Certificate in.

Accounting
(IAS)

Level 3

Model Answers
Series 2 2005 (Code 3901M)
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Accounting (IAS) Level 3
Series 2 2005

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Accounting (IAS) Level 3
Series 2 2005
QUESTION 1

The following are the Balance Sheets of Mohktar, a public company, at 31 December 2003 and
31 December 2004:
2003 2004
$000 $000 $000 $000
ASSETS
Non-current assets at cost 1,830 1,810
Accumulated depreciation 680 750
1,150 1,060
Current assets
Inventories 276 270
Trade receivables 165 178
Short-term deposits 39 140
Bank 26 101
506 689
Total assets 1,656 1,749

$000 $000 $000 $000

EQUITY AND LIABILITIES
Capital and reserves
Ordinary shares of $0.50 each 660 900
Share premium account 250 340
Accumulated profits 78 207
Equity 988 1,447

Non-current liabilities
10% loan stock 300 50
1,288 1,497

Current liabilities
Trade receivables 192 139
Proposed dividend 176 113
368 252
1,656 1,749

Additional information:

(1) Fixed assets which cost $120,000 and had a book value of $75,000 were sold during the year
ended 31 December 2004 for $91,000.

(2) An interim dividend of $94,000 was paid on 1 August 2004.

(3) During the year ended 31 December 2004, interest was received of $18,000 and loan stock
interest paid was $30,000.

(4) The proposed dividend at 31 December 2003 was paid during the year to 31 December 2004.

(5) The short-term deposits are to be classified as financing activities.

REQUIRED

Prepare a cash flow statement for Mohktar plc for the year ended 31 December 2004 in accordance
with the requirements of IAS 7.
(Total 20 marks)

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MODEL ANSWER TO QUESTION 1

Mohktar
Cash Flow Statement
for the year ended 31 December 2004

$000 $000
Operating Activities
Profit from operations 348
Adjustments for:
Depreciation 115
Profit on sale of tangible fixed asset (91 – 75) (16)
99
Operating cashflow before movements in working capital 447
Decrease in inventories (276 – 270) 6
Increase in receivables (178 – 165) (13)
Decrease in payables (192 – 139) (53)
(60)
Cash generated by operations 387
Interest paid (30)
Net cash from operating activities 357
Investing activities
Interest received 18
Receipts from sale of tangible fixed assets 91
Purchase of fixed assets (1,810 + 120 – 1,830) (100)
9
Net cash from investing activities 366

Financing activities
Dividends paid (176 + 94) (270)
Increase in short-term deposits (140 – 39) (101)
Issue of ordinary shares (900 – 660 + 340 – 250) 330
Repayment of loan stock (300 – 50) (250)

Net cash used in financing activities (291)

Net increase in cash 75
Cash at beginning of year 26
Cash at end of year 101

4
QUESTION 2

The following Trial Balance has been extracted from the accounting records of Jagga, a private
company, at 31 December 2004:
$000 $000
Administrative expenses 2,500
Bank overdraft 250
10% Debentures 600
Distribution costs 1,200
Dividends received 130
Fixed asset investments at cost 730
Furniture and fittings: – cost 100
– accumulated depreciation at 1 January 2004 40
Interim ordinary dividend paid 80
Ordinary share capital 900
Plant and equipment: – cost 7,600
– accumulated depreciation at 1 January 2004 5,000
10% irredeemable preferred share capital 200
Preferred dividend paid 20
Accumulated profits at 1 January 2004 2,320
Provision for doubtful debts at 1 January 2004 160
Purchases and manufacturing expenses 7,250
Sales 13,260
Share premium account 400
Inventory at 1 January 2004 2,170
Trade payables 990
Trade receivables 2,600
24,250 24,250

The following additional information is provided:

(1) The inventory at 31 December 2004 was valued at $2,500,000.

(2) Depreciation is to be charged as follows:

Furniture and fittings (all relating to administration): 10% on cost
Plant and equipment (all relating to cost of sales): 50% on the reducing balance basis.

(3) The provision for doubtful debts is to be maintained at 8% of trade receivables.

(4) Prepayments and accruals at 31 December 2004 were:

Prepayments Accruals
$ $
Administrative expenses 120,000 10,000
Distribution costs 80,000 30,000

(5) Interest on debentures for the year has not yet been paid.

