Suspense account

$000 3,000

1,180 13,000 22,600 6,000 5,000 600 500

$000

1,700

500 41,600

1,300 10,000 100

Notes: (1) Closing inventory at 30 September 2001 was $15,600,000. (2) Bad debts written off and the movement on the allowance for doubtful debts are to be included in administrative costs. The allowance for doubtful debts is to be reduced to $500,000. (3) The balance on the suspense account is the proceeds of sale of motor vehicles, entered to the suspense account pending correct treatment in the records. The vehicles sold had cost $180,000 and had a written down value at 1 October 2000 of $60,000. It is the company’s policy to provide for a full year’s depreciation in the year of purchase of vehicles and none in the year of sale. The vehicles sold were all used in the distribution of the company’s sales. (4) Depreciation is to be provided for on the straight line basis as follows: Warehouse machinery 10 per cent Motor vehicles 25 per cent Depreciation of motor vehicles is to be divided equally between distribution costs and administrative expenses, and depreciation of warehouse machinery charged wholly to distribution costs. (5) Prepayments and accruals at 30 September 2001 were:

Distribution costs Administrative expenses

Prepayments $000 200 100

Accruals $000 100 60

(6) The estimated income tax expense for the year is $3,000,000. Required: Prepare Tafford’s income statement, complying as far as possible with the requirements of IAS 1 Presentation of Financial Statements. (10 marks)

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2

You are preparing an income statement and balance sheet for Lamorgan, a sole trader who does not keep adequate accounting records. The following information is available to you to compute the figures for inclusion in the accounts for sales revenue, purchases and closing inventory for the year ended 30 June 2001: (a) Sales revenue Cash received from credit customers Cash sales receipts paid into bank Expenses paid out of cash sales before banking Trade receivables: 30 June 2000 30 June 2001 Refunds to customers Discounts allowed Bad debts written off Amount due from credit customer deducted by Lamorgan in paying supplier’s account

$ 218,500 114,700 9,600 41,600 44,200 800 2,600 1,500 700

Required: Compute the sales revenue figure from this information.

(5 marks)

(b) Purchases Payments to suppliers Trade payables: 30 June 2000 30 June 2001 Cost of items taken from inventory by Lamorgan for personal use Amount due from credit customer deducted by Lamorgan in settling supplier’s account

$ 114,400 22,900 24,800 400 700

Required: Compute the purchases figure from this information. (c) Closing inventory Cost of inventory obtained from physical count on 30 June 2001 This figure does NOT include any amounts for the two items below. (i)

(3 marks)

$ 77,700

An inventory line which had cost $1,800 was found to be damaged. Remedial work costing $300 is needed to enable the items to be sold for $1,700. Selling expenses of $100 would also be incurred in selling these items.

(ii) Goods sent to a customer on approval in May 2001 were not included in the inventory. The sale price of the goods was $4,000 and the cost $3,000. The customer notified his acceptance of the goods in July 2001. Note: No adjustment to the sales figure in (a) above is required for this item. Required: Compute the adjusted closing inventory figure from this information.

(2 marks) (10 marks)

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[P.T.O.

3

On 1 April 1998, Evon Limited acquired 75% of the ordinary share capital of Orset Limited for $180,000. At that date the balance sheet of Orset Limited was as follows: Sundry net assets

$ 160,000

Share capital 100,000 Ordinary shares of $1 each Accumulated profit

100,000 60,000 160,000

At 31 March 2001, the balance sheets of the two companies were as follows:

Sundry net assets Investment in Orset

Share capital Shares of $1 each Accumulated profit

Evon Ltd $ 560,000 180,000

Orset Ltd $ 230,000

740,000

230,000

500,000 240,000

100,000 130,000

740,000

230,000

Goodwill arising on consolidation is to be amortised over five years. Required: Prepare the consolidated balance sheet of Evon Limited and its subsidiary as at 31 March 2001. (10 marks)

4

The IASC’s Framework for the Preparation and Presentation of Financial Statements, and IAS 1 Presentation of Financial Statements, together present concepts important in the preparation of financial statements, including materiality, prudence and comparability among others. Required: (a) Explain the meaning of the following terms, giving one example of the application of each of them: (i) Materiality; (ii) Prudence.

(6 marks)

(b) Explain how international accounting standards and the Framework promote comparability.

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(4 marks) (10 marks)

5

The term ‘overtrading’ is used to describe the condition of an enterprise which is increasing its sales revenue with insufficient working capital to support the increase. Required: (a) State FOUR movements in items in financial statements or in accounting ratios that could indicate overtrading. (4 marks) (b) State THREE actions a company suffering from overtrading could take to rectify its position, and explain the likely effect of the actions you propose. (6 marks) (10 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) Section A 1

C

Effect of errors: 2 increased debit 4 increased credit

Answers

55,360 21,520 33,840

2

C

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

3

C

3

4

D

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

5

C

Cost: $860,000 – $80,000 + $180,000 = Depreciation: $397,000 – $43,000 + £96,000 =

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

$960,000 $450,000 $510,000

6

B

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

7

B

8

C

Items 1, 3 and 5 would appear in the bank reconciliation statement, items 2, 4 and 6 in the cash book.

9

C

$68,100 + $41,800 – $141,200 = $31,300 cash at bank

10

A 6 months to 30 June 2000 6 months to 31 December 2000

X $000 100 136 236 20

Less: for bad debt

216 11

A 6 months to 30 June 2000: Salaries Profit share 60:40 6 months to 31 December 2000 Salaries Profit share 40:40:20

12

C

13

A

S $000

T $000

15 96

64

25 60

60

30

196

124

30

$ 284,000 – (350)

Item 1 Item 2

U $000

No change Reduce to net realisable value

283,650 14

A

15

C

$ 39,000

Theoretical gross profit 30% x $130,000 Actual gross profit $130,000 – $49,800 – $88,600 + $32,000

23,600

Shortfall – missing inventory

15,400

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16

D

Share capital $75,000 + $15,000 + $30,000 = $120,000 Share premium $200,000 + $57,000 – $30,000 = $227,000

17

D

1, 2 and 3 are all incorrect.

18

D

19

B

20

C

21

D

22

C

200/1,500 is correct

23

A

300/2,500 is correct

24

A

25

C

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1D INTBA 1D INTIX Paper 1.1(INT) Paper 1.1(INT)

Section B 1

Tafford Limited Income statement for the year ended 30 September 2001

$000 41,600 (20,000)

Revenue Cost of sales Gross profit Distribution costs Administrative expenses

21,600 (6,285) (4,885)

Profit from operations Finance cost

10,430 1,000

Profit before tax Income tax expense

9,430 3,000

Net profit for the period

6,430

Working 1

Cost of sales

Opening inventory Purchases Distribution costs Administrative expenses Bad debts Reduction in allowance for doubtful debts Depreciation: warehouse machinery motor vehicles Profit on sale of vehicles Prepayments Accruals Closing inventory

$000 13,000 22,600

6,000

300 125 (40) (200) 100

(15,600) 20,000

1D INTBB Paper 1.1(INT)

2

(a)

Sales revenue

6,285

Administrative expenses $000

5,000 600 (800) 125 (100) 60 4,885

Sales revenue total account $ 41,600 800

Opening receivables Refunds to customers Sales

Distribution costs $000

225,100

Cash received from customers Discounts allowed Bad debts written off Contra purchases Closing receivables

267,500

$ 218,500 2,600 1,500 700 44,200 267,500 $ 225,100 124,300

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

349,400

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1D INTBB Paper 1.1(INT)

(b)

Purchases

Purchases total account $ 114,400 700 24,800

Payments to suppliers Contra sales Closing payables

Opening payables Lamorgan – goods taken Purchases

139,900 (c)

$ 22,900 400 116,600 139,900

Inventory

$ 77,700 1,300 3,000

Per inventory count Damaged item: $1,700 – $300 – $100 Goods on approval

1D INTBC Paper 1.1(INT)

82,000

3

Cost of control $ 180,000

Shares in Orset

75% share capital 75% pre-acquisition profits Accumulated profit Goodwill written off 3/5 x $60,000 Balance to CBS

180,000

$ 75,000 45,000 36,000 24,000 180,000

Minority Interest $ 57,500

Balance to CBS

25% share capital 25% accumulated profit

57,500

$ 25,000 32,500 57,500

Accumulated profit Minority interest 25% x 130,000 Cost of control: 75% x 60,000 Cost of control: Goodwill written off Balance to CBS

$ 32,500 45,000 36,000 256,500

$ 240,000 130,000

Evon Orset

370,000

370,000

Evon Limited Group Balance sheet as at 31 March 2001 $ 60,000 36,000

Goodwill Less: Amortisation Sundry net assets

$ 24,000 790,000 814,000

Share capital 500,000 shares of $1 each Accumulated profit

500,000 256,500

Minority interest

756,500 57,500 814,000

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1D INTBD Paper 1.1(INT)

4

(a)

(i)

Materiality Information is material to the financial statements if its misstatement or omission might reasonably be expected to influence the economic decisions of users taken on the basis of financial statements. Example: the amount of an inventory write-down through obsolescence will only be disclosed in financial statements if material.

(ii)

Prudence Prudence in accounting means that a degree of caution is necessary when making estimates required under conditions of uncertainty, so that assets or income are not overstated and liabilities or expenses are not understated. Example: In deciding whether to make an allowance for a debt, an allowance should be made whenever there is doubt as to the eventual receipt of the cash.

1D INTBE Paper 1.1(INT)

(b)

5

(a)

Comparability is promoted by two main means: (i)

The requirement to treat similar items in the same way within each accounting period and from one period to the next, subject to the need to change treatments if, for example, a new accounting standard requires a change. There is also a requirement when there is a change to disclose full details of its effect.

(ii)

The requirement to disclose accounting policies and changes in them. This makes comparisons with other entities easier.

Four from: (i) (ii) (iii) (iv) (v)

(b)

Longer payment period for suppliers Increasing overdraft Increasing inventories Deterioration in quick ratio (acid test) Rapid increase in sales revenues and trade receivables.

Three from: (i)

Raise additional long-term capital (equity or loan) – this would introduce more cash into the current assets without increasing the current liabilities, thus improving the working capital position.

(ii)

Negotiate an increased overdraft facility.

(iii) Attempt to clear inventories by sales at reduced prices – this would generate more cash to pay suppliers and speed up the working capital cycle. (iv) Offer cash discounts to customers to encourage prompt payment – this too would generate more cash to pay suppliers and speed up the working capital cycle. (v)

Negotiate longer payment periods from suppliers – this would ease the pressure on the enterprise and allow it to pay suppliers from the proceeds of profitable sales in due course.

(vi) Sell non-essential assets – this would realise cash to increase working capital. Other items marked on their merits.

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1D INTMS Paper 1.1(INT)

Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) Section B 1

2

3

Marking Scheme

Cost of sales Distribution costs Administrative expenses Interest Income tax expense Layout

(a) (b) (c)

½ mark per item ½ mark per item (i) (ii)

9 x ½ + ½ layout 5 x ½ + ½ layout

2 ½

Goodwill – calculation – amortisation

3 1

Minority interest – calculation Accumulated profit: Initial profit figures Minority interest Cost of control Goodwill written off

1 1 1 1

Consolidated balance sheet – format

4

(a)

(i)

Explanation Example

2 1

(ii)

Explanation Example

2 1

5

Consistency of treatment of items Disclosure of policies

(a)

1 mark per item 4 x 1

(b)

1 mark per item 3 x 1 1 mark per explanation of effect

Maximum

11½

10

5 3 2½ 10½

10

4

3

3

2

4

3

2

2

13

10

6

6

4

4

10

10

3

3 (b)

Available 1½ 3 3 1 1 2

2 2

4 3 3

6 10

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10

(International Stream) PART 1 THURSDAY 13 JUNE 2002

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

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Paper 1.1(INT)

Preparing Financial Statements

Section B – ALL FIVE questions are compulsory and MUST be attempted 1

The following information is available about the transactions of Marmot, a limited liability company, for the year ended 31 December 2001. $000 Depreciation 880 Cash paid for expenses 2,270 Increase in inventories 370 Cash paid to employees 2,820 Decrease in receivables 280 Cash paid to suppliers 4,940 Decrease in payables 390 Cash received from customers 12,800 Net profit before taxation* 2,370 *Marmot has no interest payable or investment income. Required: Compute Marmot’s net cash flow from operating activities for the company’s cash flow statement for the year ended 31 December 2001 using: (a) the direct method; (b) the indirect method. (10 marks)

2

The following balances appeared in the balance sheet of Addax, a limited liability company, at 31 March 2001. $ 840,000 370,000

Plant and equipment – cost Accumulated depreciation

In the year ended 31 March 2002 the following transactions took place: (1) Plant which had cost $100,000 with a written down value of $40,000 was sold for $45,000 on 10 December. (2) New plant was purchased for $180,000 on 1 October 2001. It is the policy of the company to charge depreciation at 10% per year on the straight line basis with a proportionate charge in the year of acquisition and no charge in the year of sale. None of the plant was over ten years old at 31 March 2001. Required: (a) Prepare ledger accounts recording the above transactions. A cash account is NOT required.

(5 marks)

(b) List the items which should appear in Addax’s cash flow statement for the year ended 31 March 2002 based on these transactions and using the indirect method, including the headings under which they should appear. Note. The headings from IAS 7 are to be used.

(4 marks) (9 marks)

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3

The following information is available about the balances and transactions of Alpaca, a limited liability company. Balances at 30 April 2001 Non-current assets – cost Non-current assets – accumulated depreciation Inventories Receivables Cash at bank Payables Issued share capital – ordinary shares of $1 each Accumulated profits 10% Loan notes Loan note interest owing

$ 1,000,000 230,000 410,000 380,000 87,000 219,000 400,000 818,000 200,000 10,000

Transactions during year ended 30 April 2002: Sales revenue Purchases Expenses Interest on loan notes paid during year Issue of 100,000 $1 ordinary shares at a premium of 50c

$ 4,006,000 2,120,000 1,640,000 20,000 per share

There were no purchases or sales of non-current assets during the year. Adjustments at 30 April 2002 (1) Depreciation of $100,000 is to be allowed for. (2) Receivables totalling $20,000 are to be written off. Balances at 30 April 2002 (1) (2) (3) (4)

Inventory Receivables (before writing off debts shown above) Cash at bank Trade payables

$ 450,000 690,000 114,000 180,000

Required: Prepare the balance sheet of Alpaca as at 30 April 2002 using the format in IAS 1 Presentation of Financial Statements as far as the information available allows. Note: No formal income statement is required, but your answer should include a working showing your computation of the accumulated profit figure in the balance sheet. This working carries 4 of the 11 marks available in all. (11 marks)

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4

Financial statements must be prepared according to established accounting concepts, many of which may be found in the IASB’s Framework for the Preparation and Presentation of Financial Statements. Define and explain the relevance of the following accounting concepts: (a) Going concern

(3 marks)

(b) Accruals

(2 marks)

(c) Substance over form

(3 marks)

(d) Historical cost

(2 marks) (10 marks)

5

The summarised financial statements of Weden, a limited liability company engaged in manufacturing, are shown below: Income statement Year ended 31 March 2001 $000 $000 3,200

Sales revenue Cost of sales Opening inventory Purchases less: Closing inventory

800 1,800

300 3,200

2,600 300

3,500 500 (2,300)

(3,000)

900 (400) (100)

1,000 (450) (200)

400

350

Balance sheets 31 March 2001 $000 $000 1,970

31 March 2002 $000 $000 4,000

Gross profit Expenses Interest paid Net profit

Non-current assets Current assets Inventory Receivables – trade Prepayments Cash

300 600 60 50

500 800 70 10

Issued share capital Share premium account Accumulated profits Non-current liabilities 10% loan notes Current liabilities Payables – trade Accruals

31 March 2002 $000 $000 4,000

380 50

1,010

1,380

2,980

5,380

600 200 750

600 200 1,100

1,550

1,900

1,000

2,000

430

1,400 80

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1,480 5,380

Required: (a) Compute the following five ratios for each of the two years: (i)

return on capital employed

(ii) return on owners’ equity (iii) current ratio (iv) inventory turnover (use closing figures) (v) number of days’ purchases in trade payables

(5 marks)

(b) Comment briefly on the changes in the company’s results and position between the two years, mentioning possible causes for the changes. (5 marks) (10 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

Answers

Section B 1

(a)

Net cash flow from operating activities – direct method $000 Cash Cash Cash Cash

receipts from customers paid to suppliers paid to employees paid for expenses

$000 12,800

4,940 2,820 2,270 10,030

Net cash flow from operating activities (b)

2,770

Net cash flow from operating activities – indirect method Net profit before taxation Adjustment for: Depreciation

2,370 880

Operating profit before working capital changes Increase in inventories Decrease in receivables Decrease in payables

3,250 (370) 280 (390)

Net cash from operating activities

2,770

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2

(a)

Plant and equipment – cost $ 2001 840,000 10 Dec Transfer disposal 2002 180,000 31 Mar Balance

2001 1 April Balance 1 Oct Cash

$ 100,000 920,000

1,020,000

1,020,000

Plant and equipment – depreciation 2001 10 Dec Transfer – disposal 2002 31 Mar Balance

$ 60,000 393,000

2001 1 April Balance 2002 31 March Income statement (74,000 + 9,000)

$ 370,000 83,000

453,000

453,000

Plant and equipment – disposal 2001 10 Dec Transfer – cost

$ 100,000

2002 31 Mar Income statement

2001 10 Dec Transfer – depreciation Cash

$ 60,000 45,000

5,000 105,000

(b)

105,000

Addax Cash flow statement for the year ended 31 March 2002

(extracts) $

Cash flow from operating activities Net profit before taxation Adjustments for: Depreciation Profit on sale of plant

83,000 (5,000)

Cash flows from investing activities Purchase of plant Proceeds of sale of plant

(180,000) 45,000

3

Alpaca Balance Sheet as at 30 April 2002 ASSETS Non-current assets: cost accumulated depreciation Current assets: Stocks Receivables Cash at bank

$

$

1,000,000 330,000

670,000

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

EQUITY AND LIABILITIES Capital and reserves Issued capital Share premium Accumulated profits (working)

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

Non-current liabilities 10% Loan notes

200,000

Current liabilities Payables Interest accrued

180,000 10,000

190,000 1,904,000

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Working for accumulated profits $ Balance at 30 April 2001 Sales revenue Purchases Expenses Opening inventories Closing inventories Interest payable Depreciation Bad debts written off

$ 818,000 4,006,000

2,120,000 1,640,000 410,000 450,000 20,000 100,000 20,000 4,310,000

5,274,000 4,310,000

Balance at 30 April 2002

4

(a)

964,000

Going concern The going concern assumption means that financial statements are prepared on the basis that the business will continue for the foreseeable future. The application of the concept is relevant to many items in the financial statements. (i)

Inventory is valued on the basis that it will be disposed of in sales in the normal course of business rather than in a forced bulk sale.

(ii)

Non-current assets are valued at cost less depreciation rather than their immediate sale value.

(iii) Non-current liabilities are distinguished from current liabilities in assessing a company’s liquidity position. (b)

Accruals The accruals concept is that income and expenses are recognised in the period to which they relate and not in the period in which they are paid. The relevance of the concept is that profit or loss figures would be meaningless if the inclusion of items of income or expense depended on whether they had been received or paid.

(c)

Substance over form Substance over form means that if the real nature and effect of a transaction differ from its legal form, the real nature and effect should be recognised instead of the legal form, unless legislation prohibits this. The relevance of the concept is that its application improves the usefulness of the financial statements by preventing certain creative accounting practices.

(d)

Historical cost The historical cost convention is that assets are recorded at their initial cost and are not subsequently revalued upwards, and liabilities valued at the amount initially received in exchange for the obligation. The relevance of the convention is that figures remain objectively based on verifiable figures, but in times of high inflation historical cost can become a dubious convention to follow.

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5

(a) Year ended 31 March 2001 (i)

(ii)

Return on capital employed 500/2,550 550/3,900

19·6%

Return on owners’ equity 400/1,550 350/1,900

25·8%

14·1%

18·4%

(iii) Current ratio 1,010/430 1,380/1,480

2·35:1 0·93:1

(iv) Inventory turnover 2,300/300 3,000/500 (full credit given for correct answer in days) (v)

(b)

31 March 2002

7·67 times 6·0 times

Payables’ days 1,380/1,800 x 365 1,400/3,200 x 365

77 days 160 days

Comment All ratios show a marked deterioration in 2002 compared with 2001. Return on capital employed (ROCE) and return on owners’ equity (ROOE) are at reasonable levels in 2002, but are considerably below the levels in 2001. A possible cause is the decline in the gross profit percentage caused by reducing prices to increase sales. ROOE shows a return in excess of ROCE in both years, and well in excess of the interest payable on the loan, showing that the shareholders are continuing to benefit from the gearing effect of the loan. The current ratio is seriously reduced to a potentially dangerous level. The consequence is the slowness in paying suppliers, which must be eroding suppliers’ goodwill, evidenced by the increase in creditors’ days from 77 days to 160. In effect, suppliers’ money is being used to finance the very heavy purchasing of non-current assets. The inventory turnover ratio has declined, indicating a possible slowing of activity. The decline could be caused simply by a large purchase of goods just before the balance sheet date.

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

1

(a)

1 mark per item

(b)

1 mark per item Agreement of totals

Marking scheme Available and Maximum 4 5 1 10

2

3

(a)

1/ 2

mark per entry 12 x 1/2

(b)

1 mark per item 4 x 1

Accumulated depreciation Receivables Issued capital Share premium Interest accrued

Layout and style

Accumulated profits working mark per item

1/ 2

4

Available 6

Maximum 5

4

4

10

9

1 1 1 1 1

1 1 1 1 1

5

5

2

2

7

7

41/2

4

111/

11

2

1(a) Definition Relevance

2 1

3

1(b) Definition Relevance

1 1

2

1(c) Definition Relevance

2 1

3

1(d) Historical Definition Relevance

1 1

2 10

5

(a)

1 mark per ratio 5 x 1

5

(b)

1 mark per comment 5 x 1

5 10

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(International Stream) PART 1 THURSDAY 5 DECEMBER 2002

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

The debit side of a trial balance totals $800 more than the credit side. Which one of the following errors would fully account for the difference?

2

A

$400 paid for plant maintenance has been correctly entered in the cash book and credited to the plant asset account.

B

Discount received $400 has been debited to discount allowed account.

C

A receipt of $800 for commission receivable has been omitted from the records.

D

The petty cash balance of $800 has been omitted from the trial balance.

A company receives rent from a large number of properties. The total received in the year ended 31 October 2002 was $481,200. The following were the amounts of rent in advance and in arrears at 31 October 2001 and 2002: 31 October 2001 $ 28,700 21,200

Rent received in advance Rent in arrears (all subsequently received)

31 October 2002 $ 31,200 18,400

What amount of rental income should appear in the company’s income statement for the year ended 31 October 2002? A

$486,500

B

$460,900

C

$501,500

D

$475,900

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3

A company receives rent for subletting part of its office block. Rent, receivable quarterly in advance, is received as follows: Date of receipt 1 October 2001 30 December 2001 4 April 2002 1 July 2002 1 October 2002

Period covered

$

3 months to 31 December 2001 31 March 2002 30 June 2002 30 September 2002 31 December 2002

7,5007,500 9,000 9,000 9,000

What figures, based on these receipts, should appear in the company’s financial statements for the year ended 30 November 2002?

4

Income statement

Balance sheet

A

$34,000 Debit

Prepayment (Dr) $3,000

B

$34,500 Credit

Accrual (Cr) $6,000

C

$34,000 Credit

Accrual (Cr) $3,000

D

$34,000 Credit

Prepayment (Dr) $3,000

A company’s plant and machinery ledger account for the year ended 30 September 2002 was as follows: Plant and machinery – cost 2001 1 October Balance 1 December Cash – addition

$ 381,200 18,000

2002 $ 1 June Disposal account – cost of asset sold 36,000 30 September Balance 363,200

399,200

399,200

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in years of purchase and sale. What is the depreciation charge for the year ended 30 September 2002? A

$74,440

B

$84,040

C

$72,640

D

$76,840

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5

The following bank reconciliation statement has been prepared by a trainee accountant: Bank reconciliation 30 September 2002 Balance per bank statement (overdrawn) add: Lodgements credited after date

$ 36,840 51,240

less: Outstanding cheques

88,080 43,620

Balance per cash book (credit)

44,460

Assuming the amounts stated for items other than the cash book balance are correct, what should the cash book balance be?

6

A

$44,460 credit as stated

B

$60,020 credit

C

$29,220 debit

D

$29,220 credit

Listed below are some possible causes of difference between the cash book balance and the bank statement balance when preparing a bank reconciliation: (1) Cheque paid in, subsequently dishonoured. (2) Error by bank (3) Bank charges (4) Lodgements credited after date (5) Outstanding cheques not yet presented. Which of these items require an entry in the cash book? A

(1) and (3) only

B

(1), (2), (3), (4) and (5)

C

(2), (4), and (5) only

D

(1), (2) and (3) only

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7

Which of the following items could appear on the credit side of a receivables ledger control account? (1) Cash received from customers (2) Bad debts written off (3) Increase in allowance for doubtful debts (4) Discounts allowed (5) Sales (6) Credits for goods returned by customers (7) Cash refunds to customers

8

A

(1), (2), (4) and (6)

B

(1), (2), (4) and (7)

C

(3), (4), (5) and (6)

D

(5) and (7)

A business has compiled the following information for the year ended 31 October 2002: Opening inventory Purchases Closing inventory

$ 386,200 989,000 422,700

The gross profit as a percentage of sales is always 40% Based on these figures, what is the sales revenue for the year? A

$1,333,500

B

$1,587,500

C

$2,381,250

D

The sales revenue figure cannot be calculated from this information

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9

A fire on 30 September 2002 destroyed some of a company’s inventory and its inventory records. The following information is available: $ 318,000 612,000 412,000 214,000

Inventory 1 September 2002 Sales for September 2002 Purchases for September 2002 Inventory in good condition at 30 September 2002 Standard gross profit percentage on sales is 25%

Based on this information, what is the value of the inventory lost? A

$96,000

B

$271,000

C

$26,400

D

$57,000

10 Which of the following inventory valuation methods is likely to lead to the lowest figure for closing inventory at a time when prices are rising? A

Average cost

B

First in, first out (FIFO)

C

Last in, first out (LIFO)

D

Replacement cost

11 Which of the following costs may be included when arriving at the cost of finished goods inventory for inclusion in the financial statements of a manufacturing company? (1) Carriage inwards (2) Carriage outwards (3) Depreciation of factory plant (4) Finished goods storage costs (5) Factory supervisors’ wages A

(1) and (5) only

B

(2), (4) and (5) only

C

(1), (3) and (5) only

D

(1), (2), (3) and (4) only

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12 Listed below are some characteristics of financial information. (1) Neutrality (2) Prudence (3) Completeness (4) Timeliness Which of these characteristics contribute to reliability, according to the IASC’s Framework for the Preparation and Presentation of Financial Statements? A

(1), (2) and (3) only

B

(1), (2) and (4) only

C

(1), (3) and (4) only

D

(2), (3) and (4) only

13 Which of the following statements about accounting concepts are correct? (1) The money measurement concept is that only items capable of being measured in monetary terms can be recognised in financial statements. (2) The prudence concept means that understating of assets and overstating of liabilities is desirable in preparing financial statements. (3) The historical cost concept is that assets are initially recognised at their transaction cost. (4) The substance over form convention is that, whenever legally possible, the economic substance of a transaction should be reflected in financial statements rather than simply its legal form. A

(1), (2) and (3)

B

(1), (2) and (4)

C

(1), (3) and (4)

D

(2), (3) and (4)

14 P and Q are in partnership, sharing profits in the ratio 3:2 and compiling their accounts to 30 June each year. On 1 January 2002 R joined the partnership, and from that date the profit-sharing ratio became P 50%, Q 25% and R 25%, after providing for salaries for Q and R as follows: Q

$20,000 per year

R

$12,000 per year

The partnership profit for the year ended 30 June 2002 was $480,000, accruing evenly over the year. What are the partners’ total profit shares for the year ended 30 June 2002?

A

P $ 256,000

Q $ 162,000

R $ 62,000

B

248,000

168,000

64,000

C

264,000

166,000

66,000

D

264,000

156,000

60,000

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15 The issued share capital of Alpha, a limited liability company, is as follows: Ordinary shares of 10c each 8% Preference shares of 50c each

$ 1,000,000 500,000

In the year ended 31 October 2002, the company has paid the preference dividend for the year and an interim dividend of 2c per share on the ordinary shares. A final ordinary dividend of 3c per share is proposed. What is the total amount of dividends relating to the year ended 31 October 2002? A

$580,000

B

$90,000

C

$130,000

D

$540,000

16 When a company makes a rights issue of equity shares which of the following effects will the issue have? (1) Working capital is increased (2) Gearing ratio is increased (3) Share premium account is reduced (4) Investments are increased A

(1) only

B

(1) and (2)

C

(3) only

D

(1) and (4)

17 Which of the following items may appear as current liabilities in a company’s balance sheet? (1) Minority interests in subsidiaries. (2) Loan due for repayment within one year. (3) Taxation. (4) Preference dividend payable A

(1), (2) and (3)

B

(1), (2) and (4)

C

(1), (3) and (4)

D

(2), (3) and (4)

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18 What is the correct treatment of extraordinary items in a company’s income statement, according to IAS8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies? A

Add to or subtract from profit after tax.

B

Include in calculating profit from operations with an explanatory note.

C

Show separately in the income statement as part of profit from operations with an explanatory note.

D

Exclude from income statement and disclose by note.

19 A company made an issue for cash of 1,000,000 50c shares at a premium of 30c per share. Which of the following journal entries correctly records the issue?

A

B

Share capital Share premium Bank Bank

Debit $ 500,000 300,000

Credit $

800,000 800,000

Share capital Share premium C

Bank

500,000 300,000 1,300,000

Share capital Share premium D

Share capital Share premium Bank

1,000,000 300,000 1,000,000 300,000 1,300,000

20 Which of the following items could appear in a company’s cash flow statement? (1) Surplus on revaluation of non-current assets. (2) Proceeds of issue of shares. (3) Proposed dividend. (4) Bad debts written off. (5) Dividends received. A

(1), (2) and (5) only

B

(2), (3), (4), (5) only

C

(2) and (5) only

D

(3) and (4) only

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21 Part of the process of preparing a company’s cash flow statement is the calculation of cash inflow from operating activities. Which of the following statements about that calculation (using the indirect method) are correct? (1) Loss on sale of operating non-current assets should be deducted from net profit before taxation. (2) Increase in inventory should be deducted from operating profits. (3) Increase in payables should be added to operating profits. (4) Depreciation charges should be added to net profit before taxation. A

(1), (2) and (3)

B

(1), (2) and (4)

C

(1), (3) and (4)

D

(2), (3) and (4)

22 Which of the following might appear as an item in a company’s statement of changes in equity? (1) Profit on disposal of properties. (2) Surplus on revaluation of properties (3) Equity dividends proposed after the balance sheet date. (4) Issue of share capital. A

(1), (3) and (4) only

B

(2) and (4) only

C

(1) and (2) only

D

(3) and (4) only

23 Which of the following statements about research and development expenditure are correct? (1) Research expenditure, other than capital expenditure on research facilities, should be recognised as an expense as incurred. (2) In deciding whether development expenditure qualifies to be recognised as an asset, it is necessary to consider whether there will be adequate finance available to complete the project. (3) Development expenditure recognised as an asset must be amortised over a period not exceeding five years. A

(1), (2) and (3)

B

(1) and (2) only

C

(1) and (3) only

D

(2) and (3) only

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24 Which one of the following would help a company with high gearing to reduce its gearing ratio? A

Making a rights issue of equity shares.

B

Issuing further long-term loan notes.

C

Making a bonus issue of shares.

D

Paying dividends on its equity shares.

25 Which one of the following would cause a company’s gross profit percentage on sales to fall? A

Sales volume has declined.

B

Closing inventory is lower than opening inventory.

C

Some closing inventory items were included at less than cost.

D

Selling and distribution costs have risen.

(50 marks)

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[P.T.O.

Section B – ALL FIVE questions are compulsory and MUST be attempted 1

The following items have been extracted from the trial balance of Cronos, a limited liability company, as at 30 September 2002: Reference to notes $ $ Opening inventory 186,400 Purchases 1,748,200 Carriage inwards 38,100 Carriage outwards 2 47,250 Sales 3,210,000 Trade receivables 318,000 Wages and salaries 2 and 3 694,200 Sundry administrative expenses 2 381,000 Allowance for doubtful debts, as at 1 October 2001 4 18,200 Bad debts written off during the year 4 14,680 Office equipment as at 1 October 2001: Cost 5 214,000 Accumulated depreciation 5 88,700 Office equipment: additions during year 5 48,000 Office equipment: proceeds of sale of items during year 5 12,600 Interest paid 2 30,000 Notes 1 Closing inventory amounted to $219,600 2

Prepayments and accruals Prepayments $ Carriage outwards Wages and salaries Sundry administrative expenses Interest payable

3

4,900

Accruals $ 1,250 5,800 13,600 30,000

Wages and salaries cost is to be allocated: –

cost of sales

10%



distribution costs

20%



administrative expenses

70%

4

Further bad debts totalling $8,000 are to be written off, and the closing allowance for doubtful debts is to be equal to 5% of the final trade receivables figure. The bad and doubtful debt expense is to be included in administrative expenses.

5

Office equipment: Depreciation is to be provided at 20% per annum on the straight line basis, with a full year’s charge in the year of purchase and none in the year of sale. During the year equipment which had cost $40,000, with accumulated depreciation of $26,800, was sold for $12,600.

Required: Prepare the company’s income statement in accordance with IAS 1. Notes to the income statement are not required. (12 marks)

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2

The trial balance of Rhea, a limited liability company, at 30 June 2002 failed to agree and a suspense account was opened with a debit balance of $386,400 pending further action to find the difference. Subsequent checking revealed the following errors: (1) The balance of $48,900 on the carriage outwards account was omitted from the trial balance. (2) Discount columns in the cash book had been misposted: –

Discount allowed $38,880 had been credited to discount received account.



