Preparing Financial
Statements
(International Stream)
PART 1
THURSDAY 9 DECEMBER 2004
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
answered
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
P
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 trial balance extracted from a sole trader’s records failed to agree, and a suspense account was opened for the difference.
Which of the following errors would require an entry in the suspense account in correcting them?
(1) Discount allowed was mistakenly debited to discount received account.
(2) Cash received from the sale of a non-current asset was correctly entered in the cash book but was debited to the disposal account.
(3) The balance on the rent account was omitted from the trial balance.
(4) Goods taken from inventory by the proprietor had been recorded by crediting Drawings account and debiting Purchases account.
A All four items
B 2 and 3 only
C 2 and 4 only
D 1 and 3 only
2 At 1 July 2003 a limited liability company had an allowance for doubtful debts of $83,000.
During the year ended 30 June 2004 debts totalling $146,000 were written off. At 30 June 2004 it was decided that a doubtful debt allowance of $218,000 was required.
What figure should appear in the company’s income statement for the year ended 30 June 2004 for bad and doubtful debts?
A $155,000
B $364,000
C $281,000
D $11,000
3 The plant and machinery at cost account of a business for the year ended 30 June 2004 was as follows:
Plant and machinery – cost
2003 $ 2003 $
1 July Balance 240,000 30 Sept. Transfer disposal account 60,000
2004 2004
1 Jan Cash – purchase of plant 160,000 30 Jun Balance 340,000 –––––––– –––––––– 400,000 400,000 –––––––– –––––––– The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal.
What should be the depreciation charge for the year ended 30 June 2004?
4 Which of the following correctly describes the imprest system of operating petty cash?
A The petty cash float is replenished by regular periodic transfers of equal amount.
B The petty cash float is replenished by periodic transfers of the actual expenditure in the period.
C All expenses must be supported by a properly authorised voucher.
D Petty cash is operated outside the business double entry accounting system.
5 The following receivables ledger control account prepared by a trainee accountant contains a number of errors:
Receivables ledger control account
2004 $ 2004 $
1 Jan Balance 614,000 31 Jan Credit sales 301,000 31 Jan Cash from credit customers 311,000 Discounts allowed 3,400 Bad debts written off 32,000 Contras against amounts due to Interest charged on overdue accounts 1,600 suppliers in payables ledger. 8,650 Balance 595,650 –––––––– –––––––– 933,650 933,650 –––––––– ––––––––
What should the closing balance on the control account be after the errors in it have been corrected?
A $561,550
B $578,850
C $581,550
D $568,350
6 Which of the following statements about bank reconciliations are correct?
1 A difference between the cash book and the bank statement must be corrected by means of a journal entry. 2 In preparing a bank reconciliation, lodgements recorded before date in the cash book but credited by the bank
after date should reduce an overdrawn balance in the bank statement.
3 Bank charges not yet entered in the cash book should be dealt with by an adjustment in the bank reconciliation. 4 If a cheque received from a customer is dishonoured after date, a credit entry in the cash book is required.
A 2 and 4
B 1 and 4
C 2 and 3
7 If a company changes a material accounting policy, which of the following statements are correct?
1 The notes to the financial statements should disclose the reason for the change and its effect.
2 The effect of the change should be disclosed in the current year’s income statement as an extraordinary item. 3 The opening balance of retained earnings should be adjusted if practicable, as if the change had been in effect
for previous periods.
4 In the financial statements for the current period, comparative figures for the previous period should be adjusted to reflect the change.
A 1, 3 and 4
B 2, 3 and 4
C 1, 2 and 3
D 1, 2 and 4
8 Which of the following most closely describes the meaning of prudence, as the term is defined in the IASB’s Framework for the Preparation and Presentation of Financial Statements?
A The use of a degree of caution in making estimates required under conditions of uncertainty.
B Ensuring that accounting records and financial statements are free from material error.
C Understating assets and gains and overstating liabilities and losses.
D Ensuring that financial statements comply with all accounting standards and legal requirements.