(6) The directors propose to pay a final ordinary dividend of $0.20 per ordinary share.

(7) The company’s authorised share capital is made up of 1,000,000 ordinary shares of $1 each and
250,000 10% preferred shares of $1 each.

REQUIRED

Prepare Jagga’s Income Statement for the year ended 31 December 2004 and Balance Sheet at
that date in good style.
(Total 25 marks)

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MODEL ANSWER TO QUESTION 2

Jagga
Income Statement
for the year ended 31 December 2004
$000 $000
Revenue 13,260
Cost of sales (2,170 + 7,250 + 1,300 [1] - 2,500) 8,220
Gross profit 5,040

Administrative expenses (2,500 + 10 – 120 + 10 [2] + 48 [3]) 2,448

Distribution costs (1,200 + 30 - 80) 1,150
3,598
Profit from operations 1,442
Dividends received 130
1,572
Interest payable (600 x 10%) 60
Profit for the year 1,512
Dividends – preferred (200 x 10%) 20
– ordinary (80 + 180) [4] 260
280
1,232

Workings

[1] = (7,600 – 5,000) x 50%

[2] = (100 x 10%)
[3] = (2,600 x 8%) - 160
[4] = 900 x 20%

Jagga
Balance Sheet
at 31 December 2004

Cost Depreciation NBV

$000 $000 $000
ASSETS
Non-current assets:
Plant and equipment 7,600 (5,000 + 1,300) 6,300 1,300
Furniture and fittings 100 (40 + 10) 50 50
7,700 6,350 1,350

Investments 730
2,080
Current Assets
Inventory 2,500
Trade receivables (2,600 - 208) 2,392
Prepayments (120 + 80) 200
5,092
Net assets 7,172

6 CONTINUED ON NEXT PAGE

MODEL ANSWER TO QUESTION 2 CONTINUED

EQUITY AND LIABILITIES $000

900,000 ordinary shares of $1 each 900
200,000 10% preferred shares of $1 each 200
1,100
Share premium account 400
Accumulated profits (1,232 + 2,320) 3,552
Equity 5,052

Non-current liabilities
10% Debentures 600
5,652

Current liabilities
Trade payables 990
Accrued expenses (10 + 30 + 60) 100
Proposed dividend 180
Bank overdraft 250
1,520
Total equity and liabilities 7,172

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QUESTION 3

Despite its limitations, historical cost accounting is still the most widely used system of accounting.

REQUIRED

(a) (i) List 2 advantages of a historical cost accounting system. (2 marks)

(ii) List 2 disadvantages of a historical cost accounting system. (2 marks)

A firm had the following transactions with its Product R:

1 January 2005 Opening inventory nil

5 January 2005 Buys 12 units at $45 per unit
8 January 2005 Buys 8 units at $50 per unit
12 January 2005 Sells 10 units at $80 per unit
20 January 2005 Buys 10 units at $30 per unit
25 January 2005 Sells 12 units at $30 per unit

The net realisable value of R was estimated at $20 per unit on 31 January 2005.

REQUIRED

(b) Calculate (correct to 1 decimal place) the gross profit to sales ratio for January 2005
assuming the firm uses the perpetual weighted average method of pricing inventories and
charges inventory write-downs against gross profit.
(7 marks)

(c) Define the following accounting concepts and briefly explain their implications for the
preparation of financial statements:

(i) Going concern (4 marks)

(ii) Materiality (5 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 3

(a) (i) 2 advantages of historical cost accounting system

• It is factual and objective
• It is simple and easy to understand

An additional acceptable answer could be:

• It is useful for the stewardship function

(ii) 2 disadvantages of historical cost accounting

• Historical cost information may not be relevant for decision making
• Capital profits are ignored until they are realised

Additional acceptable answers could be:

• Does not provide information about the current values of assets
• May overstate profits during inflationary periods

(b) Gross profit calculation

$
Sales [(10 x 80) + (12 x 30)] 1,160
Cost of sales [(470 + 462) + (308 - 160)] 1,080

Gross profit 80

Gross profit to sales ratio (80/1,160) x 100

= 6.90%

UNITS PRICE VALUE

Workings $ $
5 January - buy 12 45.0 540
8 January - buy 8 50.0 400
20 47.0 940
12 January - sell 10 47.0 470
10 47.0 470
20 January - buy 10 30.0 300
20 38.5 770
25 January - sell 12 38.5 462

31 January 8 38.5 308

(c) (i) Going concern

Financial statements are prepared on the assumption that the firm will continue to exist for
the foreseeable future and that there is no intention to close or curtail the scale of operations.
Non compliance will result in assets being shown at wrong values and liabilities classified as
long-term.

