ACCA preparing financial statement part 1

Alpha’s payables ledger account for Beta shows a balance due to Beta of $4,140.. 2 Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta.. The trial ba

Preparing Financial

Statements

(International Stream)

PART 1

THURSDAY 5 JUNE 2003

QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A ALL 25 questions are compulsory and MUST be

answered

Section B ALL FIVE questions are compulsory and MUST be

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 A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year The rent was increased from $90,000 per year to $120,000 per year as from 1 October 2002

What rent expense and accrual should be included in the company’s financial statements for the year ended

31 January 2003?

Rent expense Accrual

A 100,000 20,000

B 100,000 10,000

C 97,500 10,000

D 97,500 20,000

2 Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950 Alpha’s payables ledger account for Beta shows a balance due to Beta of $4,140

Investigation reveals the following:

(1) Cash paid to Beta $4,080 has not been allowed for by Beta

(2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta

(3) Goods returned by Alpha $380 have not been recorded by Beta

What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?

A $9,310

B $390

C $310

D $1,070

3 An inexperienced bookkeeper has drawn up the following receivables ledger control account:

Receivables Ledger Control Account

Opening balance 180,000 Credit sales 190,000 Cash from credit customers 228,000 Bad debts written off 1,500 Sales returns 8,000 Contras against payables 2,400 Cash refunds to credit customers 3,300 Closing balance (balancing figure) 229,600 Discount allowed 4,200

423,500 423,500

What should the closing balance be after correcting the errors made in preparing the account?

A $130,600

B $129,200

C $142,400

D $214,600

4 At 31 March 2002 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil bill for $3,600

At 31 March 2003 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of $3,200 Payments made for heating oil during the year ended 31 March 2003 totalled $34,600

Based on these figures, what amount should appear in the company’s income statement for heating oil for the year?

A $23,900

B $36,100

C $45,300

D $33,100

5 At 31 December 2002 a company’s receivables totalled $400,000 and an allowance for doubtful debts of $50,000 had been brought forward from the year ended 31 December 2001

It was decided to write off debts totalling $38,000 and to adjust the allowance for doubtful debts to 10% of the receivables

6 The plant account of a company is shown below:

Plant – Cost

1 January Balance (plant purchased 1999) 380,000 1 October Transfer disposal

1 April Cash – plant purchased 51,000 account – cost of plant sold 30,000

31 December Balance 401,000

431,000 431,000

The company’s policy is to charge depreciation on plant at 20% per year on the straight line basis, with proportionate depreciation in years of purchase and sale

What should the company’s plant depreciation charge be for the year ended 31 December 2002?

A $82,150

B $79,150

C $77,050

D $74,050

7 In preparing a company’s bank reconciliation statement at March 2003, the following items are causing the difference between the cash book balance and the bank statement balance:

(1) Bank charges $380

(2) Error by bank $1,000 (cheque incorrectly debited to the account)

(3) Lodgements not credited $4,580

(4) Outstanding cheques $1,475

(5) Direct debit $350

(6) Cheque paid in by the company and dishonoured $400

Which of these items will require an entry in the cash book?

A 2, 4 and 6

B 1, 5 and 6

C 3 and 4

D 3 and 5

8 The closing inventory at cost of a company at 31 January 2003 amounted to $284,700.

The following items were included at cost in the total:

(1) 400 coats, which had cost $80 each and normally sold for $150 each Owing to a defect in manufacture, they were all sold after the balance sheet date at 50% of their normal price Selling expenses amounted to 5% of the proceeds

(2) 800 skirts, which had cost $20 each These too were found to be defective Remedial work in February 2003 cost $5 per skirt, and selling expenses for the batch totalled $800 They were sold for $28 each

What should the inventory value be according to IAS 2 Inventories after considering the above items?

A $281,200

B $282,800

C $329,200

D None of these

9 A company values its inventory using the first in, first out (FIFO) method At 1 May 2002 the company had 700 engines in inventory, valued at $190 each

During the year ended 30 April 2003 the following transactions took place:

2002

1 July Purchased 500 engines at $220 each

1 November Sold 400 engines for $160,000

2003

1 February Purchased 300 engines at $230 each

15 April Sold 250 engines for $125,000

What is the value of the company’s closing inventory of engines at 30 April 2003?

