Answers

ACCA Certified Accounting Technician Examination – Paper T6 (INT) Drafting Financial Statements (International Stream)

December 2007 Answers and Marking Scheme Marks Workings $000 0·5 $000 1,765 (1,343) –––––– 422 (80) (192) –––––– 150 (5) –––––– 145 (45) –––––– 100 –––––– –––––– 1·0 4·0 1·5 4·5 1·0 1·0 0·5 –––– 14·0 –––– 0·5 $000 (1,800 – 35)

1

(a)

(i)

Malright Income statement for the year ended 31 October 2007 Revenue Cost of sales (W1) Gross profit Distribution costs (W1) Administrative expenses (W1) Profit from operations Finance cost Profit before tax Tax Profit for the period

(ii)

Malright Balance sheet as at 31 October 2007 $000 Assets Non-current assets Property, plant and equipment (W2) Current assets Inventory Trade receivables Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Share premium account Retained earnings Non-current liabilities 10% Loan notes Current liabilities Bank overdraft Trade payables Current tax Energy expenses accrual Loan notes interest Total equity and liabilities

966 75 304 ––––

3·5 0·5 1·0 0·5

379 –––––– 1,345 –––––– ––––––

(320 – 16)

650 80 200 –––––– 930 50 50 250 45 15 5 ––––

0·5 0·5 2·0

(130 + 100 – 30)

1·0 1·0 0·5 1·0 1·0 1·0 0·5 –––– 15·0 ––––

365 –––––– 1,345 –––––– ––––––

11

Workings W1

Purchases Discounts received Wages (40:25:35) 72 45 Energy expenses ($105 + $15) (40:20:40) 48 24 Opening inventory 160 Administrative expenses Increase in allowance for receivables ((320 x 0·05) – 10) Director’s remuneration Closing inventory (75) Depreciation – buildings (30:30:40) 11 11 Depreciation – plant 22 –––––– ––– 1,343 80 –––––– ––– –––––– ––– (4 marks) (1·5 marks) W2 Non-current assets Land $000 235 – Buildings $000 740 (60) (37) –––– 235 –––– –––– (0·5 mark) –––– 643 –––– –––– (1·5 marks) Plant $000 220 (110)

Cost of Sales $000 1,105

Distribution Cost $000

Administrative Expenses $000 (90) 63 48 80 6 70 15 (1 mark)

(1 mark) (1 mark)

–––– 192 –––– –––– (4·5 marks) Total Property, Plant & Equipment $000 1,195 (170)

Cost Accumulated depreciation b/f Current year’s depreciation: Buildings $740 x 5% Plant ($220 – $110) x 20%

(37) (22) (22) ––– –––– 88 966 ––– –––– ––– –––– (1·5 marks) (3·5 marks)

(b)

Accounting ratios for Malright (i) Quick ratio (acid test ratio) Interest cover Current assets – inventory –––––––––––––––––––––– :1 Current liabilities Profit before interest and tax –––––––––––––––––––––––– Interest Profit after tax –––––––––––––––––– No of ordinary shares Current share price per share –––––––––––––––––––––––– Earnings per share 379 – 75 = –––––––– 365 = 150 –––– 5 100 –––– 650 130 ––––– 15·4 = 0·83:1

(ii)

=

30 times

(iii) Earnings per share

=

=

15·4 cents

(iv) Price earnings ratio

=

=

8·4

Marking scheme: A total of 6 marks – 0·5 mark for stating the correct formula and 1 mark for the correct ratio.

2

(a)

Appropriation Account for the year ended 31 October 2007 $ Net profit Less partners’ salaries Alan Bob Colin Less interest on capital Alan Bob Colin Net profit available for appropriation Alan Bob Colin 3/6 2/6 1/6 $ 134,904 ) ) ) ) ) )

Marks 0·5

30,000 35,000 28,000 ––––––– 4,000 3,500 3,000 –––––––

1

(93,000)

1

(10,500) –––––––– 31,404 –––––––– –––––––– 15,702 10,468 5,234 –––––––– 31,404 –––––––– ––––––––

0·5 0·5 0·5 –––– 4 ––––

12

(b)

Partners’ Current Accounts Alan $ Bal b/f – Drawings 22,000 Capital a/c 30,502 Bal c/f ––––––– 52,502 ––––––– ––––––– Partners’ Capital Accounts Alan $ Goodwill Loan a/c 109,502 Bal c/f –––––––– 109,502 –––––––– Working for Revaluations

Marks Bob $ – 17,000 33,168 ––––––– 50,168 ––––––– ––––––– Colin $ 1,600 25,000 9,634 ––––––– 36,234 ––––––– ––––––– Alan $ 2,800 4,000 30,000 15,702 ––––––– 52,502 ––––––– ––––––– Bob $ 1,200 3,500 35,000 10,468 ––––––– 50,168 ––––––– ––––––– Colin $ – 3,000 28,000 5,234 ––––––– 36,234 ––––––– –––––––

Bal /b/f Int on cap Salaries Profit

1+1 1+1 1+1 1+1 ––––– 8 –––––

(c)

Bob $ 28,800 47,200 ––––––– 76,000 –––––––

Colin $ 43,200 14,800 ––––––– 58,000 ––––––– Book Value $ 120,000 40,000 22,000 18,000

