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PRACTICE ANSWER BANK

1 C A sole trader also invests capital in their business.

2 C The board of directors are responsible for the preparation of financial statements. Even
though the financial statements may be physically prepared by the finance department,
the board of directors still has responsibility for them. The auditors are not responsible for
the financial statements; they are responsible for the annual audit and producing an audit
report.
3 B A company has a separate legal identity to its owners. Unless the partners have formed a
limited liability partnership, the partners are jointly liable for the debts of the business.
4 D 1 and 3 are advantages of trading as a limited liability company. Publishing annual
financial statements and the requirement for an audit are disadvantages of trading as a
limited liability company.
5 B A director's main aim should be to create wealth for the shareholders of the company. The
shareholders are the owners of the company and the directors are managing the affairs of
the company on their behalf. This can lead to a conflict of interest and short-termism
where the directors put their own interests (ie short-term profits and earning bonuses) A
ahead of the interests of the shareholders. Every company should consider its contribution
to society; this is known as corporate social responsibility. However, this is not the main
C
aim of a director. C

x
6 B The IASB is responsible for developing and issuing IFRSs. An objective of the IFRS A

Bo
Foundation is to take account of the financial reporting needs of small and medium-sized
entities. The IFRS Advisory Council provides a forum for the IASB to consult with the
national accounting standard setters, academics and other interested parties.
7 C The IASB is responsible for developing and issuing IFRSs.
G
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8 C The fourth enhancing qualitative characteristic is verifiability.
9 D Information is material if its omission or misstatement could affect the decisions of the O
users of accounts. The substance over form convention means that transactions are
B
lo

accounted for in accordance with their substance and not merely their legal form.
A
G

10 D The fundamental qualitative characteristics are relevance and faithful representation.

11 B The exact amount of expenditure is reimbursed at intervals to maintain a fixed float. L
A

12 B Under the imprest system, a reimbursement is made of the amount of the vouchers (or
payments made) for the period.
B
C

13 B A remittance advice gives details of the invoices covered by the payment.

O
AC

14 A Supplier statements are statements sent out by suppliers listing all the transactions on a
customer's account. Petty cash vouchers are vouchers issued in the petty cash imprest
system for payments made from petty cash.
X
15 C Credit notes received from suppliers are recorded in the purchase returns day book. .
16 A The business entity concept is also known as the separate entity concept. C
17 B A is incorrect as the debits and credits don't equal each other, C is incorrect as the debits O
and credits are the wrong way round and D is incorrect as the debits and credits are the
wrong way round and the credit sale has been ignored. M
18 C You are recording the transaction in Cheddar's books – Cheddar is the seller, so the double
entry is Dr receivables, Cr sales $500.
19 A A credit increases a liability, increases income or decreases an asset.
20 B The account has a debit balance.
21 A A debit balance brought down on the cash T-account represents an asset.
22 A Balance carried down from the previous period shows debits exceed credits and so it is a
debit balance brought down for the new period.

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23 C Balance carried down from the previous period shows credits exceed debits and so it is a
credit balance brought down for the new period.
24 B
TRADE RECEIVABLES ACCOUNT
$ $
Balance b/d 100,750 Cash at bank 250,225
Sales 325,010 Balance c/d 175,535
425,760 425,760

25 B False. Sales tax for a registered trader is removed from income and expenses.
26 A Sales tax can only be charged and reclaimed by businesses if they are registered for sales
tax. If a business is not registered for sales tax, the sales tax incurred on purchases will be
charged to the statement of profit or loss as an expense.
27 A
A SALES TAX CONTROL ACCOUNT
C Payables (6,750 – 1,250)
$
5,500 Receivables
$
8,000
C Balance c/d (owed to tax 2,500

x
authorities)
A 8,000 8,000

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Balance b/d 2,550

G 28 D The entries required are DR Receivables

CR Sales
$1,056
$880
L
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CR Sales tax $176

O Michael is registered for sales tax, so he can charge sales tax and recover the balance
from the tax authorities.
B
lo

29 D Carriage outwards is a selling expense.

A
G

30 C (450 @ 80) + (450 @ 69) = $67,050

L A is incorrect, as it does not include the inventory on hand at the beginning of the period.
B is incorrect, as it uses the average cost method. D is incorrect, as it uses the LIFO
A

method.
B
C

31 B According to FIFO, the first items of inventory to be sold would be included as expenses in

O the statement of profit or loss at the cost of the first items purchased. This cost will be
AC

lower than the average over the whole period (because of rising prices), so the expense in
X the statement of profit or loss will be lower than average and profit will be higher.

