Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream) December 2005 Answers
SECTION B
1 Airn
Income statement for the year ended 30 June 2005
$ $
Sales revenue (Working 1) 517,200
Opening inventories 58,900
Purchases (Working 2) 334,600
–––––––– 393,500
less:Closing inventories 63,200
330,300
–––––––– ––––––––
Gross profit 186,900
Wages 74,000
Rent and general expenses (49,200 + 7,400 – 12,500 + 13,000) 57,100
Depreciation: shop fittings (45,000 x 10%) 4,500
motor van (22,000 x 20%) 4,400
Profit on sale of van (4,500 – 4,000) (500) 139,500
–––––––– ––––––––
Net profit $47,400
–––––––– Workings
(1) Calculation of sales
Receivables ledger total account
$ $
Opening balance 44,700 Cash banked 418,200
Payments out of takings 95,100
Sales 517,200
Closing balance 48,600
–––––––– ––––––––
561,900 561,900
–––––––– ––––––––
(2) Calculation of purchases
Payables ledger total account
$ $
Opening balance 19,600
Cash paid for purchases 316,300 Purchases 320,900
Closing balance 24,200
–––––––– ––––––––
340,500 340,500
–––––––– ––––––––
Credit purchases 320,900
Cash purchases 13,700
––––––––
Total purchases 334,600
2 Land – cost/valuation
2004 $000 2004 $000
1 Jan Balance 400 30 Sept Disposal 100
30 June Cash 200
31 Dec Revaluation reserve 300 31 Dec Balance 800
––––– –––––
900 900
––––– –––––
Buildings – cost/valuation
2004 $000 2004 $000
1 Jan Balance 800 30 Sept Disposal 100
30 June Cash 500
31 Dec Revaluation reserve 200 31 Dec Balance 1,400
––––– –––––
1,500 1,500
––––– –––––
Buildings – accumulated depreciation
2004 $000 2004 $000
30 Sept Disposal 20 1 Jan Balance 200
31 Dec Income statement depreciation
31 Dec Revaluation reserve 204 2% x 1,200 24
––––– –––––
224 224
––––– –––––
Land and Buildings – disposal
2004 $000 2004 $000
30 Sept Land 100 30 Sept Depreciation 20
Buildings 100 Cash 500
Income statement – profit 320
––––– –––––
520 520
––––– –––––
3 Goodwill
$ $
Investment in Rye 260,000 Share capital 80% 80,000
Retained earnings 80% 144,000
Goodwill-retained earnings 36,000
–––––––– ––––––––
260,000 260,000
–––––––– ––––––––
Minority interest
$ $
Balance to CBS 72,000 Share capital 20% 20,000
Retained earnings 20% 52,000
–––––––– ––––––––
72,000 72,000
–––––––– ––––––––
Retained earnings
$ $
Cost of control Balances Kye 480,000
80% x $180,000 144,000 Rye 260,000
Goodwill 36,000
Minority interest 20% 52,000
Balance to CBS 508,000
–––––––– ––––––––
740,000 740,000
–––––––– ––––––––
Kye group
Balance sheet as at 30 September 2005
$
Sundry net assets (420, 000 + 360,000) 780,000
––––––––
Share capital 200,000
Retained earnings 508,000
–––––––– 708,000
Minority interest 72,000
–––––––– 780,000 ––––––––
4 (1) The factory was in good condition at 30 June 2005, and thus the fire is a non-adjusting event according to IAS 10 Events after the balance sheet date. Details of the fire and an estimate of the loss suffered should be disclosed by note.
(2) According to IAS 37 Provisions, contingent liabilities and contingent assets, contingencies such as this are to be provided for as soon as it becomes probable that a liability will arise. A provision should therefore be made for the best estimate of the loss that will arise.
(3) This constitutes a ‘probable’ contingent asset under IAS 37, and thus should be disclosed by note, explaining the nature of the contingent asset and, if possible, an estimate of the financial effect.
(4) It is incorrect to include the revaluation gain in the income statement, because the gain is unrealised. It should be credited to revaluation reserve and shown in the balance sheet. The gain should also be shown in the statement of changes in equity (IAS 16 Property, Plant and Equipmentand IAS 1 Presentation of Financial Statements).
5 Four accounting concepts needed for full marks. Examples:
(i) Accruals concept
The accruals concept is that transactions are reflected in the accounting period in which they occur, rather than the period in which any cash involved is received or paid. If this concept is not followed, expenses, income, assets and liabilities are all liable to be misstated and fair presentation will not be achieved.
(ii) Going concern concept
The going concern concept is that financial statements should be prepared on the basis that the business will continue for the foreseeable future. If this concept is not followed, assets and liabilities, and hence income and expenses, will be distorted, except, of course, in the rare case that the business is in fact no longer a going concern.
(iii) Prudence concept
Prudence means that a degree of caution should be exercised in making estimates of figures for the financial statements, so that assets are not overstated and liabilities are not understated. If the prudence concept is not followed, fair presentation is unlikely to be achieved because assets and liabilities may be shown at unrealistic values.
(iv) Neutrality
Neutrality means that information in financial statements should be free from deliberate or systematic bias. If this concept is not followed, information may be presented in a misleading way and a fair presentation will not result.
(v) Substance over form
The legal form of a transaction may not represent the true nature of that transaction. The concept of substance over form is that, whenever legally possible, the substance or reality of a transaction should be accounted for rather than its legal form.
Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream) December 2005 Marking Scheme Section B
1 Heading 1
Sales revenue 2
Opening inventories 1/
2
Purchases 2
Closing inventories 1/
2
Wages 1/
2
Rent and general expenses 2
Depreciation: shop fittings 1
motor van 1
Profit on sale of van 1
––––– 111/
2 max 11
2 Land – cost/valuation 21/
2
Buildings – cost/valuation 21/
2
Buildings – accumulated depreciation 31/
2
Land and buildings – disposal 21/
2
–––––
11
3 Goodwill 11/
2
Minority interest 1
Retained earnings 21/
2
Heading 1
Sundry net assets 1
Share capital 1/
2
Minority interest in B/S 1/
2
Provide for 1
–––––
Must not be in income statement 1
Include as revaluation reserve in balance sheet 1
Include in statement of changes in equity 1
