Certificate in

Accounting
(IAS) Level 3

Model Answers
Series 2 2007 (Code 3901M)

1 ASE 3016 2 06 3

3616/2/06 >f0t@W?h2`?[6ZBk0j3d#
Certificate in Accounting (IAS) Level 3 - Malaysia
Series 2 2007

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© Education Development International plc 2007

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3901/2/07/MA 2
QUESTION 1

The Balance Sheets of Mohatir, a private company, at 31 December were as follows:

2005 2006
$000 $000 $000 $000
ASSETS
Non-current assets 1,000 1,600

Current Assets
Inventories 180 150
Receivables 120 100
Bank 70 40
370 290
TOTAL ASSETS 1370 1890

EQUITY AND LIABILITIES

Capital and reserves
$1 Ordinary shares 700 900
Share premium account 200
General reserve - 40
Accumulated profits 140 380

Equity 1040 1320

Non-current liabilities
10% Debentures 200 400

Current liabilities $000 $000

Payables 90 80
Dividends 40 90

130 170
Total equity and liabilities 1370 1890

TOTAL ASSETS

During the year ended 31 December 2006, fixed assets costing $800,000 were purchased and assets
with a net book value of $95,000 were sold for $80,000.
It can be assumed that any financing transactions took place on 1 January 2006.
An interim dividend amounting to $45,000 was paid in 2006.
Proposed dividends were proposed before 31 December each year.

REQUIRED

(a) Calculate the profit from operations for the year ended 31 December 2006.
(5 marks)

(b) Prepare a statement reconciling profit from operations to cash generated by operations.
(7 marks)

(b) Prepare the Cash Flow Statement of Mohatir for the year ended 31 December 2006 in
accordance with IAS 7.
(8 marks)

(Total 20 marks)

3901/2/07/MA 3 OVER
MODEL ANSWER TO QUESTION 1

(a) Calculation of profit from operations $' 000 $' 000

Accumulated profits balance at 31 December 2006 380

Less Accumulated profits balance at 31 December 2005 140
240

Add:
Debenture interest 40
Interim dividend 45
Proposed dividend 90
General reserve 40
215
Profit from operations 455

(b) Reconciliation of Profit from Operations to Cash Generated by Operations

$' 000 $' 000

Profit from operations (from (a) above) 455

Adjustments for
Depreciation: [1000 – (1600 + 95 – 800)] 105
Loss on asset sale 15
120
575
Operating cash flow before movements in working capital

Reduction in inventory (180 – 150) 30

Reduction in receivables (120 – 100) 20
Reduction in payables (90 – 80) (10)
40
615

3901/2/07/MA 4 CONTINUED ON THE NEXT PAGE

MODEL ANSWER TO QUESTION 1 CONTINUED

(c) Mohatir
Cash Flow Statement for the year ended 31 December 2006

$' 000 $' 000

Cash generated by operations 615

Debenture interest (40)

Net cash from operating activities 575
Investing activities
Sale of fixed asset 80
Purchase of fixed assets (800)

Net cash from inventory activities (720)

(145)
Financing activities
Dividends paid (40 + 45) (85)
Issue of debentures 200

Net cash used in financing activities 115

Net decrease in cash (30)
Cash at beginning of year 70
Cash at end of year 40

3901/2/07/MA 5 OVER
QUESTION 2

The following Profit & Loss Appropriation Account was prepared by an inexperienced accounts clerk:

Gopa
Profit and Loss Appropriation Account
for the Year Ended 30 September 2006

$ $
Net Profit ----------------------------------------------------------------------- 1,480,000
Less:

Debenture interest paid ------------------------------------ 40,000

Interest paid on director’s loan ------------------------------5,000
Proposed dividend:
Ordinary shares (5,000,000 shares x 0.10) ---------- 500,000
----------------------------------------------------------------------------------- 545,000
Profit for year------------------------------------------------------------------ 935,000

Additional information:

(1) The share capital of Gopa, a public company, is divided into:

Authorised Issued and fully paid

$
2,000,000 8% preferred shares of $1 each 1,500,000
5,000,000 ordinary shares of $1 each 3,000,000