9 CONTINUED ON NEXT PAGE

MODEL ANSWER TO QUESTION 3 CONTINUED

(ii) Materiality
Information is material if its omission from, or misstatement in, the financial statements could
influence the economic decisions of users.
Materiality will depend on the size and nature of the item
Non-compliance with the materiality concept will result in trivial items being included in the
financial statements and important items not being sufficiently disclosed.

10
QUESTION 4

Specto, a public company, had the following fixed assets on 1 January 2004:

Cost Depreciation NBV

$000 $000 $000
Freehold property (cost of land: $300,000) 900 192 708
Plant and machinery 800 150 650
Motor vehicles 500 250 250
Office equipment 750 300 650

Depreciation has been provided on cost. The rates used are 20% for motor vehicles, 10% for plant
and machinery and 10% for office equipment.

You are given the following information for the year ended 31 December 2004:

(1) The freehold property was acquired on 1 January 1988 and is being depreciated on a straight line
basis over 50 years.

(2) The freehold property was revalued at $2.6 million on 1 January 2004. One quarter of the
revaluation gain was allocated to land and the remaining three quarters to the building.

(3) On 1 January 2004, the directors decided to change the method of depreciating motor vehicles to
30% on the reducing balance basis to give a fairer presentation of the results and of the financial
position.

(4) Plant costing $ 50,000 was sold at a loss of $15,000 on 1 January 2004. The proceeds of the
sale were $25,000.

(5) The useful economic life of office equipment purchased on 1 January 2001 for $60,000 was
reduced by 2 years on 1 January 2004.

REQUIRED

Prepare the following ledger accounts for the year ended 31 December 2004:

(a) Freehold property at cost/valulation

(b) Plant and machinery at cost

(c) Accumulated depreciation – freehold property

(d) Accumulated depreciation – plant and machinery

(e) Accumulated depreciation – motor vehicles

(f) Accumulated depreciation – office equipment.

Note: Depreciation is calculated to the nearest $000.

(Total 20 marks)

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MODEL ANSWER TO QUESTION 4

(a) Freehold Property at cost/valuation

$000 $000
Balance b/f 900
Accumulated depreciation (16 x 12) 192
Revaluation reserve (R) 1,892
Balance c/f 2,600

2,792 2,792

(b) Plant and Machinery at cost

$000 $000
Balance b/f 800
Disposal 50
Balance c/f 750
800 800

(c) Accumulated depreciation – Freehold Property

$000 $000

Balance b/f 192

Freehold buildings 192
Income statement (600 – 192 + 1,892/4 x 3)/34 54
Balance c/f 54
246 246

(d) Accumulated depreciation – Plant and Machinery

$000 $000
Balance b/f 150
Asset disposal (50 - 25 - 15) 10
Income statement (800 - 50) ÷ 10 75
Balance c/f 215
225 225

(e) Accumulated depreciation – Motor Vehicles

$000 $000
Balance b/f 250
Depreciation (500 - 250) x 30% 75
Balance c/f 325
325 325

(f) Accumulated depreciation – Office Equipment

$000 $000
Balance b/f 300
Depreciation (750 - 60) x 10% + (60 -18)/5 77
Balance c/f 377
377 377

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QUESTION 5

Extracts from Athena's Balance Sheet were as follows:

$
Ordinary shares of $1 300,000
8% Preferred shares 300,000
Share premium account 150,000
Accumulated profits 100,000

During the year to 31 March 2005, the company entered into the following transactions:

1 June 2004: Redeemed 100,000 of its Preferred shares at $1.60 per share. The redemption was
partly financed by the issue of 70,000 $1 Ordinary shares at a price of $1.20 per
share. The Preferred shares redeemed were originally issued at a premium of $0.10
per share.

1 March 2005: Made a bonus issue of 1 for 10 ordinary shares using non-distributable reserves. All
the ordinary shares in issue on 1 March qualified for the bonus issue.