9 Which, if any, of the following statements about accounting concepts and the characteristics of financial information are correct?
1 The concept of substance over form means that the legal form of a transaction must be reflected in financial statements, regardless of the economic substance.
2 The historical cost concept means that only items capable of being measured in monetary terms can be recognised in financial statements.
3 It may sometimes be necessary to exclude information that is relevant and reliable from financial statements because it is too difficult for some users to understand.
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
10 Which of the following statements about goodwill are correct?
(1) Goodwill may only be revalued to a figure in excess of cost if there is relevant and reliable evidence to support the revaluation.
(2) Internally generated goodwill may not be capitalised.
(3) Impairment of goodwill should always be shown separately on the face of a company’s income statement. (4) Purchased goodwill is the difference between the cost of acquiring a company and the fair value of its identifiable
net assets.
A 1 and 3 only
B 2 and 3 only
C 1 and 4 only
D 2 and 4 only
11 In finalising the financial statements of a company for the year ended 30 June 2004, which of the following material matters should be adjusted for?
1 A customer who owed $180,000 at the balance sheet date went bankrupt in July 2004.
2 The sale in August 2004 for $400,000 of some inventory items valued in the balance sheet at $500,000. 3 A factory with a value of $3,000,000 was seriously damaged by a fire in July 2004. The factory was back in
production by August 2004 but its value was reduced to $2,000,000. 4 The company issued 1,000,000 ordinary shares in August 2004.
A All four items
B 1 and 2 only
C 1 and 4 only
D 2 and 3 only
12 Which of the following statements about provisions, contingencies and events after the balance sheet date is/are correct?
1 A company expecting future operating losses should make provision for those losses as soon as it becomes probable that they will be incurred.
2 Details of all adjusting events after the balance sheet date must be disclosed by note in a company’s financial statements.
3 Contingent assets must be recognised if it is probable that they will arise.
4 Contingent liabilities must be treated as actual liabilities and provided for if it is probable that they will arise.
A 4 only
B 2 and 4 only
C 1 and 2 only
13 A business compiling its financial statements for the year to 31 July each year pays rent quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from $60,000 per year to $72,000 per year as from 1 October 2003.
What figure should appear for rent expense in the business income statement for the year ended 31 July 2004?
A $69,000
B $62,000
C $70,000
D $63,000
14 Which of the following journal entries may be accepted as being correct according to their narratives?
Dr Cr $ $
1 Wages account 38,000 Purchases account 49,000
Buildings account 87,000 Labour and materials used in construction of extension to factory
2 Directors’ personal accounts:
A 30,000
B 40,000
Directors’ remuneration 70,000 Directors’ bonuses transferred to their accounts
3 Suspense account 10,000
Sales account 10,000
Correction of error in addition – total of credit side of sales account $10,000 understated
A 1 and 3
B 1 and 2
C 3 only
D 2 and 3
15 X and Y are in partnership, sharing profits in the ratio 2:1 and compiling their financial statements to 30 June each year.
On 1 January 2004 Z joined the partnership, and it was agreed that the profit-sharing arrangement should become X 50%, Y 30% and Z 20%.
The profit for the year ended 30 June 2004 was $540,000, after charging an expense of $30,000 which it was agreed related to the period before 1 January 2004. The profit otherwise accrued evenly over the year.
What is X’s total profit share for the year ended 30 June 2004?
A $305,000
B $312,500
C $315,000
16 G, H and I are in partnership, sharing profits in the ratio 3:1:1, after charging salaries of $20,000 per year each for H and I. On 1 January 2004 they agreed to change the profit-sharing ratio to 3:2:1 and to discontinue H’s salary. I’s salary continued unchanged. The partnership profit for the year ended 30 June 2004 was $380,000, accruing evenly over the year.
How should the $380,000 profit be divided among the partners?
G H I
17 An extract from a cash flow statement prepared by a trainee accountant is shown below. Cash flows from operating activities
$m
Net profit before taxation 28 Adjustments for:
Depreciation ((9) ––– Operating profit before working capital changes 19 Decrease in inventories 13 Increase in receivables ((4) Increase in payables ((8) –––– Cash generated from operations 10
––––
Which of the following criticisms of this extract are correct?