A $188,500

B $195,500

C $166,000

D None of these figures

10 Which of the following statements about the valuation of inventory are correct, according to IAS2 Inventories?

(1) Inventory items are normally to be valued at the higher of cost and net realisable value

(2) The cost of goods manufactured by an enterprise will include materials and labour only Overhead costs cannot

be included

(3) If LIFO (last in, first out) is used to value inventory, additional disclosures must be made in the financial statements

(4) Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable approximation

to actual cost

A 1, 3 and 4 only

B 1 and 2 only

C 3 only

D 3 and 4 only

The following information is relevant for questions 11 and 12

When Q’s trial balance failed to agree, a suspense account was opened for the difference The trial balance totals were: Debit $864,390

Credit $860,930

The company does not have control accounts for its receivables and payables ledgers

The following errors were found:

(1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capital account as $330,000

(2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant asset account

(3) The petty cash book balance $500 had been omitted from the trial balance

(4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as

$87,400

(5) A contra between the receivables ledger and the payables ledger for $1,200 which should have been credited in the receivables ledger and debited in the payables ledger was actually debited in the receivables ledger and credited in the payables ledger

11 Which of these errors will require an entry to the suspense account to correct them?

A All five items

B 3 and 5 only

C 2, 4 and 5 only

D 1, 2, 3 and 4 only

12 What will the balance on the suspense account be after making the necessary entries to correct the errors affecting the suspense account?

A $2,440 Debit

B $15,560 Credit

C $13,640 Debit

D $3,440 Debit

13 Which of the following statements about research and development expenditure are correct according to IAS38 Intangible Assets?

(1) If certain conditions are met, an enterprise may decide to capitalise development expenditure

(2) Research expenditure, other than capital expenditure on research facilities, must be written off as incurred (3) Capitalised development expenditure must be amortised over a period not exceeding 5 years

(4) Capitalised development expenditure must be disclosed in the balance sheet under intangible non-current assets

A 1, 2 and 4 only

B 1 and 3 only

C 2 and 4 only

D 3 and 4 only

14 Listed below are some comments on accounting concepts.

(1) In achieving a balance between relevance and reliability, the most important consideration is satisfying as far as possible the economic decision-making needs of users

(2) Materiality means that only items having a physical existence may be recognised as assets

(3) The substance over form convention means that the legal form of a transaction must always be shown in financial statements, even if this differs from the commercial effect

Which, if any, of these comments is correct, according to the IASB’s Framework for the Preparation and Presentation of Financial Statements?

A 1 only

B 2 only

C 3 only

D None of them

15 Which of the following explanations of the prudence concept most closely follows that in the IASB’s Framework for the Preparation and Presentation of Financial Statements?

A The application of a degree of caution in exercising judgement under conditions of uncertainty

B Revenue and profits are not recognised until realised, and provision is made for all known liabilities

C All legislation and accounting standards have been complied with

D Understatement of assets or gains and overstatement of liabilities or losses

16 In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset values and profit?

A Asset values and profit both understated

B Asset values and profit both overstated

C Asset values understated and profit overstated

D Asset values overstated and profit understated

17 At 31 December 2002 the following matters require inclusion in a company’s financial statements:

(1) On 1 January 2002 the company made a loan of $12,000 to an employee, repayable on 30 April 2003, charging interest at 2 per cent per year On the due date she repaid the loan and paid the whole of the interest due on the loan to that date

(2) The company has paid insurance $9,000 in 2002, covering the year ending 31 August 2003

(3) In January 2003 the company received rent from a tenant $4,000 covering the six months to 31 December 2002

For these items, what total figures should be included in the company’s balance sheet at 31 December 2002?

Currents assets Current liabilities

A 22,000 240

B 22,240 nil

C 10,240 nil

D 16,240 6,000

18 At 31 December 2001 the capital structure of a company was as follows:

$ Ordinary share capital

100,000 shares of 50c each 50,000

Share premium account 180,000

During 2002 the company made a bonus issue of 1 share for every 2 held, using the share premium account for the purpose, and later issued for cash another 60,000 shares at 80c per share

What is the company’s capital structure at 31 December 2002?

