Answers

Part 1 Examination Paper 1.1(INT) Preparing Financial Statements (International Stream) Section A 1 2 3 4 C D D D Opening receivables Sales
5/ 12

June 2006 Answers

(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 ) x 24,000 + 7/12 x 30,000 = 27,500; 2/3 x 7,500 = 5,000 Receivables ledger control account 148,200 880,600 Cash received from customers Discounts allowed Irrecoverable debts written off Returns from customers Closing receivables 819,300 16,200 1,500 38,700 153,100 1,028,800

1,028,800 5 6 7 8 9 10 11 12 13 14 D D C B B D A B B A Cash paid to suppliers Discounts received Contras with amounts receivable in receivables ledger Purchases returns Closing balance 430,000 x 5% = 21,500 18,000 + 28,000 Payables ledger control account 988,400 12,600 4,200 17,400 325,200 1,347,800 Opening balance Purchases 630,000 4,320 440 3,980 270 180 3,200 = 330 : difference 100

384,600 963,200

1,347,800

15 16 17 18 19 20 21 22 23 24 25

A D C A C B D C B C A 1,100,000 4/5 (400,000 + 500,000) 20% x (400,000 + 800,000) 48,000 + 400 + 2,200 38,640 + 14,260 19,270 = 33,630 756,000 x
10/ 7

17

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) $ 70,000 180,000 10,000 5,000

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

(15,000) 165,000 (10,000) 155,000

Salary Mark 20,000 x 6/12

Balance of profit Leon 60% Mark 40%

93,000 62,000

155,000 0 $ 250,000 20,000 270,000

Working Profit for year Add: irrecoverable debt Profit for division Six months ended 30 June 2005 less: irrecoverable debt Six months ended 31 December 2005 90,000 20,000

70,000 180,000 250,000

Current accounts Leon $ 160,000 13,000 Mark $ 80,000 Leon $ 70,000 10,000 93,000 Mark $ 5,000 10,000 62,000 3,000 80,000

Drawings Balance

30 June Profit 31 Dec Interest on capital Salary Share of balance 60:40 Balance

173,000

80,000

173,000

18

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) 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 Salary Mark 20,000 x 6/12 Balance of profit 60:40 93,000 103,000 Current accounts Leon $ 160,000 13,000 Mark $ 80,000 Leon $ 70,000 103,000 Mark $ 77,000 3,000 80,000 70,000 Mark $ Total $ 70,000

10,000 5,000 10,000 62,000 77,000 15,000 10,000 155,000 180,000

Drawings Balance

2005 30 June Profit 31 Dec Share of profit Balance

173,000

80,000

173,000

(a) Net profit adjustments 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) Revised net profit $ 684,000 21,600 (4,000) (5,000) (8,000) (1,500) $687,100

(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 Revised closing inventory

$ 116,800 21,600 6,000 (5,000) $139,400 $

(ii) Receivables per draft financial statements (2) Deduction of goods on sale or return (4) Debts written off (5) less: allowance for receivables

248,000 (10,000) (8,000) 230,000 (11,500) $218,500

19

Ganda Cash flow statement for the year ended 31 December 2005 $000 Cash flows from operating activities Profit before taxation Adjustment for: Depreciation (W2) Profit on sale of non-current asset (W3) Interest expense 970 310 (20) 120 1,380 (200) 200 100 1,480 (120) (200)

$000

Increase in inventory Decrease in receivables Increase in payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities 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 Net cash from financing activities Cash at beginning of period Cash at end of period Workings (1) Non-current assets cost $000 2,100 1,500 3,600 (2) Non-current assets - accumulated depreciation $000 140

1,160

(1,500) 80 480 200 (250)

(1,420)

430 170 (230) (60)

Opening balance Purchases (balancing figure)

Transfer disposal Closing balance

$000 200 3,400 3,600

Transfer disposal

Opening balance Income statement depreciation (balancing figure)

$000 550 310 860

Closing balance

720 860 Non-current assets - disposal $000 200 20 220

(3)

Transfer cost Income statement

Transfer depreciation Cash

$000 140 80 220

20

(a) The working capital cycle illustrates the changing make-up of working capital in the course of the trading operations of a business: 1 2 3 4 Purchases are made on credit and the goods go into inventory. Inventory is sold and converted into receivables Credit customers pay their accounts Cash is used to pay suppliers.

