Preparing Financial Statements

(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 ALL FIVE questions are compulsory and MUST be answered

Section B

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

Paper 1.1(INT)

Section A ALL TWENTY-FIVE questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1 On 1 September 2006, a business had inventory of $380,000. During the month, sales totalled $650,000 and purchases $480,000. On 30 September 2006 a fire destroyed some of the inventory. The undamaged goods in inventory were valued at $220,000. The business operates with a standard gross profit margin of 30%. Based on this information, what is the cost of the inventory destroyed in the fire? A B C D $185,000 $140,000 $405,000 $360,000

A company had the following transactions: 1 2 3 Goods in inventory that had cost $1,000 were sold for $1,500 cash. A credit customer whose $500 debt had been written off paid the amount in full. The company paid credit suppliers $1,000

What will be the combined effect of these transactions on the companys total working capital (current assets less current liabilities)? A B C D Increase of $1,000 Working capital remains unchanged Increase of $2,000 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 B C D $50,000 $162,500 $350,000 $300,000

Which of the following should appear as items in a companys statement of changes in equity? 1 2 3 4 A B C D Profit for the financial year Income from investments Gain on revaluation of non-current assets Dividends paid 1, 3 and 4 1 and 4 only 2 and 3 only 1, 2 and 3

The following information is available about a companys 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 companys income statement for the year ended 30 June 2006 and its balance sheet as at that date? Income statement for the period $160,000 deduction $140,000 deduction nil nil Balance sheet liability $120,000 nil $120,000 nil

A B C D

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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 As total profit share for the year ended 30 June 2006? A B C D $ 330,000 310,000 340,000 350,000

At 1 July 2005 a companys allowance for receivables was $48,000. At 30 June 2006, trade receivables amounted to $838,000. It was decided to write off $72,000 of these debts and adjust the allowance for receivables to $60,000. What are the final amounts for inclusion in the companys balance sheet at 30 June 2006? Trade receivables $ A 838,000 B C D 766,000 766,000 838,000 Allowance for receivables $ 60,000 60,000 108,000 108,000 Net balance $ 778,000 706,000 658,000 730,000

Which of the following statements about inventory valuation for balance sheet purposes are correct? 1 2 3 4 A B C D 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. Inventories of finished goods may be valued at labour and materials cost only, without including overheads. Inventories should be valued at the lowest of cost, net realisable value and replacement cost. It may be acceptable for inventories to be valued at selling price less estimated profit margin. 1 and 3 2 and 3 1 and 4 2 and 4

A business received a delivery of goods on 29 June 2006, which was included in inventory at 30 June 2006. The invoice for the goods was recorded in July 2006. What effect will this have on the business? 1 2 3 4 A B C D Profit for the year ended 30 June 2006 will be overstated. Inventory at 30 June 2006 will be understated. Profit for the year ending 30 June 2007 will be overstated. Inventory at 30 June 2006 will be overstated. 1 and 2 2 and 3 1 only 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 companys gearing ratio? A B C D 80/100 = 80% 80/180 = 444% 240/80 = 300% 80/320 = 25%

11 Which of the following statements are correct? 1 2 3 4 A B C D A companys authorised share capital must be included in its published balance sheet as part of shareholders funds. If a company makes a bonus issue of ordinary shares, the total shareholders interest (share capital plus reserves) remains unchanged. A companys statement of changes in equity must include the proceeds of any share issue during the period. A company must disclose its significant accounting policies by note to its financial statements. 1 and 2 only 1 and 3 only 3 and 4 only 2, 3 and 4

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12 Which, if any, of the following statements about intangible assets are correct? 1 2 3 4 A B C D 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. Deferred development expenditure must be amortised over a period not exceeding five years. If the conditions specified in IAS 38 Intangible assets are met, development expenditure may be capitalised, if the directors decide to do so. Trade investments must appear in a companys balance sheet under the heading of intangible assets. 1 and 3 1 and 4 2 and 4 None of the statements is correct

13 Which of the following characteristics of financial information contribute to reliability, according to the IASBs Framework for the Preparation and Presentation of Financial Statements? 1 2 3 4 A B C D Completeness Prudence Neutrality Faithful representation All four items 1, 2 and 3 only 1, 2 and 4 only 2, 3 and 4 only

14 Details of a companys insurance policy are shown below: Premium for year ended 31 March 2006 paid April 2005 Premium for year ending 31 March 2007 paid April 2006 $10,800 $12,000

What figures should be included in the companys financial statements for the year ended 30 June 2006? Income statement $ 11,100 11,700 11,100 11,700 Balance sheet $ 9,000 prepayment (Dr) 9,000 prepayment (Dr) 9,000 accrual (Cr) 9,000 accrual (Cr)

A B C D

15 Which of the following statements about bank reconciliations are correct? 1 2 3 4 A B C D In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of cash at bank shown in the bank statement. A cheque from a customer paid into the bank but dishonoured must be corrected by making a debit entry in the cash book. An error by the bank must be corrected by an entry in the cash book. An overdraft is a debit balance in the bank statement. 1 and 3 2 and 3 1 and 4 2 and 4

16 Extracts from the financial statements of Kafka, a limited liability company, are given below: Balance sheet as at 30 June 2006 Non-current assets Current assets $m 15 14 29 10 3 7 20 5 4 29 Income statement for the year ended 30 June 2006 $m Operating profit Finance costs Profit for year 8 (2) 6

Ordinary share capital Share premium account Retained earnings 10% Loan notes Current liabilities

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 B C D ROCE 8/25 = 32% 8/25 = 32% 6/25 = 24% 8/20 = 40% ROOE 6/10 = 60% 6/20 = 30% 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 B C D $460,000 $200,000 $1,120,000 $1,400,000

18 At 30 June 2005 the capital and reserves of Meredith, a limited liability company, were: $m Share capital Ordinary shares of $1 each 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 $150 per share.

