Answers

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 55,360 21,520 33,840 2 3 4 5 C C D C Items 2, 3 and 4 do not affect balancing, items 1 and 5 do.
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Answers

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

Charge 2/12 x $84,000 + 10/12 x $96,000 = $94,000 Prepayment 2/12 x $96,000 = $16,000 Cost: $860,000 – $80,000 + $180,000 = Depreciation: $397,000 – $43,000 + £96,000 = $960,000 $450,000 $510,000

6 7 8 9 10

B B C C A

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

Items 1, 3 and 5 would appear in the bank reconciliation statement, items 2, 4 and 6 in the cash book. $68,100 + $41,800 – $141,200 = $31,300 cash at bank X $000 100 136 236 20 216

6 months to 30 June 2000 6 months to 31 December 2000 Less: for bad debt

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

S $000 15 96 25 60 196

T $000 64 60 124

U $000

30 30

12 13

C A Item 1 Item 2 $ 284,000 – (350) 283,650

No change Reduce to net realisable value

14 15

A C Theoretical gross profit 30% x $130,000 Actual gross profit $130,000 – $49,800 – $88,600 + $32,000 Shortfall – missing inventory $ 39,000 23,600 15,400

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16 17 18 19 20 21 22 23 24 25

D D D B C D C A A C

Share capital $75,000 + $15,000 + $30,000 = $120,000 Share premium $200,000 + $57,000 – $30,000 = $227,000 1, 2 and 3 are all incorrect.

200/1,500 is correct 300/2,500 is correct

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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 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance cost Profit before tax Income tax expense Net profit for the period Working 1

$000 41,600 (20,000) 21,600 (6,285) (4,885) 10,430 1,000 9,430 3,000 6,430

Cost of sales $000 13,000 22,600

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

Distribution costs $000 6,000

Administrative expenses $000

(15,600) 20,000

300 125 (40) (200) 100 6,285

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

2
1D INTBB Paper 1.1(INT)

(a)

Sales revenue

Sales revenue total account $ 41,600 800 225,100 267,500 Cash received from customers Discounts allowed Bad debts written off Contra purchases Closing receivables $ 218,500 2,600 1,500 700 44,200 267,500 $ 225,100 124,300 349,400

Opening receivables Refunds to customers Sales

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

19

1D INTBB Paper 1.1(INT)

(b)

Purchases

Purchases total account $ 114,400 700 24,800 139,900 Opening payables Lamorgan – goods taken Purchases $ 22,900 400 116,600 139,900

Payments to suppliers Contra sales Closing payables

(c)

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

$ 77,700 1,300 3,000 82,000

1D INTBC Paper 1.1(INT)

3

Cost of control Shares in Orset $ 180,000 75% share capital 75% pre-acquisition profits Accumulated profit Goodwill written off 3/5 x $60,000 Balance to CBS $ 75,000 45,000 36,000 24,000 180,000

180,000 Minority Interest Balance to CBS $ 57,500 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 36,000 256,500 370,000 Evon Limited Group Balance sheet as at 31 March 2001 Goodwill Less: Amortisation Sundry net assets Share capital 500,000 shares of $1 each Accumulated profit Minority interest $ 60,000 36,000 Evon Orset 25% share capital 25% accumulated profit

$ 25,000 32,500 57,500

$ 240,000 130,000

370,000

$ 24,000 790,000 814,000 500,000 256,500 756,500 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.

(b)

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

(ii) 5 (a)

1D INTBE Paper 1.1(INT)

Four from: (i) (ii) (iii) (iv) (v) Longer payment period for suppliers Increasing overdraft Increasing inventories Deterioration in quick ratio (acid test) Rapid increase in sales revenues and trade receivables.

(b)

Three from: (i) (ii) 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. 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 Cost of sales Distribution costs Administrative expenses Interest Income tax expense Layout Available 1½ 3 3 1 1 2 11½

Marking Scheme Maximum

10

2

(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

5 3 2½ 10½ 10

3

Goodwill – calculation – amortisation Minority interest – calculation Accumulated profit: Initial profit figures Minority interest Cost of control Goodwill written off Consolidated balance sheet – format

3 1

4 3

3 2

1 1 1 1

4 2 13

3 2 10

4

(a)

(i)

Explanation Example Explanation Example

2 1 2 1 3

(ii)

3 (b) Consistency of treatment of items Disclosure of policies 2 2

6

6

4 10

4 10

5

(a) (b)

1 mark per item 4 x 1 1 mark per item 3 x 1 1 mark per explanation of effect 3 3

4 6 10 10

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