Bal b/f Cash Revaluation a/c Goodwill: 3:2:1 Current a/c

Alan $ 40,000 3,000 36,000 30,502 –––––––– 109,502 ––––––––

Bob $ 35,000 15,000 2,000 24,000 ––––––– 76,000 –––––––

Colin $ 30,000 15,000 1,000 12,000 ––––––– 58,000 –––––––

1+1 1+1 1+2 1 1 ––––– 9 –––––

Property Equipment and machinery Inventory Receivables Net Change

Revalued amount $ 136,000 35,000 18,000 17,000

Change $ 16,000 (5,000) (4,000) (1,000) –––––– 6,000 –––––– –––––– 3,000 2,000 1,000 –––––– 6,000 –––––– ––––––

New valuations apportioned to each partner Alan 3/6 Bob 2/6 Colin 1/6

(d)

Advantages of operating as a partnership: (i) Business risk is spread amongst more people. (ii) Individual partners may be able to specialise in particular activities within the business. (iii) Access to a larger pool of capital. Disadvantages of operating as a partnership: (i) (ii) Disputes might arise between the partners. Decision making may take longer if all partners have to be consulted.

Marking scheme: 1 mark for each relevant point up to a maximum of 4 marks

3

(a)

Goodwill on acquisition Cost of investment Share capital Retained earnings Goodwill

$000 2,800 42

$000 3,345 (2,842) –––––– 503 –––––– ––––––

Workings $000

Marks 0·5 1 1·5 ––– 3 –––

(70% x 60)

13

(b)

Prestend Consolidated Balance Sheet as at 31 October 2007 Assets $000 Non-current assets Property, plant and equipment Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Retained earnings Minority Interest Current liabilities Payables Tax Total equity and liabilities

Workings $000 7,500 $000 (4,200 + 3,300)

Marks 0·5

0·5

2,280 2,520 950 ––––––

5,750 ––––––– 13,250 ––––––– –––––––

(1,500 + 800 – 20) (1,800 + 750 – 30) (600 + 350)

1·5 1·5 0·5

9,000 100 1,260 ––––––– 10,360 1,390 1,500 ––––––– 13,250 ––––––– –––––––

(W1) (W2)

1 4·5 2

(1,220 + 200 – 30) (700 + 800)

1·5 0·5 ––– 14 –––

Workings W1 Retained earnings Prestend balance Retained earnings of Northon (70% x $200,000) Pre acquisition reserves (70% x $60,000) Less Goodwill Unrealised profit on purchases from Prestend Reserves W2 Minority Interest Share Capital (30% x $4,000,000) Retained earnings (30% x $200,000) Minority Interest (c)

525 140 (42) (503) (20) –––––

(565) ––––––– 100 ––––––– ––––––– 1,200 60 ––––––– 1,260 ––––––– –––––––

0·5 1 1 1 1 ––– 4·5 ––– 1 1 –– 2 ––

The existence of significant influence might be demonstrated where there is: (a) (b) (c) (d) (e) (f) A holding of 20% or more of the shares in the investee company, but less than 50%. Participation in the policy making process of the investee company. Material transactions between the two companies. An interchange of management personnel beween the companies. The provision of essential technical information by the investor company. A representative of the investor company on the board of directors of the investee company.

Marking scheme: 1 mark for each circumstance up to a maximum of 3 marks.

14

4

(a)

Prepared in accordance with IAS 7 Geofost Cash flow statement for the year ended 31 October 2007 $000 Cash flows from operating activities Net profit before tax Adjustments for: Depreciation Finance cost Profit on disposal of non-current assets Operating profit before working capital changes Decrease in inventory Increase in receivables Increase in payables Cash generated from operations Interest paid (100 – 120 + 730) Tax paid (W1) Net cash from operating activities Cash flows from investing activities Payments to acquire property, plant & equipment Proceeds from sale of property, plant & equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Repayment of long term borrowing Dividend paid Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at end of period 15,000 4,658 730 (720) ––––––– 19,668 6,075 (1,863) 3,178 ––––––– 27,058 (710) (4,090) ––––––– 22,258 (24,340) 2,694 ––––––– (21,646) 1,869 (2,300) (1,486) ––––––– (1,917) ––––––– (1,305) 634 ––––––– (671) ––––––– ––––––– $000

Marks

0·5 1 0·5 1 1 1 1 1·5 1

1 0·5

1 1 1

0·5 0·5 ––– 14 –––

Examiner’s note IAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow. Workings (all in $000): W1 Taxation Paid C/f 4,090 3,020 –––––– 7,110 –––––– –––––– B/f Income statement 2,760 4,350 –––––– 7,110 –––––– ––––––

Note: The ‘Paid’ entry is the ‘balancing figure’. (b) Over the period there was a net cash outflow from the business of $1,305,000. The company purchased non-current assets of $24,340,000. The purchase of new non-current assets may help the future operational efficiency of the business and therefore improve future cash flows. The company generated additional cash by selling non-current assets for $2,694,000 which yielded a profit on their NBV of $720,000. Loan notes of $2,300,000 were repaid, this will reduce interest payments in the future. However, the bank overdraft has increased by $801,000. This will inevitably increase the cost of finance from the bank. Inventory levels were reduced by $6,075,000. This had a positive impact on the cash flow of the business. Receivables have increased by $1,863,000. This might suggest increased sales or that debt collection arrangements need tightening up. The payables increase is good for cash flow but potentially may lead to problems with suppliers if the company does not stay within agreed credit terms. Payables have almost doubled and the company may find they are no longer given credit. Marking scheme – Other relevant comments may be acceptable. Maximum of 6 marks

15

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