(b) Collection period for receivables 250 x 365 1,000 Inventory turnover 200 x 365 700 Payment period for payables 150 x 365 800 Length of working capital cycle 68 days 127 days 104 days (see Note below) 195 days 91 days

Note. If average inventory is used the inventory turnover becomes: 100 + 200 2 x 365 700 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) 78 days

To the directors of Ambia Comments on proposals under consideration (a) Proposed bonus issue. There are several problems in connection with the proposed bonus issue: (i)

8 June 2006

A bonus issue would not raise any capital for the company. To raise capital a rights issue (or an issue at full market price) would be necessary.

(ii) For either a bonus issue or a rights issue to be possible, the authorised capital would have to be increased. (iii) There are insufficient reserves to make a bonus issue of $500,000 worth of shares. (b) Paying a dividend of 10c per share. There are insufficient retained earnings to pay a dividend of more than 5c per share. (c) IFRS 3 Business combinations does not allow goodwill to be revalued upwards. (d) It is not possible to combine the reserves as suggested. IAS1 Presentation of financial statements requires retained earnings to be shown seperately from other reserves.

21

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

June 2006 Marking Scheme Marks

2 1 1 1/ 2 1 51/2 1
1/ 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/ 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 1
1/ 2

Current accounts Drawings 2 x 1/2 Leon profit 70,000 Total profit shares

1 9

(a) Profit adjustments 1 mark per item 5 x 1 (b) Adjustments to inventory and receivables Inventory Movements Goods on sale or return Reduction to net realisable value

1 1 1 3 1 1 1 3

Receivables Goods on sale or return Debts written off Allowance for receivables

6 11

23

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 Workings: non-current assets cost depreciation disposal Heading Layout 31/2
1/ 2

2 x 1/2 3 x 1/2 2 x 1/2

1 11/2 1 11/2 11/2 11/2 1/ 2 1 131/2

max12

(a) Purchases into inventory Inventory into recievables Receivables into cash Cash to pay suppliers

1 1 1 1 3 1

(b) per ratio 1 3x1 correct calculation

(c) Up to

2 10

(a) (i) (ii) (iii) (b) (c) (d) 2 x 1

2 1 1 1 1 2 8 50

24

5DGBRAA Paper T3GBR

Workings for MCQ answers 1 C A B 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 as C, but plus 1,400 350,000 x 20% as B, but 1,400

A B C D

as D, but discounts on wrong side as D, but irrecoverable debts on wrong side as in Q, but with discounts and irrecoverable debts on credit side all items on debit side except opening balance moved to credit side

A B C D

as D, but 180 adjusted in wrong direction as D, but 270 adjusted in wrong direction as D, but 3,200 adjusted in wrong direction 3,920 270 180 3,200 = 330 : 100 difference

10

A B C D

630,000 4,320 + 440 630,000 4,800 440 630,000 4,320 440 800 630,000 4,320 440

13

B A C D

430,000 x 5% = 21,500 18,000 + 28,000 as B but 18,000 not deducted as B but provision based on 458,000 as B but provision based on 458,000 and 18,000 not deducted

14

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 C D

as A but discounts on wrong side as A but contras and discounts on wrong side as in Q but contras and discounts on credit side (410,000 33,600)

16

A B C D

(77 + 763 84) = 756 + 30% 763 x 756 x 756 x

10/ 7 10/ 3 10/ 7

25

5DGBRAA Paper T3GBR

20

A B C D

as in question (38,640 19,270 + 14,260) as B but plus 140 as B but minus 140

22

A C D

48,000 + 400 + 800 + 2,200 48,000 + 400 + 2,200 48,000 + 400

24

A B C D

(1,100,000 (400,000 + 500,000)) (1,100,000 4/5 x 400,000) (1,100,000 4/5 (400,000 + 500,000))
4/ 5

x 1,100,000

26