Discount received $68,200 had been debited to discount allowed account.

(3) An issue of 100,000 $1 ordinary shares in exchange for an asset with an agreed value of $400,000 had been recorded by crediting ordinary share capital account with $400,000 and debiting the non-current asset account with $400,000. Required: (a) Prepare journal entries with narratives to correct these errors. (b) Write up the suspense account and bring down the balance of difference not yet found. (9 marks)

3

Helios acquired 80% of the ordinary share capital of Luna for $700,000 on 1 July 1999, when the retained profits of Luna amounted to $60,000. There have been no movements on Luna’s share capital or share premium account since that date. At 30 June 2002 the balance sheets of the two companies were as follows:

Tangible non-current assets Investment in Luna Net current assets

Share capital Share premium account Accumulated profit

Helios $ 280,000 700,000 130,000

Luna $ 490,000

1,110,000

750,000

600,000 350,000 160,000

400,000 200,000 150,000

1,110,000

750,000

260,000

The policy of Helios is to amortise goodwill arising on consolidation over five years on the straight line basis. Required: Prepare the consolidated balance sheet of Helios and its subsidiary as at 30 June 2002. (11 marks)

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4

Required: Explain the extent, if any, to which the following assets should be depreciated/amortised. (a) Land and buildings that have been revalued upwards since acquisition.

(3 marks)

(b) Capitalised development expenditure on a project expected to begin commercial production in two years’ time. (3 marks) (c) A holding of quoted equity shares.

(2 marks) (8 marks)

5

The directors of a company are considering the company’s draft financial statements for the year ended 30 September 2002. The following material points are unresolved: (a) One of the company’s buildings was destroyed in a flood in October 2002. The estimated value of the building was $4m, but it was insured for only $3m. The company’s going concern status is not jeopardised. The directors are unsure what adjustment or disclosure, if any, should be made. (2 marks) (b) The company gives warranties on its products at the time of sale, undertaking to repair or replace any defective item free of charge. Some directors believe that an allowance should be made for estimated warranty liabilities at 30 September 2002 based on sales to that date, and other directors argue that the expense of warranty work should be borne in the period in which it is incurred. (2 marks) (c) Some goods which had cost $120,000, and which were included in closing inventory at 30 September 2002 at that figure, were subsequently sold for $80,000 after they were found to have deteriorated while held in inventory. The directors are unsure whether to adjust the inventory figure downwards by $40,000 or allow the loss to fall in the period when the deterioration was discovered. (2 marks) (d) The company had supplied $100,000 worth of goods to a customer on a sale or return basis in September 2002. The transaction was included as a credit sale in the accounting records, and as a result a profit of $20,000 was taken. In October 2002 the customer returned all of the items in good condition. (4 marks) Required: Advise the board of directors as to the correct treatment of each of these items, quoting the authority for your advice in each case and stating the effect, if any, on the income statement and balance sheet. (10 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

December 2002 Answers

Section A 1 B $400 debit which should have been credited – correction will bring trial balance into agreement. 2

D Rent Receivable $ 21,200 475,900 31,200

O/Balance Income Statement C/Balance

$ 28,700 481,200 18,400

O/Balance Cash C/Balance

528,300

3.

C

528,300

$2,500 + $7,500 + $9,000 + $9,000 + $6,000 One month in advance = $3,000 Cr.

4

D

$ 69,040 3,000 4,800

20% × $345,200 10/ 12 × 20% × $18,000 8/ 12 × 20% × $36,000

76,840 5

D

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

6

A

7

A

8

B

$952,500 × 100/60 = $1,587,500

9

D

Sales Opening inventory Purchases

318,000 412,000

less: Inventory held

730,000 214,000

Shortfall

516,000 57,000

$

Gross profit 25%

$ 612,000

459,000 153,000

10 C 11 C 12 A 13 C 14 A 15 D

5c × 10,000,000 + 8% × $500,000

16 A 17 D 18 A 19 B 20 C

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21 D 22 B 23 B 24 A 25 C

Section B 1

Cronos Limited Income statement for the year ended 30 September 2002 $

Sales Cost of sales (W1) Gross profit Distribution costs (W1) Administrative expenses (W1)

$ 3,210,000 (1,823,100) 1,386,900

(188,500) (944,680)

(1,133,180)

Profit from operations Interest payable (30,000 + 30,000)

253,720 (60,000)

Net profit for the year

193,720

Working 1

Opening inventory Purchases Carriage inwards Carriage outwards (47,250 + 1,250) Wages and salaries 694,200 5,800 700,000 Sundry administrative expenses (381,000 + 13,600 – 4,900) Bad and doubtful debts (14,680 + 8,000 – 2,700) Depreciation of office equipment 20% × (214,000 – 40,000 + 48,000) Loss on sale Closing inventory

Cost of Sales $ 186,400 1,748,200 38,100

Distribution Costs $

Administrative Expenses $

48,500

70,000

140,000

490,000

389,700 19,980 44,400 600 (219,600) 1,823,100

188,500

944,680

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2

(a)

Journal entries (1) Trial balance (no ledger entry) Suspense account Correction for carriage outwards balance omitted from trial balance

48,900

(2) Discount received Discount allowed Suspense account Suspense account Discount received Discount allowed

38,880 38,880

48,900

77,760 136,400 68,200 68,200

Correction of discount totals Wrong discount amount posted to the wrong side (3) Ordinary share capital account Share premium account

300,000 300,000

Correction of error in recording issue of shares – $300,000 wrongly credited to ordinary share capital account. Suspense Account

(b) Difference Discount accounts

$ 386,400 136,400

Trial balance (carriage outwards) Discount accounts Balance

522,800

3

$ 48,900 77,760 396,140 522,800

Helios Consolidated balance sheet as at 30 June 2002 Non-current assets Goodwill Tangible assets

$ 68,800 770,000

Net current assets

838,800 390,000 1,228,800

Share capital Share premium account Accumulated profit

600,000 350,000 128,800 1,078,800 150,000

Minority interest

1,228,800

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Cost of control

Investment in Luna

$ 700,000

Share Capital 80% Share Premium 80% Accumulated profits 80% pre-acq Balance – goodwill

700,000 Balance

172,000

$ 320,000 160,000 48,000 172,000 700,000

Amortisation 20% × 3 years Balance

172,000

103,200 68,800 172,000

Minority interest

Balance for CBS

$ 150,000

Share Capital 20% Share Premium 20% Accumulated profits 20%

150,000

$ 80,000 40,000 30,000 150,000

Accumulated profits $ Cost of control 80% × $60,000 Minority interest 20% × $150,000 Cost of control Goodwill amortisation Balance for CBS

48,000

Helios Luna

30,000 103,200 128,800 310,000

4

(a)

$ 160,000 150,000

310,000

The values of the land and the buildings need to be separated, because the land would not normally require depreciation. The revalued amount of the buildings should be depreciated over the estimated remaining useful economic life at the time of the revaluation. The straight-line method is usually adopted, but other methods such as the reducing balance method may be used.

(b)

Development costs should be amortised, using a method that reflects the pattern in which the economic benefits of the costs are consumed by the enterprise. If this pattern cannot be determined reliably, the straight-line method should be used. If the circumstances justifying the deferral of the expenditure cease to apply at any time, the expenditure should be written off to the extent that it is no longer recoverable.

5

(c)

Investments of this kind do not depreciate, though they may fluctuate in value. Accordingly no depreciation is provided for them.

(a)

IAS 10 Events after the Balance Sheet Date classifies this type of event as non-adjusting – no change to the figures in the financial statements is required but there should be a note to ensure that the financial statements are not misleading. The note should state the amount of the loss and the extent of the insurance cover.

(b)

A provision should be made for the estimated amount of the liabilities under warranties, as required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The provision will appear as a liability in the balance sheet and the operating profit will be reduced by the amount of the allowance.

(c)

This is an adjusting event according to IAS 10 Events after the Balance Sheet Date. The closing inventory should be reduced by $40,000 in the balance sheet and in cost of sales, thus reducing operating profit by this amount, unless it could be shown that the deterioration had taken place after the balance sheet date

(d)

The goods have to be treated as trading inventory at September 2002, applying generally accepted accounting principles. The effect on the income statement and balance sheet will be: (i)

Sales and trade receivables both reduced by $100,000.

(ii)

Closing inventory increased by $80,000.

The combined effect of the two adjustments is to reduce current assets and profit by $20,000.

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

1

Sales revenue Cost of sales Distribution costs Administrative expenses: Wages and salaries Sundry admin. expenses Bad and doubtful debts Depreciation Loss on sale

December 2002 Marking scheme Available 1/ 2

5 × 1/2 2 × 1/2

21/2 1

1 1 11/2 11/2 1

6 91/2 1 2

Interest payable Format

13

2

(1) Journal entry Narrative

1/ 2

1

(2) Journal entry Narrative

1/ 2

(3) Journal entry Narrative

1/ 2

11/2

2 21/2

1

Suspense account Per entry Final balance

3×1

11/2

3 1/ 2

31/2 9

3

Maximum

Calculation of goodwill Goodwill amortisation

4 × 1/2

Calculation of minority interest Calculation of accumulated profits Initial profits Adjustments

3 × 1/2

2 1

2 × 1/2 3×1

1 3

Consolidated balance sheet – format Assets Capital and reserves Minority interest

1 1 1/ 2

3 11/2

4

21/2 11

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12

Available 4

(a)

(b)

(c)

5

(a)

(b)

(c)

(d)

Land and buildings separated Land not normally depreciated Revalued amount for buildings depreciated over the remaining useful economic life

1

Amortised Basis of amortisation Written off if no longer recoverable

1 1 1

Value fluctuating but does not depreciate No depreciation required

1 1

Maximum

1 1

Non-adjusting event Disclose by note IAS 10 mentioned Contents of note

1/ 2 1/ 2 1/ 2 1/ 2

Allowance required IAS 37 mentioned Effect on accounts

1/ 2 1/ 2

Adjusting event IAS 10 mentioned Effect on accounts

1/ 2 1/ 2

1

1

Description of adjustment Generally accepted accounting principles Adjustments to: Sales Receivables Closing inventory Effect on profit

3

3

3

3

2

2

8

8

2

2

2

1 1 1/ 2 1/ 2 1/ 2 1/ 2

4 10

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(International Stream) PART 1 THURSDAY 5 JUNE 2003

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent was increased from $90,000 per year to $120,000 per year as from 1 October 2002. What rent expense and accrual should be included in the company’s financial statements for the year ended 31 January 2003? Rent expense $

2

Accrual $

A

100,000

20,000

B

100,000

10,000

C

97,500

10,000

D

97,500

20,000

Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alpha’s payables ledger account for Beta shows a balance due to Beta of $4,140. Investigation reveals the following: (1) Cash paid to Beta $4,080 has not been allowed for by Beta. (2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta. (3) Goods returned by Alpha $380 have not been recorded by Beta. What discrepancy remains between Alpha’s and Beta’s records after allowing for these items? A

$9,310

B

$390

C

$310

D

$1,070

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3

An inexperienced bookkeeper has drawn up the following receivables ledger control account: Receivables Ledger Control Account

Opening balance Cash from credit customers Sales returns Cash refunds to credit customers Discount allowed

$ 180,000 228,000 8,000 3,300 4,200 ———— 423,500 ————

Credit sales Bad debts written off Contras against payables Closing balance (balancing figure)

$ 190,000 1,500 2,400 229,600 ———— 423,500 ————

What should the closing balance be after correcting the errors made in preparing the account?

4

A

$130,600

B

$129,200

C

$142,400

D

$214,600

At 31 March 2002 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil bill for $3,600. At 31 March 2003 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of $3,200. Payments made for heating oil during the year ended 31 March 2003 totalled $34,600. Based on these figures, what amount should appear in the company’s income statement for heating oil for the year?

5

A

$23,900

B

$36,100

C

$45,300

D

$33,100

At 31 December 2002 a company’s receivables totalled $400,000 and an allowance for doubtful debts of $50,000 had been brought forward from the year ended 31 December 2001. It was decided to write off debts totalling $38,000 and to adjust the allowance for doubtful debts to 10% of the receivables. What charge for bad and doubtful debts should appear in the company’s income statement for the year ended 31 December 2002? A

$74,200

B

$51,800

C

$28,000

D

$24,200

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[P.T.O.

6

The plant account of a company is shown below: Plant – Cost 2002 $ 1 January Balance (plant purchased 1999) 380,000 1 April Cash – plant purchased 51,000

2002 1 October Transfer disposal account – cost of plant sold 31 December Balance

———— 431,000 ————

$ 30,000 401,000 ———— 431,000 ————

The company’s policy is to charge depreciation on plant at 20% per year on the straight line basis, with proportionate depreciation in years of purchase and sale. What should the company’s plant depreciation charge be for the year ended 31 December 2002?

7

A

$82,150

B

$79,150

C

$77,050

D

$74,050

In preparing a company’s bank reconciliation statement at March 2003, the following items are causing the difference between the cash book balance and the bank statement balance: (1) Bank charges $380 (2) Error by bank $1,000 (cheque incorrectly debited to the account) (3) Lodgements not credited $4,580 (4) Outstanding cheques $1,475 (5) Direct debit $350 (6) Cheque paid in by the company and dishonoured $400 Which of these items will require an entry in the cash book? A

2, 4 and 6

B

1, 5 and 6

C

3 and 4

D

3 and 5

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8

The closing inventory at cost of a company at 31 January 2003 amounted to $284,700. The following items were included at cost in the total: (1) 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in manufacture, they were all sold after the balance sheet date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds. (2) 800 skirts, which had cost $20 each. These too were found to be defective. Remedial work in February 2003 cost $5 per skirt, and selling expenses for the batch totalled $800. They were sold for $28 each. What should the inventory value be according to IAS 2 Inventories after considering the above items?

9

A

$281,200

B

$282,800

C

$329,200

D

None of these.

A company values its inventory using the first in, first out (FIFO) method. At 1 May 2002 the company had 700 engines in inventory, valued at $190 each. During the year ended 30 April 2003 the following transactions took place: 2002 1 July

Purchased

500 engines

at $220 each

1 November

Sold

400 engines

for $160,000

1 February

Purchased

300 engines

at $230 each

15 April

Sold

250 engines

for $125,000

2003

What is the value of the company’s closing inventory of engines at 30 April 2003? A

$188,500

B

$195,500

C

$166,000

D

None of these figures.

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[P.T.O.

10 Which of the following statements about the valuation of inventory are correct, according to IAS2 Inventories? (1) Inventory items are normally to be valued at the higher of cost and net realisable value. (2) The cost of goods manufactured by an enterprise will include materials and labour only. Overhead costs cannot be included. (3) If LIFO (last in, first out) is used to value inventory, additional disclosures must be made in the financial statements. (4) Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable approximation to actual cost. A

1, 3 and 4 only

B

1 and 2 only

C

3 only

D

3 and 4 only.

The following information is relevant for questions 11 and 12. When Q’s trial balance failed to agree, a suspense account was opened for the difference. The trial balance totals were: Debit $864,390 Credit $860,930 The company does not have control accounts for its receivables and payables ledgers. The following errors were found: (1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capital account as $330,000. (2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant asset account. (3) The petty cash book balance $500 had been omitted from the trial balance. (4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as $87,400. (5) A contra between the receivables ledger and the payables ledger for $1,200 which should have been credited in the receivables ledger and debited in the payables ledger was actually debited in the receivables ledger and credited in the payables ledger.

11 Which of these errors will require an entry to the suspense account to correct them? A

All five items

B

3 and 5 only

C

2, 4 and 5 only

D

1, 2, 3 and 4 only.

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12 What will the balance on the suspense account be after making the necessary entries to correct the errors affecting the suspense account? A

$2,440 Debit

B

$15,560 Credit

C

$13,640 Debit

D

$3,440 Debit.

13 Which of the following statements about research and development expenditure are correct according to IAS38 Intangible Assets? (1) If certain conditions are met, an enterprise may decide to capitalise development expenditure. (2) Research expenditure, other than capital expenditure on research facilities, must be written off as incurred. (3) Capitalised development expenditure must be amortised over a period not exceeding 5 years. (4) Capitalised development expenditure must be disclosed in the balance sheet under intangible non-current assets. A

1, 2 and 4 only

B

1 and 3 only

C

2 and 4 only

D

3 and 4 only.

14 Listed below are some comments on accounting concepts. (1) In achieving a balance between relevance and reliability, the most important consideration is satisfying as far as possible the economic decision-making needs of users. (2) Materiality means that only items having a physical existence may be recognised as assets. (3) The substance over form convention means that the legal form of a transaction must always be shown in financial statements, even if this differs from the commercial effect. Which, if any, of these comments is correct, according to the IASB’s Framework for the Preparation and Presentation of Financial Statements? A

1 only

B

2 only

C

3 only

D

None of them.

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[P.T.O.

15 Which of the following explanations of the prudence concept most closely follows that in the IASB’s Framework for the Preparation and Presentation of Financial Statements? A

The application of a degree of caution in exercising judgement under conditions of uncertainty

B

Revenue and profits are not recognised until realised, and provision is made for all known liabilities

C

All legislation and accounting standards have been complied with

D

Understatement of assets or gains and overstatement of liabilities or losses.

16 In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset values and profit? A

Asset values and profit both understated

B

Asset values and profit both overstated

C

Asset values understated and profit overstated

D

Asset values overstated and profit understated.

17 At 31 December 2002 the following matters require inclusion in a company’s financial statements: (1) On 1 January 2002 the company made a loan of $12,000 to an employee, repayable on 30 April 2003, charging interest at 2 per cent per year. On the due date she repaid the loan and paid the whole of the interest due on the loan to that date. (2) The company has paid insurance $9,000 in 2002, covering the year ending 31 August 2003. (3) In January 2003 the company received rent from a tenant $4,000 covering the six months to 31 December 2002. For these items, what total figures should be included in the company’s balance sheet at 31 December 2002? Currents assets $

Current liabilities $

A

22,000

240

B

22,240

nil

C

10,240

nil

D

16,240

6,000

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18 At 31 December 2001 the capital structure of a company was as follows: $ Ordinary share capital 100,000 shares of 50c each

50,000

Share premium account

180,000

During 2002 the company made a bonus issue of 1 share for every 2 held, using the share premium account for the purpose, and later issued for cash another 60,000 shares at 80c per share. What is the company’s capital structure at 31 December 2002? Ordinary share capital $

Share premium account $

A

130,000

173,000

B

105,000

173,000

C

130,000

137,000

D

105,000

137,000

19 Listed below are some items that may appear in a company’s income statement, either separately disclosed or included in another figure. (1) Profit or loss on discontinuing operations (2) Profit or loss on the sale of part of the enterprise (3) Extraordinary items According to International Accounting Standards, which of these items must always be shown separately if material to avoid misleading users? A

All three items

B

1 and 2 only

C

1 and 3 only

D

2 and 3 only.

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[P.T.O.

20 In the course of preparing a company’s cash flow statement, the following figures are to be included in the calculation of net cash from operating activities. $ Depreciation charges

980,000

Profit on sale of non-current assets

40,000

Increase in inventories

130,000

Decrease in receivables

100,000

Increase in payables

80,000

What will the net effect of these items be in the cash flow statement? $ A

Addition to operating profit

890,000

B

Subtraction from operating profit

890,000

C

Addition to operating profit

1,070,000

D

Addition to operating profit

990,000

The following information is relevant for questions 21 to 23 On 1 January 2000 Alpha purchased 80,000 ordinary $1 shares in Beta for $180,000. At that date Beta’s retained profits amounted to $90,000 and the fair values of Beta’s assets at acquisition were equal to their book values. Three years later, on 31 December 2002, the balance sheets of the two companies were:

Sundry net assets Shares in Beta

Share capital Ordinary shares of $1 each Accumulated profits

Alpha $

Beta $

230,000 180,000 ———— 410,000 ————

260,000 – ———— 260,000 ————

200,000 210,000 ———— 410,000 ————

100,000 160,000 ———— 260,000 ————

The share capital of Beta has remained unchanged since 1 January 2000. Goodwill on consolidation is being amortised over four years.

21 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for goodwill? A

$25,000

B

$28,000

C

$7,000

D

$14,000

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22 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for minority interest? A

$52,000

B

$20,000

C

$34,000

D

$32,000

23 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for accumulated profits? A

$266,000

B

$338,000

C

$370,000

D

$245,000

24 A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December 2001 to 27% in the year ended 31 December 2002. Which of the following events is most likely to have caused the increase? A

An increase in sales volume

B

A purchase in December 2001 mistakenly being recorded as happening in January 2002

C

Overstatement of the closing inventory at 31 December 2001

D

Understatement of the closing inventory at 31 December 2001.

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[P.T.O.

25 A company’s capital structure at December 2002 is as follows: $m Ordinary share capital Accumulated profits

8% Loan notes

380 120 —— 500 100 —— 600 ——

The company’s income statement shows the following for the year ended 31 December 2002: $m Operating profit Interest paid

Taxation

Dividends paid Retained profit for year

40 8 —— 32 10 —— 22 10 —— 12 ——

What is the return on equity shareholders’ capital employed, using closing capital figures? A

4·4%

B

2·4%

C

3·7%

D

5·8%

(50 marks)

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Section B – ALL FIVE questions are compulsory and MUST be attempted 1

Alamute and Brador have been in partnership for several years, compiling their financial statements for the year ending 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5% per year. Extracts from their trial balance at 31 March 2003 are given below: Reference to notes Capital accounts: Alamute Brador Current accounts: Alamute Brador Drawings: Alamute Brador Office equipment: cost 1 accumulated depreciation, 1 April 2002 Inventory, 1 April 2002 2 Trade receivables 3 Allowance for doubtful debts, 1 April 2002 3 Sales revenue Purchases Rent paid 4 Salaries Insurance 5 Sundry expenses

$ 50,000 50,000 3,800 Credit 2,600 Debit 48,400 36,900 48,300 12,800 15,600 68,400 3,800 448,700 184,600 30,000 88,000 4,000 39,400

Notes: (1) Office equipment should be depreciated at 20% per year on the reducing balance basis. (2) Closing inventory amounted to $21,400. (3) Debts of $2,400 are to be written off, and the allowance for doubtful debts is to be adjusted to 5% of trade receivables. (4) Rent paid $30,000 is the amount for the nine months to 31 December 2002. From that date the rent was increased by 10%. (5) Insurance paid in advance amounted to $1,500. Required (a) Prepare the partnership’s income statement and a statement showing the division of profit among the partners for the year ended 31 March 2003. (9 marks) (b) Write up the partners’ current accounts for the year ended 31 March 2003.

(3 marks) (12 marks)

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[P.T.O.

2

The balance sheets of Paniel at 31 March 2002 and 2003 were as follows: 31 March Reference to notes

2002 $

2003 $

Non-current assets Less: accumulated depreciation

2

2,140,000 (580,000) ————— 1,560,000

3,060,000 (840,000) ————— 2,220,000

Net current assets

3

1,520,000 ————— 3,080,000 —————

1,570,000 ————— 3,790,000 —————

1,000,000 800,000 480,000 ————— 2,280,000 800,000 ————— 3,080,000 —————

1,100,000 900,000 590,000 ————— 2,590,000 1,200,000 ————— 3,790,000 —————

Ordinary share capital Share premium account Accumulated profits

6% Loan notes

4

Notes 1

The net cash generated from operating activities for the year is $746,000, before deducting interest paid on the loan notes.

2

During the year the company sold non-current assets which had cost $480,000 for $280,000.

3

The net current asset figures include cash at bank: 31 March 2002 31 March 2003

$14,000 $18,000

All other movements in net current assets have already been allowed for in computing the net cash inflow from operating activities given in Note 1 above. Dividends paid, when computed, should be included in financing activities. 4

The loan note issue during the year took place on 1 April 2002, and all interest for the year ended 31 March 2003 was paid in the year.

5

The profit for the year ended 31 March 2003 before allowing for dividends paid was $260,000.

6

Ignore taxation.

Required: Prepare the company’s cash flow statement for the year ended 31 March 2003, beginning with the net cash inflow from operating activities given in Note 1 above. (9 marks)

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3

(a) The net assets of Altese, a trader, at 1 January 2002 amounted to $128,000. During the year to 31 December 2002 Altese introduced a further $50,000 of capital and made drawings of $48,000. At 31 December 2002 Altese’s net assets totalled $184,000. Required: Using this information compute Altese’s total profit for the year ended 31 December 2002.

(3 marks)

(b) Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for the year ended 31 January 2003 from the following information: $ 130,400 171,250 888,400

Trade payables 31 January 2002 31 January 2003 Payment to suppliers Cost of goods taken from inventory by Senji for her personal use Refunds received from suppliers Discounts received

1,000 2,400 11,200

Required: Compute the figure for purchases for inclusion in Senji’s financial statements.

(3 marks)

(c) Aluki fixes prices to make a standard gross profit percentage on sales of 331/3%. The following information for the year ended 31 January 2003 is available to compute her sales total for the year. Inventory: 1 February 2002 31 January 2003 Purchases Purchases returns

$ 243,000 261,700 595,400 41,200

Required: Calculate the sales figure for the year ended 31 January 2003.

(3 marks) (9 marks)

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[P.T.O.

4

Extracts from the financial statements of Apillon for the years ended 31 March 2002 and 2003 are given below: Year ended 31 March Income statement

2002 $

Sales revenue (including cash sales $300,000 in 2002 and $100,000 in 2003)

2003 $

$

3,100,000

$ 3,800,000

Cost of sales Opening inventory Purchases (all on credit)

Less: closing inventory

360,000 2,080,000 ————— 2,440,000 540,000 —————

540,000 2,580,000 ————— 3,120,000 (1,900,000) 720,000 ————— ————— 1,200,000 (900,000) ————— 300,000 —————

540,000 450,000 ————

720,000 700,000 ————

Gross profit Expenses Net profit Balance Sheet Current assets Inventory Trade receivables Current liabilities Trade payables Bank overdraft

410,000 20,000 ————

990,000

430,000

690,000 170,000 ————

(2,400,000) ————— 1,400,000 (1,100,000) ————— 300,000 —————

1,420,000

860,000

Required: (a) Calculate the following for each of the two years: (i) (ii) (iii) (iv) (v)

Current ratio; Quick ratio (acid test); Inventory turnover period (use closing inventory); Average period of credit allowed to customers; Average period of credit taken from suppliers.

Calculate items (iii), (iv) and (v) in days.

(5 marks)

(b) Make four brief comments on the changes in the position of the company as revealed by the changes in these ratios and/or in the given figures from the financial statements. (4 marks) (9 marks)

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5

(a) The term ‘reserves’ is frequently found in company balance sheets. Required: (i)

Explain the meaning of ‘reserves’ in this context;

(ii) Give two examples of reserves and explain how each of your examples comes into existence. (6 marks) (b) A company’s issued share capital may be increased by a bonus (capitalisation) issue or by a rights issue. Required: Define ‘bonus issue’ and ‘rights issue’ and explain the fundamental difference between these two types of share issue. (5 marks) (11 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2003 Answers

Section A 1

B

8 months at 90,000 per year, 4 months at 120,000 per year; accrual 1 month

2

C

(8,950 – 4,080 – 380) – (4,140 + 40) = 310

3

B

180 + 190 + 3·3 – 228 – 8 – 4·2 – 1·5 – 2·4 = 129·2

4

D

8,200 + 34,600 + 3,200 – 3,600 – 9,300 = 33,100

5

D

38,000 – (50,000 – 36,200) = 24,200

6

A

(350,000 + 9/12 x 30,000 + 9/12 x 51,000) x 20% = 82,150

7

B

8

A

284,700 – (32,000 – 28,500) = 281,200

9

A

300 @ 230 + 500 @ 220 + 50 @ 190 = 188,500

10 D 11 D 12 A

3,000 + 9,000 – 3,460 – 5,600 – 500 = 2,440

13 C 14 A 15 A 16 C 17 B

12,000 + 240 + 6,000 + 4,000 = 22,240

18 B

Share capital 50 + 25 + 30 Share premium 180 – 25 + 18

19 A 20 D

980 – 40 – 130 + 100 + 80 = 990

21 C

180 – 152 – 21 = 7

22 A

20% x 260 = 52

23 D

210 + 160 – 72 – 32 – 21 = 245

24 D 25 A

22/500 = 4·4%

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Section B 1

(a)

Alamute and Brador Income statement for the year ended 31 March 2003 $ Sales Revenue Cost of sales:

Opening inventory Purchases

Less: Closing inventory

Gross profit Less: Expenses:

Salaries Rent (30,000 + 11,000) Insurance (4,000 – 1,500) Sundry expenses Depreciation (35,500 × 20%) Bad and doubtful debts (2,400 – 500)

15,600 184,600 ———— 200,200 21,400 ————

Alamute $

Net profit Interest on capital

Balance of profit 60:40

1,900 ————

2,500

51,000 ———— 53,500 ————

34,000 ———— 36,500 ————

(179,900) ———— 90,000 ———— Total $ 90,000 (5,000) ———— 85,000 (85,000) ———— – ————

Current Accounts Alamute $

Balance Drawings Balance

Brador $

2,500

(b)

(178,800) ———— 269,900

88,000 41,000 2,500 39,400 7,100

Net profit Division of profit

$ 448,700

48,400 8,900 ––––––– 57,300 –––––––

Brador $ 2,600 36,900 ––––––– 39,500 –––––––

Balance Share of profit Balance

Alamute $ 3,800 53,500 ––––––– 57,300 –––––––

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Brador $ 36,500 3,000 ––––––– 39,500 –––––––

2

Paniel Cash flow statement for the year ended 31 March 2003 $ 746,000 (72,000) ————

Net cash inflow from operating activities Interest paid Cash flows from investing activities Purchase of non-current assets (W1) Proceeds from sale of non-current assets

(1,120,000)

Cash flows from financing activities Proceeds from issuance of share capital Proceeds from long-term borrowings Dividends paid (260,000 – 110,000)

200,000 400,000 (150,000) —————

Net cash from financing activities

450,000 ———— 4,000 14,000 ———— 18,000 ————

Increase in cash Cash at 31 March 2002 Cash at 31 March 2003

Fixed assets – cost $ 2,140,000 1,400,000 ————— 3,540,000 —————

Opening balance Purchases

3

674,000

(1,400,000) 280,000 —————

Net cash used in investing activities

Workings 1

$

(a)

Transfer – disposal Closing balance

$ 480,000 3,060,000 ————— 3,540,000 —————

$ 128,000 50,000 ———— 178,000 48,000 ———— 130,000 184,000 ———— 54,000 ————

Opening capital Capital introduced

Less: Drawings

Closing capital Profit is therefore

(b)

Payments to suppliers Discounts received Balance carried forward

Purchases Total Account $ Balance brought forward 888,400 Goods taken by Senji 11,200 Refunds from suppliers Purchases 171,250 ————— 1,070,850 —————

$ 130,400 1,000 2,400 937,050 ————— 1,070,850 —————

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(c)

$ Cost of sales: Opening inventory Purchases Less: Returns

$ 243,000

595,400 41,200 ————

554,200 ———— 797,200 Less: Closing inventory 261,700 ———— 535,500 ———— Sales figure is therefore $535,500 × 3/2 = $803,250

4

(a) (i)

Current ratio 990,000/430,000 1,420,000/860,000

Year ended 31 March 2002 2003 2.3:1 1·65:1

(ii)

Quick ratio

1·05:1 0·81:1

(iii) Inventory turnover 540,000/1,900,000 × 365 720,000/2,400,000 × 365

104 days

(iv) Average period of credit allowed to customers 450,000/2,800,000 × 365 700,000/3,700,000 × 365

59 days

(v)

(b)

450,000/430,000 700,000/860,000

109 days

69 days

Average period of credit allowed by suppliers 410,000/2,080,000 × 365 690,000/2,580,000 × 365

72 days 98 days

Comments (i)

The current ratio and quick ratio are both down by over 20%. The drop in the quick ratio to below 1:1 could indicate liquidity problems.

(ii)

The increase in sales, and hence in receivables, purchases and payables, is placing strain on the working capital, evidenced by the increase in the receivables and payables payment periods.

(iii) The business is one requiring large holdings of inventory, but inventory control appears to have deteriorated slightly between the two years (iv) Cash sales have decreased considerably in 2003. Making more sales for cash could contribute to an improvement in the current and quick ratios because this would reduce the overdraft. Other comments considered on their merits.

5

(a)

(i)

Reserves are balances in a company’s balance sheet forming part of the equity interest and representing surpluses or gains, whether realised or not.

(ii)

Share premium account The surplus arising when shares are issued at a price in excess of their par value. Revaluation reserve The unrealised gain when the amount at which non-current assets are carried is increased above cost. (Other examples given credit on their merits)

(b)

A bonus issue is the conversion of reserves into share capital, with shares being issued to existing members in proportion to their shareholdings, without any consideration being given by the shareholders. A rights issue is again an issue of shares to existing members in proportion to their shareholdings, but with payment being made by the shareholders for the shares allotted to them. The fundamental difference between them is that the rights issue raises funds for the company whereas the bonus issue does not.