Ordinary share capital Share premium account

A 130,000 173,000

B 105,000 173,000

C 130,000 137,000

D 105,000 137,000

19 Listed below are some items that may appear in a company’s income statement, either separately disclosed or

included in another figure

(1) Profit or loss on discontinuing operations

(2) Profit or loss on the sale of part of the enterprise

(3) Extraordinary items

According to International Accounting Standards, which of these items must always be shown separately if

material to avoid misleading users?

A All three items

B 1 and 2 only

C 1 and 3 only

D 2 and 3 only

20 In the course of preparing a company’s cash flow statement, the following figures are to be included in the calculation

of net cash from operating activities

$ Depreciation charges 980,000

Profit on sale of non-current assets 40,000

Increase in inventories 130,000

Decrease in receivables 100,000

Increase in payables 80,000

What will the net effect of these items be in the cash flow statement?

$

A Addition to operating profit 890,000

B Subtraction from operating profit 890,000

C Addition to operating profit 1,070,000

D Addition to operating profit 990,000

The following information is relevant for questions 21 to 23

On 1 January 2000 Alpha purchased 80,000 ordinary $1 shares in Beta for $180,000 At that date Beta’s retained profits amounted to $90,000 and the fair values of Beta’s assets at acquisition were equal to their book values

Three years later, on 31 December 2002, the balance sheets of the two companies were:

Alpha Beta

Sundry net assets 230,000 260,000

Shares in Beta 180,000 –

———— ————

410,000 260,000

———— ————

Share capital

Ordinary shares of $1 each 200,000 100,000

Accumulated profits 210,000 160,000

———— ————

410,000 260,000

———— ————

The share capital of Beta has remained unchanged since 1 January 2000

Goodwill on consolidation is being amortised over four years

21 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for goodwill?

A $25,000

22 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for minority interest?

A $52,000

B $20,000

C $34,000

D $32,000

23 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for accumulated profits?

A $266,000

B $338,000

C $370,000

D $245,000

24 A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December 2001 to 27%

in the year ended 31 December 2002

Which of the following events is most likely to have caused the increase?

A An increase in sales volume

B A purchase in December 2001 mistakenly being recorded as happening in January 2002

C Overstatement of the closing inventory at 31 December 2001

D Understatement of the closing inventory at 31 December 2001

25 A company’s capital structure at December 2002 is as follows:

$m Ordinary share capital 380

Accumulated profits 120

——

500 8% Loan notes 100

——

600

——

The company’s income statement shows the following for the year ended 31 December 2002:

$m Operating profit 40

Interest paid 8

——

32 Taxation 10

——

22 Dividends paid 10

——

Retained profit for year 12

——

What is the return on equity shareholders’ capital employed, using closing capital figures?

A 4·4%

B 2·4%

C 3·7%

D 5·8%

(50 marks)

Section B – ALL FIVE questions are compulsory and MUST be attempted

1 Alamute and Brador have been in partnership for several years, compiling their financial statements for the year ending 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5% per year

Extracts from their trial balance at 31 March 2003 are given below:

Reference $

to notes Capital accounts: Alamute 50,000

Brador 50,000 Current accounts: Alamute 3,800 Credit

Brador 2,600 Debit Drawings: Alamute 48,400

Brador 36,900 Office equipment: cost 1 48,300

accumulated depreciation, 1 April 2002 12,800 Inventory, 1 April 2002 2 15,600

Trade receivables 3 68,400

Allowance for doubtful debts, 1 April 2002 3 3,800

Sales revenue 448,700

Rent paid 4 30,000

Sundry expenses 39,400

Notes:

(1) Office equipment should be depreciated at 20% per year on the reducing balance basis

(2) Closing inventory amounted to $21,400

(3) Debts of $2,400 are to be written off, and the allowance for doubtful debts is to be adjusted to 5% of trade receivables

(4) Rent paid $30,000 is the amount for the nine months to 31 December 2002 From that date the rent was increased by 10%

(5) Insurance paid in advance amounted to $1,500

Required

(a) Prepare the partnership’s income statement and a statement showing the division of profit among the partners for the year ended 31 March 2003. (9 marks)

(b) Write up the partners’ current accounts for the year ended 31 March 2003. (3 marks)