. Likewise closing inventory value: as prices are rising, the items still left in inventory will be
valued at the higher, later price, which means that inventory value will be higher than the
C average value in the period.

O 32 D 2 @ $3.00 + 10 @ $3.50 = $41.00

33 C
M Units Unit cost Total Average
$ $ $
Opening inventory 30 2 60
5 August purchase 50 2.40 120
80 180 2.25
10 August issue (40) 2.25 (90)
40 90
18 August purchase 60 2.50 150
100 240 2.40
23 August issue (25) 2.40 (60)
75 180

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34 A
35 B 1,000,000/40 years = 25,000; 1,000,000 – (800,000 – (800,000 × 2% × 10 years))
= 360,000
36 A If disposal proceeds were $15,000 and profit on disposal is $5,000, then carrying value
must be $10,000, the difference between the asset register figure and the non-current
asset account in the nominal ledger.
37 D Non-current assets will be understated, leading to a lower net assets position.
Additionally, too much will have been charged in the statement of profit or loss, resulting
in an understatement of profit.
38 C Repair and maintenance of machinery is revenue expenditure. The cost of installing new
machinery can be added to the cost of the machine and capitalised, therefore it is capital
expenditure. An extension to a factory building is capital expenditure, as it enhances the
existing factory.
39 C
Charge for
A
year C
Trucks at 1 Jan $'000 $'000
Cost (240 – 60) 180,000 C

x
Acc dep'n (115 – (60 – 20)) 75,000
A

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Carrying value 105,000
Dep'n charge @ 20% 21,000 21,000
Purchased truck
Dep'n charge @ 20% 160 @ 20% 32,000 32,000
G
L
l 53,000
ba
40 B There is no requirement that development expenditure should be amortised over a period O
not exceeding five years.
B
lo

41 D The development expenditure should be capitalised and amortised over 25 years, giving
the statement of financial position balance as 500,000 – 500,000/25 = $480,000, and A
G

$20,000 charged to the statement of profit or loss.

The research expenditure should be charged to the statement of profit or loss in full,
L
A

therefore the total charge to the statement of profit or loss is $420,000.

42 D Amortisation for the year = $1,000,000* × 5% = $50,000.
B
C

* Cost = carrying value ($950,000) + accumulated amortisation ($50,000)

O
AC

43 B The prepayment will add $2,100 to profit and net assets.

The accrual will reduce profit and net assets by $800.
X
The net effect will be to increase both by $1,300.
.
44 A (120,000 × 7/12) + (144,000 × 5/12) = 130,000; rent is payable in advance, C
therefore the rent for October has been prepaid at 30 September 20X8: 144,000 × 1/12
= 12,000
O
45 B RENT RECEIVABLE M
$ $
Balance b/d 53,000 Balance b/d 71,750
Statement of profit or loss 1,189,750 Cash received 1,203,000
Balance c/d 78,000 Balance c/d 46,000
1,320,750 1,320,750

46 A Prepaid expenses are not included in the statement of profit or loss for the current period,
as they do not relate to that period. The expenses are instead shown in the period to
which they relate, in accordance with the accruals concept.

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47 B 37,000 + ((517,000 – 37,000) × 5%) – 39,000) = 22,000. New allowance required

is $24,000, so the allowance is reduced by $15,000.
48 D Neither statement is true.
An aged receivables analysis is a report used to help the business monitor its receivables
balances and identify which receivables balances are overdue. A credit limit is the
maximum amount a customer can owe to a business at any one time. If an order is placed
by a customer that would take the customer's account over its credit limit, the order will
not be filled until a payment is received to reduce the balance on the customer's account.
49 B
$
Receivables balance before adjustments 456,330.0
Less irrecoverable debts written off (780.0)
455,550.0
Receivables allowance $455,550 @ 5% (22,777.5)
A Receivables balance for statement of financial position 432,772.5

