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Answers

Part 1 Examination – Paper 1.1(INT)


Preparing Financial Statements (International Stream) Answers
Section A

1 C Effect of errors: 2 increased debit 55,360


4 increased credit 21,520
33,840

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

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


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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 = $960,000


Depreciation: $397,000 – $43,000 + £96,000 = $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 X
$000
6 months to 30 June 2000 100
6 months to 31 December 2000 136
236
Less: for bad debt 20
216

11 A S T U
$000 $000 $000
6 months to 30 June 2000:
Salaries 15
Profit share 60:40 96 64
6 months to 31 December 2000
Salaries 25
Profit share 40:40:20 60 60 30
196 124 30

12 C

13 A $
284,000
Item 1 – No change
Item 2 (350) Reduce to net realisable value
283,650

14 A

15 C $
Theoretical gross profit 30% x $130,000 39,000
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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Paper 1.1(INT) Paper 1.1(INT)

Section B
1D INTIX

1
Tafford Limited
Income statement for the year ended 30 September 2001
$000
1D INTBA

Revenue 41,600
Cost of sales (20,000)
Gross profit 21,600
Distribution costs (6,285)
Administrative expenses (4,885)
Profit from operations 10,430
Finance cost 1,000
Profit before tax 9,430
Income tax expense 3,000
Net profit for the period 6,430

Working 1
Cost of sales Distribution Administrative
costs expenses
$000 $000 $000
Opening inventory 13,000
Purchases 22,600
Distribution costs 6,000
Administrative expenses 5,000
Bad debts 600
Reduction in allowance for doubtful debts (800)
Depreciation: warehouse machinery 300
motor vehicles 125 125
Profit on sale of vehicles (40)
Prepayments (200) (100)
Accruals 100 60
Closing inventory (15,600)
20,000 6,285 4,885

2 (a) Sales revenue


Sales revenue total account
Paper 1.1(INT)

$ $
1D INTBB

Opening receivables 41,600 Cash received from customers 218,500


Refunds to customers 800 Discounts allowed 2,600
Bad debts written off 1,500
Sales 225,100 Contra purchases 700
Closing receivables 44,200
267,500 267,500

$
Credit sales as above 225,100
Cash sales $114,700 + $9,600 124,300
349,400

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(b) Purchases
Paper 1.1(INT)

Purchases total account


1D INTBB

$ $
Payments to suppliers 114,400 Opening payables 22,900
Contra sales 700 Lamorgan – goods taken 400
Closing payables 24,800 Purchases 116,600
139,900 139,900

(c) Inventory
$
Per inventory count 77,700
Damaged item: $1,700 – $300 – $100 1,300
Goods on approval 3,000
82,000

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Paper 1.1(INT)

Cost of control
1D INTBC

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

Minority Interest
$ $
Balance to CBS 57,500 25% share capital 25,000
25% accumulated profit 32,500
57,500 57,500

Accumulated profit
$ $
Minority interest 25% x 130,000 32,500 Evon 240,000
Cost of control: 75% x 60,000 45,000 Orset 130,000
Cost of control: Goodwill written off 36,000
Balance to CBS 256,500
370,000 370,000

Evon Limited Group


Balance sheet as at 31 March 2001
$ $
Goodwill 60,000
Less: Amortisation 36,000 24,000
Sundry net assets 790,000
814,000
Share capital
500,000 shares of $1 each 500,000
Accumulated profit 256,500
756,500
Minority interest 57,500
814,000

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4 (a)
Paper 1.1(INT)

(i) Materiality
1D INTBD

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

5 (a) Four from:


Paper 1.1(INT)

(i) Longer payment period for suppliers


1D INTBE

(ii) Increasing overdraft


(iii) Increasing inventories
(iv) Deterioration in quick ratio (acid test)
(v) Rapid increase in sales revenues and trade receivables.

(b) 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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Part 1 Examination – Paper 1.1(INT)
Paper 1.1(INT)

Preparing Financial Statements (International Stream) Marking Scheme


1D INTMS

Section B

Available Maximum
1 Cost of sales 1½
Distribution costs 3
Administrative expenses 3
Interest 1
Income tax expense 1
Layout 2
11½ 10

2 (a) ½ mark per item 9 x ½ + ½ layout 5


(b) ½ mark per item 5 x ½ + ½ layout 3
(c) (i) 2
(ii) ½ 2½
10½ 10

3 Goodwill – calculation 3
– amortisation 1 4 3
Minority interest – calculation 3 2
Accumulated profit:
Initial profit figures 1
Minority interest 1
Cost of control 1
Goodwill written off 1 4 3
Consolidated balance sheet – format 2 2
13 10

4 (a) (i) Explanation 2


Example 1
3
(ii) Explanation 2
Example 1
3 6 6

(b) Consistency of treatment of items 2


Disclosure of policies 2
4 4
10 10

5 (a) 1 mark per item 4 x 1 4

(b) 1 mark per item 3 x 1 3


1 mark per explanation of effect 3 6
10 10

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