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2003 Marking Scheme Marks

1

Gross profit (4 × 1/2) Rent Insurance Depreciation Bad and doubtful debts

2 1 1 1 1

Division of profit

2 —— 8

Layout and style

1 ——

Current accounts Share of profit Drawings Balances 2 × 1/2

2

1 1 1 ——

Interest paid

1

Capital expenditure Purchases of non-current assets Proceeds of sale of non-current assets

2 1

Financing Issue of shares Issue of loan notes Dividends paid Increase in cash and cash movement

(a)

3 —— 12 ——

1 1 2 11/2

Format and style

3

9

1 ——

101/2 max 9

1/ 2

Opening capital Capital introduced Drawings Closing capital

1 1 1/ 2 ——

3

(Marks awarded for having figures the correct way round)

4

mark per item 6 × 1/2

(b)

1/ 2

(c)

Opening inventory Purchases Purchases returns Closing inventory

1/ 2 1/ 2 1/ 2 1/ 2

Sale figure correct

1 ——

(a)

1 mark per pair of ratios 5 × 1

(b)

1 mark per valid comment 4 × 1

3

3 ——

9

5 4 ——

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9

Marks 5

(a)

(b)

(i)

Definition Examples 2 × 1 Origins 2 × 1

2 2 2 ——

Bonus issue Rights issue Difference

2 2 1 ——

6

5 ——

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11

(International Stream) PART 1 THURSDAY 4 DECEMBER 2003

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

At 1 July 2002 the doubtful debt allowance of Q was $18,000. During the year ended 30 June 2003 debts totalling $14,600 were written off. It was decided that the doubtful debt allowance should be $16,000 as at 30 June 2003. What amount should appear in Q’s income statement for bad and doubtful debts for the year ended 30 June 2003?

2

A

$12,600

B

$16,600

C

$48,600

D

$30,600.

A company’s trial balance totals were: Debit

$387,642

Credit

$379,511

A suspense account was opened for the difference. Which ONE of the following errors would have the effect of reducing the difference when corrected?

3

A

The petty cash balance of $500 has been omitted from the trial balance

B

$4,000 received for rent of part of the office has been correctly recorded in the cash book and debited to Rent account

C

No entry has been made in the records for a cash sale of $2,500

D

$3,000 paid for repairs to plant has been debited to the plant asset account.

The bookkeeper of Peri made the following mistakes: Discount allowed $3,840 was credited to Discounts Received account. Discount received $2,960 was debited to Discounts Allowed account. Discounts were otherwise correctly recorded. Which of the following journal entries will correct the errors?

A

B

C D

Dr $ 7,680

Discount allowed Discount received Suspense account

Cr $ 5,920 1,760

Discount allowed Discount received Suspense account

880 880

Discount allowed Discount received

6,800

Discount allowed Discount received Suspense account

3,840

1,760 6,800 2,960 880 2

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4

The following bank reconciliation statement has been prepared by a trainee accountant: $ Overdraft per bank statement 3,860 less: Outstanding cheques 9,160 ––––––– 5,300 add: Deposits credited after date 16,690 ––––––– Cash at bank as calculated above 21,990 ––––––– What should be the correct balance per the cash book?

5

A

$21,990 balance at bank as stated

B

$3,670 balance at bank

C

$11,390 balance at bank

D

$3,670 overdrawn.

The following receivables ledger control account has been prepared by a trainee accountant 2003

$

1 Jan Balance 31 Dec Credit sales

2003 31 Dec Cash received from credit customers Contras against amounts owing by company in payables ledger

284,680 189,120

Discounts allowed Bad debts written off Sales returns

3,660 1,800 4,920 –––––––– 484,180 ––––––––

Balance

$ 179,790 800

303,590 –––––––– 484,180 ––––––––

What should the closing balance on the account be when the errors in it are corrected?

6

A

$290,150

B

$286,430

C

$282,830

D

$284,430.

Which of the following calculations could produce an acceptable figure for a trader’s net profit for a period if no accounting records had been kept? A

Closing net assets plus drawings minus capital introduced minus opening net assets

B

Closing net assets minus drawings plus capital introduced minus opening net assets

C

Closing net assets minus drawings minus capital introduced minus opening net assets

D

Closing net assets plus drawings plus capital introduced minus opening net assets.

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[P.T.O.

7

A company with an accounting date of 31 October carried out a physical check of inventory on 4 November 2003, leading to an inventory value at cost at this date of $483,700. Between 1 November 2003 and 4 November 2003 the following transactions took place: (1) Goods costing $38,400 were received from suppliers. (2) Goods that had cost $14,800 were sold for $20,000. (3) A customer returned, in good condition, some goods which had been sold to him in October for $600 and which had cost $400. (4) The company returned goods that had cost $1,800 in October to the supplier, and received a credit note for them. What figure should appear in the company’s financial statements at 31 October 2003 for closing inventory, based on this information?

8

A

$458,700

B

$505,900

C

$508,700

D

$461,500.

In preparing its financial statements for the current year, a company’s closing inventory was understated by $300,000. What will be the effect of this error if it remains uncorrected?

9

A

The current year’s profit will be overstated and next year’s profit will be understated

B

The current year’s profit will be understated but there will be no effect on next year’s profit

C

The current year’s profit will be understated and next year’s profit will be overstated

D

The current year’s profit will be overstated but there will be no effect on next year’s profit.

A sole trader took some goods costing $800 from inventory for his own use. The normal selling price of the goods is $1,600. Which of the following journal entries would correctly record this?

A B C D

Dr $ 1,800

Inventory account Purchases account

Cr $ 1,800

Drawings account Purchases account

1,800

Sales account Drawings account

1,600

Drawings account Sales account

1,800

1,800 1,600 1,800

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10 A company’s gross profit percentage on sales has decreased by 5% in 2002 compared with 2001. Which one of the following matters could have caused the decrease? A

The level of sales in 2002 is lower than that in 2001

B

There have been more bad debts in 2002 than in 2001

C

Inventory at the end of 2002 is lower than that at the end of 2001

D

Theft of inventory by staff and customers has increased.

11 A sole trader fixes his prices to achieve a gross profit percentage on sales revenue of 40%. All his sales are for cash. He suspects that one of his sales assistants is stealing cash from sales revenue. His trading account for the month of June 2003 is as follows: $ 181,600 114,000 –––––––– 167,600 ––––––––

Recorded sales revenue Cost of sales Gross profit

Assuming that the cost of sales figure is correct, how much cash could the sales assistant have taken? A

$5,040

B

$8,400

C

$22,000

D

It is not possible to calculate a figure from this information.

12 P, after having been a sole trader for some years, entered into partnership with Q on 1 July 2002, sharing profits equally. The business profit for the year ended 31 December 2002 was $340,000, accruing evenly over the year, apart from a charge of $20,000 for a bad debt relating to trading before 1 July 2002 which it was agreed that P should bear entirely. How is the profit for the year to be divided between P and Q? P Q $000 $000 A

245

95

B

250

90

C

270

90

D

255

85

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[P.T.O.

13 Part of a company’s draft cash flow statement is shown below: $000 8,640 (2,160) 360 (330) 440

Operating profit Depreciation charges Proceeds of sale of non-current assets Increase in inventory Increase in accounts payable The following criticisms of the above extract have been made: (1) Depreciation charges should have been added, not deducted. (2) Increase in inventory should have been added, not deducted. (3) Increase in accounts payable should have been deducted, not added.

(4) Proceeds of sale of non-current assets should not appear in this part of the cash flow statement. Which of these criticisms are valid? A

2 and 3 only

B

1 and 4 only

C

1 and 3 only

D

2 and 4 only.

14 In preparing a company’s cash flow statement complying with IAS 7 Cash Flow Statements, which, if any, of the following items could form part of the calculation of cash flow from financing activities? (1) Proceeds of sale of premises (2) Dividends received (3) Bonus issue of shares A

1 only

B

2 only

C

3 only

D

None of them.

15 Which of the following assertions about cash flow statements is/are correct? (1) A cash flow statement prepared using the direct method produces a different figure for operating cash flow from that produced if the indirect method is used. (2) Rights issues of shares do not feature in cash flow statements. (3) A surplus on revaluation of a non-current asset will not appear as an item in a cash flow statement. (4) A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing Activities in a cash flow statement. A

1 and 4

B

2 and 3

C

3 only

D

2 and 4.

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16 Which of the following statements concerning the accounting treatment of research and development expenditure are true, according to IAS 38 Intangible Assets? (1) Development costs recognised as an asset must be amortised over a period not exceeding five years. (2) Research expenditure, other than capital expenditure on research facilities, should be recognised as an expense as incurred. (3) In deciding whether development expenditure qualifies to be recognised as an asset, it is necessary to consider whether there will be adequate finance available to complete the project. (4) Development projects must be reviewed at each balance sheet date, and expenditure on any project no longer qualifying for capitalisation must be amortised through the income statement over a period not exceeding five years. A

1 and 4

B

2 and 4

C

2 and 3

D

1 and 3.

17 Which of the following statements about accounting concepts and policies is/are correct? (1) The effect of a change to an accounting policy should be disclosed as an extraordinary item if material. (2) Information in financial statements should be presented so as to be understood by users with a reasonable knowledge of business and accounting. (3) Companies should create hidden reserves to strengthen their financial position. (4) Consistency of treatment of items from one period to the next is essential to enhance comparability between companies, and must therefore take precedence over other accounting concepts such as prudence. A

1 and 4

B

2 and 3

C

3 and 4

D

2 only.

18 Which, if any, of the following statements are correct according to IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies? (1) The correction of a fundamental error relating to a past period should be made in the current period. It is not acceptable to make the correction by adjusting the opening balance of retained earnings. (2) A change in an accounting estimate constitutes a fundamental error and should be accounted for as such. (3) The benchmark treatment for a change of accounting policy is normally to apply it retrospectively, with adjustment to the opening balance of retained earnings. A

1 only

B

2 only

C

3 only

D

None of the statements are correct.

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[P.T.O.

19 Which of the following statements about company financial statements is/are correct, according to International accounting standards? (1) A material profit or loss on the sale of part of the entity must appear in the income statement as an extraordinary item. (2) Dividends paid and proposed should be included in the income statement. (3) The income statement must show separately any material profit or loss from operations discontinuing during the year. (4) The statement of changes in equity must not include unrealised gains or losses. A

1, 2 and 3

B

2 and 4

C

3 only

D

1 and 4.

20 Which of the following items are required to be disclosed in a limited liability company’s financial statements according to IAS 1 Presentation of Financial Statements? (1) Authorised share capital (2) Finance costs (3) Staff costs (4) Depreciation and amortisation A

1, 2 and 3 only

B

1, 2 and 4 only

C

2, 3 and 4 only

D

All four items.

21 At 30 June 2002 a company’s capital structure was as follows: $ Ordinary share capital 500,000 shares of 25c each Share premium account

125,000 100,000

In the year ended 30 June 2003 the company made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the share premium account for the purpose. What was the company’s capital structure at 30 June 2003? Ordinary share capital $

Share premium account $

A

450,000

125,000

B

225,000

250,000

C

225,000

325,000

D

212,500

262,500

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22 At 30 June 2002 a company had $1m 8% loan notes in issue, interest being paid half-yearly on 30 June and 31 December. On 30 September 2002 the company redeemed $250,000 of these loan notes at par, paying interest due to that date. On 1 April 2003 the company issued $500,000 7% loan notes, interest payable half-yearly on 31 March and 30 September. What figure should appear in the company’s income statement for interest payable in the year ended 30 June 2003? A

$88,750

B

$82,500

C

$65,000

D

$73,750.

23 Which of the following material events after the balance sheet date and before the financial statements are approved by the directors should be adjusted for in those financial statements? (1) A valuation of property providing evidence of impairment in value at the balance sheet date. (2) Sale of inventory held at the balance sheet date for less than cost. (3) Discovery of fraud or error affecting the financial statements. (4) The insolvency of a customer with a debt owing at the balance sheet date which is still outstanding. A

All of them

B

1, 2 and 4 only

C

3 and 4 only

D

1, 2 and 3 only.

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[P.T.O.

24 A company’s summarised financial statements, ignoring tax, are shown below: Income statement

Balance sheet $m Non-current assets

Profit before interest Interest paid

200 (80) –––– 120

Profit after interest Dividends paid

Net current assets

Ordinary share capital Reserves

(40)

Loan capital –––– 80 ––––

Retained profit

$m 1,000 1,600 –––––– 2,600 –––––– 1,000 800 –––––– 1,800 800 –––––– 2,600 ––––––

What is the correct calculation of return on shareholders’ capital employed? A

120/1,800 = 16·7%

B

200/2,600 = 17·7%

C

40/1,800 1= 12·2%

D

120/1,000 = 12·0%

25 The capital of a limited liability company is made up as follows: $m Issued ordinary share capital 1,000 Share premium account 1,500 Accumulated profits 3,000 8% loan notes 1,500 Which of the following calculations of the company’s gearing ratio, based on these figures, is correct? A

1,500/6,000 = 1 25%

B

4,500/1,500 = 300%

C

4,500/6,000 = 1 75%

D

1,500/1,000 = 150% (50 marks)

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This is a blank page. Section B begins on page 12.

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[P.T.O.

Section B – ALL FIVE questions are compulsory and must be attempted 1

(a) At 31 December 2002 the following balances existed in the accounting records of Abrador, a limited liability company

Issued share capital – 2,000,000 ordinary shares of 50c each Share premium account Suspense account Accumulated profits Deferred development costs Property, plant and equipment – cost depreciation at 31 December 2001 Inventory at 31 December 2002 Trade receivables Overdraft at bank Trade payables Allowance for doubtful debts at 31 December 2001 6% loan notes

Reference to notes

$

1 1 1 2

1,000,000 400,000 800,000 7,170,000 570,000 5,000,000 1,000,000 3,900,000 3,400,000 100,000 1,900,000 100,000 400,000

3 4

4 5

Notes 1 On 31 December 2002 the company issued for cash 1,000,000 ordinary shares at a premium of 30c per share. The proceeds have been debited to cash and credited to the suspense account. 2

The profit for the year is included in the figure of $7,170,000 above but does not include adjustments for Notes 3 and 4 below.

3

Depreciation is to be provided at 25% per year on the reducing balance basis, on the property, plant and equipment.

4

Debts totalling $400,000 are to be written off and the provision for doubtful debts adjusted to 3% of the receivables.

5

The 6% loan notes are due for redemption on 31 December 2003 and the obligation is not to be refinanced. All interest due to 31 December 2002 has been paid.

Required: Prepare the company’s balance sheet as at 31 December 2002 for publication, using the format in IAS 1 Presentation of Financial Statments. Note. The information in (b) below is not relevant for this part of the question.

(8 marks)

(b) The deferred development costs of $570,000 in (a) above are made up as follows: Project A Completed by 31 December 2001 Balance of costs as at 31 December 2001 Amortised 2002

$ 400,000 (100,000) –––––––––

Project B In progress Total costs as at 31 December 2001 Further costs in 2002

150,000 120,000 –––––––––

Balance as at 31 December 2002

$ 300,000

270,000 ––––––––– 570,000 –––––––––

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The charge in the income statement for 2002 was $185,000 made up as follows: $ 100,000

Project A Amortisation Project C Research costs written off

85,000

Required: State the figures for the disclosure note summarising this information required by IAS 38 Intangible Assets. A statement of the company’s policy for research and development expenditure is NOT required. (4 marks) (12 marks)

2

The accounting records of Riffon, a limited liability company included the following balances at 30 June 2002: $ Office buildings – cost 1,600,000 Office buildings – accumulated depreciation Office buildings – (10 years at 2% per year) 1,320,000 Plant and machinery – cost (all purchased in 2000 or later) 1,840,000 Plant and machinery – accumulated depreciation Plant and machinery – (straight line basis at 25% per year) 1,306,000 During the year ended 30 June 2003 the following events occurred: 2002 1 July

It was decided to revalue the office building to $2,000,000, with no change to the estimate of its remaining useful life.

1 October New plant costing $200,000 was purchased. 2003 1 April

Plant which had cost $240,000 and with accumulated depreciation at 30 June 2002 of $180,000 was sold for $70,000.

It is the company’s policy to charge a full year’s depreciation on plant in the year of acquisition and none in the year of sale. Required: Prepare the following ledger accounts to record the above balances and events: (a) Office building: cost/valuation (a) Office building: accumulated depreciation (a) Office building: revaluation reserve.

(6 marks)

(b) Plant and machinery: cost (b) Plant and machinery: accumulated depreciation (b) Plant and machinery: disposal.

(6 marks) (12 marks)

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[P.T.O.

3

On 1 November 1999 Eagle, a limited liability company, acquired 70% of the share capital of Oxer for $180,000. At this date the accumulated profits of Oxer amounted to $150,000. The balance sheets of the two companies at 31 October 2003 were as follows: Eagle $ 180,000 490,000 ––––––––– 670,000 ––––––––– 220,000 450,000 ––––––––– 670,000 –––––––––

Investment in Oxer Sundry net assets

Ordinary share capital Accumulated profits

Oxer $ 410,000 –––––––– 410,000 –––––––– 100,000 310,000 –––––––– 410,000 ––––––––

Eagle’s policy is to amortise goodwill arising on consolidation over five years. Required: Prepare the consolidated balance sheet of Eagle and its subsidiary at 31 October 2003. (8 marks)

4

The directors of Aluki, a fashion wholesaler, are reviewing the company’s draft financial statements for the year ended 30 September 2003, which show a profit of $900,000 before tax. The following matters require consideration: (a) The closing inventory includes: (i)

3,000 skirts at cost $40,000. Since the balance sheet date they have all been sold for $65,000, with selling expenses of $3,000.

(ii) 2,000 jackets at cost $60,000. Since the balance sheet date half the jackets have been sold for $25,000 (selling expenses $1,800) and the remainder are expected to sell for $20,000 with selling expenses of $2,000. (2 marks) (b) An employee dismissed in August 2003 began an action for damages for wrongful dismissal in October 2003. She is claiming $100,000 in damages. Aluki is resisting the claim and the company’s lawyers have advised that the employee has a 30% chance of success in her claim. The financial statements currently include a provision for the $100,000 claim.

(4 marks)

(c) In October 2003 a fire destroyed part of the company’s warehouse, with an uninsured loss of inventory worth $180,000 and damage to the building, also uninsured, of $228,000. The going concern status of the company is not affected. The financial statements currently make no mention of the fire losses.

(3 marks)

Required: Explain to the directors how these matters should be treated in the financial statements for the year ended 30 September 2003, stating the relevant accounting standards. (9 marks)

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5

The use of historical cost as a basis for accounting is widespread. Required: (a) Explain THREE ways in which the use of historical cost accounting may mislead users of financial statements. (6 marks) (b) Briefly state THREE reasons why historical cost accounting remains in use in spite of its limitations. (3 marks) (9 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream)

December 2003 Answers

Section A 1

A A B C D

2

B

3

B

4

B B C D

5

C A B C

D 6

A

7

D A B C D

8

C

9

B

16,000 18,000 18,000 16,000

+ + + +

14,600 – 18,000 14,600 – 16,000 14,600 + 16,000 14,600

16,690 – 9,160 – 3,860 16,690 + 3,860 – 9,160 As B but overdrawn C + 2 x $3,660 discounts allowed C + 2 x $1,800 bad debts written off Sales ledger control account $ $ 284,680 3,660 189,120 1,800 4,920 179,790 800 Balance 282,830 –––––––– –––––––– 473,800 473,800 –––––––– –––––––– C + $1,600 (contras)

483,700 483,700 483,700 483,700

– 38,400 + + 38,400 – + 38,400 – – 38,400 +

14,800 14,800 14,800 14,800

+ 400 – + 400 – – 400 + – 400 +

1,800 1,800 1,800 1,800 (Correct)

10 D 11 B A B C 12 B A B C D

$181,600 x 40% = 72,640 – 67,600 = $5,040 $114,000 x 10/6 = $190,000 – 181,600 = $8,400 (correct) $181,600 – (114,000 + 40%) P Q P Q P Q P Q

(340,000 – 95,000 180,000 + 90,000 180,000 + 90,000 170,000 + 85,000

20,000)/2 + 170,000/2 90,000 – 20,000 (Correct) 90,000 85,000

13 B 14 D 15 C 16 C 17 D 18 C

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19 C 20 D 21 B A B C D 22 D A B C D

All rights issue proceeds added to share capital Bonus issue 75,000 125,000 + 62,500 + 37,500; 100,000 + 187,500 – 37,500 (correct) As B, but bonus issue added to share premium Bonus issue does not allow for previous issue. $80,000 + 7% x $500,000 x 3/12 As D but including 7% x $500,000 x 6/12 instead of 3/12 As D but excluding 7% x $500,000 x 3/12 8% x $1m x 3/12 + 8% x $750,000 x 9/12 + 7% x $500,000 x 3/12

23 A 24 A 25 A

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Section B 1

(a)

Abrador Balance sheet as at 31 December 2002 $

Assets Non-current assets Property, plant and equipment (W1) Development costs Current assets Inventory Receivables (W2)

3,000,000 570,000 –––––––––– 3,900,000 2,910,000 ––––––––––

Equity and liabilities Capital and reserves Issued share capital Share premium account Accumulated profits (W3)

Curent liabilities Trade payables Bank overdraft 6% loan notes

3,570,000

6,810,000 –––––––––– 10,380,000 ––––––––––

1,500,000 700,000 5,780,000 –––––––––– 7,980,000 1,900,000 100,000 400,000 ––––––––––

Workings 1 Property, plant and equipment per question less: depreciation at 31 December 2001

2,400,000 –––––––––– 10,380,000 –––––––––– 5,000,000 1,000,000 –––––––––– 4,000,000 1,000,000 –––––––––– 3,000,000 ––––––––––

less: 25% x 4,000,000

2

$

Receivables less: Written off

3,400,000 400,000 –––––––––– 3,000,000 90,000 –––––––––– 2,910,000 ––––––––––

less: Allowance

$ 3

Accumulated profit Per question less: Depreciation Bad debts Allowance for doubtful debts

7,170,000 1,000,000 400,000 (10,000) –––––––––

1,390,000 –––––––––– 5,780,000 ––––––––––

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(b) $ Movements on deferred development expenditure during year Balance at 31 December 2001 New expenditure in 2002

550,000 120,000 ––––––––– 670,000 (100,000) ––––––––– 570,000 –––––––––

Amortisation for year Deferred development expenditure at 31 December 2002 Total expenditure on research and development charged in income statement Current expenditure Amortisation

2

(a)

85,000 100,000 ––––––––– 185,000 –––––––––

Office building – cost/valuation 2002 1 July Balance 1 July Revaluation

$ 1,600,000 400,000 –––––––––– 2,000,000

$

Office building – accumulated depreciation 2002 1 July Revaluation reserve 2003 30 June Balance

$ 320,000

2002 1 July Balance 2003 30 June Income statement (W1)

50,000 ––––––––– 370,000 –––––––––

$ 320,000 50,000 ––––––––– 370,000 –––––––––

Revaluation reserve $

(b)

2002 1 July Office building – cost 1 July Office building – depreciation

$ 400,000 320,000 ––––––––– 720,000

Plant and machinery – cost 2002 1 July Balance 1 Oct Cash

2003 1 July Balance

$ 840,000 200,000 –––––––––– 1,040,000 ––––––––––

2003 1 April Transfer disposal 30 June Balance

800,000

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$ 240,000 800,000 –––––––––– 1,040,000 ––––––––––

Plant and machinery – accumulated depreciation 2003 1 April Transfer – disposal 30 June Balance

$ 180,000

2002 1 July Balance 2003 30 June Income statement (W2)

326,000 –––––––––– 506,000 ––––––––––

$ 306,000 200,000 –––––––––– 506,000 ––––––––––

Plant and machinery – disposal 2003 1 April Transfer – cost 30 June Income statement profit

$ 240,000

2003 1 April Transfer – depreciation Cash

10,000 –––––––––– 250,000 ––––––––––

$ 180,000 70,000 –––––––––– 250,000 ––––––––––

Workings 1 Depreciation of office building $2m/40 (remaining useful life) = $50,000 2

Depreciation of plant and machinery 25% x ($840,000 – $240,000 + $200,000) = $200,000

3

Cost of control $ 180,000

Investment

Share capital 70% Accumulated profits 70% Accumulated profits – goodwill amortised 4/5 x $5,000 Balance for CBS

–––––––––– 180,000 ––––––––––

$ 70,000 105,000 4,000 1,000 –––––––––– 180,000 ––––––––––

Minority interest $ 123,000

Balance for CBS

Share capital 30% Accumulated profits 30%

–––––––––– 123,000 ––––––––––

$ 30,000 93,000 –––––––––– 123,000 ––––––––––

Accumulated profits $ Cost of control 70% pre-acq Minority interest 30% Cost of control goodwill amortised Balance for CBS

Eagle Oxer

105,000 93,000 4,000 558,000 –––––––––– 760,000 ––––––––––

$ 450,000 310,000

–––––––––– 760,000 ––––––––––

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Eagle Group Consolidated balance sheet as at 31 October 2003 $ 1,000 900,000 –––––––– 901,000 –––––––– 220,000 558,000 –––––––– 778,000 123,000 –––––––– 901,000 ––––––––

Goodwill Sundry net assets

Share capital Accumulated profits

Minority interest

4

(a)

The basic principle for the valuation of inventory according to IAS 2 Inventories is to take the lower of cost and net realisable value. The 3,000 skirts should therefore be included at cost $40,000, and the jackets should be valued at net realisable value: $ $25,000 less $1,800 23,200 $20,000 less $2,000 18,000 ––––––– 41,200 –––––––

(b)

IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires contingent liabilities of this kind and degree of probability be disclosed by note, detailing the nature of the contingent liability and an estimate of the financial effect. The $100,000 should therefore be removed and the note substituted. Provision should be made for legal expenses to be incurred.

5

(c)

IAS 10 Events after the Balance Sheet Date classifies this as a non-adjusting event but a note giving details of the event and its financial effect (a loss of $180,000 plus $228,000 = $408,000) is required as the item is material enough to influence a reader of the financial statements.

(a)

(i)

Profit on a sale is calculated by taking the difference between historical cost and sale proceeds. When prices are rising, as they usually are, the ‘holding gain’ arising while the goods were held in inventory is included as part of the profit, ignoring the fact that it will cost more to replace the item.

(ii)

Depreciation based on the historical cost of assets understates the real value of the benefit obtained from the use of these assets if prices have risen since the assets were acquired. Profit is thus overstated.

(iii) The retention of historical values for non-current assets in the balance sheet understates their actual value. This can mislead shareholders when the balance sheet value of the business is used when calculating return on capital employed. (b)

(i)

It is simple and cheap

(ii)

Figures used are objective and verifiable.

(iii) Lack of a sound and acceptable alternative.

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Part 1 Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream)

December 2003 Marking Scheme

Marks 1

(a)

(b)

2

(a)

(b)

3

Tangible non-current assets 2 x 1/2 Development costs correctly displayed Receivables 2 x 1/2 Issued share capital Share premium Accumulated profits 3 x 1/2 Loan notes in current liabilities Layout

1 1/ 2 1 1 1 11/2 1/ 2 2 –––

Movements in deferred development expenditure Opening balance Movements 2 x 1 Income statement 2 x 1/2

1 2 1 –––

Office building cost/valuation 2 x 1/2 accumulated depreciation: calculations entries 4 x 1/2 revaluation reserve 2 x 1

81/2 max 8

4 ––– 12 –––

1 1 2 2 –––

Plant and machinery cost 4 x 1/2 accumulated depreciation 4 x 1/2 disposal 4 x 1/2

2 2 2 –––

Goodwill 5 x 1/2 Minority interest 2 x 1/2 Accumulated profits 5 x 1/2 Share capital Sundry net assets Heading

21/2 1 21/2 1/ 2 1 1/ 2 –––

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6

6 ––– 12 –––

8 –––

Marks 4

(a)

(b)

(c)

5

Inventory IAS 2 mentioned IAS 2 Valuation 2 x 1/2 Contingent liability IAS 37 mentioned Disclose by note stating nature and financial effect Remove $100,000 and replace with note Provide for legal expenses Event after the balance sheet date IAS 10 mentioned Non-adjusting Note required detailing event and financial effect

1 1 –––

2

1 1 1 1 –––

4

1 1 1 –––

(a)

3x2

6

(b)

3x1

3 –––

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3 ––– 9 –––

9 –––

(International Stream) PART 1 THURSDAY 10 JUNE 2004

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

A business purchased a motor car on 1 July 2003 for $20,000. It is to be depreciated at 20 per cent per year on the straight line basis, assuming a residual value at the end of five years of $4,000, with a proportionate depreciation charge in the year of purchase. The $20,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles repairs account. How will the business profit for the year ended 31 December 2003 be affected by the error?

2

A

Understated by $18,400

B

Understated by $16,800

C

Understated by $18,000

D

Overstated by $18,400

A company has sublet part of its offices and in the year ended 30 November 2003 the rent receivable was: Until 30 June 2003

$8,400 per year

From 1 July 2003

$12,000 per year

Rent was paid quarterly in advance on 1 January, April, July, and October each year. What amounts should appear in the company’s financial statements for the year ended 30 November 2003?

3

Income statement Rent receivable

Balance sheet

A

$9,900

$2,000 in sundry payables

B

$9,900

$1,000 in sundry payables

C

$10,200

$1,000 in sundry payables

D

$9,900

$2,000 in sundry receivables

At 30 September 2002 a company’s allowance for doubtful debts amounted to $38,000, which was five per cent of the receivables at that date. At 30 September 2003 receivables totalled $868,500. It was decided to write off $28,500 of debts as bad and to keep the allowance for doubtful debts at five per cent of receivables. What should be the charge in the income statement for the year ended 30 September 2003 for bad and doubtful debts? A

$42,000

B

$33,925

C

$70,500

D

$32,500

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4

A company’s policy as regards depreciation of its plant and machinery is to charge depreciation at 20 per cent per year on cost, with proportional depreciation for items purchased or sold during a year. The company’s plant and machinery at cost account for the year ended 30 September 2003 is shown below: Plant and machinery – cost 2002 1 Oct 2003 1 Apr

Balance (all plant purchased after 1999) Cash-purchase of plant

$ 200,000

2003 30 Jun Transfer disposal account

50,000 –––––––– 250,000 ––––––––

30 Sept Balance

$ 40,000

210,000 –––––––– 250,000 ––––––––

What should be the depreciation charge for plant and machinery (excluding any profit or loss on the disposal) for the year ended 30 September 2003?

5

A

$43,000

B

$51,000

C

$42,000

D

$45,000

A company’s trial balance failed to agree, the totals being: Debit

$815,602

Credit

$808,420

Which one of the following errors could fully account for the difference? A

The omission from the trial balance of the balance on the insurance expense account $7,182 debit

B

Discount allowed $3,591 debited in error to the discount received account

C

No entries made in the records for cash sales totalling $7,182

D

The returns outwards total of $3,591 was included in the trial balance as a debit balance

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[P.T.O.

6

The following control account has been prepared by a trainee accountant: Receivables ledger control account Opening balance Credit sales Cash sales Contras against credit balances in payables ledger

$ 308,600 154,200 88,100 4,600

––––––––– $555,500 –––––––––

Cash received from credit customers Discounts allowed to credit customers

Interest charged on overdue accounts Bad debts written off Allowance for doubtful debts Closing balance

$ 147,200 1,400

2,400 4,900 2,800 396,800 ––––––––– $555,500 –––––––––

What should the closing balance be when all the errors made in preparing the receivables ledger control account have been corrected?

7

A

$395,200

B

$304,300

C

$307,100

D

$309,500

Listed below are five potential causes of difference between a company’s cash book balance and its bank statement balance as at 30 November 2003: (1) Cheques recorded and sent to suppliers before 30 November 2003 but not yet presented for payment. (2) An error by the bank in crediting to another customer’s account a lodgement made by the company. (3) Bank charges. (4) Cheques paid in before 30 November 2003 but not credited by the bank until 3 December 2003. (5) A cheque recorded and paid in before 30 November 2003 but dishonoured by the bank. Which of the following alternatives correctly analyses these items into those requiring an entry in the cash book and those that would feature in the bank reconciliation? Cash book entry

Bank reconciliation

A

1, 2, 4

3, 5

B

3, 5

1, 2, 4

C

3, 4

1, 2, 5

D

2, 3, 5

1, 4

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8

At 30 September 2003 the closing inventory of a company amounted to $386,400. The following items were included in this total at cost: (1) 1,000 items which had cost $18 each. These items were all sold in October 2003 for $15 each, with selling expenses of $800. (2) Five items which had been in inventory since 1973, when they were purchased for $100 each, sold in October 2003 for $1,000 each, net of selling expenses. What figure should appear in the company’s balance sheet at 30 September 2003 for inventory? A

$382,600

B

$384,200

C

$387,100

D

$400,600

The following information is relevant for questions 9 and 10 A is a sole trader who does not keep full accounting records. The following details relate to her transactions with credit customers and suppliers for the year ended 30 November 2003: Trade receivables, 1 December 2002 Trade payables, 1 December 2002 Cash received from customers Cash paid to suppliers Discounts allowed Discounts received Bad debts Amount due from a customer who is also a supplier offset against an amount due for goods supplied by him Trade receivables, 30 November 2003 Trade payables, 30 November 2003

9

$ 130,000 60,000 686,400 302,800 1,400 2,960 4,160 2,000 181,000 84,000

Based on the above information, what figure should appear in A’s income statement for the year ended 30 November 2003 for sales revenue? A

$748,960

B

$748,800

C

$744,960

D

$743,560

10 Based on the above information, what figure should appear in A’s income statement for the year ended 30 November 2003 for purchases? A

$283,760

B

$325,840

C

$329,760

D

$331,760

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[P.T.O.

11 A sole trader fixes her prices by adding 50 per cent to the cost of all goods purchased. On 31 October 2003 a fire destroyed a considerable part of the inventory and all inventory records. Her trading account for the year ended 31 October 2003 included the following figures: $ Sales Opening inventory at cost Purchases Closing inventory at cost

$ 281,250

183,600 249,200 –––––––– 432,800 204,600 ––––––––

228,200 –––––––– 53,050

Gross profit Using this information, what inventory loss has occurred? A

$61,050

B

$87,575

C

$40,700

D

$110,850

12 According to IAS 2 Inventories, which of the following costs should be included in valuing the inventories of a manufacturing company? (1) Carriage inwards (2) Carriage outwards (3) Depreciation of factory plant (4) General administrative overheads A

All four items

B

1, 2 and 4 only

C

2 and 3 only

D

1 and 3 only

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13 G, H and I are in partnership, compiling their accounts for the year to 31 December each year. The profit-sharing arrangements are as follows: Until 30 June 2003 Annual salaries H I

$40,000 $20,000

Balance of profit split

G 60%, H 20%, I 20%

From 1 July 2003 Salaries to be discontinued, profit to be divided:

G 50%, H 30%, I 20%

The profit for the year ended 31 December 2003 was $400,000 before charging partners’ salaries, accruing evenly through the year and after charging an expense of $40,000, which it was agreed related wholly to the first six months of the year. How should the profit for the year be divided among the partners?