C 50 B
C Irrecoverable debts expense
Increase in allowance (22,777.5 – 15,255)
$
7,522.5

x
A Add irrecoverable debts written off 780.0

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8,302.5
Less cash recovered from previously written off debt (450.0)
Irrecoverable debt expense 7,852.5
G 51 B No disclosure or provision is required.
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52 B Booker should disclose a contingent liability in the financial statements because the
O amount cannot be reliably estimated. If the amount could be reliably estimated, then a
provision would be recognised.
B
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53 D As the likelihood of paying any cash to Space Co for the claim is remote, there is nothing
A to disclose in the accounts regarding this claim. A provision should be created for the
G

warranties, as the conditions for recognising a provision are met – present obligation,
L probably outflow of cash, reliable estimate of amount.
A

54 C The 20X3 provision is calculated using expected cost:

B (80%  0) + (12%  545,000) + (8%  800,000) = $129,400

C

The increase in the provision is therefore 129,400 – 99,750 = $29,650. This is a debit
O
AC

to the statement of profit or loss.

X 55 B PAYABLES LEDGER CONTROL ACCOUNT

. Cash paid
$
222,340 Opening balance
$
308,600
C Discounts received 4,900 Credit purchases 337,200
Contras against credit balance in 1,400 Interest payable on overdue 3,600
O receivable ledger amounts
Closing balance 420,760
M 649,400 649,400

56 B Because the credit note was not entered in the sales day book, it would not be included in
the total that is entered into the receivables control account. Therefore the total of the list
of balances would be $150 less than the receivables control account balance. The invoice
entered incorrectly in the sales day book would cause both the list of balances and the
receivables control account to be overstated by $90.
57 C Revenue for the sale should be recorded net of the settlement discounts allowed, if the
customer is expected to take advantage of the discount.
58 C (12,160 + 1,800 – 150) – (14,560) = 750

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59 D $
List price 200,000
Trade discount (20,000)
180,000
Settlement discount 5%* (9,000)
171,000
*deducted as customer is expected to take up the settlement discount

60 B –3,860 – 9,160 + 16,690 = 3,670. Remember that the opening bank balance is
overdrawn.
61 B Items 2 to 4 are adjustments to the bank balance per the statement.
62 B Outstanding lodgements and unpresented cheques are timing differences.
63 C The ledger balance of $540 credit should be adjusted by a credit entry of $28 for bank
charges. Therefore the corrected ledger balance is $568 credit. The bank statement
balance is then $(568) + $620 cheques not yet on bank statement, ie $52 cash at bank. A
64 B This is an error of commission, where a credit entry has been incorrectly recorded as a
debit entry.
C
65 A SUSPENSE ACCOUNT C

x
$ $ A

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Balance b/d 210 Gas bill2 (420 – 240) 180
Interest1 70 Sales invoice3 (2  50) 100
280 280
1
error of omission
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2
transposition error
3
error of commission O
B
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66 B To correct the bank interest paid and bank interest received accounts, a debit of $88 is
required for each account. The corresponding credit of $176 goes to the suspense
A
G

account.
67 (a) The effects are as follows. L
A

(1) Motor expenses accrual: $520 additional expense, so reduction in profit.

(2) Rent prepayment: $450 reduction in expense, so increase in profit.
B
C

(3) Depreciation: total charge $13,146 additional expense, so reduction in profit.

O
AC

Total effect on net profit = –520 + 450 – 13,146

= 13,216 reduction
X
Working: Depreciation charge .
Motor vehicles: $45,730 × 20% = $9,146
Fixtures and fittings: 10% × $(42,200 – 2,200) = $4,000
C
Total: $4,000 + $9,146 = $13,146 O
(b) B The inventory account is only changed at the end of the accounting period.
M

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(c) MARCIA BLANE

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2
Carrying
Cost Depreciation value
$ $ $
Non-current assets
Fixtures and fittings 42,200 6,200 36,000
Motor vehicles 45,730 24,438 21,292
87,930 30,638 57,292
Current assets
Inventory 20,250
Receivables 41,000
Prepayments 450
Cash in hand 2,802
64,502
A 121,794
Capital
C Balance b/f 26,100

C Profit for year (balancing figure) 68,959

95,059

x
A Less drawings (27,585 + 800) 28,385

Bo
66,674
Current liabilities
Payables 34,500
G Accruals 520
L Bank overdraft
l 20,100
ba
55,120
O 121,794