(2) Debentures of $1,000,000 with an interest rate of 6% per annum were issued in 1998 and are
repayable in 2008
(3) A director loaned RM400,000 to the company on 30 September 2002, repayable in five equal
annual instalments commencing 30 September 2003. The loan carries an interest rate of 5%,
calculated on the balance of the loan outstanding at the previous 1 October
(4) The accumulated losses brought forward on 1 October 2005 were $50,000
(5) The balance on the Share Premium account at 1 October 2005 was $150,000
(6) The balance on the General Reserve account at 1 October 2005 was $500,000
(7) No share issues took place during the year ended 30 September 2006
(8) No dividends were paid during the year ended September 2006
(9) The proposed dividend was proposed prior to 30 September 2006

REQUIRED

(a) Prepare an amended Profit & Loss Appropriation Account for the year ended
30 September 2006.
(8 marks)
(b) Give a reason for each of the amendments made in (a) above.
(4 marks)

(c) Calculate, to two decimal places, the maximum permissible value of the ordinary dividend per
share that the directors of Gopa could have proposed for the year ended 30 September 2006.

(6 marks)

(d) Give one possible reason why the directors have not proposed to pay the maximum permissible
ordinary share dividend.
(2 marks)

(Total 20 marks)

3901/2/07/MA 6
MODEL ANSWER TO QUESTION 2

(a) Gopa
Profit & Loss Appropriation Account for the year ended 30 September 2006

$ $

[i] Net Profit W1 1,412,000

Less:

Proposed Dividends

[ii] Preferred shares (1,500,000 x 8%) 120,000

[iii] Ordinary shares (3,000,000 x 0.10) 300,000

420,000
Profit for year 992,000

(b) Reasons for Amendments

Reference

[i]
[1] Debenture and director’s loan interest are charges against profit

[2] A full years interest in each case must be paid or accrued

[ii] Preferred shareholders have a prior right to dividends ahead of

ordinary shareholders

[iii] Dividend calculations are made on the issued share capital and
not on the authorised share capital

(c) Maximum Ordinary Share Dividend

RM

Net Profit 1,412,000

Add: General Reserve 500,000

1,912,000
Less: Accumulated losses b/fwd 50,000

Preferred dividend 120,000

170,000
Total available for ordinary share dividend 1,742,000

Dividend per share therefore: 1,742,000 $0.58 No OF if share

3,000,000 premium included

3901/2/07/MA 7 CONTINUED ON THE NEXT PAGE

MODEL ANSWER TO QUESTION 2 CONTINUED

(d)
[1] Insufficient cash to pay the maximum dividend.

[2] Directors wish to re-invest profits to finance expansion.

[3] Poor profits in future years may result in reduced dividends

due to falling reserves and thus shareholder dissatisfaction.

W1 RM
Original Net Profit 1,480,000

Less: $
Debenture interest (1,000,000 x 6%) 60,000
Director's loan interest (160,000** x 5%) 8,000
68,000
1,412,000

** Loan balance at 30 September 2005 = 400,000 - (80,000 x 3)

3901/2/07/MA 8
QUESTION 3

Hashim has asked for assistance in the preparation of a cash budget for the six months from
1 July 2007 to 31 December 2007 and has provided the following information:

(1) Trade receivables and trade payables at 30 June 2007 were estimated to be $540,000 and
$320,000 respectively
(2) Hashim expects to sell 800 units in each of July and August, 1,000 units in each of September
and October, 1,200 units in November and 900 units in each of December 2007 and January
2008. The selling price of each unit is $600, which includes a 50% mark-up
(3) 20% of each month’s sales will be for cash and receive a 5% discount. The remainder will be
sold on credit and be paid for in the month following the month of sale
(4) Purchases in each month will be sufficient to meet the next month’s sales. They will be paid for in
the month following the month of purchase and be subject to a 2% settlement discount. No other
inventories will be held
(5) Overheads will be paid for in the month they are incurred
(6) Hashim will purchase fixed assets on 1 July 2007 costing $900,000 and pay for them over a
twelve-month period. Depreciation will be provided for at 20% per annum on cost. All other fixed
assets were sold on 30 June 2007