A

G $ 182,000

H $ 130,000

I $ 88,000

B

200,000

116,000

84,000

C

198,000

118,000

88,000

D

180,000

132,000

88,000

14 IAS 38 Intangible Assets governs the accounting treatment of expenditure on research and development. The following statements about the provisions of IAS 38 may or may not be correct. (1) Capitalised development expenditure must be amortised over a period not exceeding five years. (2) If all the conditions specified in IAS 38 are met, development expenditure may be capitalised if the directors decide to do so. (3) Capitalised development costs are shown in the balance sheet under the heading of Non-current Assets. (4) Amortisation of capitalised development expenditure will appear as an item in a company’s statement of changes in equity. Which of these four statements are in fact correct? A

3 only

B

2 and 3

C

1 and 4

D

1 and 3

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[P.T.O.

15 A company accountant is considering how to include the following items in the financial statements: (1) Cost of restructuring the activities of the enterprise. (2) The correction of a fundamental error in the financial statements for the previous period. (3) Loss from expropriation of assets by a government. Which of these items would constitute an extraordinary item according to IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies? A

1 only

B

2 only

C

3 only

D

All three items

16 Which of the following statements about the financial statements of limited liability companies are correct according to International Accounting Standards? (1) In preparing a cash flow statement, either the direct or the indirect method may be used. Both lead to the same figure for net cash from operating activities. (2) Loan notes can be classified as current or non-current liabilities. (3) Financial statements must disclose a company’s total expense for staff costs and for depreciation, if material. (4) A company must disclose by note details of all adjusting events allowed for in the financial statements. A

1, 2 and 3 only

B

2 and 4 only

C

3 and 4 only

D

All four items

17 Which of the following could appear as separate items in the statement of changes in equity required by IAS I Presentation of Financial Statements as part of a company’s financial statements? (1) Gain on revaluation of land. (2) Loss on sale of investments. (3) Prior year adjustments. (4) Proceeds of an issue of ordinary shares. (5) Dividends proposed after the year end. A

1, 3 and 4 only

B

1, 2 and 4 only

C

1 and 3 only

D

All five items

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18 Which of the following must be disclosed in the financial statements of a quoted (listed) company, if material? (1) Total spent on research and development. (2) An analysis of operating profit into continuing and discontinuing activities. (3) Profit or loss on the disposal of a discontinuing operation. (4) Authorised share capital. (5) Finance costs. A

2, 3 and 4 only

B

1, 2, 3 and 5 only

C

1 and 5 only

D

All five items

19 The draft financial statements of a limited liability company are under consideration. The accounting treatment of the following material events after the balance sheet date needs to be determined. (1) The bankruptcy of a major customer, with a substantial debt outstanding at the balance sheet date. (2) A fire destroying some of the company’s inventory (the company’s going concern status is not affected). (3) An issue of shares to finance expansion. (4) Sale for less than cost of some inventory held at the balance sheet date. According to IAS 10 Events after the Balance Sheet Date, which of the above events require an adjustment to the figures in the draft financial statements? A

1 and 4 only

B

1, 2 and 3 only

C

2 and 3 only

D

2 and 4 only

20 A limited liability company issued 50,000 ordinary shares of 25c each at a premium of 50c per share. The cash received was correctly recorded but the full amount was credited to the ordinary share capital account. Which of the following journal entries is needed to correct this error?

A B C D

Share premium account Share capital account

Debit $ 25,000

Credit $ 25,000

Share capital account Share premium account

25,000

Share capital account Share premium account

37,500

Share capital account Cash

25,000

25,000 37,500 25,000

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[P.T.O.

21 Which of the following journal entries could correctly record a bonus (capitalisation) issue of shares? $ Debit A B C D

Cash Ordinary share capital

100,000

Ordinary share capital Share premium

100,000

Share premium Ordinary share capital

100,000

Investments Cash

100,000

$ Credit 100,000 100,000 100,000 100,000

22 Which one of the following formulas would give a valid calculation of a company’s gearing ratio? Ordinary share capital A ––––––––––––––––––––––––––––– x 100 Ordinary share capital + reserves Loan capital B –––––––––––––––––––––––––––––––––––––––––– x 100 Ordinary share capital + preference share capital C

Total share capital + reserves ––––––––––––––––––––––––––––––––– x 100 Loan capital + preference share capital

D

Loan capital + preference share capital ––––––––––––––––––––––––––––––––––––– x 100 Total share capital + reserves + loan capital

The following information is relevant for questions 23 and 24. Hyrax acquired 80 per cent of the share capital of Shrew on 1 January 2003 for $280,000. The balance sheets of the two companies at 31 December 2003 were as follows: Balance sheets

Sundry assets Investment in Shrew

Issued share capital Share premium account Accumulated profits As at 1 Jan 2003 Profit for 2003

Hyrax $ 660,000 280,000 ––––––––– 940,000 –––––––––

Shrew $ 290,000 – ––––––––– 290,000 –––––––––

400,000 320,000

140,000 50,000

140,000 80,000 ––––––––– 940,000 –––––––––

60,000 40,000 ––––––––– 290,000 –––––––––

There have been no changes in the share capital or share premium account of either company since 1 January 2003. Goodwill on consolidation is to be amortised on the straight line basis over five years.

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23 What figure for goodwill on consolidation should appear in the consolidated balance sheet of the Hyrax group at 31 December 2003? A

$96,000

B

$80,000

C

$64,000

D

$38,400

24 What figure for minority interest should appear in the consolidated balance sheet of the Hyrax group at 31 December 2003? A

$56,000

B

$48,000

C

$58,000

D

$50,000

25 P, the parent company of a group, owns shares in three other companies. P’s holdings are: Q

Shares giving control of 60% of the voting rights in Q

R

Shares giving control of 20% of the voting rights in R. P also has the right to appoint or remove all the directors of R.

S

Shares giving control of 10% of the voting rights in S. In addition, Q owns 70% of the voting rights in S.

Which of these companies must be included in the consolidated financial statements of P? A

Q, R and S

B

Q and S only

C

R and S only

D

Q and R only

(50 marks)

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Section B – ALL FIVE questions are compulsory and must be attempted 1

The following balances have been extracted from the accounting records of Minica, a limited liability company, at 31 December 2003: Reference to notes 2

Sales revenue Opening inventory Purchases Carriage inwards Carriage outwards Office equipment at 1 January 2003 Cost Accumulated depreciation Trade receivables Allowance for doubtful debts at 1 January 2003 Bad debts written off during the year Sundry administrative expenses

3

$ 3,845,000 360,000 2,184,000 119,000 227,000

2, 3 and 4 460,000 92,000 620,000 5

20,000 15,000 416,000

The following further information is available: (1) Closing inventory amounts to $450,000 (2) Some office equipment, which had cost $20,000, with accumulated depreciation at 1 January 2003 of $14,000, was sold for $15,000 during the year. The sale proceeds were included in the sales figure of $3,845,000. (3) The cost of new equipment purchased on 1 July 2003 for $60,000 has been included in the purchases figure of $2,184,000 (4) The company depreciates its office equipment at 20 per cent per year on the straight line basis, with proportionate depreciation in the year of purchase but none in the year of sale. None of the equipment held at 1 January 2003 was more than three years old. (5) The allowance for doubtful debts at 31 December 2003 is to be five per cent of trade receivables. (6) Accruals and prepayments on sundry administrative expenses at 31 December 2003 were: Accrued expenses Prepaid expenses

$ 28,700 14,400

(7) The directors propose a dividend of 6c per share on the ordinary share capital (4,000,000 shares of 25c each) to be paid in July 2004. No dividends were paid in 2003. Required: (a) Prepare the company’s income statement for the year ended 31 December 2003 for internal use. (11 marks) (b) State the total amount of the proposed dividend and explain how it would be dealt with in the company’s financial statements for publication. (1 mark) (12 marks)

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2

The draft financial statements of Arbados at 30 September 2003 have been prepared, but there remains a difference of $100, which has been temporarily inserted as a credit in a suspense account in the company’s balance sheet. On investigation the following errors were found: (1) $8,700 paid for repairs to premises and correctly recorded in the cash book was debited to the premises asset account as $7,800. (2) A $1,000 cheque received for the wreckage of a car destroyed in an accident while uninsured had been correctly entered in the cash book but not posted anywhere. The car had cost $30,000 and depreciation of $6,000 had already been provided on the car for the year ended 30 September 2003, making accumulated depreciation on the car at that date $12,000. No entries have yet been made to eliminate the cost and accumulated depreciation of the car. It is the company’s policy to charge no depreciation on an asset in the year of its disposal. Required: Prepare journal entries, including narratives, to correct the errors, record the loss of the car and clear the suspense account. (9 marks)

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The following financial statements and notes are relevant for questions 3 and 4. The summarised financial statements of Renada, a limited liability company, at 31 October 2002 and 31 October 2003 are given below: Balance sheets 31 October Reference to notes Non-current assets (net book value)

2002 $

1,2,3

Current assets Inventories Receivables Cash

4 4 5

Current liabilities Bank overdraft Income tax Trade payables

$

1,000,000 600,000 1,270,000 140,000 ––––––––––

Capital and reserves Ordinary share capital Share premium account Revaluation reserve Accumulated profits

2003 $

2,010,000 –––––––––– 3,010,000 ––––––––––

1,800,000 1,600,000 1,800,000 – ––––––––––

500,000 420,000 – 920,000 ––––––––––

– 120,000 1,050,000 ––––––––––

1,340,000 –––––––––– 1,840,000

1,170,000 –––––––––– 3,010,000 ––––––––––

260,000 40,000 2,100,000 ––––––––––

31 October

Sales revenue (all on credit) Cost of sales Gross profit Operating expenses Profit before tax Income tax expense Profit for the year

6

3,400,000 –––––––––– 5,200,000 –––––––––– 600,000

820,000 300,000 1,080,000 ––––––––––

Income statements Reference to notes

$

2002 $ 8,400,000 (6,300,000) –––––––––– 2,100,000

2003 $ 9,000,000 (7,200,000) –––––––––– 1,800,000

(1,500,000) –––––––––– 600,000 (120,000) –––––––––– 480,000 ––––––––––

(1,600,000) –––––––––– 200,000 (40,000) –––––––––– 160,000 ––––––––––

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2,200,000 –––––––––– 2,800,000

2,400,000 –––––––––– 5,200,000 ––––––––––

Notes (1) On 1 November 2002 office equipment that had cost $240,000, with a net book value of $80,000, was sold for $30,000. (2) The purchase of new non-current assets took place near the end of the year. (3) The depreciation charge for the year ended 31 October 2003 was $120,000. (4) The ordinary share issue was on 31 October 2003. (5) Some of the non-current assets were revalued upwards by $300,000 on 1 November 2002. (6) Cost of sales was made up as follows:

Opening inventory Purchases Closing inventory Cost of sales

3

31 October 2002 2003 $ $ 500,000 600,000 6,400,000 8,200,000 –––––––––– –––––––––– 6,900,000 8,800,000 (600,000) (1,600,000) –––––––––– –––––––––– 6,300,000 7,200,000 –––––––––– ––––––––––

Prepare a cash flow statement for Renada for the year ended 31 October 2003, using the format in IAS 7 Cash Flow Statements. (11 marks)

4

(a) Calculate in DAYS for the two years shown, the following (use closing figures for all three calculations): (i) Inventory holding period; (ii) Average period of credit granted to customers; (iii) Average period of credit allowed by suppliers. (3 marks) (b) (i)

Comment briefly on the changes in the position of the company revealed by the changes in these ratios between the two years. (3 marks) (ii) Briefly explain how two factors shown in the financial statements and/or the notes may have contributed to the decline in the company’s pre-tax return on capital employed, which is down from 32·6 per cent in 2002 to 7·1 per cent in 2003. (4 marks) (10 marks)

5

Comparability is a characteristic which adds to the usefulness of financial statements. Required: (a) Explain what is meant by the term ‘comparability’ in financial statements, referring to two types of comparison that users of financial statements may make. (4 marks) (b) Explain two ways in which the IASB’s Framework for the Preparation and Presentation of Financial Statements and the requirements of accounting standards aid the comparability of financial information. (4 marks) (8 marks)

End of Question Paper

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[P.T.O.

Answers

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Part 1 Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream)

June 2004 Answers

Section A 1

A

20,000 minus

16,000 x 20%/2

2

B

(7/12 x 8,400) + (5/12 x 12,000) = 9,900 1,000 paid in advance in sundry payables

3

D

28,500 + 42,000 – 38,000

4

A

(160,000 x 20%) + (40,000 x 20% x 3/4) + (50,000 x 20% x 1/2)

5

D

6

C

Receivables ledger control account 308,600 154,200 2,400

147,200 1,400 4,900 4,600 307,100 –––––––– 465,200 ––––––––

–––––––– 465,200 –––––––– 7

B

8

A

9

C

386,400 minus loss on 1

3,800 Receivables ledger total account 130,000

Balance

686,400 1,400 4,160 2,000 181,000 –––––––– 874,960 ––––––––

744,960

–––––––– 874,960 ––––––––

10 D

Payables ledger total account 302,800 2,960 2,000 84,000 –––––––– 391,760 ––––––––

11 C

60,000 Balance

331,760 –––––––– 391,760 ––––––––

281,250/3 – 53,050

12 D 13 B

G 90,000 110,000 ––––––––– 200,000 –––––––––

H 20,000 30,000 66,000 ––––––––– 116,000 –––––––––

I 10,000 30,000 44,000 ––––––––– 84,000 –––––––––

14 A 15 C 16 A 17 A 18 D

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19 A 20 B 21 C 22 D 23 C

280,000 – (112,000 + 40,000 + 48,000) = 80,000; minus 20% = 64,000

24 C

290,000 x 20%

25 A

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Section B 1

(a)

Sales revenue less:

less:

Minica Income statement for the year ended 31 December 2003 $ $ (3,845,000 – 15,000) 3,830,000

Cost of sales Opening inventory Purchases (2,184,000 – 60,000) Carriage inwards

360,000 2,124,000 119,000 –––––––––– 2,603,000 450,000 ––––––––––

Closing inventory

Gross profit less: Expenses Sundry administrative expenses Carriage outwards Bad and doubtful debts Depreciation Profit on sale of office equipment

(W1)

430,300 227,000 26,000 94,000 (9,000) ––––––––––

(W2) (W3) (W4)

Net profit for the year (b)

2,153,000 –––––––––– 1,677,000

768,300 –––––––––– 908,700 ––––––––––

The proposed dividend of $240,000 would be disclosed by note in Minica’s published income statement. Workings 1 2

$

Sundry administrative expenses 416,000 + 28,700 – 14,400

430,300

Bad and doubtful debts Bad debts written off Allowance (31,000 – 20,000)

3

15,000 11,000 ––––––

26,000

88,000 6,000 ––––––

94,000

Depreciation (460,000 – 20,000) x 20 per cent 60,000 x 20 per cent x 6/12

4

$

Profit on sale of equipment 15,000 proceeds minus 6,000 net book value

9,000

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2

$ Repairs to premises Premises asset Suspense

$

8,700 7,800 900

Correction of error in posting cost of repairs to premises Suspense account Motor vehicle disposal

1,000 1,000

Entry for unposted item Accumulated depreciation Depreciation expense (or Income statement)

6,000 6,000

Motor vehicle disposal Motor vehicles – cost Transfer of cost of vehicle destroyed to disposal account Accumulated depreciation Motor vehicle disposal Transfer of depreciation on vehicle destroyed to disposal account

30,000

Income statement Motor vehicle disposal Loss on destruction of car transferred

23,000

30,000

6,000 6,000

23,000

3

Renada Cash flow statement for the year ended 31 October 2003 $ Cash flows from operating activities Net profit before taxation Adjustments for: Depreciation Loss on sale of office equipment Operating profit before working capital changes Increase in inventory Increase in receivables Increase in payables Cash used in operations Income taxes paid Net cash used in operating activities Cash flows from investing activities Purchase of non-current assets Proceeds from sale of noncurrent assets Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of share capital Net cash from financing activities

$

200,000 120,000 50,000 ––––––––––– 370,000 (1,000,000) (530,000) 1,050,000 ––––––––––– (110,000) (120,000) –––––––––––

(230,000)

(700,000) 30,000 ––––––––––

500,000 ––––––––––

Net decrease in cash and cash equivalents Cash and cash equivalents at 31 October 2002 Cash and cash equivalents at 31 October 2003

(670,000)

500,000 ––––––––– (400,000) 140,000 ––––––––– (260,000) –––––––––

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Working Non-current assets – net book value $ 1,000,000 300,000

Balance Revaluation reserve Assets purchased (balancing figure)

$ 80,000 120,000

Transfer disposal Depreciation

700,000 Balance

1,800,000 –––––––––– 2,000,000 ––––––––––

–––––––––– 2,000,000 ––––––––––

4

(a)

31 October 2002 (i)

Inventory holding period 600,000/6,300,000

x 365

35 days

1,600,000/7,200,000 x 365 (ii)

2003

81 days

Average period of credit granted to customers 1,270,000 / 8,400,000 x 365

55 days

1,800,000 / 9,000,000 x 365

73 days

(iii) Average period of credit allowed by suppliers 1,050,000 / 6,400,000 x 365

60 days

2,100,000 / 8,200,000 x 365 (b)

(i)

93 days

All three ratios show deterioration. The large increase in the inventory holding period suggests that the company is having difficulty making sales in the closing months of the period. Customers are taking longer to pay, placing further strain on the company’s liquid position. The company is attempting to finance the increased inventory and receivables by paying its suppliers more slowly, which will probably have the effect of losing supplier goodwill.

(ii)

5

(a)

The main reason for the decline is the reduced gross profit percentage. If the gross profit percentage of 2002 (25 per cent) had continued in 2003, an additional $450,000 of profit would have been made. Instead, the gross profit percentage went down to 20 per cent. Other contributing factors are: – the new non-current assets ($700,000) were not acquired until near the end of the year, and thus may not be fully operational – the share issue also took place right at the end of the year, and so has not yet been deployed in profit-earning assets.

Comparability means that users are able to draw conclusions about the performance or financial position of a business by relating figures for a particular period to other relevant figures. Possible types of comparison are: (i) comparison with figures for the same business for earlier periods (ii) comparison with figures for other businesses for the same period (iii) comparison with budgets or forecasts (Two types required for full marks)

(b)

Two (i) (ii) (iii)

from: by requiring the disclosure of accounting policies and the effect of changes in them by reducing or eliminating the number of possible alternative treatments for similar items available to businesses by requiring businesses to treat similar items in the same way within each period and from one period to the next, unless a change is required to comply with accounting standards or to ensure that a more appropriate presentation of events or transactions is provided.

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Part 1 Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream)

June 2004 Marking Scheme

Section B Marks 1

1/ 2 1/ 2 1/ 2

Sales revenue Opening inventory Purchases Carriage inwards Closing inventory Gross profit correct Sundry administrative expenses Carriage outwards Bad and doubtful debts Depreciation Profit on sale

1 1/ 2

1 1 1/ 2 11/2 2 1

Heading

1 –– 11 1 –– 12 ––

Proposed dividend

2

For each journal entry 1/ 2 1/ 2

per entry for narrative

1 1/ 2

––– 11/2

11/2 x 6 3

9

Calculation of cash used in operations 1/ 2

Profit Depreciation Loss on sale Working capital movements 3 x 1/2

1 1 11/2 ––––

4 1/ 2

Taxation Investing activities Purchases Proceeds of sale

5 x 1/2

21/2 1/ 2

Share issue

1

Cash movement

4

5

2x

1/ 2

1

Heading

1/ 2

Layout

1 –– 11 ––

(a)

Ratios

3x1

3

(b)

(i)

Comments

3x1

3

(c)

(ii)

Reasons for decline

2x2

4 –– 10 ––

(a)

Explanation Types of comparison

(b)

2x1

2x2

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2 2 –– 4 4 –– 8 ––

(International Stream) PART 1 THURSDAY 9 DECEMBER 2004

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the candidate registration sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

A trial balance extracted from a sole trader’s records failed to agree, and a suspense account was opened for the difference. Which of the following errors would require an entry in the suspense account in correcting them? (1) Discount allowed was mistakenly debited to discount received account. (2) Cash received from the sale of a non-current asset was correctly entered in the cash book but was debited to the disposal account. (3) The balance on the rent account was omitted from the trial balance. (4) Goods taken from inventory by the proprietor had been recorded by crediting Drawings account and debiting Purchases account.

2

A

All four items

B

2 and 3 only

C

2 and 4 only

D

1 and 3 only

At 1 July 2003 a limited liability company had an allowance for doubtful debts of $83,000. During the year ended 30 June 2004 debts totalling $146,000 were written off. At 30 June 2004 it was decided that a doubtful debt allowance of $218,000 was required. What figure should appear in the company’s income statement for the year ended 30 June 2004 for bad and doubtful debts?

3

A

$155,000

B

$364,000

C

$281,000

D

$11,000

The plant and machinery at cost account of a business for the year ended 30 June 2004 was as follows: Plant and machinery – cost 2003 1 July Balance 2004 1 Jan Cash – purchase of plant

$ 240,000

2003 30 Sept. Transfer disposal account 2004 30 Jun Balance

160,000 –––––––– 400,000 ––––––––

$ 60,000 340,000 –––––––– 400,000 ––––––––

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal. What should be the depreciation charge for the year ended 30 June 2004? A

$68,000

B

$64,000

C

$61,000

D

$55,000

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4

5

Which of the following correctly describes the imprest system of operating petty cash? A

The petty cash float is replenished by regular periodic transfers of equal amount.

B

The petty cash float is replenished by periodic transfers of the actual expenditure in the period.

C

All expenses must be supported by a properly authorised voucher.

D

Petty cash is operated outside the business double entry accounting system.

The following receivables ledger control account prepared by a trainee accountant contains a number of errors: Receivables ledger control account 2004 1 Jan Balance 31 Jan Cash from credit customers Contras against amounts due to suppliers in payables ledger.

$ 614,000 311,000

2004 31 Jan Credit sales Discounts allowed Bad debts written off Interest charged on overdue accounts Balance

8,650 –––––––– 933,650 ––––––––

$ 301,000 3,400 32,000 1,600 595,650 –––––––– 933,650 ––––––––

What should the closing balance on the control account be after the errors in it have been corrected?

6

A

$561,550

B

$578,850

C

$581,550

D

$568,350

Which of the following statements about bank reconciliations are correct? 1

A difference between the cash book and the bank statement must be corrected by means of a journal entry.

2

In preparing a bank reconciliation, lodgements recorded before date in the cash book but credited by the bank after date should reduce an overdrawn balance in the bank statement.

3

Bank charges not yet entered in the cash book should be dealt with by an adjustment in the bank reconciliation.

4

If a cheque received from a customer is dishonoured after date, a credit entry in the cash book is required.

A

2 and 4

B

1 and 4

C

2 and 3

D

1 and 3

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[P.T.O.

7

8

9

If a company changes a material accounting policy, which of the following statements are correct? 1

The notes to the financial statements should disclose the reason for the change and its effect.

2

The effect of the change should be disclosed in the current year’s income statement as an extraordinary item.

3

The opening balance of retained earnings should be adjusted if practicable, as if the change had been in effect for previous periods.

4

In the financial statements for the current period, comparative figures for the previous period should be adjusted to reflect the change.

A

1, 3 and 4

B

2, 3 and 4

C

1, 2 and 3

D

1, 2 and 4

Which of the following most closely describes the meaning of prudence, as the term is defined in the IASB’s Framework for the Preparation and Presentation of Financial Statements? A

The use of a degree of caution in making estimates required under conditions of uncertainty.

B

Ensuring that accounting records and financial statements are free from material error.

C

Understating assets and gains and overstating liabilities and losses.

D

Ensuring that financial statements comply with all accounting standards and legal requirements.

Which, if any, of the following statements about accounting concepts and the characteristics of financial information are correct? 1

The concept of substance over form means that the legal form of a transaction must be reflected in financial statements, regardless of the economic substance.

2

The historical cost concept means that only items capable of being measured in monetary terms can be recognised in financial statements.

3

It may sometimes be necessary to exclude information that is relevant and reliable from financial statements because it is too difficult for some users to understand.

A

1 and 2 only

B

2 and 3 only

C

1 and 3 only

D

None of these statements is correct

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10 Which of the following statements about goodwill are correct? (1) Goodwill may only be revalued to a figure in excess of cost if there is relevant and reliable evidence to support the revaluation. (2) Internally generated goodwill may not be capitalised. (3) Impairment of goodwill should always be shown separately on the face of a company’s income statement. (4) Purchased goodwill is the difference between the cost of acquiring a company and the fair value of its identifiable net assets. A

1 and 3 only

B

2 and 3 only

C

1 and 4 only

D

2 and 4 only

11 In finalising the financial statements of a company for the year ended 30 June 2004, which of the following material matters should be adjusted for? 1

A customer who owed $180,000 at the balance sheet date went bankrupt in July 2004.

2

The sale in August 2004 for $400,000 of some inventory items valued in the balance sheet at $500,000.

3

A factory with a value of $3,000,000 was seriously damaged by a fire in July 2004. The factory was back in production by August 2004 but its value was reduced to $2,000,000.

4

The company issued 1,000,000 ordinary shares in August 2004.

A

All four items

B

1 and 2 only

C

1 and 4 only

D

2 and 3 only

12 Which of the following statements about provisions, contingencies and events after the balance sheet date is/are correct? 1

A company expecting future operating losses should make provision for those losses as soon as it becomes probable that they will be incurred.

2

Details of all adjusting events after the balance sheet date must be disclosed by note in a company’s financial statements.

3

Contingent assets must be recognised if it is probable that they will arise.

4

Contingent liabilities must be treated as actual liabilities and provided for if it is probable that they will arise.

A

4 only

B

2 and 4 only

C

1 and 2 only

D

All four statements are correct

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[P.T.O.

13 A business compiling its financial statements for the year to 31 July each year pays rent quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from $60,000 per year to $72,000 per year as from 1 October 2003. What figure should appear for rent expense in the business income statement for the year ended 31 July 2004? A

$69,000

B

$62,000

C

$70,000

D

$63,000

14 Which of the following journal entries may be accepted as being correct according to their narratives?

1

2

3

Wages account Purchases account Buildings account Labour and materials used in construction of extension to factory Directors’ personal accounts: A B Directors’ remuneration Directors’ bonuses transferred to their accounts

Dr $ 38,000 49,000

Cr $

87,000

30,000 40,000 70,000

Suspense account Sales account

10,000 10,000

Correction of error in addition – total of credit side of sales account $10,000 understated A

1 and 3

B

1 and 2

C

3 only

D

2 and 3

15 X and Y are in partnership, sharing profits in the ratio 2:1 and compiling their financial statements to 30 June each year. On 1 January 2004 Z joined the partnership, and it was agreed that the profit-sharing arrangement should become X 50%, Y 30% and Z 20%. The profit for the year ended 30 June 2004 was $540,000, after charging an expense of $30,000 which it was agreed related to the period before 1 January 2004. The profit otherwise accrued evenly over the year. What is X’s total profit share for the year ended 30 June 2004? A

$305,000

B

$312,500

C

$315,000

D

$295,000

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16 G, H and I are in partnership, sharing profits in the ratio 3:1:1, after charging salaries of $20,000 per year each for H and I. On 1 January 2004 they agreed to change the profit-sharing ratio to 3:2:1 and to discontinue H’s salary. I’s salary continued unchanged. The partnership profit for the year ended 30 June 2004 was $380,000, accruing evenly over the year. How should the $380,000 profit be divided among the partners?

A

G $ 192,000

H $ 104,000

I $ 84,000

B

192,500

103,333

84,167

C

209,000

101,333

69,667

D

209,000

111,333

89,667

17 An extract from a cash flow statement prepared by a trainee accountant is shown below. Cash flows from operating activities $m 28

Net profit before taxation Adjustments for: Depreciation

((9) ––– 19 13 ((4) ((8) –––– 10 ––––

Operating profit before working capital changes Decrease in inventories Increase in receivables Increase in payables Cash generated from operations Which of the following criticisms of this extract are correct? 1

Depreciation charges should have been added, not deducted

2

Decrease in inventories should have been deducted, not added.

3

Increase in receivables should have been added, not deducted.

4

Increase in payables should have been added, not deducted

A

2 and 4

B

2 and 3

C

1 and 3

D

1 and 4

18 Which of the following items could appear in a company’s cash flow statement? 1

Proposed dividends

2

Rights issue of shares

3

Bonus issue of shares

4

Repayment of loan

A

1 and 3

B

2 and 4

C

1 and 4

D

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19 Which of these statements about limited liability companies is/are correct? (1) A company might make a bonus (capitalisation) issue to raise funds for expansion. (2) The profit or loss on the disposal of part of a company’s operations must be disclosed in the income statement as an extraordinary item if material. (3) Both realised and unrealised gains and losses may be included in the statement of changes in equity required by IAS 1 Presentation of Financial Statements. A

1 and 3

B

2 and 3

C

1 and 2

D

3 only

20 Which of the following statements relating to parent companies and subsidiaries are correct? (1) A parent company could consolidate a company in which it holds less than 50% of the ordinary share capital in certain circumstances. (2) Goodwill on consolidation must be amortised over a period not exceeding ten years. (3) Goodwill on consolidation will appear as an item in the parent company’s individual balance sheet. (4) A subsidiary may be excluded from consolidation if it has not previously been consolidated and the parent’s investment in it is held for resale in the near future. A

1 and 4

B

2 and 3

C

1 and 2

D

3 and 4

21 A trading company makes all its sales and purchases on credit. How will the length of its working capital cycle normally be calculated? A

Collection period for receivables plus inventory turnover period plus period of credit taken from suppliers.

B

Collection period for receivables plus inventory turnover period minus period of credit taken from suppliers.

C

Collection period for receivables plus period of credit taken from suppliers.

D

Average time from date of purchase of goods to the receipt of cash from the sale of those goods.

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22 A company monitors the performance of its credit control department by calculating the receivables collection period as closing trade receivables/annual credit sales x 365. Which of the following factors could cause the receivables collection period calculated as above to be abnormally high compared to the monthly average level during the year? 1

The company’s trade is seasonal

2

A downturn in the company’s credit sales in the last few months of its accounting period.

3

A large credit sale in the final month of its accounting period

A

1 and 2

B

1 and 3

C

2 and 3

D

All three factors

The following summarised financial statements for Q are relevant for questions 23 to 25. (Income tax is ignored)

Operating profit Interest payable Dividends paid

Q Income statement for the year ended 31 July 2004 $m 140 11(8) –––– 132 1(18) –––– 114 –––– Balance sheet as at 31 July 2004 $m 400 –––– 200 130 120 150 –––– 300 100 –––– 400 ––––

Non-current assets plus net current assets Ordinary share capital Share premium account Revaluation reserve Accumulated profits

Loans

23 What is the company’s return on total capital employed? A

32/200 = 16%

B

32/400 = 8%

C

40/400 = 10%

D

14/300 = 42/3%

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24 What is the company’s return on owners’ equity? A

32/200 = 16%

B

32/300 = 102/3%

C

18/300 = 6%

D

14/300 = 42/3%

25 What is the company’s gearing ratio? A

300/400 = 75%

B

100/200 = 50%

C

100/400 = 25%

D

300/100 = 300% (50 marks)

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Section B – ALL FIVE questions are compulsory and MUST be attempted 1

Bob is a sole trader who does not maintain complete accounting records. The following information is available to prepare his income statement for the year ended 30 September 2004. (1) Assets and liabilities As at 30 September 2003 2004 $ $ 38,000 46,000 119,200 125,000 2,400 2,600 68,100 77,100 3,900 4,600

Inventory Trade receivables Payments in advance for expenses Payables – goods purchased Creditors – expenses (2)

Bank summary 2003 1 Oct Balance 2004 30 Sept Cash banked 30 Sept Receipts from credit 30 Sept sales banked

(3)

$ 20,500

2004 30 Sept Purchases

$ 408,100

12,900

30 Sept Expenses 30 Sept Drawings 30 Sept Balance

89,400 30,000 25,300 –––––––– 552,800 ––––––––

519,400 –––––––– 552,800 ––––––––

Cash summary 2003 1 Oct Balance 2004 30 Sept Cash sales

$ 300

2004 30 Sept Cash banked

79,000

30 30 30 30

Sept Sept Sept Sept

Purchases Expenses Drawings Balance

–––––––– 79,300 ––––––––

$ 12,900 14,200 4,100 47,900 200 –––––––– 79,300 ––––––––

(4) Bob has taken goods from inventory for his personal use but has kept no records of their cost. The cost of these goods, when calculated, is to be deducted from purchases in the income statement. (5) Bob always fixes his selling prices by adding 50% to the buying price of goods. There is no wastage. Required: (a) Prepare Bob’s income statement for the year ended 30 September 2004 based on this information. (8 marks) (b) Calculate the cost of the goods taken from inventory by Bob during the year.

(4 marks) (12 marks)

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2

At 1 July 2003 the balance sheet of Cougar, a limited liability company, contained the following items: Issued share capital – ordinary shares of 50c Share premium account Revaluation reserve Accumulated profits

$m 100 140 160 120 –––– 420 ––––

During the year ended 30 June 2004 the following events took place: (i)

A fundamental error in calculating the inventory at 30 June 2003 was discovered. The effect of the error was a reduction in the inventory at that date from $30m to $24m.

