Preparing Financial Statements

(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 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 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: 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 $ 186,000 274,000

Using this information, what is the trader’s profit for the year ended 30 June 2005? A B C D $126,000 $50,000 $86,000 $90,000

2

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: Debit: Credit: C D Debit: Credit: Debit: Credit: Cash Share capital Share premium Share capital Share premium Cash Cash Share capital Cash Share capital Retained earnings $1,100,000 $250,000 $850,000 $250,000 $850,000 $1,100,000 $1,100,000 $1,100,000 $1,100,000 $250,000 $850,000

B

2

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? P $ 95,000 122,500 125,000 110,000 Q $ 95,000 122,500 125,000 110,000 R $ 110,000 55,000 50,000 50,000

A B C D

4

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 B C D 675,000 687,500 687,500 Share premium account $ 650,000 375,000 150,000 400,000

5

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 A B C D 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. 3 and 4 2 and 4 1 and 2 1 and 3

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Which of the following journal entries are correct, according to their narratives? Dr $ 18,000 Cr $ 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 –––––––––––––––––––––––––––––––––––––––––––– 2 B receivables ledger account A receivables ledger account Correction of error: cash received from A wrongly entered to B’s account –––––––––––––––––––––––––––––––––––––––––––– 3 Share premium account Share capital account 1 for 3 bonus issue on share capital of 1,200,000 50c shares –––––––––––––––––––––––––––––––––––––––––––– 4 Shares in X Share capital account Share premium account

22,000 22,000

400,000 400,000

750,000 250,000 500,000

500,000 50c shares issued at $1·50 per share in exchange for shares in X –––––––––––––––––––––––––––––––––––––––––––– A B C D 1 and 3 2 and 3 1 and 4 2 and 4

7

The receivables ledger control account below contains several incorrect entries. Receivables ledger control account $ 138,400 $ 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 ––––––––

Opening balance

Cash received from credit customers

78,420

–––––––– 216,820 ––––––––

What should the closing balance be when all the errors are corrected? A B C D $133,840 $135,540 $137,740 $139,840 4

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? A B C D 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. 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. 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. 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.

9

A draft cash flow statement contains the following calculation of net cash inflow from operating activities: Operating profit Depreciation Decrease in inventories Decrease in trade and other receivables Decrease in trade payables Net cash inflow from operating activities $m 13 2 (3) 5 4 ––– 21

Which of the following corrections need to be made to the calculation? 1 2 3 4 A B C D 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. 1 and 3 2 and 3 1 and 4 2 and 4

10 Which of the following factors would cause a company’s gearing ratio to fall? 1 2 3 4 A B C D A bonus issue of ordinary shares. A rights issue of ordinary shares. An issue of loan notes. An upward revaluation of non-current assets. 1 and 3 2 and 3 1 and 4 2 and 4

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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 B C D $2,352,000 $1,038,000 $917,280 $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 B C D Income statement $27,200 $39,300 $36,700 $55,700 Balance sheet Prepayment $19,000 Prepayment $9,500 Prepayment $9,500 Prepayment $9,500

13 Which of the following correctly describes the imprest system for operating petty cash? A B C D All expenditure out of petty cash must be supported by a properly authorised voucher. A regular equal amount of cash is transferred into petty cash. The exact amount of expenditure out of petty cash is reimbursed at intervals. 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 B C D Alpha has sent a cheque to Beta for $500 which has not yet been received by Beta. The credit side of Beta’s account in Alpha’s records has been undercast by $500. An invoice for $250 from Beta has been treated in Alpha’s records as if it had been a credit note. Beta has issued a credit note for $500 to Alpha which Alpha has not yet received.

6

15 Which of the following statements about intangible assets are correct? 1 2 3 A B C D 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. 2 and 3 only 1 and 3 only 1 and 2 only 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 A B C D Declaration of equity dividends. Decline in market value of investments. The announcement of changes in tax rates. The announcement of a major restructuring. 1 only 2 and 4 3 only 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: In arrears $ 3,800 4,700 In advance $ 2,400 3,000

30 June 2004 30 June 2005

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 B C D $84,000 $83,400 $80,600 $85,800

18 Which of the following statements about accounting ratios and their interpretation are correct? 1 2 3 A B C D 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. 2 and 3 only 1 and 3 only 1 and 2 only All three statements are correct 7 [P.T.O.

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 B C D $61,000 $22,000 $24,000 $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 2 3 A B C D 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. All three statements are correct 1 and 2 only 1 and 3 only 2 and 3 only

21 A limited liability company sold a building at a profit. How will this transaction be treated in the company’s cash flow statement? A Proceeds of sale Cash inflow under Financing activities Cash inflow under Investing activities Cash inflow under Investing activities Cash inflow under Financing activities Profit on sale Added to profit in calculating cash flow from operating activities Deducted from profit in calculating cash flow from operating activities Added to profit in calculating cash flow from operating activities Deducted from profit in calculating cash flow from operating activities

B

C

D

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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 A B C D Unrealised revaluation gains. Dividends paid. Proceeds of equity share issue. Profit for the period. 2, 3 and 4 only 1, 3 and 4 only All four items 1, 2 and 4 only

23 The capital structure of a company at 30 June 2005 is as follows: Ordinary share capital Share premium account Retained earnings 10% Loan notes $m 100 40 60 40

The company’s income statement for the year ended 30 June 2005 showed: Operating profit Loan note interest Profit for year $m 44 (4) ––– 40 ––– 162/3 per cent 40 per cent 181/3 per cent 22 per cent

What is the company’s return on capital employed? A B C D 40/240 40/100 44/240 44/200 = = = =

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 B C D $43,100 overdrawn $16,900 overdrawn $60,300 overdrawn $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 less: Closing inventories Gross profit 5,000 15,000 ––––––– 20,000 3,000 ––––––– $000 22,000

17,000 ––––––– 5,000 –––––––

To the nearest day, how many days’ sales are held in the closing inventories? A B C D 3,000/22,000 x 365 3,000/17,000 x 365 3,000/15,000 x 365 3,000/20,000 x 365 = 50 days = 64 days = 73 days = 55 days (50 marks)

10

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 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 Receipts $ 418,200 4,500 316,300 22,000 49,200 80,400 77,600 –––––––– 500,300 –––––––– ––––––––– 500,300 ––––––––– Payments $ 32,400

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 2004 $ 35,000 4,000 – 44,700 19,600 58,900 12,500

2,3 3

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 5 $000 1,000 700 2,200 –––––– 3,900 –––––– 2004 Notes $000

30 Sep Cash proceeds of sale 31 Dec Income statement 31 Dec Balance

3 4

500 20 3,380 –––––– 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 800 (200) –––– $000 400 600 –––––– 1,000 –––––– $000 200 500 –––– 700 ––––

2

Cash paid for new land and building: Land Building

3

Cash received on sale of land and buildings: Details of the transaction were: $000 Proceeds of sale Cost: Land Building Accumulated depreciation at 1 January 2004 Profit $000 (100) (100) 20 –––– (80) –––– (180) –––– 320 –––– $000 500

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. 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: Land Buildings $000 800 1,400 –––––– 2,200 ––––––

5

The revaluation is not to be reflected in the depreciation charge for the year to 31 December 2004.

12

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: Kye $ 260,000 420,000 ––––––––– 680,000 ––––––––– 200,000 480,000 ––––––––– 680,000 ––––––––– Rye $ – 360,000 ––––––––– 360,000 ––––––––– 100,000 260,000 ––––––––– 360,000 –––––––––

Investment in Rye Sundry net assets

Ordinary share capital Retained earnings

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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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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