1 Depreciation charges should have been added, not deducted 2 Decrease in inventories should have been deducted, not added. 3 Increase in receivables should have been added, not deducted. 4 Increase in payables should have been added, not deducted
A 2 and 4
B 2 and 3
C 1 and 3
D 1 and 4
18 Which of the following items could appear in a company’s cash flow statement?
1 Proposed dividends 2 Rights issue of shares 3 Bonus issue of shares 4 Repayment of loan
A 1 and 3
B 2 and 4
C 1 and 4
19 Which of these statements about limited liability companies is/are correct?
(1) A company might make a bonus (capitalisation) issue to raise funds for expansion. (2) The profit or loss on the disposal of part of a company’s operations must be
disclosed in the income statement as an extraordinary item if material.
(3) Both realised and unrealised gains and losses may be included in the statement of changes in equity required by IAS 1 Presentation of Financial Statements.
A 1 and 3
B 2 and 3
C 1 and 2
D 3 only
20 Which of the following statements relating to parent companies and subsidiaries are correct?
(1) A parent company could consolidate a company in which it holds less than 50% of the ordinary share capital in certain circumstances.
(2) Goodwill on consolidation must be amortised over a period not exceeding ten years.
(3) Goodwill on consolidation will appear as an item in the parent company’s individual balance sheet.
(4) A subsidiary may be excluded from consolidation if it has not previously been consolidated and the parent’s investment in it is held for resale in the near future.
A 1 and 4
B 2 and 3
C 1 and 2
D 3 and 4
21 A trading company makes all its sales and purchases on credit.
How will the length of its working capital cycle normally be calculated?
A Collection period for receivables plus inventory turnover period plus period of credit taken from suppliers.
B Collection period for receivables plus inventory turnover period minus period of credit taken from suppliers.
C Collection period for receivables plus period of credit taken from suppliers.
22 A company monitors the performance of its credit control department by calculating the receivables collection period as closing trade receivables/annual credit sales x 365.
Which of the following factors could cause the receivables collection period calculated as above to be abnormally high compared to the monthly average level during the year?
1 The company’s trade is seasonal
2 A downturn in the company’s credit sales in the last few months of its accounting period. 3 A large credit sale in the final month of its accounting period
A 1 and 2
B 1 and 3
C 2 and 3
D All three factors
The following summarised financial statements for Q are relevant for questions 23 to 25. (Income tax is ignored)
Q
Income statement for the year ended 31 July 2004 $m
Operating profit 140 Interest payable 11(8)
––––
132
Dividends paid 1(18) ––––
114
––––
Balance sheet as at 31 July 2004
$m
Non-current assets plus net current assets 400 –––– Ordinary share capital 200 Share premium account 130 Revaluation reserve 120
23 What is the company’s return on total capital employed?
A 32/200 = 16%
B 32/400 = 8%
C 40/400 = 10%
24 What is the company’s return on owners’ equity?
A 32/200 = 16%
B 32/300 = 102/3%
C 18/300 = 6%
D 14/300 = 42/3%
25 What is the company’s gearing ratio?
A 300/400 = 75%
B 100/200 = 50%
C 100/400 = 25%
D 300/100 = 300%
Section B – ALL FIVE questions are compulsory and MUST be attempted
1 Bob is a sole trader who does not maintain complete accounting records.
The following information is available to prepare his income statement for the year ended 30 September 2004.
(1) Assets and liabilities Payments in advance for expenses 2,400 2,600 Payables – goods purchased 68,100 77,100
Creditors– expenses 3,900 4,600
(2) Bank summary
2003 $ 2004 $
1 Oct Balance 20,500 30 Sept Purchases 408,100
2004
30 Sept Cash banked 12,900 30 SeptExpenses 89,400
30 SeptReceipts from credit 30 SeptDrawings 30,000
30 Septsales banked 519,400 30 SeptBalance 25,300
–––––––– ––––––––
30 Sept Cash sales 79,000 30 SeptPurchases 14,200
30 SeptExpenses 4,100
(4) Bob has taken goods from inventory for his personal use but has kept no records of their cost. The cost of these goods, when calculated, is to be deducted from purchases in the income statement.