(ii) On 1 July 2003 the company issued 200m ordinary shares, ranking equally with those already in issue, at $1.40 per share. (iii) Some land held by the company as a non-current asset was sold for $100m. The land had originally cost $25m and was revalued to $85m in 2002, giving rise to the revaluation reserve of $60m shown above. (iv) The company’s draft pre-tax profit for the year ended 30 June 2004 was $40m. In calculating this figure the opening inventory was taken as $30m, and $15m was included as the profit on the sale of the land. (See items (i) and (iii) above). (v) Dividends totalling 2c per share were paid in the year on the enlarged capital. Required: Prepare the company’s statement of changes in equity for the year ended 30 June 2004. (8 marks)

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3

On 1 July 1998, Leo, a limited liability company, acquired 70% of the ordinary share capital of Pard for $700,000. The summarised balance sheet of Pard at that date was as follows: $ Sundry net assets 800,000 –––––––– Share capital 200,000 ordinary shares of $1 each 200,000 Accumulated profits 600,000 –––––––– 800,000 –––––––– The balance sheets of the two companies at 30 June 2004 are shown below.

Sundry net assets Investment in Pard

Share capital Ordinary shares of $1 each Revaluation reserve Accumulated profits

Leo $ 2,000,000 1,700,000 –––––––––– 2,700,000 ––––––––––

Pard $ 1,100,000 – –––––––––– 1,100,000 ––––––––––

1,500,000 1,800,000 1,400,000 –––––––––– 2,700,000 ––––––––––

200,000 – 900,000 –––––––––– 1,100,000 ––––––––––

Required: Prepare the consolidated balance sheet for the Leo Group as at 30 June 2004. Goodwill on consolidation was fully written off by 30 June 2003. (10 marks)

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4

Lion is a company producing medicinal drugs. At 1 October 2003 the following balances existed in the records: Deferred development expenditure $1,200,000 Project Q.

$800,000. This is the balance remaining of expenditure totalling $1,000,000 on a completed project which is being amortised on the straight line basis over 10 years.

Project R.

$400,000. This is the accumulated costs to 30 September 2003 of developing a new drug. The project was completed in July 2004 and sales of the drug are expected to begin in January 2005.

Equipment used in research $300,000 (cost $500,000, depreciation to date $200,000) During the year ended 30 September 2004 the following costs were incurred: Project R

Costs to complete $250,000

Project S

(a research project) $140,000

Purchase of testing equipment for use in the research department $180,000. All equipment has an estimated useful life of five years, and a full year’s depreciation is charged in the year of acquisition. Required: (a) Calculate the figures to be included in Lion’s income statement for the year ended 30 September 2004 and balance sheet as at that date, and state the headings under which they will appear. (6 marks) (b) Prepare the disclosure notes required by IAS 38 Intangible Assets. (The note detailing the accounting policy for research and development expenditure is NOT required). (6 marks) (12 marks)

5

Explain FOUR ways in which the use of historical cost accounting may cause users of financial statements to be misled when prices are rising. (8 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream)

December 2004 Answers

Section A 1 2 3 4 5

B C D B A

146,000 + 218,000 – 83,000 (240,000 x 20%) + (160,000 x 20% x

Balance Sales Interest

6/

12)

– (60,000 x 20% x

614,000 301,000 1,600

A A A D D B A C C B A D B D A B B C B C

A B C D

7 8 5 5 ––– 25 –––

12)

Cash Discounts Contras Bad Debts Balance

–––––––– 916,600 –––––––– 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

9/

311,000 3,400 8,650 32,000 561,550 –––––––– 916,600 ––––––––

(2 x 5,000) + ( 10 x 6,000) [2/3 x

1/

2

x (540,000 + 30,000)] – 20,000 + (50% x 285,000)

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Section B 1

(a)

Bob Income statement for the year ended 30 September 2004

Sales Less: Cost of sales Less: Opening inventory Less: Purchases

Reference to workings 1

$ 604,200

138,000 410,800 –––––––– 448,800 146,000 ––––––––

2

Less: less: Closing inventory Gross profit Expenses

$

402,800 –––––––– 201,400 194,000 –––––––– 107,400 ––––––––

3

Net profit

(b)

Calculation of goods taken by Bob: Purchases as above Purchases per information in question: 408,100 – 68,100 + 77,100 + 14,200

410,800 431,300 –––––––– 20,500 ––––––––

Goods taken by Bob therefore total Workings 1 Sales Credit sales $519,400 – $119,200 + $125,000 Cash sales Sales for income statement 2

Purchases and cost of sales Cost of sales $604,200 x 2/3 Details Opening inventory Purchases (balancing figure)

less: closing stock 3

$ 525,200 79,000 –––––––– 604,200 –––––––– 402,800

38,000 410,800 –––––––– 448,800 46,000 ––––––––

Expenses $89,400 + $4,100 – $3,900 + $4,600 + $2,400 – $2,600

Alternative workings for (b) Purchases and cost of sales (before deducting goods taken by Bob) Purchases $408,100 – $68,100 + $77,100 + $14,200 Cost of sales $431,300 + $38,000 – $46,000 Calculation of goods taken by Bob Cost of sales allowing for 50% mark-up $604,200 x 2/3 Cost of sales as above Goods taken by Bob therefore total Purchases total becomes $431,300 – $20,500

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402,800 –––––––– 94,000 ––––––––

431,300 423,300 402,800 423,300 –––––––– 20,500 –––––––– 410,800 ––––––––

2

(a)

At 1 July 2003 Prior year adjustment Arising on issue of shares Surplus on land revaluation, now realised Net profit for year (40 + 6) Dividends paid

3

Cougar Statement of changes in equity Year ended 30 June 2004 Share Share premium Revaluation capital account reserve $m $m $m 100 140 60 11 ––– ––– ––– 100 140 60 100 180 (60) 1 ––– 200 –––

––– 320 –––

––– – –––

Accumulated profits $m 120 1((6) ––– 114

Total

160 146 1((8) ––– 212 –––

– 146 1((8) –––– 732 ––––

$m 420 1(6) ––– 414 280

Leo Group Consolidated balance sheet as at 30 June 2004 $ 3,100,000 ––––––––––– $3,100,000 ––––––––––– 500,000 800,000 1,470,000 ––––––––––– 2,770,000 330,000 ––––––––––– $3,100,000 –––––––––––

Sundry net assets

Share capital Revaluation reserve Accumulated profits Minority interest

Workings Cost of control Shares in Pard

$ 700,000

Share capital 70% Accumulated profits: 70% pre-acq Accumulated profits: goodwill written off

–––––––– 700,000 ––––––––

$ 1,140,000 1,420,000 1,140,000 1,–––––––– 1,700,000 1,––––––––

Minority interest $ Balance for CBS

330,000 –––––––– 330,000 ––––––––

Share capital 30% Accumulated profits 30%

$ 1, 60,000 1,270,000 1,–––––––– 1,330,000 1,––––––––

Accumulated profits $ Cost of control 70% x 600,000 Minority interest 30% x 900,000 Cost of control goodwill written off Balance for CBS

Leo Pard

$ 1,400,000 1,900,000

1,420,000 1,270,000 1,140,000 1,470,000 ––––––––– 2,300,000 –––––––––

––––––––– 2,300,000 –––––––––

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4

(a)

Research and development Balance at 1 Oct 2003 $ Project Q 1,000,000 1)(200,000) R )))400,000 S –––––––––– 1,200,000 –––––––––– Equipment

Balance at 1 Oct 2003 $ 1500,000 ((200,000) –––––––––– 300,000 ––––––––––

New expenditure $

Income statement Amortisation Research $ $

Balance sheet 30 Sept 2004 $

(100,000)

1,700,000 1,650,000

250,000 (140,000) ––––––––– (140,000) –––––––––

–––––––– 250,000 ––––––––

––––––––– (100,000) –––––––––

New expenditure $ 180,000

Depreciation

–––––––––– 1,350,000 –––––––––– Balance sheet 30 Sept 2004 $ 1,680,000 1,(336,000) –––––––––– 1,344,000 ––––––––––

$ (136,000) ––––––––– (136,000) –––––––––

–––––––– 180,000 ––––––––

Headings The amortisation of deferred development expenditure ($100,000) and the research expenditure ($140,000) and the depreciation of the research equipment ($136,000) will appear in the income statement under cost of sales. The total deferred development expenditure ($1,350,000) will appear in the balance sheet under intangible non-current assets. (b)

Disclosure notes Income statement The aggregate amount of research and development expenditure recognised as an expense during the period was $376,000, all charged in cost of sales. Balance sheet Movements on deferred development expenditure during the year were:

Balance at 1 October 2003 Year ended 30 September 2004 Amortisation New expenditure

5

Cost $ 1,400,000

250,000 –––––––––– 1,650,000 ––––––––––

Amortisation $ (200,000)

Net book value $ 1,200,000

(100,000)

(100,000) 250,000 –––––––––– 1,350,000 ––––––––––

––––––––– (300,000) –––––––––

The use of historical cost accounting can mislead users when prices are rising in the following ways: (i)

Depreciation is based on the original cost of non-current assets and thus understates the true value obtained by the business from the use of these assets. The result is that profit is overstated.

(ii)

Inventory is often valued at cost, using FIFO or average costs. If prices are rising, sales in current terms are matched with cost of sales in historical cost terms. Profit is again overstated.

(iii) Balance sheet values of assets may become seriously below their current value. (iv) The combined effects of the above three factors mean that return on capital employed is overstated. (v)

Year on year comparison of results is likely to be misleading as figures will show an automatic increase as prices rise, when in real terms sales and profits may have risen far less, or even have fallen.

Any four points needed for full marks.

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Part 1 Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream)

December 2004 Marking Scheme

Section B 1

(a)

sales 4 x 1/2 cost of sales purchases as balancing figure expenses 6 x 1/2 2 x 1/2

Calculations

Heading and layout

(b)

2

3

Calculation of purchases Correct method (subtraction of net purchases)

Opening balances Prior year adjustment Share issue Surplus on revaluation transferred Net profit for year Dividends paid

Goodwill Minority interest Accumulated profits Balance sheet Share capital Sundry net assets Revaluation reserve B/S layout heading

4x

1/

2

2 2 ––– 4 ––– 12 ––– 1 1 2 2 1 1 ––– 8 –––

2x1

4x 2x 5x

Marks 2 1 1 3 1 ––– 8 –––

1/

2

1/

2

1/

2

2 1 21/2 1 1 1 1 1/

2

––– 41/2 ––– 10 ––– 4

(a)

Project

Q R S Equipment Cost Depreciation Headings Accumulated profits Balance sheet

1 1 1 1/

2

1 1 1/

2

––– 6 ––– (b) (b)

5

Income statement Total Income statement heading used Balance sheet

2 1 3 ––– 6 ––– 12 –––

4x2

8 ––– 50 –––

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(International Stream) PART 1 THURSDAY 9 JUNE 2005

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

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Paper 1.1(INT)

Preparing Financial Statements

Section A – All 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

B, a limited liability company, receives rent for subletting part of its office premises to a number of tenants. In the year ended 31 December 2004 B received cash of $318,600 from its tenants. Details of rent in advance and in arrears at the beginning and end of 2004 are as follows:

Rent received in advance Rent owing by tenants

31 December 2004 $ 28,400 18,300

31 December 2003 $ 24,600 16,900

All rent owing was subsequently received What figure for rental income should be included in the income statement of B for 2004?

2

A

$341,000

B

$336,400

C

$300,800

D

$316,200

The following information is available for the year ended 31 December 2004 for a trader who does not keep proper accounting records: Inventories at 1 January 2004 Inventories at 31 December 2004 Purchases Gross profit percentage on sales

$ 38,000 45,000 637,000 30%

Based on this information, what was the trader’s sales figure for the year? A

$900,000

B

$819,000

C

$920,000

D

$837,200

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3

The following bank reconciliation statement has been prepared for a company: $ 39,800 64,100 –––––––– 103,900 44,200 –––––––– 59,700 ––––––––

Overdraft per bank statement add: Deposits credited after date less: Outstanding cheques presented after date Overdraft per cash book

Assuming the amount of the overdraft per the bank statement of $39,800 is correct, what should be the balance in the cash book?

4

A

$158,100

overdrawn

B

$19,900

overdrawn

C

$68,500

overdrawn

D

$59,700

overdrawn as stated

Which, if any, of the following journal entries is correct according to their narratives? Dr $ 450

(1) B receivables ledger account Bad debts account Irrecoverable balance written off (2) Investments: Q ordinary shares Share capital 80,000 shares of 50c each issued at $1·25 in exchange for shares in Q. (3) Suspense account Motor vehicles account Correction of error – debit side of Motor vehicles account undercast by $1,000

5

A

None of them

B

1 only

C

2 only

D

3 only

Cr $ 450

100,000 100,000

1,000 1,000

An enterprise has made a material change to an accounting policy in preparing its current financial statements. Which of the following disclosures are required by IAS 8 Accounting policies, changes in accounting estimates and errors in these financial statements? 1 2 3

The reasons for the change. The amount of the consequent adjustment in the current period and in comparative information for prior periods. An estimate of the effect of the change on future periods, where possible.

A

1 and 2 only

B

1 and 3 only

C

2 and 3 only

D

All three items

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6

At 31 December 2003 Q, a limited liability company, owned a building that had cost $800,000 on 1 January 1994. It was being depreciated at two per cent per year. On 31 December 2003 a revaluation to $1,000,000 was recognised. At this date the building had a remaining useful life of 40 years. Which of the following pairs of figures correctly reflects the effects of the revaluation?

7

A

Depreciation charge for year ended 31 December 2004 $ 25,000

Revaluation reserve as at 31 December 2003 $ 200,000

B

25,000

360,000

C

20,000

200,000

D

20,000

360,000

The inventory value for the financial statements of Q for the year ended 31 December 2004 was based on an inventory count on 4 January 2005, which gave a total inventory value of $836,200. Between 31 December and 4 January 2005, the following transactions took place: Purchases of goods Sales of goods (profit margin 30% on sales) Goods returned by Q to supplier

$ 8,600 14,000 700

What adjusted figure should be included in the financial statements for inventories at 31 December 2004?

8

A

$838,100

B

$853,900

C

$818,500

D

$834,300

P and Q are in partnership, sharing profits in the ratio 2:1. On 1 July 2004 they admitted P’s son R as a partner. P guaranteed that R’s profit share would not be less than $25,000 for the six months to 31 December 2004. The profitsharing arrangements after R’s admission were P 50%, Q 30%, R 20%. The profit for the year ended 31 December 2004 is $240,000, accruing evenly over the year. What should P’s final profit share be for the year ended 31 December 2004? A

$140,000

B

$139,000

C

$114,000

D

$139,375

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9

Which of the following items must be disclosed in a company’s published financial statements (including notes) if material, according to IAS1 Presentation of financial statements? 1 2 3 4

Finance costs. Staff costs. Depreciation and amortisation expense. Movements on share capital.

A

1 and 3 only

B

1, 2 and 4 only

C

2, 3 and 4 only

D

All four items

10 Which of the following costs should be included in valuing inventories of finished goods held by a manufacturing company, according to IAS2 Inventories? 1 2 3 4

Carriage inwards. Carriage outwards. Depreciation of factory plant. Accounts department costs relating to wages for production employees.

A

All four items

B

2 and 3 only

C

1, 3 and 4 only

D

1 and 4 only

11 During 2004, B, a limited liability company, paid a total of $60,000 for rent, covering the period from 1 October 2003 to 31 March 2005. What figures should appear in the company’s financial statements for the year ended 31 December 2004? A

Income statement $40,000

Balance sheet Prepayment $10,000

B

$40,000

Prepayment $15,000

C

$50,000

Accrual $10,000

D

$50,000

Accrual $15,000

12 Wanda keeps no accounting records. The following information is available about her position and transactions for the year ended 31 December 2004: Net assets at 1 January 2004 Drawings during 2004 Capital introduced during 2004 Net assets at 31 December 2004

$ 210,000 48,000 100,000 400,000

Based on this information, what was Wanda’s profit for 2004? A

$42,000

B

$242,000

C

$138,000

D

$338,000

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13 The following receivables ledger control account has been prepared by a trainee accountant: Receivables ledger control account 2005 1 Jan

$ 318,650 161,770

Balance Credit sales Cash sales Discounts allowed to credit customers

84,260 1,240 –––––––– 565,920 ––––––––

2005 $ 31 Jan Cash from credit customers 181,140 Interest charged on overdue accounts 280 Bad debts written off 1,390 Sales returns from credit customers 3,990 Balance 379,120 –––––––– 565,920 ––––––––

What should the closing balance at 31 January 2005 be after correcting the errors in the account? A

$292,380

B

$295,420

C

$292,940

D

$377,200

14 At 31 December 2004 a company’s trade receivables totalled $864,000 and the allowance for doubtful debts was $48,000. It was decided that debts totalling $13,000 were to be written off, and the allowance for doubtful debts adjusted to five per cent of the receivables. What figures should appear in the balance sheet for trade receivables (after deducting the allowance) and in the income statement for the total of bad and doubtful debts?

A

Income statement Bad and doubtful debts $ 8,200

Balance sheet Net trade receivables $ 807,800

B

7,550

808,450

C

18,450

808,450

D

55,550

808,450

15 A trader who fixes her prices by adding 50% to cost actually achieved a mark-up of 45%. Which of the following factors could account for the shortfall? 1 2 3 4

Sales were lower than expected. The opening inventories had been overstated. The closing inventories of the business were higher than the opening inventories. Goods taken from inventories by the proprietor were recorded by debiting drawings and crediting purchases with the cost of the goods.

A

All four factors

B

1, 2 and 4 only

C

2 only

D

3 and 4 only

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16 Which of the following statements about accounting concepts and conventions are correct? (1) The entity concept requires that a business is treated as being separate from its owners. (2) The use of historical cost accounting tends to understate assets and profit when prices are rising. (3) The prudence concept means that the lowest possible values should be applied to income and assets and the highest possible values to expenses and liabilities. (4) The money measurement concept means that only assets capable of being reliably measured in monetary terms can be included in the balance sheet of a business. A

1 and 2

B

2 and 3

C

3 and 4

D

1 and 4

17 A business income statement for the year ended 31 December 2004 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to motor expenses account. It is the company’s policy to depreciate motor vans at 25 per cent per year, with a full year’s charge in the year of acquisition. What would the net profit be after adjusting for this error? A

$106,100

B

$70,100

C

$97,100

D

$101,600

18 How should interest charged on partners’ drawings appear in partnership financial statements? A

As income in the income statement

B

Added to net profit and charged to partners in the division of profit

C

Deducted from net profit and charged to partners in the division of profit

D

Deducted from net profit in the division of profit and credited to partners

19 Which of the following statements about intangible assets in company financial statements are correct according to international accounting standards? 1 2 3

Internally generated goodwill should not be capitalised. Purchased goodwill should normally be amortised through the income statement. Development expenditure must be capitalised if certain conditions are met.

A

1 and 3 only

B

1 and 2 only

C

2 and 3 only

D

All three statements are correct

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20 Which of the following events occurring after the balance sheet date are classified as adjusting, if material? 1 2 3 4

The sale of inventories valued at cost at the balance sheet date for a figure in excess of cost. A valuation of land and buildings providing evidence of an impairment in value at the year end. The issue of shares and loan notes. The insolvency of a customer with a balance outstanding at the year end.

A

1 and 3

B

2 and 4

C

2 and 3

D

1 and 4

21 Which of the following statements about contingent assets and contingent liabilities are correct? 1 2 3 4

A contingent asset should be disclosed by note if an inflow of economic benefits is probable. A contingent liability should be disclosed by note if it is probable that a transfer of economic benefits to settle it will be required, with no provision being made. No disclosure is required for a contingent liability if it is not probable that a transfer of economic benefits to settle it will be required. No disclosure is required for either a contingent liability or a contingent asset if the likelihood of a payment or receipt is remote.

A

1 and 4 only

B

2 and 3 only

C

2, 3 and 4

D

1, 2 and 4

22 Which of the following statements about limited liability companies’ accounting is/are correct? 1 2 3

A revaluation reserve arises when a non-current asset is sold at a profit. The authorised share capital of a company is the maximum nominal value of shares and loan notes the company may issue. The notes to the financial statements must contain details of all adjusting events as defined in IAS10 Events after the balance sheet date.

A

All three statements

B

1 and 2 only

C

2 and 3 only

D

None of the statements

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The following information is relevant for questions 23 and 24: On 1 January 2004, J, a limited liability company, acquired 80% of the ordinary share capital of K, another limited liability company, for $160,000. The balance sheets of the two companies at 31 December 2004 were as follows:

Net assets Investment in K

Issued share capital Retained earnings At 31 December 2003 Profit for 2004

J $ 130,000 160,000 –––––––– 290,000 ––––––––

K $ 120,000 – –––––––– 120,000 ––––––––

200,000

50,000

40,000 50,000 –––––––– 290,000 ––––––––

30,000 40,000 –––––––– 120,000 ––––––––

Goodwill as calculated at 1 January 2004 is to be reduced in value by $24,000 because of impairment during 2004.

23 What figure should appear in the consolidated balance sheet of the J group as at 31 December 2004 for goodwill? A

$48,000

B

$96,000

C

$72,000

D

$64,000

24 What figure should appear in the consolidated balance sheet of the J group as at 31 December 2004 for minority interest? A

$32,000

B

$16,000

C

$10,000

D

$24,000

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[P.T.O.

25 On 1 April 2000, X, a limited liability company, paid $120,000 for 48,000 $1 shares in Y, another limited liability company, representing 80% of Y’s $60,000 share capital. The retained earnings of Y at that date were $70,000. At 31 March 2005 the retained earnings of the companies were: $ 180,000 100,000

X Y

All goodwill arising has been written off because of impairment. What figure should appear in the consolidated balance sheet of the X group at 31 March 2005 for retained earnings? A

$208,000

B

$8,000

C

$204,000

D

$188,000 (50 marks)

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Section B – ALL FIVE questions are compulsory and MUST be attempted 1

The draft balance sheet shown below has been prepared for Shuswap, a limited liability company, as at 31 December 2004: Cost Assets Non-current assets Land and buildings Plant and equipment

$000 9,000 21,000 ––––––– 30,000 –––––––

Accumulated depreciation $000 1,000 9,000 ––––––– 10,000 –––––––

Current assets Inventories Receivables Cash at bank

Net book value $000 8,000 12,000 ––––––– 20,000 3,000 2,600 1,900 ––––––– 27,500 –––––––

Total assets Equity and liabilities Capital and reserves Issued share capital (ordinary shares of 50c each) Retained earnings Non-current liabilities Loan notes (redeemable 2010) Current liabilities Trade payables Suspense account

6,000 12,400 2,000 2,100 ––––––– 22,500 5,000 ––––––– 27,500 –––––––

The following further information is available: 1 2 3

4 5

It has been decided to revalue the land and buildings to $12,000,000 at 31 December 2004. Trade receivables totalling $200,000 are to be written off. During the year there was a contra settlement of $106,000 in which an amount due to a supplier was set off against the amount due from the same company for goods sold to it. No entry has yet been made to record the set-off. Some inventory items included in the draft balance sheet at cost $500,000 were sold after the balance sheet date for $400,000, with selling expenses of $40,000. The suspense account is made up of two items: (a) The proceeds of issue of 4,000,000 50c shares at $1·10 per share, credited to the suspense account from the cash book. (b) The balance of the account is the proceeds of sale of some plant on 1 January 2004 with a net book value at the date of sale of $700,000 and which had originally cost $1,400,000. No other accounting entries have yet been made for the disposal apart from the cash book entry for the receipt of the proceeds. Depreciation on plant has been charged at 25% (straight line basis) in preparing the draft balance sheet without allowing for the sale. The depreciation for the year relating to the plant sold should be adjusted for in full.

Required: Prepare the company’s balance sheet as at 31 December 2004, complying as far as possible with IAS1 Presentation of financial statements. Details of non-current assets, adjusted appropriately, should appear as they are presented in the question. (12 marks) 11 FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

[P.T.O.

2

The draft financial statements of Choctaw, a limited liability company, for the year ended 31 December 2004 showed a profit of $86,400. The trial balance did not balance, and a suspense account with a credit balance of $3,310 was included in the balance sheet. In subsequent checking the following errors were found: (a) Depreciation of motor vehicles at 25 per cent was calculated for the year ended 31 December 2004 on the reducing balance basis, and should have been calculated on the straight-line basis at 25 per cent. Relevant figures: Cost of motor vehicles $120,000, net book value at 1 January 2004, $88,000 (b) Rent received from subletting part of the office accommodation $1,200 had been put into the petty cash box. No receivable balance had been recognised when the rent fell due and no entries had been made in the petty cash book or elsewhere for it. The petty cash float in the trial balance is the amount according to the records, which is $1,200 less than the actual balance in the box. (c) Bad debts totalling $8,400 are to be written off. (d) The opening accrual on the motor repairs account of $3,400, representing repair bills due but not paid at 31 December 2003, had not been brought down at 1 January 2004. (e) The cash discount totals for December 2004 had not been posted to the discount accounts in the nominal ledger. The figures were: Discount allowed Discount received

$ 380 290

After the necessary entries, the suspense account balanced. Required: Prepare journal entries, with narratives, to correct the errors found, and prepare a statement showing the necessary adjustments to the profit. (10 marks)

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3

The following information is available for Sioux, a limited liability company: Balance sheets 31 December 2004 $000 Non-current assets Cost or valuation Accumulated depreciation

3,400 3,800 400 –––––––

Equity and liabilities Capital and reserves Ordinary share capital Revaluation reserve Retained earnings Non-current liabilities 10% Loan notes Current liabilities Trade payables Income tax

$000

11,000 (5,600) ––––––– 5,400

Net book value Current assets Inventories Receivables Cash at bank

2003 $000

1,000 1,500 3,100 –––––––

7,600 ––––––– 13,000 –––––––

5,600

8,000 (4,800) ––––––– 3,200 3,800 2,900 100 –––––––

1,000 1,000 2,200 –––––––

3,000 3,700 700 –––––––

4,400 ––––––– 13,000 –––––––

$000

6,800 ––––––– 10,000 –––––––

4,200

2,000 3,200 600 –––––––

3,800 ––––––– 10,000 –––––––

Summarised income statement for the year ended 31 December 2004 $000 Profit from operations 2,650 Finance cost (loan note interest) (300) –––––– 2,350 Income tax expense (700) –––––– Net profit for the period 1,650 –––––– Notes (1) During the year non-current assets which had cost $800,000, with a net book value of $350,000, were sold for $500,000. (2) The revaluation surplus arose from the revaluation of some land that was not being depreciated. (3) The 2003 income tax liability was settled at the amount provided for at 31 December 2003. (4) The additional loan notes were issued on 1 January 2004. Interest was paid on 30 June 2004 and 31 December 2004. (5) Dividends paid during the year amounted to $750,000. Required: Prepare the company’s cash flow statement for the year ended 31 December 2004, using the indirect method, adopting the format in IAS7 Cash flow statements. (11 marks) 13 FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

[P.T.O.

4

(a) A company may choose to finance its activities mainly by equity capital, with low borrowings (low gearing) or by relying on high borrowings with relatively low equity capital (high gearing). Required: Explain why a highly geared company is generally more risky from an investor’s point of view than a company with low gearing. (3 marks) (b) Ratio analysis in general can be useful in comparing the performance of two companies, but it has its limitations. Required: State and briefly explain three factors which can cause accounting ratios to be misleading when used for such comparison. (6 marks) (9 marks)

5

The directors of Quapaw, a limited liability company, are reviewing the company’s draft financial statements for the year ended 31 December 2004. The following material matters are under discussion: (a) During the year the company has begun selling a product with a one-year warranty under which manufacturing defects are remedied without charge. Some claims have already arisen under the warranty. (2 marks) (b) During the inventory count on 31 December, some goods which had cost $80,000 were found to be damaged. In February 2005 the damaged goods were sold for $85,000 by an agent who received a 10% commission out of the sale proceeds. (2 marks) (c) In August 2004 it was discovered that the inventory at 31 December 2003 had been overstated by $100,000. (4 marks) Required: Advise the directors on the correct treatment of these matters, stating the relevant accounting standard which justifies your answer in each case. NOTE: The mark allocation is shown against each of the three matters. (8 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2005 Answers

Section A 1

D

Rent received Balance Income statement Balance

16,900 316,200 28,400 –––––––– 361,500 ––––––––

Balance Cash Balance

24,600 318,600 18,300 –––––––– 361,500 ––––––––

2

A

38,000 + 637,000 – 45,000 = 630,000 x 10/7 = 900,000

3

B

39,800 + 44,200 – 64,100 = 19,900 overdrawn

4

A

5

A

6

B

Depreciation 1/40 x 1,000,000 Revaluation 1,000,000 – 640,000

7

A

836,200 – 8,600 + 700 + (14,000 x 70%) = 838,100

8

B

80,000 + 60,000 – 1,000 = 139,000

9

D

10 C

11 A

Income statement 12/18 x 60,000 = 40,000 Prepayment 3/12 x 40,000 = 10,000

12 C

400,000 – 210,000 – 100,000 + 48,000 = 138,000

13 C 318,650 161,770 280 –––––––– 480,700 ––––––––

14 B

181,140 1,390 3,990 1,240 292,940 –––––––– 480,700 ––––––––

864,000 – 13,000 = 851,000 – 5% = 13,000 – (48,000 – 42,550)

808,450 7,550

15 C

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16 D

17 C

83,600 + 18,000 – 4,500 = 97,100

18 B

19 A

20 B

21 A

22 D

23 C

160,000 – 80% (50,000 + 30,000) – 24,000

24 D

20% x 120,000

25 D

180,000 + 100,000 – 56,000 – 20,000 – 16,000 = 188,000

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Section B 1

Shuswap Balance sheet as at 31 December 2004 Cost or Accumulated valuation depreciation $000 $000

Assets Non-current assets Land and buildings Plant and equipment

12,000 19,600 ––––––– 31,600 –––––––

Net book value $000

– 7,950 –––––– 7,950 ––––––

Current assets Inventories (3,000 – 140) Receivables (2,600 – 200 – 106) Cash at bank

12,000 11,650 ––––––– 23,650

2,860 2,294 1,900 ––––––

Equity and liabilities Capital and reserves Called up share capital (6,000 + 2,000) Share premium account Revaluation reserve Retained earnings (working)

7,054 ––––––– 30,704 –––––––

8,000 2,400 4,000 12,310 ––––––

26,710

Non-current liabilities Loan notes Current liabilities Trade payables (2,100 – 106)

2,000 1,994 ––––––– 30,704 –––––––

Working Retained earnings balance Per question Bad debts written off Loss on sale of plant Depreciation adjustment Inventory adjustment

2

(a)

(b)

(c)

(d)

(e)

$000 12,400 (200) (100) 350 (140) ––––––– 12,310 –––––––

Income statement Accumulated depreciation of motor vehicles Adjustment to depreciation from reducing balance basis to straight-line basis

$ 8,000

$ 8,000

Petty cash Rent receivable Rent received omitted from records

1,200

Bad debts Sundry receivables ledger accounts Bad debts written off

8,400

1,200

8,400

Suspense account 3,400 Motor vehicle repairs Correction of error – opening balance not brought forward Discounts allowed Discounts received Suspense account December 2004 discount totals not posted

3,400

380 290 90

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Profit adjustments Profit per draft financial statements (a) Depreciation adjustment (b) Rent receivable not recorded (c) Bad debts written off (d) Motor repairs adjustment (e) Discounts not posted: 380 – 290 Adjusted profit

3

$ 86,400 (8,000) 1,200 (8,400) 3,400 (90) –––––––– 74,510 ––––––––

Sioux Cash flow statement for the year ended 31 December 2004. $000 Cash flows from operating activities Net profit before taxation 2,350 Adjustments for: Depreciation 1,250 Profit on sale of plant (150) Interest expense 300 –––––– Operating profit before working capital changes 3,750 Decrease in inventories 400 Increase in receivables (900) Increase in payables 500 –––––– Cash generated from operations 3,750 Interest paid (300) Income taxes paid (600) –––––– Cash flows from investing activities Purchase of non-current assets Proceeds of sale of non-current assets Net cash used in investing activities

(3,300) 500 ––––––

Cash flows from financing activities Proceeds of issue of loan notes Dividends paid Net cash from financing activities

1,000 (750) ––––––

Net increase in cash Cash at 1 January 2004

$000

2,850

(2,800)

250 –––––– 300 100 –––––– 400 ––––––

Cash at 31 December 2004 Workings Non-current assets – cost

Opening balance Revaluation reserve Cash (balancing figure)

$000 8,000 500 3,300 ––––––– 11,800 –––––––

Disposal

Closing balance

$000 800

11,000 ––––––– 11,800 –––––––

Non-current assets – depreciation

Disposal Closing balance

$000 450

Opening balance Income statement

5,600 ––––––– 6,050 –––––––

$000 4,800 1,250 ––––––– 6,050 –––––––

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Non-current assets – disposal $000 800 150 –––– 950 ––––

Cost Profit on sale

4

Depreciation Cash

$000 450 500 –––– 950 ––––

(a)

A highly-geared company has an obligation to pay interest on its loans regardless of its profit level. It will show high profits if its overall rate of return on capital is greater than the rate of interest being paid on its borrowings, but a low profit or a loss if there is a down-turn in its profit such that the rate of interest to be paid exceeds the return on its assets.

(b)

(i)

One company may have revalued its assets while the other has not.

(ii)

Accounting policies and estimation techniques may differ. For example, one company may use higher depreciation rates than the other.

(iii) The use of historical cost accounting may distort the capital and profit of the two companies in different ways. Other answers considered on their merits.

5

(a)

The correct treatment is to provide for the best estimate of the costs likely to be incurred under the warranty, as required by IAS37 Provisions, contingent liabilities and contingent assets.