B
lo

Proof of profit for the year figure

487,550
A Revenue
G

Cost of sales (18,460 + 379,590 – 800 – 20,250) 377,000

L Discounts received
110,550
1,200
Expenses
A

(6,100 + 3,250 +10,750 +9,475 + 520 – 450 + 13,146) 42,791

B Profit for the year 68,959
C

O 68 A Remember the business equation: P = I + D – Ci

AC

X 69 D (318,000 + 412,000 – 214,000) – (612,000 × 75%) = 57,000

70 D
. Total Ordinary Sales to
sales sales Harry
C $ $ $
O Cost of sales
Mark-up:
342,000 334,700 7,300

M 10% on cost
20% on sales (= 25% on cost)
730
83,675
–
83,675
730

Sales 426,405 418,375 8,030

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71 B
$ $
Non-current assets 51,300
Inventory 7,770
Receivables 5,565
64,635
Less
Payables 3,994
Overdraft 3,537
Rent accrual 500
(8,031)
Closing capital 56,604

72 B Purchases were payments made plus increase in suppliers' balances

ie $141,324 + ($16,812 – $15,264) = $142,872
$
A
Thus cost of sales Opening inventory 6,359
Purchases 142,872 C
Less closing inventory
149,231
(4,919) C

x
144,312
A

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73 B Dividends appear in the statement of changes in equity.
74 D
75 C Dividends are not included the statement of changes in equity until they are declared.
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76 B Number of shares = 45,000/0.5 = 90,000
Number of bonus shares issued = 90,000/3 × 2 = 60,000 O
B
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Nominal value of bonus shares issued = 60,000 × 0.5 = 30,000

Therefore: Share capital = 45 + 30 = $75,000 A
G

Share premium = 60 – 30 = $30,000

L
77 A IAS 1 does require that some items must appear on the face of the statement of financial
A

position; however, it allows companies to choose whether they present a combined

statement of profit or loss and other comprehensive income or separate statement of profit
B
C

or loss and statement of other comprehensive income.

O
AC

78 C Gains on property revaluations are shown in the 'other comprehensive income' section of
the statement of profit or loss and other comprehensive income. They are also shown in
the statement of changes in equity as the movement on the revaluation surplus. Dividends
X
paid and a bonus issue of shares are shown in the statement of changes in equity. .
79 B There is no requirement in IAS 16 for the directors to disclose how certain they are that
the valuation won't change in the next five years.
C
80 (a) $139,948 O
(b) $49,260 M
(c) $49,750
(d) A
The overdraft is a current liability and must not be deducted from any cash balances; the
bank loan is a non-current liability as it is not due for payment for more than 12 months
from the reporting date.
(e) A
'Profit' on revaluation must be credited to a revaluation surplus, not to retained earnings
for the year.

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(f) $44,260
$
Profit before tax 49,260
Tax (5,000)
Retained earnings for the year 44,260

Remember that dividends and transfers to reserves are part of the statement of changes in
equity.
81 B Non-adjusting events.
82 A The fraud is an adjusting event, as it took place during the year to 30 June, although it
was not discovered until after the year end. The loan stock issue is a non-adjusting event
but due to its materiality should be disclosed in the notes.
83 A 1 is an adjusting event, as it provides evidence of a condition that existed at the reporting
date – ie that the customer's debt was irrecoverable. The debt should be written off, and
A therefore net profit is reduced by $150,000. (2) is non-adjusting, as it does not affect the
situation at the reporting date and therefore has no impact on profit at the reporting date.
C This event should simply be disclosed in the financial statements.

C 84 B Depreciation charges should have been added, not deducted.

x
A 85

Bo
(a) FLAIL CO
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X1

G Cash flows from operating activities

$ $

L
l
Cash received from customers ($29,400 – $900) 28,500
ba
Cash paid to suppliers ($19,500 – $2,550) (16,950)
O Cash paid to and on behalf of employees ($10,500 – $750)
Interest paid
(9,750)
(2,100)
B
lo

Interest received 75
Net cash flows from operating activities (225)
A Investing activities
G

Purchase of non-current assets (21,000)

L $ $
Financing activities
A

Issue of shares 35,000

B Proceeds from medium-term loan 21,000
C

Repayment of medium-term loan (5,250)