What would the balances on each account be at 30 June 2006? Share capital $m 210 210 240 240 Share premium account $m 110 60 30 80

A B C D

19 The following items have to be considered in finalising the financial statements of Q, a limited liability company: 1 2 The company gives warranties on its products. The companys statistics show that about 5% of sales give rise to a warranty claim. 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 A B C D 1, 2 1, 2

Disclose by note only 2, 2 1, 2

No action

1, 2

20 Which of the following errors would cause a trial balance not to balance? 1 2 3 4 A B C D An error in the addition in the cash book. Failure to record a transaction at all. Cost of a motor vehicle debited to motor expenses account. The cash entry was correctly made. Goods taken by the proprietor of a business recorded by debiting purchases and crediting drawings account. 1 only 1 and 2 only 3 and 4 only All four items

21 How should interest charged on partners drawings be dealt with in partnership financial statements? A B C D Credited as income in the income statement Deducted from profit in allocating the profit among the partners Added to profit in allocating the profit among the partners 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 2 3 4 A B C D $5,000 cash has been stolen from the sales revenue prior to banking Goods costing $5,000 have been stolen Goods costing $2,500 have been stolen Some goods costing $2,500 had been sold at cost price 1 and 2 1 and 3 2 and 4 3 and 4

23 A company owns a number of properties which are rented to tenants. The following information is available for the year ended 30 June 2006: Rent in advance $ 134,600 144,400 Rent in arrears $ 4,800 8,700

30 June 2005 30 June 2006

Cash received from tenants in the year ended 30 June 2006 was $834,600. All rent in arrears was subsequently received. What figure should appear in the companys income statement for rent receivable in the year ended 30 June 2006? A B C D $840,500 $1,100,100 $569,100 $828,700

24 In October 2006 Utland sold some goods on sale or return terms for $2,500. Their cost to Utland was $1,500. The transaction has been treated as a credit sale in Utlands financial statements for the year ended 31 October 2006. In 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 B C D Sales and receivables should be reduced by $2,500, and closing inventory increased by $1,500. Sales and receivables should be reduced by $1,250, and closing inventory increased by $750 Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory No adjustment is necessary

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25 The payables ledger control account below contains a number of errors: Payables ledger control account $ 318,600 1,364,300 41,200 2,700 $1,726,800 $ 1,268,600 48,000 8,200 402,000 $1,726,800

Opening balance (amounts owed to suppliers) Cash paid to suppliers Purchases returns Refunds received from suppliers

Purchases Contras against debit balances in receivables ledger Discounts received Closing balance

All items relate to credit purchases. What should the closing balance be when all the errors are corrected? A B C D $128,200 $509,000 $224,200 $144,600 (50 marks)

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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 The following further information is available: (1) Inventory at 30 June 2006 was $4,700,000 (2) The companys land and buildings were revalued at 1 July 2005. The revaluation has not yet been reflected in the balances given above. Details: Cost $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 10,000 3,600 6,000 3,200 3,600 1,200 2,500 500 1,000 5,000 2,200 4,600

Land Buildings

(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 Required: Prepare the companys balance sheet as at 30 June 2006, using the format and headings in IAS 1 Presentation of Financial Statements. (11 marks) $200,000 $1,200,000

12

The draft income statement of Lorca, a limited liability company, showed a profit of $830,000. However, the trial balance did not balance and a suspense account with a credit balance of $20,000 has been included in the balance sheet for the difference. The following errors were found on investigation: (1) The proceeds of issue of 100,000 50c shares at 70c per share were correctly entered in the cash book but had been credited to sales account. (2) During the year $8,000 interest received on a holding of loan notes had been correctly entered in the cash 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. (b) Calculate the revised profit after adjusting for the errors. (7 marks) (4 marks) (11 marks)

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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 30 June 2006 $000 $000 148,000 14,000 21,400 35,400 183,400 Ordinary share capital Share premium account Revaluation reserve Retained earnings Total equity Non-current liabilities 8% Loan notes Current liabilities Payables Current tax payable Bank overdraft 3 7,100 8,000 1,300 16,400 183,400 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) 110,000 5,000 14,000 28,000 157,000 10,000 9,200 6,000 15,200 156,200 30 June 2005 $000 $000 130,000 9,100 12,500 4,600 26,200 156,200 109,000 4,000 2,000 18,000 133,000 8,000

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The directors of a recently formed company are unsure as to the policies they should adopt as regards depreciation. Required: Advise the directors on the following points: (a) The fundamental objective of depreciation; (b) The extent to which land and buildings should be depreciated; (c) Two possible methods of calculating depreciation, with explanations. (1 mark) (3 marks) (4 marks) (8 marks)

IAS 10 Events after the balance sheet 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) (2 marks) (1 mark) (8 marks)

(ii) Inventory; (iii) Loan notes.

End of Question Paper

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