(b)

The inventories should be valued at the lower of cost and net realisable value. Cost is $80,000, net realisable value is $85,000 less 10%, or $76,500. The net realisable value of $76,500 should therefore be taken (IAS2 Inventories)

(c)

The opening inventory should be included in the current year’s income statement at the corrected figure, and the opening balance of retained profit reduced by $100,000. The $100,000 reduction will appear in the statement of changes in equity. (IAS8 Accounting policies, changes in accounting estimates and errors)

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) 1

2

Land and buildings Plant and equipment depreciation adjustment for disposal Inventory adjustment Receivables-adjustment for write-off Payables Contra Payables Contra Share capital Share premium Revaluation reserve Retained earnings bad debts loss on plant depreciation adjustment Inventory adjustment Heading

Journal entries 1/ mark per entry 2 1/ mark for narrative 2

June 2005 Marking Scheme 1 1 1

2 1 1/ 2 1/ 2 1/ 2 1 1 1 1 1 1 1 1 ––––– 131/2

max 12

1 1/ 2

––––– 11/2 x 5

Profit adjustments 5 x 1/2

71/2 21/ –––––2 10

3

Workings: Non-current assets: cost depreciation disposal

3 x 1/2 2 x 1/2 3 x 1/2

11/2 1 11/2

Cash flow statement 1/ per item 2

13 x 1/2

61/2

Layout Heading

4

1 1 ––––– 1 12 /2

(a) (b)

max 11

3 3x2

6 ––––– 9

5

(a)

(b)

(c)

Provision IAS 37

1 1

2

Correct treatment IAS2

1 1

2

Prior year adjustment Reconciliation Comparative figures adjusted IAS8

1 1 1 1

4 ––––– 8 ––––– 50 –––––

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(International Stream) PART 1 THURSDAY 8 DECEMBER 2005

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

The following information is available for a sole trader who keeps no accounting records: $ 186,000 274,000

Net business assets at 1 July 2004 Net business assets at 30 June 2005 During the year ended 30 June 2005: Cash drawings by proprietor Additional capital introduced by proprietor Business cash used to buy a car for the proprietor’s wife, who takes no part in the business

68,000 50,000 20,000

Using this information, what is the trader’s profit for the year ended 30 June 2005?

2

A

$126,000

B

$50,000

C

$86,000

D

$90,000

Evon, a limited liability company, issued 1,000,000 ordinary shares of 25c each at a price of $1·10 per share, all received in cash. What should be the accounting entries to record this issue? A

Debit: Credit:

Cash Share capital Share premium

$1,100,000 $250,000 $850,000

B

Debit: Credit:

Share capital Share premium Cash

$250,000 $850,000 $1,100,000

C

Debit: Credit:

Cash Share capital

$1,100,000 $1,100,000

D

Debit: Credit:

Cash Share capital Retained earnings

$1,100,000 $250,000 $850,000

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3

P and Q are in partnership, sharing profits equally. On 1 January 2005, R joined the partnership and it was agreed that from that date all three partners should share equally in the profit. In the year ended 30 June 2005 the profit amounted to $300,000, accruing evenly over the year, after charging a bad debt of $30,000 which it was agreed should be borne equally by P and Q only. What should be the partners’ total profit shares for the year ended 30 June 2005?

4

A

P $ 95,000

Q $ 95,000

R $ 110,000

B

122,500

122,500

55,000

C

125,000

125,000

50,000

D

110,000

110,000

50,000

At 1 July 2004 a limited liability company’s capital structure was as follows: Share capital 1,000,000 shares of 50c each Share premium account

$ 500,000 400,000

In the year ended 30 June 2005 the company made the following share issues: 1 January 2005 A bonus issue of one share for every four in issue at that date, using the share premium account. 1 April 2005 A rights issue of one share for every ten in issue at that date, at $1·50 per share. What will be the balances on the company’s share capital and share premium accounts at 30 June 2005 as a result of these issues? Share capital $ A 687,500

5

Share premium account $ 650,000

B

675,000

375,000

C

687,500

150,000

D

687,500

400,000

Which of the following factors could cause a company’s gross profit percentage on sales to fall below the expected level? 1 2 3 4

Understatement of closing inventories. The incorrect inclusion in purchases of invoices relating to goods supplied in the following period. The inclusion in sales of the proceeds of sale of non-current assets. Increased cost of carriage charges borne by the company on goods sent to customers.

A

3 and 4

B

2 and 4

C

1 and 2

D

1 and 3

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[P.T.O.

6

Which of the following journal entries are correct, according to their narratives? Dr $ 18,000

1

Suspense account Rent received account Correction of error in posting $24,000 cash received for rent to the rent received account as $42,000 ––––––––––––––––––––––––––––––––––––––––––––

Cr $ 18,000

2

B receivables ledger account A receivables ledger account Correction of error: cash received from A wrongly entered to B’s account ––––––––––––––––––––––––––––––––––––––––––––

22,000 22,000

3

Share premium account Share capital account 1 for 3 bonus issue on share capital of 1,200,000 50c shares ––––––––––––––––––––––––––––––––––––––––––––

400,000

4

750,000

400,000

Shares in X Share capital account Share premium account

250,000 500,000

500,000 50c shares issued at $1·50 per share in exchange for shares in X ––––––––––––––––––––––––––––––––––––––––––––

7

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

The receivables ledger control account below contains several incorrect entries. Receivables ledger control account $ 138,400

Opening balance

Cash received from credit customers

78,420

–––––––– 216,820 ––––––––

$ Credit sales 80,660 Contras against credit balances in payables ledger 1,000 Discounts allowed to credit customers 1,950 Bad debts written off 3,000 Dishonoured cheques from credit customers 850 Closing balance 129,360 –––––––– 216,820 ––––––––

What should the closing balance be when all the errors are corrected? A

$133,840

B

$135,540

C

$137,740

D

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8

A limited liability company’s trial balance does not balance. The totals are: Debit Credit

$384,030 $398,580

A suspense account is opened for the difference. Which of the following pairs of errors could clear the balance on the suspense account when corrected?

9

A

Debit side of cash book undercast by $10,000; $6,160 paid for rent correctly entered in the cash book but entered in the rent account as $1,610.

B

Debit side of cash book overcast by $10,000; $1,610 paid for rent correctly entered in the cash book but entered in the rent account as $6,160.

C

Debit side of cash book undercast by $10,000; $1,610 paid for rent correctly entered in the cash book but entered in the rent account as $6,160.

D

Debit side of cash book overcast by $10,000; $6,160 paid for rent correctly entered in the cash book but entered in the rent account as $1,610.

A draft cash flow statement contains the following calculation of net cash inflow from operating activities: $m 13 2 (3) 5 4 ––– 21

Operating profit Depreciation Decrease in inventories Decrease in trade and other receivables Decrease in trade payables Net cash inflow from operating activities

Which of the following corrections need to be made to the calculation? 1 2 3 4

Depreciation should be deducted, not added. Decrease in inventories should be added, not deducted. Decrease in receivables should be deducted, not added. Decrease in payables should be deducted, not added.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

10 Which of the following factors would cause a company’s gearing ratio to fall? 1 2 3 4

A bonus issue of ordinary shares. A rights issue of ordinary shares. An issue of loan notes. An upward revaluation of non-current assets.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

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[P.T.O.

11 The following information is available for Orset, a sole trader who does not keep full accounting records: Inventory 1 July 2004 30 June 2005 Purchases for year ended 30 June 2005

$ 138,600 149,100 716,100

Orset makes a standard gross profit of 30 per cent on sales. Based on these figures, what is Orset’s sales figure for the year ended 30 June 2005? A

$2,352,000

B

$1,038,000

C

$917,280

D

$1,008,000

12 At 1 July 2004 a company had prepaid insurance of $8,200. On 1 January 2005 the company paid $38,000 for insurance for the year to 30 September 2005. What figures should appear for insurance in the company’s financial statements for the year ended 30 June 2005? A

Income statement $27,200

Balance sheet Prepayment $19,000

B

$39,300

Prepayment $9,500

C

$36,700

Prepayment $9,500

D

$55,700

Prepayment $9,500

13 Which of the following correctly describes the imprest system for operating petty cash? A

All expenditure out of petty cash must be supported by a properly authorised voucher.

B

A regular equal amount of cash is transferred into petty cash.

C

The exact amount of expenditure out of petty cash is reimbursed at intervals.

D

A budget is fixed for a period which petty cash expenditure must not exceed.

14 Alpha buys goods from Beta. At 30 June 2005 Beta’s account in Alpha’s records showed $5,700 owing to Beta. Beta submitted a statement to Alpha as at the same date showing a balance due of $5,200. Which of the following could account fully for the difference? A

Alpha has sent a cheque to Beta for $500 which has not yet been received by Beta.

B

The credit side of Beta’s account in Alpha’s records has been undercast by $500.

C

An invoice for $250 from Beta has been treated in Alpha’s records as if it had been a credit note.

D

Beta has issued a credit note for $500 to Alpha which Alpha has not yet received.

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15 Which of the following statements about intangible assets are correct? 1 2 3

If certain criteria are met, research expenditure must be recognised as an intangible asset. Goodwill may not be revalued upwards. Internally generated goodwill should not be capitalised.

A

2 and 3 only

B

1 and 3 only

C

1 and 2 only

D

All three statements are correct

16 Which of the following events between the balance sheet date and the date the financial statements are authorised for issue must be adjusted in the financial statements? 1 2 3 4

Declaration of equity dividends. Decline in market value of investments. The announcement of changes in tax rates. The announcement of a major restructuring.

A

1 only

B

2 and 4

C

3 only

D

None of them

17 A company sublets part of its office accommodation. In the year ended 30 June 2005 cash received from tenants was $83,700. Details of rent in arrears and in advance at the beginning and end of the year were:

30 June 2004 30 June 2005

In arrears $ 3,800 4,700

In advance $ 2,400 3,000

All arrears of rent were subsequently received. What figure for rental income should be included in the company’s income statement for the year ended 30 June 2005? A

$84,000

B

$83,400

C

$80,600

D

$85,800

18 Which of the following statements about accounting ratios and their interpretation are correct? 1 2 3

A low-geared company is more able to survive a downturn in profit than a highly-geared company. If a company has a high price earnings ratio, this will often indicate that the market expects its profits to rise. All companies should try to achieve a current ratio (current assets/current liabilities) of 2:1.

A

2 and 3 only

B

1 and 3 only

C

1 and 2 only

D

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19 At 30 June 2004 a company’s allowance for receivables was $39,000. At 30 June 2005 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the equivalent of 5 per cent of the trade receivables based on past events. What figure should appear in the income statement for these items? A

$61,000

B

$22,000

C

$24,000

D

$23,850

20 IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories of finished goods. Which of the following statements about the IAS 2 requirements in this area are correct? 1

3

Finished goods inventories may be valued on the basis of labour and materials cost only, without including overheads. Carriage inwards, but not carriage outwards, should be included in overheads when valuing inventories of finished goods. Factory management costs should be included in fixed overheads allocated to inventories of finished goods.

A

All three statements are correct

B

1 and 2 only

C

1 and 3 only

D

2 and 3 only

2

21 A limited liability company sold a building at a profit. How will this transaction be treated in the company’s cash flow statement? Proceeds of sale Cash inflow under Financing activities

Profit on sale Added to profit in calculating cash flow from operating activities

B

Cash inflow under Investing activities

Deducted from profit in calculating cash flow from operating activities

C

Cash inflow under Investing activities

Added to profit in calculating cash flow from operating activities

D

Cash inflow under Financing activities

Deducted from profit in calculating cash flow from operating activities

A

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22 Which of the following items may appear in a company’s statement of changes in equity, according to IAS 1 Presentation of financial statements? 1 2 3 4

Unrealised revaluation gains. Dividends paid. Proceeds of equity share issue. Profit for the period.

A

2, 3 and 4 only

B

1, 3 and 4 only

C

All four items

D

1, 2 and 4 only

23 The capital structure of a company at 30 June 2005 is as follows: $m 100 40 60 40

Ordinary share capital Share premium account Retained earnings 10% Loan notes

The company’s income statement for the year ended 30 June 2005 showed: $m 44 (4) ––– 40 –––

Operating profit Loan note interest Profit for year

What is the company’s return on capital employed? A

40/240

=

162/3 per cent

B

40/100

=

40 per cent

C

44/240

=

181/3 per cent

D

44/200

=

22 per cent

24 Sigma’s bank statement shows an overdrawn balance of $38,600 at 30 June 2005. A check against the company’s cash book revealed the following differences: 1 2 3 4

Bank charges of $200 have not been entered in the cash book. Lodgements recorded on 30 June 2005 but credited by the bank on 2 July $14,700. Cheque payments entered in cash book but not presented for payment at 30 June 2005 $27,800. A cheque payment to a supplier of $4,200 charged to the account in June 2005 recorded in the cash book as a receipt.

Based on this information, what was the cash book balance BEFORE any adjustments? A

$43,100 overdrawn

B

$16,900 overdrawn

C

$60,300 overdrawn

D

$34,100 overdrawn

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25 The following is an extract from the income statement of a business: $000 Sales revenue Opening inventories Purchases

$000 22,000

5,000 15,000 ––––––– 20,000 3,000 –––––––

less: Closing inventories

17,000 ––––––– 5,000 –––––––

Gross profit

To the nearest day, how many days’ sales are held in the closing inventories? A

3,000/22,000 x 365

= 50 days

B

3,000/17,000 x 365

= 64 days

C

3,000/15,000 x 365

= 73 days

D

3,000/20,000 x 365

= 55 days (50 marks)

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Section B – ALL FIVE questions are compulsory and MUST be attempted 1

Airn is a sole trader who does not keep a full set of accounting records. An analysis of his cash transactions for the year ended 30 June 2005 is given below: Reference to notes

Receipts $

Overdraft, 1 July 2004 Cash banked 1 Proceeds of sale of old motor van 2,3 Payments for purchases New motor van (purchased 1 January 2005) 3 Rent and general expenses Drawings Overdraft, 30 June 2005

Payments $ 32,400

418,200 4,500 316,300 22,000 49,200 80,400 77,600 –––––––– 500,300 ––––––––

––––––––– 500,300 –––––––––

Airn’s other assets and liabilities at the beginning and end of the year ended 30 June 2005 were: Reference to notes Shop fittings (cost $45,000) Motor van (cost $18,000) New motor van Trade receivables Trade payables Inventories Owing for rent and general expenses

30 June 2005 $ to be calculated sold 22,000 48,600 24,200 63,200 13,000

2,3 3

2004 $ 35,000 4,000 – 44,700 19,600 58,900 12,500

Notes: (1) Before banking the cash received from customers, Airn made the following payments: $ Wages 74,000 Purchases for cash 13,700 General expenses 7,400 ––––––– 95,100 ––––––– (2) The motor van held at 30 June 2004 was sold during the year. (3) Airn’s depreciation policy is to charge depreciation on the straight line basis as follows, assuming no residual value: Motor van Shop fittings

20% per year 10% per year

No depreciation is charged in the year of sale of assets, but there is a full year’s depreciation in the year of purchase. Required: Prepare Airn’s income statement for the year ended 30 June 2005. (11 marks)

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2

The following land and buildings account for the year ended 31 December 2004 has been written up by a bookkeeper who has since been dismissed. The notes under the account explain each entry. Land and buildings 2004 1 Jan Balance 30 June Cash 31 Dec

Revaluation reserve

Notes 1 2

$000 1,000 700

5

2,200

2004

Notes

$000

3 4

500 20 3,380 –––––– 3,900 ––––––

30 Sep Cash proceeds of sale 31 Dec Income statement 31 Dec Balance

–––––– 3,900 ––––––

Notes 1 This is the net balance appearing in the company’s balance sheet at 1 January 2004. It is made up as follows: $000 Land-cost Buildings-cost Buildings-accumulated depreciation

2

Cash paid for new land and building: Land Building

3

Cash received on sale of land and buildings: Details of the transaction were:

800 (200) ––––

$000 400 600 –––––– 1,000 –––––– $000 200 500 –––– 700 ––––

$000 Proceeds of sale Cost: Land Building Accumulated depreciation at 1 January 2004

$000

$000 500

(100) (100) 20 ––––

(80) ––––

Profit

(180) –––– 320 ––––

4

This is the depreciation charge for the year, calculated as 2 per cent of the opening balance $1,000,000. It is the company’s policy to charge depreciation on buildings only, at 2 per cent per year on the straight line basis, with a full year’s depreciation in the year of purchase and none in the year of sale.

5

This entry was made to reflect a revaluation of the land and buildings held at 31 December 2004. The valuer placed the following values on the property: $000 800 1,400 –––––– 2,200 ––––––

Land Buildings

The revaluation is not to be reflected in the depreciation charge for the year to 31 December 2004.

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Required: Prepare the following ledger accounts for the year ended 31 December 2004 correctly recording the above transactions: – Land, cost or valuation; – Buildings, cost or valuation; – Buildings, accumulated depreciation; – Disposal of land and buildings. (11 marks)

3

On 1 October 1999 Kye, a limited liability company, purchased 80 per cent of the share capital of Rye for $260,000. The retained earnings balance of Rye at this date was $180,000. At 30 September 2005 the balance sheets of the two companies were:

Investment in Rye Sundry net assets

Ordinary share capital Retained earnings

Kye $ 260,000 420,000 ––––––––– 680,000 ––––––––– 200,000 480,000 ––––––––– 680,000 –––––––––

Rye $ – 360,000 ––––––––– 360,000 ––––––––– 100,000 260,000 ––––––––– 360,000 –––––––––

Goodwill arising on the acquisition has been fully written off. Required: Prepare the consolidated balance sheet of Kye and the subsidiary as at 30 September 2005, showing workings for the retained earnings figure in the consolidated balance sheet. (8 marks)

4

The directors of Umbria, a limited liability company, are reviewing the company’s draft financial statements for the year ended 30 June 2005. The following material matters are under discussion: (1) After the balance sheet date one of the company’s factories was seriously damaged by fire. Insurance will only cover part of the loss suffered. The company’s going concern status is not affected. (2) Umbria guaranteed the overdraft of another company in 2003. No disclosure has been made in previous financial statements, but events in the latter part of the year ended 30 June 2005 suggest that it is probable that a liability will fall on Umbria in 2006. (3) One of the company’s directors was dismissed during 2005 for disclosing confidential information to a competitor. Umbria has commenced an action against this director, and the company has been advised that it is probable that substantial damages will be awarded. (4) One of the company’s buildings was revalued during the year. The directors are uncertain as to how the revaluation surplus should be included in the financial statements. The surplus has been separately disclosed as an item in the draft income statement. Required: Explain how each of these four matters should be dealt with in the financial statements for the year ended 30 June 2005, stating in each case the relevant accounting standard. (10 marks)

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[P.T.O.

5

State four accounting concepts, and explain how each one contributes to fair presentation in the financial statements. (10 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

December 2005 Answers

Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A A B D C D B A D D D C C D A D A C B D B C C A B

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SECTION B 1

Airn Income statement for the year ended 30 June 2005 $ Sales revenue (Working 1) Opening inventories Purchases (Working 2)

$ 517,200

58,900 334,600 –––––––– 393,500 63,200

less: Closing inventories

–––––––– Gross profit Wages Rent and general expenses (49,200 + 7,400 – 12,500 + 13,000) Depreciation: shop fittings (45,000 x 10%) motor van (22,000 x 20%) Profit on sale of van (4,500 – 4,000)

74,000 57,100 4,500 4,400 (500) ––––––––

Net profit

330,300 –––––––– 186,900

139,500 –––––––– $47,400 ––––––––

Workings (1) Calculation of sales Receivables ledger total account $ 44,700

Opening balance Sales

Cash banked Payments out of takings

$ 418,200 95,100

517,200 –––––––– 561,900 ––––––––

Closing balance

48,600 –––––––– 561,900 ––––––––

(2) Calculation of purchases Payables ledger total account $ Cash paid for purchases Closing balance

316,300 24,200 –––––––– 340,500 ––––––––

Credit purchases Cash purchases

320,900 13,700 –––––––– 334,600 ––––––––

Total purchases

Opening balance Purchases

$ 19,600 320,900 –––––––– 340,500 ––––––––

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2

Land – cost/valuation 2004 1 Jan Balance 30 June Cash 31 Dec Revaluation reserve

$000 400 200 300 ––––– 900 –––––

2004 30 Sept

Disposal

31 Dec

Balance

$000 100 800 ––––– 900 –––––

Buildings – cost/valuation 2004 1 Jan Balance 30 June Cash 31 Dec Revaluation reserve

$000 800 500 200 ––––– 1,500 –––––

2004 30 Sept

Disposal

31 Dec

Balance

$000 100 1,400 ––––– 1,500 –––––

Buildings – accumulated depreciation 2004 30 Sept Disposal

$000 20

31 Dec Revaluation reserve

204 ––––– 224 –––––

2004 1 Jan 31 Dec

Balance Income statement depreciation 2% x 1,200

$000 200 24 ––––– 224 –––––

Land and Buildings – disposal 2004 30 Sept Land Buildings Income statement – profit

$000 100 100 320 ––––– 520 –––––

3

2004 30 Sept

Depreciation Cash

$000 20 500 ––––– 520 –––––

Goodwill

Investment in Rye

$ 260,000 –––––––– 260,000 ––––––––

Share capital 80% Retained earnings 80% Goodwill-retained earnings

$ 80,000 144,000 36,000 –––––––– 260,000 ––––––––

Minority interest

Balance to CBS

$ 72,000 –––––––– 72,000 ––––––––

Share capital 20% Retained earnings 20%

$ 20,000 52,000 –––––––– 72,000 ––––––––

Retained earnings $ Cost of control 80% x $180,000 Goodwill Minority interest 20% Balance to CBS

144,000 36,000 52,000 508,000 –––––––– 740,000 ––––––––

Balances Kye Rye

$ 480,000 260,000

–––––––– 740,000 ––––––––

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Kye group Balance sheet as at 30 September 2005 $ 780,000 –––––––– 200,000 508,000 –––––––– 708,000 72,000 –––––––– 780,000 ––––––––

Sundry net assets (420, 000 + 360,000) Share capital Retained earnings Minority interest

4

(1) The factory was in good condition at 30 June 2005, and thus the fire is a non-adjusting event according to IAS 10 Events after the balance sheet date. Details of the fire and an estimate of the loss suffered should be disclosed by note. (2) According to IAS 37 Provisions, contingent liabilities and contingent assets, contingencies such as this are to be provided for as soon as it becomes probable that a liability will arise. A provision should therefore be made for the best estimate of the loss that will arise. (3) This constitutes a ‘probable’ contingent asset under IAS 37, and thus should be disclosed by note, explaining the nature of the contingent asset and, if possible, an estimate of the financial effect. (4) It is incorrect to include the revaluation gain in the income statement, because the gain is unrealised. It should be credited to revaluation reserve and shown in the balance sheet. The gain should also be shown in the statement of changes in equity (IAS 16 Property, Plant and Equipment and IAS 1 Presentation of Financial Statements).

5

Four accounting concepts needed for full marks. Examples: (i)

Accruals concept The accruals concept is that transactions are reflected in the accounting period in which they occur, rather than the period in which any cash involved is received or paid. If this concept is not followed, expenses, income, assets and liabilities are all liable to be misstated and fair presentation will not be achieved.

(ii)

Going concern concept The going concern concept is that financial statements should be prepared on the basis that the business will continue for the foreseeable future. If this concept is not followed, assets and liabilities, and hence income and expenses, will be distorted, except, of course, in the rare case that the business is in fact no longer a going concern.

(iii) Prudence concept Prudence means that a degree of caution should be exercised in making estimates of figures for the financial statements, so that assets are not overstated and liabilities are not understated. If the prudence concept is not followed, fair presentation is unlikely to be achieved because assets and liabilities may be shown at unrealistic values. (iv) Neutrality Neutrality means that information in financial statements should be free from deliberate or systematic bias. If this concept is not followed, information may be presented in a misleading way and a fair presentation will not result. (v)

Substance over form The legal form of a transaction may not represent the true nature of that transaction. The concept of substance over form is that, whenever legally possible, the substance or reality of a transaction should be accounted for rather than its legal form.

Other concepts considered on their merits.

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

December 2005 Marking Scheme

Section B 1

2

Heading Sales revenue Opening inventories Purchases Closing inventories Wages Rent and general expenses Depreciation: shop fittings motor van Profit on sale of van

1 2 1/ 2 2 1/ 2 1/ 2 2 1 1 1 ––––– 1 11 /2

max 11

21/2 21/2 31/2 21/ –––––2

Land – cost/valuation Buildings – cost/valuation Buildings – accumulated depreciation Land and buildings – disposal

11

3

11/2 1 21/2 1 1 1/ 2 1/ –––––2

Goodwill Minority interest Retained earnings Heading Sundry net assets Share capital Minority interest in B/S

8

4

5

(1) IAS 10 Non-adjusting Details in note 2 x 1/2

1 1 1 ––––– 3

(2) IAS 37 Provide for

1 1 ––––– 2

(3) IAS 37 Disclose by note 2 x 1/2

1 1 ––––– 2

(4) IASs 16/1 Must not be in income statement Include as revaluation reserve in balance sheet Include in statement of changes in equity

1 1 1 1 ––––– 4 ––––– 11

max 10

4 8 ––––– 12

max 10

Concepts stated explained

4x1 4x1

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(International Stream) PART 1 THURSDAY 8 JUNE 2006

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

The plant and machinery cost account of a company is shown below. The company’s policy is to charge depreciation at 20% on the straight line basis, with proportionate depreciation in years of acquisition and disposal. Plant and machinery - cost 2005 1 Jan Balance 1 Apr Cash 1 Sept Cash

$ 280,000 48,000 36,000 –––––––– 364,000 ––––––––

2005 30 June

Transfer disposal

31 Dec

Balance

$ 14,000 350,000 –––––––– 364,000 ––––––––

What should be the depreciation charge for the year ended 31 December 2005?

2

3

A

$67,000

B

$70,000

C

$64,200

D

$68,600

Which of the following are correct? 1.

The balance sheet value of inventory should be as close as possible to net realisable value.

2.

The valuation of finished goods inventory must include production overheads.

3.

Production overheads included in valuing inventory should be calculated by reference to the company’s normal level of production during the period.

4.

In assessing net realisable value, inventory items must be considered separately, or in groups of similar items, not by taking the inventory value as a whole.

A

1 and 2 only

B

3 and 4 only

C

1 and 3 only

D

2, 3 and 4

A business sublets part of its office accommodation. The rent is received quarterly in advance on 1 January, 1 April, 1 July and 1 October. The annual rent has been $24,000 for some years, but it was increased to $30,000 from 1 July 2005. What amounts for this rent should appear in the company’s financial statements for the year ended 31 January 2006? Income statement

Balance sheet

A

$27,500

$5,000 in sundry receivables

B

$27,000

$2,500 in sundry receivables

C

$27,000

$2,500 in sundry payables

D

$27,500

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4

A trainee accountant has prepared the following receivables ledger total account to calculate the credit sales of a business which does not keep proper accounting records (all sales are on credit): Receivables ledger total account $ Opening receivables 148,200 Cash received from customers 819,300 Discounts allowed to credit customers 16,200 Irrecoverable debts written off 1,500 Returns from customers

38,700 –––––––––– 1,023,900 ––––––––––

Credit sales

Closing receivables

$ 870,800

153,100 –––––––––– 1,023,900 ––––––––––

The account contains several errors. What is the sales figure when all the errors have been corrected?

5

6

A

$848,200

B

$877,600

C

$835,400

D

$880,600

Which of the following events after the balance sheet date would normally qualify as adjusting events according to IAS 10 Events after the balance sheet date? 1

The bankruptcy of a credit customer with a balance outstanding at the balance sheet date.

2

A decline in the market value of investments.

3

The declaration of an ordinary dividend.

4

The determination of the cost of assets purchased before the balance sheet date.

A

1, 3, and 4

B

1 and 2 only

C

2 and 3 only

D

1 and 4 only

Ordan received a statement from one of its suppliers, Alta, showing a balance due of $3,980. The amount due according to the payables ledger account of Alta in Ordan’s records was only $230. Comparison of the statement and the ledger account revealed the following differences: 1

A cheque sent by Ordan for $270 has not been allowed for in Alta’s statement.

2

Alta has not allowed for goods returned by Ordan $180.

3

Ordan made a contra entry, reducing the amount due to Alta by $3,200, for a balance due from Alta in Ordan’s receivables ledger. No such entry has been made in Alta’s records.

What difference remains between the two companies’ records after adjusting for these items? A

$460

B

$640

C

$6,500

D

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7

A company’s trial balance failed to agree, and a suspense account was opened for the difference. Subsequent checking revealed that discounts allowed $13,000 had been credited to discounts received account and an entry on the credit side of the cash book for the purchase of some machinery $18,000 had not been posted to the plant and machinery account. Which two of the following journal entries would correct the errors?

(1) Discounts allowed Discounts received

8

Debit $ 13,000

13,000

(2) Discounts allowed Discounts received Suspense account

13,000 13,000

(3) Suspense account Discounts allowed Discounts received

26,000

(4) Plant and machinery Suspense account

18,000

(5) Suspense account Plant and machinery

18,000

A

1 and 4

B

2 and 5

C

2 and 4

D

3 and 5

Credit $

26,000 13,000 13,000 18,000 18,000

Which of the following statements about accounting concepts and conventions are correct? (1) The money measurement concept requires all assets and liabilities to be accounted for at historical cost. (2) The substance over form convention means that the economic substance of a transaction should be reflected in the financial statements, not necessarily its legal form. (3) The realisation concept means that profits or gains cannot normally be recognised in the income statement until realised. (4) The application of the prudence concept means that assets must be understated and liabilities must be overstated in preparing financial statements. A

1 and 3

B

2 and 3

C

2 and 4

D

1 and 4.

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The following information is relevant for questions 9 and 10 A company’s draft financial statements for 2005 showed a profit of $630,000. However, the trial balance did not agree, and a suspense account appeared in the company’s draft balance sheet. Subsequent checking revealed the following errors: (1) The cost of an item of plant $48,000 had been entered in the cash book and in the plant account as $4,800. Depreciation at the rate of 10% per year ($480) had been charged. (2) Bank charges of $440 appeared in the bank statement in December 2005 but had not been entered in the company’s records. (3) One of the directors of the company paid $800 due to a supplier in the company’s payables ledger by a personal cheque. The bookkeeper recorded a debit in the supplier’s ledger account but did not complete the double entry for the transaction. (The company does not maintain a payables ledger control account). (4) The payments side of the cash book had been understated by $10,000.

9

Which of the above items would require an entry to the suspense account in correcting them? A

All four items

B

3 and 4 only

C

2 and 3 only

D

1, 2 and 4 only

10 What would the company’s profit become after the correction of the above errors? A

$634,760

B

$624,760

C

$624,440

D

$625,240

11 Which of the following statements are correct? 1

A company might make a rights issue if it wished to raise more equity capital.

2

A rights issue might increase the share premium account whereas a bonus issue is likely to reduce it.

3

A bonus issue will reduce the gearing (leverage) ratio of a company.

4

A rights issue will always increase the number of shareholders in a company whereas a bonus issue will not.

A

1 and 2

B

1 and 3

C

2 and 3

D

2 and 4

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[P.T.O.

12 Which of the following statements are correct? (1) Contingent assets are included as assets in financial statements if it is probable that they will arise. (2) Contingent liabilities must be provided for in financial statements if it is probable that they will arise. (3) Details of all adjusting events after the balance sheet date must be given in notes to the financial statements. (4) Material non-adjusting events are disclosed by note in the financial statements. A

1 and 2

B

2 and 4

C

3 and 4

D

1 and 3

13 At 1 January 2005 a company had an allowance for receivables of $18,000 At 31 December 2005 the company’s trade receivables were $458,000. It was decided: (a) To write off debts totalling $28,000 as irrecoverable; (b) To adjust the allowance for receivables to the equivalent of 5% of the remaining receivables based on past experience. What figure should appear in the company’s income statement for the total of debts written off as irrecoverable and the movement in the allowance for receivables for the year ended 31 December 2005? A

$49,500

B

$31,500

C

$32,900

D

$50,900

14 The following payables ledger control account contains some errors. All goods are purchased on credit Payables ledger control account $ 963,200

Purchases Discounts received Contras with amounts receivable in receivables ledger Closing balance

12,600

Opening balance Cash paid to suppliers Purchases returns

4,200 410,400 –––––––––– 1,390,400 ––––––––––

–––––––––– 1,390,400 ––––––––––

What should the closing balance be when the errors have been corrected? A

$325,200

B

$350,400

C

$358,800

D

$376,800

$ 384,600 988,400 17,400

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15 What journal entry is required to record goods taken from inventory by the owner of a business? A

Debit Drawings Credit Purchases

B

Debit Sales Credit Drawings

C

Debit Drawings Credit Inventory

D

Debit Purchases Credit Drawings

16 The following information is available about the transactions of Razil, a sole trader who does not keep proper accounting records: $ Opening inventory 77,000 Closing inventory 84,000 Purchases 763,000 Gross profit as a percentage of sales

30%

Based on this information, what is Razil’s sales revenue for the year? A

$982,800

B

$1,090,000

C

$2,520,000

D

$1,080,000

17 Which of the following statements are correct? (1) All non-current assets must be depreciated. (2) If goodwill is revalued, the revaluation surplus appears in the statement of changes in equity. (3) If a tangible non-current asset is revalued, all tangible assets of the same class should be revalued. (4) In a company’s published balance sheet, tangible assets and intangible assets must be shown separately. A

1 and 2

B

2 and 3

C

3 and 4

D

1 and 4

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[P.T.O.