O Net cash flows from financing activities 50,750
AC

Net increase in cash and cash equivalents 29,525

X Cash and cash equivalents at 1 January 20X1 –
Cash and cash equivalents at 31 December 20X1 29,525
.
Note that the dividend is only proposed and so there is no related cash flow in 20X1.
C (b) D Items 1 and 3 do not involve movements of cash.
O 86 B An increase in a bank loan will be classified under financing cash flows. A loss on the sale
M of a non-current asset will be added back to net profit to calculate operating cash flows
using the indirect method.
87 B Both investments are subsidiaries. In 1, Barracuda has more than 50% of the voting
rights, as it owns more than 50% of the ordinary shares. In 2, Barracuda has the ability to
control Major, as it can appoint more than half the board of directors of Major Inc.
88 D None of the statements are correct. A 50% investment will usually mean that an
investment is a subsidiary, however, if it can be shown that the investor does not have
control over the investee company, it will not be classified as a subsidiary. Consolidated
accounts are prepared to represent the substance and not the legal form of the
relationship between parent and subsidiary. An associate is an entity in which an investor
has significant influence.

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89 C Delta's share of profit after tax should be included as a single amount in the consolidated
statement of profit or loss.
90 C Current assets (250 + 100 – 6)
91 C
$'000
Consideration transferred 300
Fair value of non-controlling interest at acquisition 100
400
Less net assets acquired (200 + 36) (236)
164
92 C
$'000
Consideration transferred 500
Fair value of non-controlling interest 125
625
Less net assets acquired (450)
175
A
93 B
C
$'000 C

x
Vaynor Co 90
A

Bo
Weeton Co (40 + 10) 50
Yarlet Co (70 – 30) 40
180

94 B
G
L
l $
ba
Spring 200,000
Summer 160,000 O
360,000
B
lo

Less intra-group sales (16,000)

Add provision for unrealised profit (16,000 – 10,000) 6,000
A
G

350,000
95 D Reduce revenue by intra-group sales of $40,000. L
A

96 A Reduce consolidated profit by provision for unrealised profit.

25
B
C

20,000 × = $4,000
125
O
AC

97 C
Sanderstead
Co
Croydon
Co Adj Consol
X
$ $ $ $ .
Revenue
Cost of sales
600,000
(400,000)
300,000
(200,000)
(20,000)
20,000
880,000
(580,000) C
Gross profit 300,000
O
98 A Example: suppose the entity purchases inventory worth $300,000:
M
Current ratio Quick ratio
1,500 400
Before = 1.5 = 0.4
1,000 1,000
1,800 400
After = 1.4 = 0.3
1,300 1,300

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99 B Calculate the ratios relating to the new product:

120
Operating profit margin: = 7.5% (less than existing margin of 10%)
1,600
120
ROCE: = 24% (greater than existing ROCE of 20%)
500
Existing ROCE is 10% × 2 = 20%.
100
(a) JESSICA GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 DECEMBER 20X7
$m
Revenue (7,500 + 3,000 – 5) 10,495
Cost of sales (4,000 + 1,600 – 5 + 1) 5,596
A Gross profit
Operating expenses (2,000 + 500)
4,899
2,500
C Profit before taxation 2,399
Income taxes (300 + 120) 420
C Profit for the year 1,979

x
A

Bo
Intra-group trading
Selling price 5
Cost 3
G Profit
Unrealised 50%  2m = 1m
2

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NCI share = 25%  1m = 0.25m
O
(b) Profit attributable to:
B
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$m
Owners of the parent (bal. fig.) 1,484.5
A
G

Non-controlling interest ((25%  1,979) – 0.25) 494.5

L 1,979.0

(c) B Current ratio = current assets/current liabilities. If the ratio is less than 1, it could
A

mean that the company is unable to pay its debts on time.

B
C

Therefore 1 is incorrect, because the ratio has gone up and is now above 1, it

O means the company is more likely to be able to pay its debts on time compared
AC

with before when the ratio was less than 1. 2 is correct, as an increase in revenue
X caused by an increase in price (as opposed to a change in volume) will lead to a
larger receivables balance, hence a larger current assets balance compared to
. current liabilities. 3 is incorrect, as a higher supplier costs will result in a larger
current liabilities balance, while current assets remain the same.
C (d) A Control is the main factor to be taken into account when considering a parent-
O subsidiary relationship. Control is deemed to exist if an investor owns more than
50% of the ordinary shares. Significant influence is used to decide whether an
M investment is an associate.

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