REQUIRED

(a) Copy the following cash budget format into your answer books and fill in the blanks:

July August September October November December

$ $ $ $ $ $
Receipts
Cash Sales
Trade Receivables

Payments
Trade Payables
Overheads 65,000 70,000 75,000 80,000 70,000 80,000
Fixed Assets nil 300,000 250,000 nil nil 200,000

Surplus/(deficit)

Balance b/fwd 11,000

Balance c/fwd

(12 marks)

(b) Calculate the depreciation charge that would appear in Hashim’s Profit & Loss Account for the six
months ended 31 December 2007.
(2 marks)

Hashim’s accountant has been explaining the difference between profit and cash.

REQUIRED

(c) Give three reasons why a profitable business may suffer from a worsening cash position.
(6 marks)

(Total 20 marks)

3901/2/07/MA 9 OVER
MODEL ANSWER TO QUESTION 3

(a)

July August September October November December

Receipts $ $ $ $ $ $

Cash sales 91,200 91,200 114,000 114,000 136,800 102,600

Receivables 540,000 384,000 384,000 480,000 480,000 576,000

631,200 475,200 498,000 594,000 616,800 678,600

Payments $ $ $ $ $ $

Payables 313,600 313,600 392,000 392,000 470,400 352,800

Overheads 65,000 70,000 75,000 80,000 70,000 80,000

Fixed
Assets Nil 300,000 250,000 Nil Nil 200,000
378,600 683,600 717,000 472,000 540,400 632,800

Surplus/
[deficit] 252,600 -208,400 -219,000 122,000 76,400 45,800

Balance
b/fwd 11,000 263,600 55,200 -163,800 -41,800 34,600

Balance
c/fwd 263,600 55,200 -163,800 -41,800 34,600 80,400

$
(b) 900,000 x 20% x 50% = 90,000

(c) Any three reasonable suggestions

Programme of purchasing fixed assets

Increase in inventory holding
Lengthening of receivables period of credit
Shortening of payables period of credit
Excessive drawings/dividends
Repayment of long term loans

3901/2/07/MA 10 CONTINUED ON THE NEXT PAGE

MODEL ANSWER TO QUESTION 3 CONTINUED

WORKINGS

Sales Cash
Sales Cash Sales Credit
Sales less Sales
Calculation $ 20% 5% 80% Received
July 800 x 600 480,000 96,000 91,200 384,000 540,000 Receivables at 1 July
August 800 x 600 480,000 96,000 91,200 384,000 384,000
September 1,000 x 600 600,000 120,000 114,000 480,000 384,000
October 1,000 x 600 600,000 120,000 114,000 480,000 480,000
November 1,200 x 600 720,000 144,000 136,800 576,000 480,000
December 900 x 600 540,000 108,000 102,600 432,000 576,000

Purchases
Sales for
following Purchase Less
month Cost 2% Paid
July 480,000 320,000 313,600 313,600 Payables at 1 July
August 600,000 400,000 392,000 313,600
September 600,000 400,000 392,000 392,000
October 720,000 480,000 470,400 392,000
November 540,000 360,000 352,800 470,400
December 540,000 360,000 352,800 352,800

3901/2/07/MA 11 OVER
QUESTION 4

On 1 January 2004 Musa, a private company, purchased 20 machines for $60,000 each.
Depreciation was provided using the reducing balance method at a rate of 15% per annum. For parts
of years the annual amount was calculated and then reduced proportionately.

On 30 June 2005 four of the machines were destroyed as the result of an accident. They were
replaced on 1 July 2005 by four new machines each costing $66,000. Musa received $180,000 from
the insurance company on 16 July 2005.

On 1 January 2006 the company decided to change to the straight-line method of calculating
depreciation. It was estimated that all machines would have a useful life of ten years from their date of
purchase and a scrap value of $3,000 each. The effect of the change in depreciation method is not
expected to distort future results to any material degree.