The following information is relevant for questions 18 and 19 Extracts from a company’s financial statements for 2005 are given below: Balance sheet as at 31 December 2005 $m Non-current assets Current assets

90 80 –––– 170 ––––

Ordinary share capital Share premium account Retained earnings

40 25 35 –––– 100 50 20 –––– 170 ––––

10% Loan notes Current liabilities

Income statement for the year ended 31 December 2005 $m 20 (5) –––– 15 ––––

Profit before finance costs Finance costs Profit before tax

18 What is the company’s return on total capital employed? A

20/150

=

13·3%

B

15/150

=

10%

C

20/100

=

20%

D

15/100

=

15%

19 What is the company’s return on shareholders’ equity? A

15/40

=

37·5%

B

20/100

=

20%

C

15/100

=

15%

D

20/150

=

13·3%

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20 The following bank reconciliation statement has been prepared by an inexperienced bookkeeper at 31 December 2005. Bank reconciliation statement Balance per bank statement (overdrawn) Add: lodgements not credited

Less: unpresented cheques Balance per cash book

$ 38,640 19,270 ––––––– 57,910 14,260 ––––––– 43,650 –––––––

What should the final cash book balance be when all the above items have been properly dealt with? A

$43,650

overdrawn

B

$33,630

overdrawn

C

$5,110

overdrawn

D

$72,170

overdrawn

21 Which of the following items must be disclosed in a company’s published financial statements? 1

Authorised share capital

2

Movements in reserves

3

Finance costs

4

Movements in non-current assets

A

1, 2 and 3 only

B

1, 2 and 4 only

C

2, 3 and 4 only

D

All four items

22 On 1 January 2005 a company purchased some plant. The invoice showed Cost of plant Delivery to factory One year warranty covering breakdown during 2005

$ 48,000 400 800 ––––––– 49,200 –––––––

Modifications to the factory building costing $2,200 were necessary to enable the plant to be installed. What amount should be capitalised for the plant in the company’s records? A

$51,400

B

$48,000

C

$50,600

D

$48,400

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[P.T.O.

23 A business had an opening inventory of $180,000 and a closing inventory of $220,000 in its financial statements for the year ended 31 December 2005. Which of the following entries for these opening and closing inventory figures are made when completing the financial records of the business?

A

B

C D

Debit $ 180,000

Inventory account Income statement

Credit $ 180,000

Income statement Inventory account

220,000

Income statement Inventory account

180,000

Inventory account Income statement

220,000

Inventory account Purchases account

40,000

Purchases account Inventory account

40,000

220,000 180,000 220,000 40,000 40,000

The following information is relevant for questions 24 and 25 24 On 1 January 2001 H acquired 80% of the share capital of S for $1,100,000. The share capital and reserves of the two companies were:

Share capital

Retained earnings

At 1 January 2001 $000

At 31 December 2005 $000

H

1,000

1,200

S

400

400

H

800

1,300

S

500

800

What was the goodwill arising on H’s acquisition of S? A

$200,000

B

$780,000

C

$380,000

D

$880,000

25 What should the minority interest figure be in the group’s consolidated balance sheet at 31 December 2005? A

$240,000

B

$80,000

C

$180,000

D

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Section B – ALL FIVE questions are compulsory and MUST be attempted 1

The following balances are in the accounting records of a partnership as at 31 December 2005: Capital accounts

Drawings

Leon, as at 1 January 2005

$ 400,000

Mark, introduced 1 July 2005

200,000

Leon

160,000

Mark

80,000

Notes (1) Until 30 June 2005, Leon had run the business as a sole trader. Mark joined him on 1 July 2005 introducing capital of $200,000. (2) The (i) (ii) (iii)

following profit-sharing arrangements were agreed from that date: Both partners to receive interest on their capital account balances at 5% per year Mark to receive a salary of $20,000 per year Balance of profit to be shared – Leon 60%, Mark 40%.

(3) The profit for the year ended 31 December 2005 was $250,000. It was agreed that this profit had accrued one third in the six months ended 30 June 2005 and two thirds in the six months ended 31 December 2005, except for an irrecoverable debt of $20,000 charged in arriving at the profit which was to be regarded as occurring in the six months ended 30 June 2005. Required: Prepare a statement showing the division of the profit and prepare the partners’ current accounts for the year ended 31 December 2005. (9 marks)

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[P.T.O.

2

The draft financial statements of Rampion, a limited liability company, for the year ended 31 December 2005 included the following figures: $ Profit 684,000 Closing inventory 116,800 Trade receivables 248,000 Allowance for receivables 10,000 No adjustments have yet been made for the following matters: (1) The company’s inventory count was carried out on 3 January 2006 leading to the figure shown above. Sales between the close of business on 31 December 2005 and the inventory count totalled $36,000. There were no deliveries from suppliers in that period. The company fixes selling prices to produce a 40% gross profit on sales. The $36,000 sales were included in the sales records in January 2006. (2) $10,000 of goods supplied on sale or return terms in December 2005 have been included as sales and receivables. They had cost $6,000. On 10 January 2006 the customer returned the goods in good condition. (3) Goods included in inventory at cost $18,000 were sold in January 2006 for $13,500. Selling expenses were $500. (4) $8,000 of trade receivables are to be written off. (5) The allowance for receivables is to be adjusted to the equivalent of 5% of the trade receivables after allowing for the above matters, based on past experience. Required: (a) Prepare a statement showing the effect of the adjustments on the company’s net profit for the year ended 31 December 2005. (5 marks) (b) Show how the adjustments affect: (i)

Closing inventory;

(ii) Receivables, showing separately the deduction of the allowance for receivables.

(6 marks) (11 marks)

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3

The summarised financial statements of Ganda for 2004 and 2005 are given below: Balance sheets as at Reference 31 December 31 December to notes 2005 2004 $000 $000 $000 $000 Non-current assets: cost 1 3,400 2,100 less Accumulated depreciation (720) 2,680 (550) 1,550 –––––– –––––– Current assets Inventory 600 400 Receivables 1,500 1,700 Cash 80 2,180 50 2,150 –––––– –––––– –––––– –––––– 4,860 3,700 –––––– –––––– Equity and liabilities Ordinary share capital 900 600 Share premium account 500 320 Retained earnings 2 920 1,420 500 820 –––––– –––––– –––––– –––––– 2,320 1,420 Net current liabilities 10% loan notes 1,200 1,000 Current liabilities Bank overdraft Trade payables Current tax payable

140 900 300 ––––––

1,340 –––––– 4,860 ––––––

280 800 200 ––––––

1,280 –––––– 3,700 ––––––

Notes (1) Non-current assets that had cost $200,000 with a written down value of $60,000 were sold for $80,000 during the year. (2) The increase in the retained earnings is made up as follows: $000 Opening balance Operating profit less: Finance costs paid

1,090 (120) –––––– 970 (300) (250) ––––––

Profit before taxation Income tax expense Dividends paid Retained profit for year Closing balance

$000 500

420 –––––– 920 ––––––

Required: Prepare a cash flow statement for Ganda for the year ended 31 December 2005, using the format in IAS 7 Cash flow statements. (12 marks)

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[P.T.O.

4

(a) Explain the meaning of the term ‘working capital cycle’ for a trading company.

(4 marks)

(b) Calculate the working capital cycle in days from the information below. $000 Sales (all on credit) less: Cost of goods sold Opening inventory Purchases (all on credit)

less: Closing inventory

$000 1,000

100 800 –––– 900 (200) ––––

700 –––– 300 –––– 250 150

Gross profit Closing receivables Closing payables

(4 marks) (c) State one advantage to a business of keeping its working capital cycle as short as possible. (2 Marks) (10 marks)

5

At 31 December 2005 the capital structure of Ambia, a limited liability company, was as follows: $ 1,000,000 200,000 100,000 50,000

1,000,000 ordinary shares of $1 each Share premium account Revaluation reserve Retained earnings The authorised share capital of the company was $1,000,000.

The directors of the company are considering the following proposals. None of them is a qualified accountant: (a) Making a bonus issue of one ordinary share for every two held, in order to raise $500,000 for the company. (4 marks) (b) Paying a dividend of 10c per share

(1 mark)

(c) Increasing the revaluation reserve to $300,000 by revaluing goodwill from $800,000 to $1,000,000. (1 mark) (d) Combining all reserves into a single figure.

(2 marks)

Required: Comment on the validity of these proposals. (The mark allocation is shown against each of the four proposals). (8 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2006 Answers

Section A 1

C

2

D

3

D

4

D

(280,000 x 20%) + (48,000 x 20% x 9/12 ) + (36,000 x 20% x 4/12 ) – (14,000 x 20% x 6/12 ) 5/ 12

x 24,000 + 7/12 x 30,000 = 27,500; 2/3 x 7,500 = 5,000 Receivables ledger control account

Opening receivables Sales

148,200 880,600

Cash received from customers Discounts allowed Irrecoverable debts written off Returns from customers Closing receivables

–––––––––– 1,028,800 –––––––––– 5

D

6

D

7

C

8

B

9

B

10

D

11

A

12

B

13

B

14

A

819,300 16,200 1,500 38,700 153,100 –––––––––– 1,028,800 ––––––––––

3,980 – 270 – 180 – 3,200 = 330 : difference 100

630,000 – 4,320 – 440

430,000 x 5% = 21,500 – 18,000 + 28,000 Payables ledger control account Cash paid to suppliers Discounts received Contras with amounts receivable in receivables ledger Purchases returns Closing balance

988,400 12,600 4,200 17,400 325,200 –––––––––– 1,347,800 ––––––––––

15

A

16

D

17

C

18

A

19

C

20

B

21

D

22

C

23

B

24

C

1,100,000 – 4/5 (400,000 + 500,000)

25

A

20% x (400,000 + 800,000)

756,000 x

Opening balance Purchases

384,600 963,200

–––––––––– 1,347,800 ––––––––––

10/ 7

38,640 + 14,260 – 19,270 = 33,630

48,000 + 400 + 2,200

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Section B 1

Leon and Mark Statement of division of profit for the year ended 31 December 2005 Six months ended 30 June 2005 $ Leon:

(90,000 – 20,000) (see working)

Six months ended 31 December 2005 Profit Interest on capital Leon 5% x 400,000 x 6/12 Mark 5% x 200,000 x 6/12

$ 70,000 –––––––– 180,000

10,000 5,000 ––––––––

Salary Mark 20,000 x 6/12

(15,000) –––––––– 165,000 (10,000) –––––––– 155,000

Balance of profit Leon 60% Mark 40%

93,000 62,000 ––––––––

Working Profit for year Add: irrecoverable debt

155,000 –––––––– 0 –––––––– $ 250,000 20,000 –––––––– 270,000 ––––––––

Profit for division Six months ended 30 June 2005 less: irrecoverable debt

90,000 20,000 ––––––––

Six months ended 31 December 2005

70,000 180,000 –––––––– 250,000 ––––––––

Current accounts

Drawings Balance

Leon $ 160,000 13,000

173,000

Mark $ 80,000

30 June Profit 31 Dec Interest on capital Salary Share of balance 60:40 Balance

80,000

Leon $ 70,000 10,000 93,000

173,000

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Mark $ 5,000 10,000 62,000 3,000 80,000

Alternative format Leon and Mark Statement of division of profit for the year ended 31 December 2006 Leon $ Six months ended 30 June 2005 Leon: (90,000 – 20,000)(see working)

Mark $

70,000 –––––––

Six months ended 31 December 2005 Interest on capital Leon 5% x 400,000 x 6/12 Mark 5% x 200,000 x 6/12

Total $ 70,000 –––––––

10,000

Salary Mark 20,000 x 6/12 Balance of profit 60:40

93,000 ––––––– 103,000 –––––––

5,000

15,000

10,000

10,000

62,000 ––––––– 77,000 –––––––

155,000 ––––––– 180,000 –––––––

Current accounts

Drawings Balance

2

Leon $ 160,000 13,000

Mark $ 80,000

173,000

80,000

2005 30 June Profit 31 Dec Share of profit Balance

Leon $ 70,000 103,000

173,000

Mark $ 77,000 3,000 80,000

(a) Net profit adjustments $ 684,000

Profit per draft financial statements (1) Inventory movement Adjustment for sales $36,000 x 60% (2) Goods on sale or return Elimination of profit (3) Reduction in inventory: $18,000 – ($13,500 – $500) (4) Debts written off (5) Increase in allowance for receivables ($11,500 – $10,000)

21,600 (4,000) (5,000) (8,000) (1,500) ––––––––– $687,100 –––––––––

Revised net profit

(b) Adjustments to inventory and receivables (i) Inventory Inventories per draft financial statements (1) Inventory movement – as (a) above (2) Goods on sale or return cost introduced into inventory (3) Reduction in inventory (a) above

$ 116,800 21,600 6,000 (5,000) ––––––––– $139,400 –––––––––

Revised closing inventory

$ (ii) Receivables per draft financial statements (2) Deduction of goods on sale or return (4) Debts written off

248,000 (10,000) (8,000) ––––––––– 230,000 (11,500) ––––––––– $218,500 –––––––––

(5) less: allowance for receivables

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Ganda Cash flow statement for the year ended 31 December 2005 $000

3

Cash flows from operating activities Profit before taxation Adjustment for: Depreciation (W2) Profit on sale of non-current asset (W3) Interest expense

$000

970 310 (20) 120 ––––– 1,380

Increase in inventory Decrease in receivables Increase in payables

(200) 200 100 ––––– 1,480 (120) (200) –––––

Cash generated from operations Interest paid Income taxes paid Net cash from operating activities

1,160

Cash flows from investing activities Purchase of non-current assets (W1) Proceeds of sale of non-current assets (W3) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital (300 + 180) Proceeds from issue of loan notes Dividends paid

(1,500) 80 ––––– 480 200 (250) –––––

Net cash from financing activities Cash at beginning of period Cash at end of period

(1,420)

430 ––––– 170 (230) ––––– (60) –––––

Workings (1)

Non-current assets – cost

Opening balance Purchases (balancing figure)

$000 2,100 1,500

Transfer disposal Closing balance

–––––– 3,600 –––––– (2)

$000 200 3,400 –––––– 3,600 ––––––

Non-current assets - accumulated depreciation

Transfer disposal

Closing balance

(3)

$000 140

Opening balance Income statement – depreciation (balancing figure)

720 –––––– 860 ––––––

$000 550 310 –––––– 860 ––––––

Non-current assets - disposal

Transfer – cost Income statement

$000 200 20 –––––– 220 ––––––

Transfer – depreciation Cash

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$000 140 80 –––––– 220 ––––––

4

(a) The working capital cycle illustrates the changing make-up of working capital in the course of the trading operations of a business: 1

Purchases are made on credit and the goods go into inventory.

2

Inventory is sold and converted into receivables

3

Credit customers pay their accounts

4

Cash is used to pay suppliers.

(b) Collection period for receivables 250 ––––– x 365 1,000

91 days

Inventory turnover 200 ––––– x 365 700

104 days –––––––– (see Note below) 195 days

Payment period for payables 150 ––––– x 365 800

68 days –––––––– 127 days

Length of working capital cycle

Note. If average inventory is used the inventory turnover becomes: 100 + 200 ––––––––––– ÷ 2 x 365 700

78 days

The length of the cycle becomes 101 days. Either answer is acceptable. (c) The advantage to a company of keeping its working capital cycle short is that fewer resources are tied up in working capital, thus freeing them for other purposes. (Other answers considered on their merits)

5

To the directors of Ambia

8 June 2006

Comments on proposals under consideration (a) Proposed bonus issue. There are several problems in connection with the proposed bonus issue: (i)

A bonus issue would not raise any capital for the company. To raise capital a rights issue (or an issue at full market price) would be necessary.

(ii) For either a bonus issue or a rights issue to be possible, the authorised capital would have to be increased. (iii) There are insufficient reserves to make a bonus issue of $500,000 worth of shares. (b) Paying a dividend of 10c per share. There are insufficient retained earnings to pay a dividend of more than 5c per share. (c) IFRS 3 Business combinations does not allow goodwill to be revalued upwards. (d) It is not possible to combine the reserves as suggested. IAS1 Presentation of financial statements requires retained earnings to be shown seperately from other reserves.

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2006 Marking Scheme Marks

Section B 1

Statement of division of profit Leon profit for first six months Profit for second six months Interest on capital Salary Balance of profit

2 1 1 1/ 2 1 –––– 51/2

Current accounts Drawings 2 x 1/2 Leon profit 70,000 Interest on capital 2 x 1/2 Salary Share of balance

1 1/ 2

1 1/ 2 1/ 2

–––– 9 –––– Alternative marking scheme (if statement of division of profit shows partners’ total shares) Leon : profit for first six months Profit for second six months (as total) Interest on capital Salary Balance of profit Total shares

2 1 1 1/ 2 1 1 –––– 61/2

Current accounts Drawings 2 x 1/2 Leon profit 70,000 Total profit shares

2

1 1/ 2

1 –––– 9 ––––

(a) Profit adjustments 1 mark per item 5 x 1

5

(b) Adjustments to inventory and receivables Inventory Movements Goods on sale or return Reduction to net realisable value

1 1 1 –––– 3

Receivables Goods on sale or return Debts written off Allowance for receivables

1 1 1 –––– 3 ––––

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6 –––– 11

Marks 3

Cash flows from operating activities 1/ mark per item other than interest 2 Interest added and deducted Cash flows from investing activities 1/ mark per item 2 Cash flows from financing activities 1/ mark per item 2 Cash movement

31/2 1/ 2

2 x 1/2

1

3 x 1/2 2 x 1/2

11/2 1 11/2 11/2 11/2 1/ 2 1 –––– 131/2 ––––

Workings: non-current assets – cost – depreciation – disposal Heading Layout

4

(a) Purchases into inventory Inventory into recievables Receivables into cash Cash to pay suppliers

1 1 1 1 ––––

(b) per ratio 1 3x1 correct calculation

3 1 ––––

(c) Up to

5

max12

4

4

2 –––– 10

(a) (i) (ii) (iii)

2 1 1

(b)

1

(c)

1

(d) 2 x 1

2 ––––

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8 –––– 50 ––––

5D–GBRAA Paper T3GBR

Workings for MCQ answers 1

4

6

10

13

14

16

C

280,000 x 20% + 48,000 x 20% x 9/12 + 36,000 x 20% x 4/12 – 14,000 x 20% x 6/12

A

as C, but plus 1,400

B

350,000 x 20%

D

as B, but – 1,400

A

as D, but discounts on wrong side

B

as D, but irrecoverable debts on wrong side

C

as in Q, but with discounts and irrecoverable debts on credit side

D

all items on debit side except opening balance moved to credit side

A

as D, but 180 adjusted in wrong direction

B

as D, but 270 adjusted in wrong direction

C

as D, but 3,200 adjusted in wrong direction

D

3,920 – 270 – 180 – 3,200 = 330 : 100 difference

A

630,000 – 4,320 + 440

B

630,000 – 4,800 – 440

C

630,000 – 4,320 – 440 – 800

D

630,000 – 4,320 – 440

B

430,000 x 5% = 21,500 – 18,000 + 28,000

A

as B but 18,000 not deducted

C

as B but provision based on 458,000

D

as B but provision based on 458,000 and 18,000 not deducted

A

Purchase returns Cash Discounts Contras c/bal

17,400 988,400 12,600 4,200 325,200 ––––––––– 1,347,800 –––––––––

O/Bal Purchases

384,600 963,200

––––––––– 1,347,800 –––––––––

B

as A but discounts on wrong side

C

as A but contras and discounts on wrong side

D

as in Q but contras and discounts on credit side (410,000 – 33,600)

A

(77 + 763 – 84) = 756 + 30%

B

763 x

10/ 7

C

756 x

10/ 3

D

756 x

10/ 7

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5D–GBRAA Paper T3GBR

20

22

24

A

as in question

B

(38,640 – 19,270 + 14,260)

C

as B but plus 140

D

as B but minus 140

A

48,000 + 400 + 800 + 2,200

C

48,000 + 400 + 2,200

D

48,000 + 400

A

(1,100,000 – (400,000 + 500,000))

B

(1,100,000 – 4/5 x 400,000)

C

(1,100,000 – 4/5 (400,000 + 500,000))

D

4/ 5

x 1,100,000

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(International Stream) PART 1 THURSDAY 7 DECEMBER 2006

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

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Paper 1.1(INT)

Preparing Financial Statements

Section A – ALL TWENTY-FIVE questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

On 1 September 2006, a business had inventory of $380,000. During the month, sales totalled $650,000 and purchases $480,000. On 30 September 2006 a fire destroyed some of the inventory. The undamaged goods in inventory were valued at $220,000. The business operates with a standard gross profit margin of 30%. Based on this information, what is the cost of the inventory destroyed in the fire?

2

A

$185,000

B

$140,000

C

$405,000

D

$360,000

A company had the following transactions: 1

Goods in inventory that had cost $1,000 were sold for $1,500 cash.

2

A credit customer whose $500 debt had been written off paid the amount in full.

3

The company paid credit suppliers $1,000

What will be the combined effect of these transactions on the company’s total working capital (current assets less current liabilities)?

3

A

Increase of $1,000

B

Working capital remains unchanged

C

Increase of $2,000

D

Increase of $3,000

On 30 June 2006, H acquired 75% of the ordinary share capital of S for $500,000. At that date the balance sheet of S showed the following: Ordinary share capital Share premium account Retained earnings

$ 200,000 150,000 100,000

What was the goodwill arising on the acquisition? A

$50,000

B

$162,500

C

$350,000

D

$300,000

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4

5

Which of the following should appear as items in a company’s statement of changes in equity? 1

Profit for the financial year

2

Income from investments

3

Gain on revaluation of non-current assets

4

Dividends paid

A

1, 3 and 4

B

1 and 4 only

C

2 and 3 only

D

1, 2 and 3

The following information is available about a company’s dividends: $ 2005 Sept. 2006 March Sept.

Final dividend for the year ended 30 June 2005 paid (declared August 2005) Interim dividend for the year ended 30 June 2006 paid Final dividend for the year ended 30 June 2006 paid (declared August 2006)

100,000

40,000 120,000

What figures, if any, should be disclosed in the company’s income statement for the year ended 30 June 2006 and its balance sheet as at that date?

A

Income statement for the period $160,000 deduction

Balance sheet liability $120,000

B

$140,000 deduction

C

nil

$120,000

D

nil

nil

nil

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[P.T.O.

6

A and B are in partnership, sharing profits in the ratio 3:2 and preparing their accounts to 30 June each year. On 1 January 2006, C joined the partnership and the profit sharing ratio became A 40%, B 30%, and C 30%. Profits for the year ended 30 June 2006 were: 6 months ended 31 December 2005 6 months ended 30 June 2006

$ 300,000 450,000

A bad debt of $50,000 was written off in the six months to 30 June in computing the $450,000 profit. It was agreed that this expense should be borne by A and B only, in their original profit-sharing ratios. What is A’s total profit share for the year ended 30 June 2006?

7

A

$ 330,000

B

310,000

C

340,000

D

350,000

At 1 July 2005 a company’s allowance for receivables was $48,000. At 30 June 2006, trade receivables amounted to $838,000. It was decided to write off $72,000 of these debts and adjust the allowance for receivables to $60,000. What are the final amounts for inclusion in the company’s balance sheet at 30 June 2006? Trade receivables $ A 838,000

8

Allowance for receivables $ 60,000

Net balance $ 778,000

B

766,000

60,000

706,000

C

766,000

108,000

658,000

D

838,000

108,000

730,000

Which of the following statements about inventory valuation for balance sheet purposes are correct? 1

According to IAS 2 Inventories, average cost and FIFO (first in and first out) are both acceptable methods of arriving at the cost of inventories.

2

Inventories of finished goods may be valued at labour and materials cost only, without including overheads.

3

Inventories should be valued at the lowest of cost, net realisable value and replacement cost.

4

It may be acceptable for inventories to be valued at selling price less estimated profit margin.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

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9

A business received a delivery of goods on 29 June 2006, which was included in inventory at 30 June 2006. The invoice for the goods was recorded in July 2006. What effect will this have on the business? 1

Profit for the year ended 30 June 2006 will be overstated.

2

Inventory at 30 June 2006 will be understated.

3

Profit for the year ending 30 June 2007 will be overstated.

4

Inventory at 30 June 2006 will be overstated.

A

1 and 2

B

2 and 3

C

1 only

D

1 and 4

10 The capital and reserves of Lamb, a limited liability company, are as follows: 10% Loan notes Ordinary share capital Share premium account Retained earnings

$m 80 100 60 80

What is the company’s gearing ratio? A

80/100 = 80%

B

80/180 = 44·4%

C

240/80 = 300%

D

80/320 = 25%

11 Which of the following statements are correct? 1

A company’s authorised share capital must be included in its published balance sheet as part of shareholders’ funds.

2

If a company makes a bonus issue of ordinary shares, the total shareholders’ interest (share capital plus reserves) remains unchanged.

3

A company’s statement of changes in equity must include the proceeds of any share issue during the period.

4

A company must disclose its significant accounting policies by note to its financial statements.

A

1 and 2 only

B

1 and 3 only

C

3 and 4 only

D

2, 3 and 4

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12 Which, if any, of the following statements about intangible assets are correct? 1

Goodwill arising on the acquisition of a subsidiary will appear as an intangible asset in the balance sheet of the acquiring company and in the consolidated balance sheet.

2

Deferred development expenditure must be amortised over a period not exceeding five years.

3

If the conditions specified in IAS 38 Intangible assets are met, development expenditure may be capitalised, if the directors decide to do so.

4

Trade investments must appear in a company’s balance sheet under the heading of intangible assets.

A

1 and 3

B

1 and 4

C

2 and 4

D

None of the statements is correct

13 Which of the following characteristics of financial information contribute to reliability, according to the IASB’s Framework for the Preparation and Presentation of Financial Statements? 1

Completeness

2

Prudence

3

Neutrality

4

Faithful representation

A

All four items

B

1, 2 and 3 only

C

1, 2 and 4 only

D

2, 3 and 4 only

14 Details of a company’s insurance policy are shown below: Premium for year ended 31 March 2006 paid April 2005 Premium for year ending 31 March 2007 paid April 2006

$10,800 $12,000

What figures should be included in the company’s financial statements for the year ended 30 June 2006?

A

Income statement $ 11,100

Balance sheet $ 9,000 prepayment (Dr)

B

11,700

9,000 prepayment (Dr)

C

11,100

9,000 accrual (Cr)

D

11,700

9,000 accrual (Cr)

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15 Which of the following statements about bank reconciliations are correct? 1

In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of cash at bank shown in the bank statement.

2

A cheque from a customer paid into the bank but dishonoured must be corrected by making a debit entry in the cash book.

3

An error by the bank must be corrected by an entry in the cash book.

4

An overdraft is a debit balance in the bank statement.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

16 Extracts from the financial statements of Kafka, a limited liability company, are given below: Balance sheet as at 30 June 2006 Non-current assets Current assets

Ordinary share capital Share premium account Retained earnings 10% Loan notes Current liabilities

$m 15 14 ––– 29 ––– 10

Income statement for the year ended 30 June 2006 $m Operating profit Finance costs Profit for year

8 (2) ––– 6 –––

3 7 ––– 20 5 4 ––– 29 –––

Using these figures, which of the following are correct calculations of return on total capital employed (ROCE) and return on owners’ equity (ROOE)? (Tax ignored) A

ROCE 8/25 = 32%

ROOE 6/10 = 60%

B

8/25 = 32%

6/20 = 30%

C

6/25 = 24%

8/20 = 40%

D

8/20 = 40%

6/20 = 30%

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17 On 30 June 2002 H acquired 80% of the share capital of S. Extracts from the balance sheets of S at 30 June 2002 and 30 June 2006 are shown below: S balance sheets 30 June 2002 30 June 2006 $ $ 1,000,000 1,000,000 400,000 400,000 4,700,000 5,600,000

Ordinary share capital Share premium account Retained earnings

What figure for minority interest should appear in the consolidated balance sheet as at 30 June 2006? A

$460,000

B

$200,000

C

$1,120,000

D

$1,400,000

18 At 30 June 2005 the capital and reserves of Meredith, a limited liability company, were: $m Share capital Ordinary shares of $1 each Share premium account

100 80

During the year ended 30 June 2006, the following transactions took place: 1 September 2005 1 January 2006

A bonus issue of one ordinary share for every two held, using the share premium account. A fully subscribed rights issue of two ordinary shares for every five held at that date, at $1·50 per share.

What would the balances on each account be at 30 June 2006?

A

Share capital $m 210

Share premium account $m 110

B

210

60

C

240

30

D

240

80

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19 The following items have to be considered in finalising the financial statements of Q, a limited liability company: 1

The company gives warranties on its products. The company’s statistics show that about 5% of sales give rise to a warranty claim.

2

The company has guaranteed the overdraft of another company. The likelihood of a liability arising under the guarantee is assessed as possible.

What is the correct action to be taken in the financial statements for these items?

Create a provision

Disclose by note only

1, 2

2, 2

A B

No action

1, 2

C

2

1, 2

D

1, 2

20 Which of the following errors would cause a trial balance not to balance? 1

An error in the addition in the cash book.

2

Failure to record a transaction at all.

3

Cost of a motor vehicle debited to motor expenses account. The cash entry was correctly made.

4

Goods taken by the proprietor of a business recorded by debiting purchases and crediting drawings account.

A

1 only

B

1 and 2 only

C

3 and 4 only

D

All four items

21 How should interest charged on partners’ drawings be dealt with in partnership financial statements? A

Credited as income in the income statement

B

Deducted from profit in allocating the profit among the partners

C

Added to profit in allocating the profit among the partners

D

Debited as an expense in the income statement.

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22 All the sales made by a retailer are for cash, and her sale prices are fixed by doubling cost. Details recorded of her transactions for September 2006 are as follows: 1 Sept. 30 Sept.

Inventories Purchases for month Cash banked for sales for month Inventories

$ 40,000 60,000 95,000 50,000

Which two of the following conclusions could separately be drawn from this information? 1

$5,000 cash has been stolen from the sales revenue prior to banking

2

Goods costing $5,000 have been stolen

3

Goods costing $2,500 have been stolen

4

Some goods costing $2,500 had been sold at cost price

A

1 and 2

B

1 and 3

C

2 and 4

D

3 and 4

23 A company owns a number of properties which are rented to tenants. The following information is available for the year ended 30 June 2006:

30 June 2005 30 June 2006

Rent in advance $ 134,600 144,400

Rent in arrears $ 4,800 8,700

Cash received from tenants in the year ended 30 June 2006 was $834,600. All rent in arrears was subsequently received. What figure should appear in the company’s income statement for rent receivable in the year ended 30 June 2006? A

$840,500

B

$1,100,100

C

$569,100

D

$828,700

24 In October 2006 Utland sold some goods on sale or return terms for $2,500. Their cost to Utland was $1,500. The transaction has been treated as a credit sale in Utland’s financial statements for the year ended 31 October 2006. In November 2006 the customer accepted half of the goods and returned the other half in good condition. What adjustments, if any, should be made to the financial statements? A

Sales and receivables should be reduced by $2,500, and closing inventory increased by $1,500.

B

Sales and receivables should be reduced by $1,250, and closing inventory increased by $750

C

Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory

D

No adjustment is necessary

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25 The payables ledger control account below contains a number of errors: Payables ledger control account

Opening balance (amounts owed to suppliers) Cash paid to suppliers Purchases returns Refunds received from suppliers

$ 318,600 1,364,300 41,200 2,700 ––––––––––– $1,726,800 –––––––––––

Purchases Contras against debit balances in receivables ledger Discounts received Closing balance

$ 1,268,600 48,000 8,200 402,000 ––––––––––– $1,726,800 –––––––––––

All items relate to credit purchases. What should the closing balance be when all the errors are corrected? A

$128,200

B

$509,000

C

$224,200

D

$144,600 (50 marks)

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[P.T.O.

Section B – ALL FIVE questions are compulsory and MUST be attempted. 1

The following balances appear in the accounting records of Golding, a limited liability company, at 30 June 2006: $000 Land and buildings: cost accumulated depreciation at 1 July 2005 Plant and equipment: cost accumulated depreciation at 1 July 2005 Receivables Cash at bank Payables Accruals 8% Loan notes Ordinary share capital Share premium account Retained earnings 1 July 2005

10,000 3,600 6,000 3,200 3,600 1,200 2,500 500 1,000 5,000 2,200 4,600

The following further information is available: (1) Inventory at 30 June 2006 was $4,700,000 (2) The company’s land and buildings were revalued at 1 July 2005. The revaluation has not yet been reflected in the balances given above. Details: Cost

Land Buildings

$000 4,000 6,000

Accumulated depreciation $000 – 3,600

Net book value $000 4,000 2,400

Revalued amount $000 5,000 4,000

(3) The draft profit for the year was $2,900,000. However, three adjustments are required: (a) Receivables totalling $280,000 are to be written off (b) Provision is to be made for bonuses to the directors totalling $250,000 (c) Depreciation charges for the year, based on revalued amounts: Buildings Plant and equipment

$200,000 $1,200,000

Required: Prepare the company’s balance sheet as at 30 June 2006, using the format and headings in IAS 1 Presentation of Financial Statements. (11 marks)

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2

The draft income statement of Lorca, a limited liability company, showed a profit of $830,000. However, the trial balance did not balance and a suspense account with a credit balance of $20,000 has been included in the balance sheet for the difference. The following errors were found on investigation: (1) The proceeds of issue of 100,000 50c shares at 70c per share were correctly entered in the cash book but had been credited to sales account. (2) During the year $8,000 interest received on a holding of loan notes had been correctly entered in the cash book but debited to interest payable account. (3) In arriving at the net sales and purchases totals for the year, the $48,000 balance on the returns outwards account had been transferred to the debit of sales account and the $64,000 balance on the returns inwards account had been transferred to the credit of purchases account. (4) A payment of $4,000 for rent had been correctly recorded in the cash book but debited to the rent account as $40,000. Required: (a) Prepare journal entries to correct the errors. Narratives are NOT required.

(7 marks)

(b) Calculate the revised profit after adjusting for the errors.

(4 marks) (11 marks)

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[P.T.O.