REQUIRED

(a) State 3 uses of a Share Premium account.

(6 marks)

(b) Prepare journal entries (without narratives) to record the above.

(14 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 5

(a) 3 uses of a Share Premium

• Discount on issue of debentures
• bonus issues
• premium on redemption of shares or debentures

An additional acceptable answer could be:

• issue costs

(b) Debit Credit

Preferred share capital 100,000

Premium on redemption (100,000 x .6) 60,000
Preferred share redemption 160,000

Preferred share redemption 160,000

Bank 160,000

Bank (70,000 x 1.2) 84,000

Ordinary share capital 70,000
Share premium (70,000 x .2) 14,000

Accumulated profits (100,000 – 84,000) 16,000

Capital redemption reserve 16,000

Share premium (100,000 x .1) 10,000

Accumulated profits (R) 50,000
Premium on redemption 60,000

Share premium (300,000 + 70,000)/10 37,000

Ordinary share capital 37,000

14
QUESTION 6

Tweddie, Carlsberg and Edey were in partnership for many years sharing profits and losses in the
ratio 3: 2: 1 respectively and making up their accounts to 31 March. Edey retired from the partnership
on 31 March 2005 and the partnership was dissolved as from that date.

The partnership Balance Sheet at 31 March 2005 was as follows:

$ $
Fixed Assets
Plant and machinery 130,000
Office equipment 22,500
Motor vehicles 22,000
174,500

Current Assets
Inventory 55,000
Trade receivables less provision 23,700
Bank 2,000
80,700
255,200

$
Capital Accounts
Tweddie 90,000
Carlsberg 60,000
Edey 30,000
180,000

Non-current liabilities
Bank loan 60,000
240,000
Current liabilities 15,200
255,200

In the period from 1 April to 30 April 2005, the following transactions took place and were recorded in
the books of the partnership:

(1) Fixed Assets $

Plant and machinery – sold for 185,000
Office equipment – sold for 29,500
Motor vehicles – sold for 18,000

(2) Current Assets $

Inventory – taken over by Tweddie at agreed value 57,000
Trade receivables: cash received 28,400

(3) Current liabilities

Tweddie took over a liability of $4,000
The remaining current liabilities were settled for $10,000

(4) Non-current liabilities

The bank loan was settled on 21 April 2005.

(5) Expenses of dissolution

$500 was paid.

(6) Capital accounts

The partners received the amounts due to them on 30 April 2005.

15 CONTINUED ON NEXT PAGE

QUESTION 6 CONTINUED

REQUIRED

Prepare the following Accounts for 30 April 2005 showing the dissolution of the partnership:

(a) Realisation
(9 marks)

(b) Partners’ Capital (in columnar form)

(4 marks)

(c) Bank
(7 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 6

(a) Tweddie, Carlsberg and Edey Partnership

Realisation Account

$ $ $
Plant and machinery 130,000 Cash – plant and machinery 185,000
Office equipment 22,500 Cash – office equipment 29,500
Motor vehicles 22,000 Cash – motor vehicles 18,000
Inventory 55,000 Capital (Tweddie) – inventory 57,000
Trade receivables 23,700 Cash – receivables 28,400
Expenses 500 Discount – payables 1,200
(15,200 - 4,000 – 10,000)

Share of profit
Tweddie (1/2) 32,700
Carlsberg (1/3) 21,800
Edey (1/6) 10,900
65,400
319,100 319,100

(b)
Capital Accounts
Tweddie Carlsberg Edey Tweddie Carlsberg Edey
$ $ $ $ $ $
Inventory 57,000 Bal b/f 90,000 60,000 30,000
Payables 4,000
Realisation 32,700 21,800 10,900
Bank (R) 69,700 81,800 40,900
126,700 81,800 40,900 126,700 81,800 40,900

(c)
Bank Account
$ $
Bal b/f 2,000 Dissolution expenses 500
Realisation – plant and machinery 185,000 Bank loan 60,000
Realisation – equipment 29,500 Payables 10,000
Realisation – motor vehicles 18,000
Realisation – receivables 28,400 Capital – Tweddie 69,700
Capital – Carlsberg 81,800
Capital – Edey 40,900
262,900 262,900

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