REQUIRED

(a) Show in accordance with IAS 16 the following accounts for each of the three
years ended 31 December 2004, 2005 and 2006:

(i) Machinery Account

(3 marks)
(ii) Provision for Depreciation of Machinery Account
(7 marks)
(iii) Machinery Disposal Account
(4 marks)

All calculations are to be made to the nearest $ where necessary

(b) Define the term depreciation.

(3 marks)

(c) Give three causes of depreciation.

(3 marks)

3901/2/07/MA 12
MODEL ANSWER TO QUESTION 4

(a) Machinery Account

2004 $ 2004 $
01-Jan Bank 1,200,000 31-Dec Bal c/d 1,200,000
2005 2005
01-Jan Bal b/d 1,200,000 30-Jun Disposals 240,000
01-Jul Bank 264,000 31-Dec Bal c/d 1,224,000
1,464,000 1,464,000
2006 2006
01-Jan Bal b/d 1,224,000 31-Dec Bal c/d 1,224,000
2007
01-Jan Bal b/d 1,224,000

Provision for Depreciation of Machinery Account

2004 $ 2004 $
31-Dec Bal c/d 180,000 31-Dec Profit & Loss 180,000
2005 2005
30-Jun Disposals 51,300 01-Jan Bal b/d 180,000
31-Dec Bal c/d 286,200 31-Dec Profit & Loss 157,500
337,500 337,500
2006 2006
31-Dec Bal c/d 391,342 01-Jan Bal b/d 286,200
________ 31-Dec Profit & Loss 105,142
391,342 391,342
2007
01-Jan Bal b/d 391,342

Machinery Disposal Account

2005 $ 2005 $
30-Jun Machine 240,000 30-Jun Prov Depreciation 51,300
16-Jul Bank 180,000
________ 31-Dec Profit & Loss 8,700
240,000 240,000

(b) Depreciation is an estimate of the fall in value of fixed assets over a period of time

(c) Any three reasonable causes e.g. wear & tear, become unsuitable
for needs of the business, become obsolete, depletion, time

3901/2/07/MA 13 CONTINUED ON THE NEXT PAGE

MODEL ANSWER TO QUESTION 4 CONTINUED

Workings:

Depreciation year 2004 1,200,000 x 15% = 180,000

Depreciation year 2005 4 destroyed 16 4 new

machines remaining machines

N.B.V b/fwd 204,000 816,000 264,000

Depreciation at 15% per annum 30,600 122,400 39,600

Restricted to 6 months 15,300 19,800

Total charge 15,300

122,400
19,800
157,500

Depreciation year 2006

N.B.V b/fwd 693,600 244,200

Less: Residual value at $3,000 each machine 48,000 12,000
645,600 232,200

Divided by remaining useful life 8 years 9.5 years

Annual charge 80,700 24,442

Total charge 80,700

24,442
105,142

Depreciation on destroyed machines

Year
2004 240,000 x 15% = 36,000

2005 WDV (240,000 - 36,000) x 15% x 0.5 = 15,300

51,300

3901/2/07/MA 14
QUESTION 5

Karmina, a private company, manufactures various containers and produces 750,000 each year. The
company provided the following information regarding its inventory of manufactured containers at 31
March 2007:

Inventory classification Units in inventory Cost Net realisable value

per unit per unit
$ $

A 6,000 18 24
B 4,000 15 12
D 9,000 21 20
E 1,300 24 27
F 4,500 30 40
G 8,000 11 16
H 2,000 4 6
K 16,000 13 22

REQUIRED

(a) State the main requirement of IAS 2 concerning the valuation of inventory.
(3 marks)

(b) State the bases of cost acceptable under IAS 2.

(4 marks)

(c) On the basis of the above information calculate the value of inventory of Karmina at
31 March 2007 in accordance with IAS 2.
(4 marks)

An interim audit has revealed that the above unit costs excluded any allowance for production
overheads. It was calculated that variable production overheads amounted to $2 per unit and fixed
production overheads were $750,000 per annum. It was further discovered that no account had been
taken of variable selling and distribution costs of $1 per unit.

REQUIRED

(d) Re-calculate the value of inventory taking into account this new information.