(5) Bob always fixes his selling prices by adding 50% to the buying price of goods. There is no wastage.
Required:
(a) Prepare Bob’s income statement for the year ended 30 September 2004 based on this information.
(8 marks)
(b) Calculate the cost of the goods taken from inventory by Bob during the year. (4 marks)
2 At 1 July 2003 the balance sheet of Cougar, a limited liability company, contained the following items:
$m
Issued share capital – ordinary shares of 50c 100 Share premium account 140 Revaluation reserve 160 Accumulated profits 120 –––– 420 –––– During the year ended 30 June 2004 the following events took place:
(i) A fundamental error in calculating the inventory at 30 June 2003 was discovered. The effect of the error was a reduction in the inventory at that date from $30m to $24m.
(ii) On 1 July 2003 the company issued 200m ordinary shares, ranking equally with those already in issue, at $1.40 per share.
(iii) Some land held by the company as a non-current asset was sold for $100m. The land had originally cost $25m and was revalued to $85m in 2002, giving rise to the revaluation reserve of $60m shown above.
(iv) The company’s draft pre-tax profit for the year ended 30 June 2004 was $40m. In calculating this figure the opening inventory was taken as $30m, and $15m was included as the profit on the sale of the land. (See items (i) and (iii) above).
(v) Dividends totalling 2c per share were paid in the year on the enlarged capital.
Required:
Prepare the company’s statement of changes in equity for the year ended 30 June 2004.
3 On 1 July 1998, Leo, a limited liability company, acquired 70% of the ordinary share capital of Pard for $700,000. The summarised balance sheet of Pard at that date was as follows:
$
Sundry net assets 800,000 –––––––– Share capital
200,000 ordinary shares of $1 each 200,000 Accumulated profits 600,000 –––––––– 800,000 –––––––– The balance sheets of the two companies at 30 June 2004 are shown below.
Leo Pard
$ $
Sundry net assets 2,000,000 1,100,000 Investment in Pard 1,700,000 –
–––––––––– –––––––––– 2,700,000 1,100,000 –––––––––– –––––––––– Share capital
Ordinary shares of $1 each 1,500,000 200,000 Revaluation reserve 1,800,000 – Accumulated profits 1,400,000 900,000
–––––––––– –––––––––– 2,700,000 1,100,000 –––––––––– ––––––––––
Required:
Prepare the consolidated balance sheet for the Leo Group as at 30 June 2004. Goodwill on consolidation was fully written off by 30 June 2003.
4 Lion is a company producing medicinal drugs. At 1 October 2003 the following balances existed in the records: Deferred development expenditure $1,200,000
Project Q. $800,000. This is the balance remaining of expenditure totalling $1,000,000 on a completed project which is being amortised on the straight line basis over 10 years.
Project R. $400,000. This is the accumulated costs to 30 September 2003 of developing a new drug. The project was completed in July 2004 and sales of the drug are expected to begin in January 2005.
Equipment used in research $300,000 (cost $500,000, depreciation to date $200,000) During the year ended 30 September 2004 the following costs were incurred:
Project R Costs to complete $250,000 Project S (a research project) $140,000
Purchase of testing equipment for use in the research department $180,000.
All equipment has an estimated useful life of five years, and a full year’s depreciation is charged in the year of acquisition.
Required:
(a) Calculate the figures to be included in Lion’s income statement for the year ended 30 September 2004 and balance sheet as at that date, and state the headings under which they will appear. (6 marks)
(b) Prepare the disclosure notes required by IAS 38 Intangible Assets. (The note detailing the accounting policy for research and development expenditure is NOT required). (6 marks)
(12 marks)
5 Explain FOUR ways in which the use of historical cost accounting may cause users of financial statements to be misled when prices are rising.
(8 marks)