3

The balance sheets of Joyce, a limited liability company, at 30 June 2005 and 2006 are as follows Balance sheets Reference to notes Non-current assets (net book value) 1 Current assets Inventories Receivables Cash at bank

Ordinary share capital Share premium account Revaluation reserve Retained earnings

30 June 2006 $000 $000 148,000 14,000 21,400 – –––––––

1

Total equity Non-current liabilities 8% Loan notes Current liabilities Payables Current tax payable Bank overdraft

9,100 12,500 4,600 ––––––– 35,400 –––––––– 183,400 ––––––––

26,200 –––––––– 156,200 ––––––––

110,000 5,000 14,000 28,000 –––––––– 157,000

109,000 4,000 2,000 18,000 –––––––– 133,000

10,000

8,000

3

2

30 June 2005 $000 $000 130,000

7,100 8,000 1,300 –––––––

9,200 6,000 – ––––––– 16,400 –––––––– 183,400 ––––––––

15,200 –––––––– 156,200 ––––––––

Notes: (1) The depreciation charge for the year was $13,000,000 (2) $6,200,000 was paid during the year to settle the income tax liability at 30 June 2005. (3) The additional loan notes were issued on 1 January 2006. All interest due was paid on 31 December 2005 and 30 June 2006. (4) Dividends paid during the year totalled $4,000,000. Required: Prepare a cash flow statement for the company for the year ended 30 June 2006, using the format in IAS 7 Cash flow statements. (12 marks)

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4

The directors of a recently formed company are unsure as to the policies they should adopt as regards depreciation. Required: Advise the directors on the following points: (a) The fundamental objective of depreciation;

(1 mark)

(b) The extent to which land and buildings should be depreciated;

(3 marks)

(c) Two possible methods of calculating depreciation, with explanations.

(4 marks) (8 marks)

5

IAS 10 Events after the balance sheet date defines the accounting treatment of material events occurring after the balance sheet date. Required: (a) Explain what determines whether an event after the balance sheet date must be adjusted in the financial statements. (3 marks) (b) Explain what changes would have to be made to the following items in the balance sheet if it became clear, shortly after the balance sheet date, that the going concern basis was no longer appropriate. (i)

Non-current assets;

(2 marks)

(ii) Inventory;

(2 marks)

(iii) Loan notes.

(1 mark) (8 marks)

End of Question Paper

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Answers

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

December 2006 Answers

Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A A B A D D B C C D D D A A C B D B A A C B D A A

Workings for computational MCQs 1

A

0/inventory Purchases

380 480 –––– 860 455 –––– 405 220 –––– 185 ––––

COGS 650 – 195 Inventory Remaining inventory Inventory lost

2

A

1 2 3

+ 500 + 500 no change ––––– 1,000 –––––

3

B

500 – (75% x 450)

6

D

180 + (40% x 500) – 30

7

B

838,000 – 72,000 = 766,000; allowance 60,000

14 A

3/ 4

x 10,800 + 1/4 x 12,000 = 11,100; prepayment 3/4 x 12,000

17 D

20% x (1,000,000 + 400,000 + 5,600,000)

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18 B

100 + 50 + 60; 80 – 50 + 30

22 B

1: (40,000 + 60,000 – 50,000) x 2 = 100,000 – 95,000 = 5,000 cash lost 3: (40,000 + 60,000 – 50,000 – 2,500 inventory loss) x 2 = 95,000

23 D

834,600 + 134,600 – 4,800 + 8,700 – 144,400

25 A

Payables ledger control account

Cash paid to suppliers 1,364,300 Purchase returns 41,200 Contras against debit balances in receivables ledger 48,000 Discounts 8,200 Closing balance 128,200 –––––––––– 1,589,900 ––––––––––

Opening balance Purchases Refunds received from suppliers

318,600 1,268,600 2,700

–––––––––– 1,589,900 ––––––––––

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Section B 1

Golding Balance sheet as at 30 June 2006

Non-current assets Land and buildings Plant and equipment

Cost or valuation $000

Accumulated depreciation $000

Net book value $000

9,000 6,000 ––––––– 15,000 –––––––

200 4,400 –––––– 4,600 ––––––

8,800 1,600 ––––––– 10,400

Current assets Inventories Receivables (3,600 – 280) Cash

4,700 3,320 1,200 –––––– 9,220 ––––––– 19,620 –––––––

Capital and reserves Called up share capital Share premium account Revaluation reserve (5,000 + 4,000 – 4,000 – 2,400) Retained earnings (see working)

Non-current liabilities 8% Loan notes Current liabilities Payables Accruals (500 + 250)

Working Retained earnings balance 1 July 2005 Draft profit less: irrecoverable debts bonuses depreciation

5,000 2,200 2,600 5,570 ––––––– 15,370 1,000 2,500 750 –––––––

$000

$000

3,250 –––––– 19,620 ––––––– $000 4,600

2,900 280 250 1,400 –––––––

1,930 ––––––

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970 ––––––– 5,570 –––––––

2

(a)

Dr $ 70,000

(1) Sales Share capital Share premium

Cr $ 50,000 20,000

(2) Suspense Interest payable Interest receivable

16,000

(3) Sales Purchases Suspense

16,000 16,000

8,000 8,000

32,000

OR Suspense Sales

48,000

Purchases Suspense

64,000

Sales

64,000

48,000 64,000

Suspense

64,000

Suspense Purchases

48,000 48,000

(4) Suspense Rent

36,000 36,000

(b)

– $ Profit per draft accounts Adjustments (1) Sales (2) Interest (3) Sales/Purchases (4) Rent

+ $ 830,000

70,000 16,000 32,000 –––––––– 102,000

Revised profit

36,000 –––––––– 882,000 102,000 –––––––– 780,000 ––––––––

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3

Joyce Cash flow statement for the year ended 30 June 2006 $000 Cash flows from operating activities Profit before taxation (working 1) Adjustments for Depreciation Interest expense

$000

22,200 13,000 720 ––––––– 35,920 (4,900) (8,900) (2,100) ––––––– 20,020 (720) (6,200) –––––––

Increase in inventories Increase in receivables Decrease in payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Purchase of property plant and equipment (Working 3)

13,100 (19,000) –––––––

Net cash used in investing activities Cash flows from financing activities Proceeds of issue of share capital Proceeds of issue of loan notes Dividends paid

(19,000) 2,000 2,000 (4,000 ) –––––––

Net cash from financing activities

– ––––––– (5,900) 4,600 ––––––– (1,300) –––––––

Net decrease in cash Cash at 1 July 2005 Cash at 30 June 2006 WORKINGS 1

Calculation of profit for year

Dividends Tax Closing balance

$000 4,000 8,200 28,000 ––––––– 40,200 –––––––

2

$000 18,000 22,200 ––––––– 40,200 –––––––

Income taxes

Cash Closing balance

3

$000 6,200 8,000 ––––––– 14,200 –––––––

Opening balance Income statement

$000 6,000 8,200 ––––––– 14,200 –––––––

Non-current assets

Opening balance Revaluation reserve Purchases

$000 130,000 12,000 19,000 –––––––– 161,000 ––––––––

4

0pening balance Profit for year

$000 Depreciation

13,000

Closing balance

148,000 –––––––– 161,000 ––––––––

(a)

Following the matching concept, to reflect in operating profit the cost of use of tangible non-current assets (the amount of economic benefits consumed).

(b)

It is not normally necessary to depreciate land, unless it is subject to depletion in some way – a quarry for example. Buildings should be depreciated like any other non-current asset so as to allocate their depreciable amount (cost or valuation) over their useful economic life.

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(c)

(i)

Straight line. The depreciable amount of an asset, less any residual value, is written off in equal instalments over its estimated useful economic life.

(ii)

Reducing balance. Depreciation is calculated as a percentage of the net book value of the asset at the end of each period.

Other answers to (c) considered on their merits.

5

(a)

If the event provides evidence of conditions that existed at the balance sheet date, adjustment must be made, if material. Adjustment is also required if an event after the balance sheet date indicates that the going concern basis of accounting is no longer appropriate.

(b)

(i)

Non-current assets are normally valued at cost or valuation less depreciation. If the going concern basis was no longer appropriate, net realisable value on the basis of a short-term sale would have to be adopted instead, and the assets would be included in current assets.

(ii)

Inventory is normally valued at the lower of cost and net realisable value. If the going concern basis no longer applied, net realisable value on the basis of a short-term sale would have to be substituted.

(iii) Loan notes, if shown as non-current liabilities, would have to be reclassified as current liabilities.

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Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) 1

December 2006 Marking Scheme

Heading Land and building valuation accumulated depreciation

1 1 1/ 2

––––

Plant and equipment cost accumulated depreciation Inventory Receivables Cash Share capital Share premium account Revaluation reserve Retained earnings Loan notes Accruals Payables Format

2

(a)

1 2 3 4

(b)

3

1/ 2 1/ 2

–––– 1/ 2

+ 1/2

1

1 2 1/ 2 1 1/ 2 2 ––––– 131/ –––––2

4 x 1/2 1/ 2

1 1/ 2 1/ 2 1/ 2 1/ 2

+ 1/2

3 x 1 (or 4 x 1 max 3)

4x1

4 –––– 11 ––––

1/ + 1/ Heading 2 2 Operating profit 4 x 1/2 + tax 1 Depreciation Interest expense Increase in inventory Increase in receivables Decrease in payables Net cash inflow from operating activities All other items in statement 6 x 1/2 Calculation of non-current asset payment 1/ + 1/ Balances 2 2 Revaluation reserve Depreciation

(c)

11

1 3 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 3 1 1 1/ ––––2

21/2 1 1 ––––– 1 14 / –––––2

(a) (b)

max 11

11/2 11/2 3 1

Cash movement Layout

4

11/2

max 12

1 1/ 2 1/ 2

Land – not depreciated Land – mention of depletion Buildings – cost or valuation Spread over useful economic life

1 1 ––––

2x2

3 4 –––– 8 ––––

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8

5

(a)

(b)

11/2 1 1/ ––––2

Conditions at b/s date Materiality Going concern 2+2+1

3 5 –––– 8 ––––

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8

(International Stream) PART 1 THURSDAY 7 JUNE 2007

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

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Paper 1.1(INT)

Preparing Financial Statements

7J–INTPA Paper 1.1INT 7J–INTAA Paper 1.1INT

Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

A company issued one million ordinary $1 shares at a premium of 50c per share. The proceeds were correctly recorded in the cash book, but were incorrectly credited to the sales account. Which of the following journal entries will correct the error?

A

B

C

Debit $ 1,500,000

Sales Share capital Share premium

1,000,000 500,000

Share capital Share premium Sales

1,000,000 500,000

Sales

1,500,000

1, 500,000

Share capital

7J–INTAC Paper 1.1INT

7J–INTAB Paper 1.1INT

D

2

3

Credit $

1,500,000

Share capital Sales

1,500,000 1,500,000

Which one of the following would cause a company’s gross profit percentage on sales to fall? A

A reduction in the total value of goods returned to suppliers.

B

An increase in the costs of delivery of goods to customers.

C

A decline in average inventory levels.

D

An increase in theft of inventory by customers and staff

Where, in a company’s financial statements complying with International accounting standards, should you find dividends paid? 1

Income statement

2

Balance sheet

3

Cash flow statement

4

Statement of changes in equity.

A

1 and 3

B

2 and 3

C

1 and 4

D

3 and 4

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7J–INTAD Paper 1.1INT

4

A property company received cash for rent totalling $838,600 in the year ended 31 December 2006. Figures for rent in advance and in arrears at the beginning and end of the year were:

Rent received in advance Rent in arrears

31 December 2005 $ 102,600

31 December 2006 $ 88,700

42,300

48,400

(all subsequently received)

7J–INTAE Paper 1.1INT

What amount should appear in the company’s income statement for the year ended 31 December 2006 for rental income?

5

A

$818,600

B

$738,000

C

$939,200

D

$858,600

Which one of the following journal entries is correct according to its narrative?

A

B

Debit $ 100,000

Mr Smith personal account Directors’ remuneration Bonus allocated to account of managing director (Mr Smith)

Credit $ 100,000

Purchases Wages Repairs to buildings

14,000 24,000 38,000

Transferring cost of repairs to buildings carried out by company’s own employees, using materials from inventory. C

D

Discounts allowed Discounts received Correction of error: discounts allowed total incorrectly debited to discounts received account

2,800 2,800

Suspense account Rent receivable Rent payable Correction of error: rent received credited in error to rent payable account.

20,000 10,000 10,000

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[P.T.O.

7J–INTAF Paper 1.1INT 7J–INTAG Paper 1.1INT 7J–INTAH Paper 1.1INT

6

A company’s gross profit as a percentage of sales increased from 28% in the year ended 31 December 2005 to 33% in the year ended 31 December 2006. Which one of the following could have caused the increase?

7

8

A

An increase in sales volume.

B

Understatement of closing inventory at 31 December 2005.

C

Overstatement of closing inventory at 31 December 2005.

D

Goods received in December 2005 and included in inventory at 31 December 2005 were not recorded in purchases until January 2006.

Which of the following items could appear as items in a company’s cash flow statement? 1

A bonus issue of shares

2

A rights issue of shares

3

Revaluation of non-current assets

4

Dividends paid

A

All four items

B

1, 3 and 4 only

C

2 and 4 only

D

2 and 3 only

A company has occupied rented premises for some years, paying an annual rent of $120,000. From 1 April 2006 the rent was increased to $144,000 per year. Rent is paid quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. What figures should appear for rent in the company’s financial statements for the year ended 30 November 2006? Income statement $

Balance sheet $

A

136,000

Prepayment

12,000

B

136,000

Prepayment

24,000

C

138,000

Nil

D

136,000

Accrual

12,000

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7J–INTAH Paper 1.1INT

9

At 1 January 2006 a company had an allowance for receivables of $49,000. At 31 December 2006 the company’s trade receivables were $863,000 and it was decided to write off balances totalling $23,000 and to adjust the allowance for receivables to the equivalent of 5% of the remaining receivables based on past experience.

7J–INTAJ Paper 1.1INT

What total figure should appear in the company’s income statement for bad debts and allowance for receivables? A

$16,000

B

$65,000

C

$30,000

D

$16,150

10 At 1 January 2006, a company’s capital structure was as follows: $ Ordinary share capital 2,000,000 shares of 50c each 1,000,000 Share premium account

1,400,000

In January 2006 the company issued 1,000,000 shares at $1·40 each. In September 2006 the company made a bonus issue of 1 share for every 3 held using the share premium account.

7J–INTAK Paper 1.1INT

What were the balances on the company’s share capital and share premium accounts after these transactions?

A

Share capital $ 4,000,000

Share premium $ 800,000

B

3,200,000

600,000

C

2,000,000

1,800,000

D

2,000,000

1,300,000

11 Which of the following statements about the treatment of inventory and work in progress in financial statements are correct? 1

Inventory should be valued at the lowest of cost, net realisable value and replacement cost.

2

In valuing work in progress, materials costs, labour costs and variable and fixed production overheads must be included.

3

Inventory items can be valued using either first in, first out (FIFO) or weighted average cost.

4

A company’s financial statements must disclose the accounting policies used in measuring inventories.

A

All four statements are correct.

B

1, 2 and 3 only

C

2, 3 and 4 only

D

1 and 4 only

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7J–INTAL Paper 1.1INT

12 The plant and equipment account in the records of a company for the year ended 31 December 2006 is shown below: Plant and equipment – cost 2006 1 Jan Balance 1 July Cash

$ 960,000 48,000

2006 30 Sept 31 Dec

––––—–––– 1,008,000 ––––––––––

$ Transfer disposal account 84,000 Balance 924,000 ––––—–––– 1,008,000 ––––––––––

The company’s policy is to charge depreciation on the straight line basis at 20% per year, with proportionate depreciation in the years of purchase and sale.

7J–INTAM Paper 1.1INT

What should be the charge for depreciation in the company’s income statement for the year ended 31 December 2006? A

$184,800

B

$192,600

C

$191,400

D

$184,200

13 X has a 40% shareholding in each of the following three companies: P: X has the right to appoint or remove a majority of the directors of P. Q: X has significant influence over the affairs of Q. R: X has the power to govern the financial and operating policies of R.

7J–INTAN Paper 1.1INT

Which of these companies are subsidiaries of X for financial reporting purposes? A

Q and R only

B

P and R only

C

P and Q only

D

P, Q and R

14 The trial balance of a company did not balance, and a suspense account was opened for the difference. Which of the following errors would require an entry to the suspense account in correcting them? (1) A cash payment to purchase a motor van had been correctly entered in the cash book but had been debited to motor expenses account. (2) The debit side of the wages account had been undercast. (3) The total of the discounts allowed column in the cash book had been credited to discounts received account. (4) A cash refund to a customer had been recorded by debiting the cash book and crediting the customer’s account. A

1 and 2

B

2 and 3

C

3 and 4

D

2 and 4

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7J–INTAO Paper 1.1INT

15 A trader took goods that had cost $2,000 from inventory for personal use. Which of the following journal entries would correctly record this?

A B C

Drawings Inventory

Debit $ 2,000

2,000

Purchases Drawings

2,000

Sales

2,000

2,000

Drawings

7J–INTAQ Paper 1.1INT

7J–INTAP Paper 1.1INT

D

Drawings Purchases

Credit $

2,000 2,000 2,000

16 Which of the following statements about the requirements of IAS 37 Provisions, contingent liabilities and contingent assets are correct? 1

A contingent asset should be disclosed by note if an inflow of economic benefits is probable.

2

No disclosure of a contingent liability is required if the possibility of a transfer of economic benefits arising is remote.

3

Contingent assets must not be recognised in financial statements unless an inflow of economic benefits is virtually certain to arise.

A

All three statements are correct

B

1 and 2 only

C

1 and 3 only

D

2 and 3 only

17 Which of the following statements are correct, according to IAS 10 Events after the balance sheet date? 1

Details of all adjusting events must be disclosed by note to the financial statements.

2

A material loss arising from the sale, after the balance sheet date, of inventory valued at cost at the balance sheet date must be reflected in the financial statements.

3

If the market value of investments falls materially after the balance sheet date, the details must be disclosed by note.

4

Events after the balance sheet date are those that occur between the balance sheet date and the date when the financial statements are authorised for issue.

A

1 and 2 only

B

1, 3 and 4

C

2 and 3 only

D

2, 3 and 4

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7J–INTAR Paper 1.1INT 7J–INTAS Paper 1.1INT 7J–INTAT Paper 1.1INT

18 Where in the financial statements should tax on profit for the current period, and unrealised surplus on revaluation of properties, be separately disclosed? Tax on profit for current period

Unrealised surplus on revaluation of properties Income statement

A

Income statement

B

Statement of changes in equity

Income statement

C

Income statement

Statement of changes in equity

D

Statement of changes in equity

Statement of changes in equity

19 Which one of the following statements is correct? A

The prudence concept requires assets to be understated and liabilities to be overstated.

B

To comply with the law, the legal form of a transaction must always be reflected in financial statements.

C

If a non-current asset initially recognised at cost is revalued, the surplus must be credited in the income statement.

D

In times of rising prices, the use of historical cost accounting tends to understate assets and overstate profits.

20 A draft cash flow statement contains the following: Profit before tax Depreciation Increase in inventories Decrease in receivables Increase in payables Net cash inflow from operating activities

$m 22 8 (4) (3) (2) ––– 21

Which of the following corrections need to be made to the calculation? 1

Depreciation should be deducted, not added

2

Increase in inventories should be added, not deducted

3

Decrease in receivables should be added, not deducted

4

Increase in payables should be added, not deducted

A

1 and 2

B

1 and 3

C

2 and 4

D

3 and 4

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7J–INTAU Paper 1.1INT 7J–INTAV Paper 1.1INT

21 What is the correct treatment of interest charged on partners’ drawings in preparing a partnership’s financial statements? A

Credited as income in the income statement

B

Debited as an expense in the income statement

C

Added to total profit in calculating partners’ profit shares

D

Deducted from total profit in calculating partners’ profit shares.

22 X and Y are in partnership. They share profits equally after charging a salary $40,000 per year for X and interest on capital at 5% per year. At 1 January 2006 their capital balances were: X Y

$ 200,000 100,000

On 1 July 2006 Y introduced a further $100,000 capital, and X’s salary was discontinued. The partnership profit for the year ended 31 December 2006 was $337,500.

7J–INTAW Paper 1.1INT

What was X’s total profit share for the year ended 31 December 2006? A

$ 182,500

B

178,750

C

180,000

D

190,000

23 Where, in a company’s financial statements complying with International accounting standards, should you find the proceeds of non-current assets sold during the period? A

Cash flow statement and balance sheet

B

Statement of changes in equity and balance sheet

C

Income statement and cash flow statement

D

Cash flow statement only

7J–INTAX Paper 1.1INT

24 Which of the following events would reduce a company’s gearing? 1

An issue of loan notes

2

A rights issue of equity shares

3

A bonus issue of equity shares

A

1 and 2

B

1 and 3

C

3 only

D

2 only

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[P.T.O.

7J–INTAY Paper 1.1INT

25 A payables ledger control account showed a credit balance of $768,420. The payables ledger balances totalled $781,200. Which one of the following possible errors could account in full for the difference? A

A contra against a receivables ledger debit balance of $6,390 has been entered on the credit side of the payables ledger control account.

B

The total of discount allowed $28,400 was entered to the debit of the payables ledger control account instead of the correct figure for discount received of $15,620.

C

$12,780 cash paid to a supplier was entered on the credit side of the supplier’s account in the payables ledger.

D

The total of discount received $6,390 has been entered on the credit side of the payables ledger control account. (50 marks)

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7J–INTPB Paper 1.1INT 7J–INTBA Paper 1.1INT

Section B – ALL FIVE questions are compulsory and MUST be attempted 1

Hasta is an antique dealer operating from rented premises. He keeps few accounting records. All his sales and purchases are for cash, except for some sales to other dealers which are made on credit. The following information is available to prepare his income statement for the year ended 31 December 2006. Assets and liabilities

As at 31 December 2005 2006 $ $ 1,200 2,000 85,000 88,500 4,800 6,400 1,100 1,400

Equipment Inventory Trade receivables Payable for expenses

Cash summary 2006 1 Jan 31 Dec

Balance – float Cash from sales Proceeds of sale of equipment

$ 100

2006 31 Dec

191,400 700 –––––––– 192,200 ––––––––

Wages for assistant Sundry expenses Purchases of new equipment Purchases Drawings Balance – float

$ 15,600 8,300 2,000 ? ? 150 –––––––– 192,200 ––––––––

Hasta keeps cash that is in hand at the end of each week as drawings, subject to the retention of the float. No record has been made of payments for purchases of goods for sale. He fixes his selling price for all items by doubling their cost. He allowed a trade discount of $9,000, representing 30% on selling price, for sales to dealers with a normal price of $30,000. ($30,000 less $9,000 discount = $21,000). All the equipment held at the beginning of the year was sold for $700, and new equipment purchased for $2,000. A full year’s depreciation is to be charged on the new equipment at 20%, with no depreciation on the items sold. Required: (a) Prepare Hasta’s income statement for the year ended 31 December 2006. Your answer should include a detailed calculation of cost of sales. (b) Calculate Hasta’s drawings for the year ended 31 December 2006

(10 marks) (2 marks) (12 marks)

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[P.T.O.

7J–INTBB Paper 1.1INT

2

The receivables ledger control account of Atanga at 31 December 2006 shows a debit balance of $487,600. The list of receivables ledger balances at the same date totalled $455,800 debit. There were no credit balances. On investigation the following errors and revisions were found: (1) The sales day book had been overcast by $2,000 (2) A debt of $8,400 is to be written off (3) A credit note for $1,200 was entered on the debit side of the customer’s account. (4) Contras against amounts owing to Atanga in the payables ledger totalling $16,100 were entered on the debit side of the receivables ledger control account. (5) A credit note for $5,600 sent to a customer and recorded at that figure should have been for $4,500. (6) Cash discount allowed and agreed at $150 has not been recorded in the accounting system. Required: (a) Prepare a statement showing the necessary adjustments to the receivables ledger control account balance. (5 marks) (b) Prepare a statement showing the necessary adjustments to the total of the list of receivables ledger balances. (4 marks)

7J–INTBC Paper 1.1INT

(9 marks)

3

On 1 January 2000 Gasta acquired 75% of the share capital of Erica for $1,380,000. The retained earnings of Erica at that date was $480,000. Erica’s share capital has remained unchanged since the acquisition. The following draft balance sheets for the two companies have been prepared at 31 December 2006.

Investment in Erica Sundry net assets

Ordinary share capital Retained earnings

Gasta $ 1,380,000 2,660,000 –––––––––– 4,040,000 –––––––––– 2,000,000 2,040,000 –––––––––– 4,040,000 ––––––––––

Erica $ – 1,660,000 –––––––––– 1,660,000 –––––––––– 1,000,000 660,000 –––––––––– 1,660,000 ––––––––––

Goodwill arising on the acquisition has been fully written off. Before consolidation, it was found that the inventories of both companies at 31 December 2006 had been overstated, Gasta’s by $400,000 and Erica’s by $150,000. Required: Prepare the consolidated balance sheet of Gasta and the subsidiary Erica as at 31 December 2006, after adjusting for the inventory errors. Note: Your workings for all figures in the consolidated balance sheet must be shown. (9 marks)

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7J–INTBD Paper 1.1INT

4

Hathan has just concluded a ratio analysis comparing its performance and position at 31 December 2006 with those at 31 December 2005. The directors are concerned to see that the current ratio and quick ratio show a considerable decline. Required: (a) State and explain TWO possible causes for the decline in one or both of these ratios. (b) State and explain TWO ways in which the company could improve these ratios.

7J–INTBE Paper 1.1INT

(8 marks)

5

A company manufacturing aircraft engages in a number of research and development projects. At 1 January 2006 the company’s records showed total capitalised development costs of $18,000,000 made up as follows: Project A17 This project was completed in 2005 at a total cost of $16,000,000, and is being amortised over 8 years on the straight line basis, beginning on 1 January 2005. Project J9 This project began in 2004 and the $4m balance represents expenditure qualifying for capitalisation to 31 December 2005 Project J9 is due to be completed in 2009

$ 14,000,000

4,000,000

––––––––––– 18,000,000 –––––––––––

During the year ended 31 December 2006 the following further expenditure was incurred: Project J9 Further expenditure qualifying for capitalisation

$1,500,000

Project A20 Investigation into new materials for aircraft construction

$3,000,000

Required: (a) Calculate the amounts for research and development to be included in the company’s income statement and balance sheet for the year ended 31 December 2006. (6 marks) (b) Discuss the accounting concepts applicable to the accounting treatment of development expenditure. Note: You are NOT required to provide the criteria for capitalisation of development expenditure in IAS 38 Intangible assets. (6 marks) (12 marks)

End of Question Paper

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Answers

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7J–INTIX Paper 1.1INT 7J–INTAA Paper 1.1INT

Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2007 Answers

Section A 1

A

2

D

3

D

4

D

5

C

6

B

7

C

8

A

(4 x 10,000) + (8 x 12,000) = 136,000; 1/12 x 144,000 = 12,000

9

A

23,000 – (49,000 – 42,000)

10 C

838,600 + (102,600 – 42,300) – (88,700 – 48,400)

Share capital 1,000,000 Issue 500,000 –––––––––– 1,500,000 Bonus 500,000 –––––––––– 2,000,000 ––––––––––

Share premium 1,400,000 900,000 –––––––––– 2,300,000 (500,000) –––––––––– 1,800,000 ––––––––––

11 C 12 B

(960,000 x 20%) + (48,000 x 20% x 1/2) – (84,000 x 20% x 1/4)

13 B 14 B 15 D 16 A 17 D 18 C 19 D 20 D 21 C 22 C

X salary 20,000 + interest 10,000 + share 150,000 = 180,000

23 D 24 D 25 B

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7J–INTBA Paper 1.1INT

1

(a)

Hasta Income statement for the year ended 31 December 2006 $ Sales less: Cost of sales Opening inventory Purchases (balancing figure)

85,000 104,500 ———— 189,500 88,500 ————

less: Closing inventory

Gross profit less: Expenses Wages Sundry expenses (8,300 – 1,100 + 1,400) Loss on sale of equipment (1,200 – 700) Depreciation (2,000 x 20%)

15,600 8,600 500 400 ———

Net profit

$ 193,000

101,000 ———— 92,000

25,100 ———— $66,900 ————

Workings $ Calculation of sales $191,400 – $4,800 + $6,400

$ 193,000

Calculation of gross profit (193,000 – $21,000)/2 $21,000 – ($30,000/2)

86,000 6,000 ———

Cost of goods sold is therefore

92,000 ———— 101,000 ————

Alternative calculation of gross profit $ 193,000 9,000 ———— 202,000 ————

Sales Add: trade discount

Gross profit if all sales at full price less: trade discount

(b)

Cash not accounted for: less: purchases

101,000 9,000 ———— 92,000 ————

$192,200 – $15,600 – $8,300 – $2,000 – $150

Drawings

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166,150 104,500 ———— 61,650 ————

7J–INTBB Paper 1.1INT

2

(a)

Receivables ledger control account balance

(1) (2) (4) (5) (6)

+ $ 487,600

Original balance Sales day book overcast Bad debt written off Contras incorrectly entered Credit note adjustment Discount not recorded

2,000 8,400 32,200 1,100

Receivables ledger balances

(2) (3) (5) (6)

+ $ 455,800

Original balance Bad debt written off Credit note incorrectly entered Credit note adjustment Discount not recorded

– $ 8,400 2,400

1,100 150 ———– 10,950

————– 456,900 10,950 ————– $445,950 ————–

Revised balance

7J–INTBC Paper 1.1INT

150 ———– 42,750

————– 488,700 42,750 ————– $445,950 ————–

Revised balance

(b)

– $

3

Gasta Group Consolidated balance sheet as at 31 December 2006 Sundry net assets (2,660,000 + 1,660,000 – 550,000)

$ 3,770,000 —————

Share capital

2,000,000

Retained earnings

1,392,500 ————— 3,392,500 377,500 ————— 3,770,000 —————

Minority interest

Goodwill

Investment in Erica

$ 1,380,000

$ 750,000 360,000

Share capital 75% Retained earnings 75% Retained earnings – goodwill written off

270,000 ————— 1,380,000 —————

————— 1,380,000 ————— Minority interest

Balance to CBS

$ 377,500

Share capital 25% Retained earnings 25%

(WI)

————— 377,500 —————

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$ 250,000 127,500 ————— 377,500 —————

7J–INTBC Paper

Retained earnings $ Goodwill 75% × $480,000 Minority interest Goodwill impairment written off Balance to CBS

Working 1 Retained profits:

Balances:

Gasta Erica

360,000 127,500

(W1) (W1)

270,000 1,392,500 ————— 2,150,000 —————

$ 1,640,000 510,000

————— 2,150,000 —————

Gasta

$2,040,000 – $400,000 = $1,640,000

Erica

$660,000 – $150,000 = $510,000

Alternative calculations Goodwill Cost of investment Share of net assets acquired Share capital Retained profit

$

1,000,000 480,000 ————— 1,480,000 —————

Group share

75%

Goodwill Minority interest Share capital Retained earnings

1,000,000 510,000 ————— 1,510,000 ————— 25%

Minority share

Retained earnings Gasta Erica Less: preacquisition

7J–INTBD Paper 1.1INT

377,500 —————

1,640,000

22,500 ————— 1,662,500 270,000 ————— 1,392,500 —————

less: goodwill written off

(a)

1,110,000 ————— 270,000

510,000 480,000 ———— 30,000

Group share 75%

4

$ 1,380,000

Two from: (i)

Heavy spending on non-current assets, depleting cash or increasing overdraft. Such expenditure comes out of current assets, and will reduce both the current ratio and the quick ratio. (ii) Write-downs of inventory through obsolescence or fashion changes. This will reduce the current ratio. (iii) Repayment of long-term loans (iv) Payment of high dividends (v) Reduction in receivables as a result of bad debts

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7J–INTBD Paper 1.1INT

(b)

Two from: (i) (ii) (iii) (iv)

Raise new long-term capital (equity shares or loan notes) Sell non-trading assets such as investments Reduce inventory levels to improve quick ratio Defer capital expenditure

These steps increase current assets or quick assets without increasing current liabilities, thus improving the ratios.

7J–INTBE Paper 1.1INT

Other points considered on their merits for both (a) and (b)

5

(a)

Income statement $ Project A17 A20

2,000,000 3,000,000 ————— 5,000,000 —————

Balance sheet

A17 J9

(b)

Cost $ 16,000,000 5,500,000 ––––––––––– 21,500,000 –––––––––––

Amortisation $ 4,000,000 –––––––––– 4,000,000 ––––––––––

Net book value $ 12,000,000 5,500,000 ––––––––––– 17,500,000 –––––––––––

The main applicable accounting concepts are accruals and prudence. The accruals concept favours capitalisation of development expenditure to match the expenditure against the future income to be generated from it. The prudence concept argues for caution, having regard to the inevitable doubt as to the successful outcome of the development project. The going concern concept is also relevant, because doubt as to the going concern status of the company would clearly mean that the capitalisation of development costs could not be justified. Other concepts considered on their merits.

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7J–INTMS Paper 1.1INT

Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

1

(a)

June 2007 Marking Scheme Marks 1 1

Heading 2 x 1/2 Sales Gross profit 172,000/2 $21,000 – (30,000/2) Cost of goods sold Opening / Closing inventory 2 x 1/2 Purchases (balancing figure)

1 2

1 1 — 7 1/ 2 11/2

Wages Sundry expenses Loss on sale Depreciation

(b)

3

1 1

Calculation of cash not accounted for Deduction of cash for purchases

4 — 11 max

1 1 —

2 — 12 —

Alternative calculation of gross profit 193,000 + 9,000 Gross profit 101,000 Deduction of trade discount

2

3

4

1 1 1 — 3 —

(a)

Correction of errors

5x1

5

(b)

Correction of errors

4x1

4 —

9

1 1 1 31/2 11/2 1 —

9

Heading 2 x 1/2 Sundry net assets Share capital Retained earnings 21/2 + 1 for inventory adjustments Goodwill Minority interest

(a)

2x2

4

(b)

2x2

4 —

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10

8

7J–INTMS Paper 1.1INT

Marks 5

(a)

Income statement A17 A20

2 1 —

Balance sheet A17 J9

(b)

2 1 —

Accruals concept Stated Explained Prudence concept Stated Explained Going concern concept Stated Explained

3

3 —

1 1 —

2

1 1 —

2

1 1 —

Other valid concepts considered on their merits.

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2 ––

6

6 — 12

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