(9 marks)

(Total 20 marks)

3901/2/07/MA 15 OVER
MODEL ANSWER TO QUESTION 5

(a)
IAS 2 states that inventory is to be valued at the lower of cost or net realisable value

(b)
Bases of cost acceptable under IAS 2 are:

FIFO
Average cost
Replacement cost
Standard cost

(c)
Value of inventory at 31 March 2007:

Classification Units Cost NRV Value

$ $ $
A1 6,000 18 108,000
B3 4,000 12 48,000
D8 9,000 20 180,000
E2 1,300 24 31,200
F4 4,500 30 135,000
G7 8,000 11 88,000
H9 2,000 4 8,000
K5 16,000 13 208,000
806,200

(d)
Re-calculated value of inventory at 31 March 2007:

[1] The cost per unit will be increased by $2 for variable production overheads
plus $1 for fixed production overheads ($750,000/750,000 units)

[2] The net realisable value per unit will be reduced $1 in respect of variable
selling and distribution costs

Classification Units Cost NRV Value

$ $ $
A1 6,000 21 126,000
B3 4,000 11 44,000
D8 9,000 19 171,000
E2 1,300 26 33,800
F4 4,500 33 148,500
G7 8,000 14 112,000
H9 2,000 5 10,000
K5 16,000 16 256,000
901,300

3901/2/07/MA 16
QUESTION 6

Santo prepared the following incorrect Purchase Ledger Control Account for the month of
March 2007:

Purchase Ledger Control Account

$ $
Balance b/d 400 Balance b/d 82,728
Bank 46,728 Purchases 45,560
Discounts received 1,868 Total of debit balances extracted
Returns outwards 8,000 from Purchase Ledger 3,000
Total of credit balances extracted
from Purchase Ledger 72,172
Unexplained difference 2,120
131,288 131,288

On further investigation Santo discovered that the following errors and omissions had occurred during
March 2007:

(1) The Purchase Day Book had been over added by $2,400
(2) A purchase invoice for $1,484 had been correctly entered in the Purchase Day Book but had
been posted to the payable’s personal account as $2,924
(3) A balance of $640 owing to a payable had been transferred from his account in the Purchase
Ledger to his account in the Sales Ledger. No entry was made in the Purchase Ledger Control
Account
(4) When preparing his list of balances at 31 March 2007, Santo misread one credit balance as
$2,000 instead of $2,200
(5) A payable had agreed to allow $360 in respect of faulty goods. This amount had been debited
to the appropriate Purchase Ledger Account but no entry had been made in Purchase Ledger
Control Account
(6) Santo omitted a debit balance of $40 from his list of Purchase Ledger balances at 31 March
2007

REQUIRED

(a) State the source of each of the following entries in the Purchase Ledger Control Account
prepared by Santo:

(i) Bank
(ii) Discounts received
(iii) Returns outwards
(iv) Purchases
(4 marks)

(b) Calculate the revised totals of both the credit and debit balances extracted from the Purchase
Ledger.
(5 marks)

(c) Prepare the Purchase Ledger Control Account for March 2007, as it would appear after making all
necessary adjustments.
(11 marks)

(Total 20 marks)

3901/2/07/MA 17 OVER
MODEL ANSWER TO QUESTION 6

(a)
Entry Source
Bank Cash Book
Discount Received Cash Book
Returns Outwards Returns Outwards Day Book/Journal
Purchases Purchases Day Book/Journal

(b)

Credit Balances $ Debit Balances $

Original balance 72,172 Original balance 3,000

Add: missed
Less: overposting (2,924 - 1,484) 1,440 balance 40
70,732 3,040
Add: misread balance 200
70,932

(c)
Purchase Ledger Control Account
$ $

Balance b/d 400 Balance b/d 82,728

Bank 46,728 Purchases (45,560 - 2,400) 43,160

Discount received 1,868 Balance c/d 3,040

Returns outwards 8,000

Allowance 360

Contra - Sales Ledger 640

Balance c/d 70,932

128,928 128,928

Balance b/d 3,040 Balance b/d 70,932

3901/2/07/MA 18 © Education Development International plc