03 answers f3-ffa lrp 2014-15

7/23/2019 03 Answers f3-Ffa Lrp 2014-15

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ANSWERS

7/23/2019 03 Answers f3-Ffa Lrp 2014-15


FA/FFA : F INANCIAL ACCOUNTING

66 KAPLAN PUBLISHING

MULTIPLE CHOICE QUESTIONS

REGULATORY FRAMEWORK

1 A

The correct answer is A. The IASB Framework states: 'Prudence is the inclusion of a degree of

caution in the exercise of the judgements needed in making the estimates required under

conditions of uncertainty, such that assets or income are not over-stated and liabilities and

expenses are not understated'.

2 D

The historical cost convention is unreliable when the rate of inflation is high, and can be very

misleading when non-current assets are held for a long time, such that their historical cost is

far lower than their current value. When the prices of land and buildings rise over time, the

historical cost convention is probably inappropriate for the valuation of land and buildings that

an enterprise has owned for many years.

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LECTURER RESOURCE PACK – ANSWERS

KAPLAN PUBLISHING 67

DOUBLE ENTRY BOOKKEEPING

3 A

4 B

5 D

6 A

7 B

Bank account

$ $

Customer receipt 500 Balance b/d 1,750

Petty cash 1,300 Drawings 225

Balance c/d 805 Purchases 630

––––– –––––

2,605 2,605

––––– –––––

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SALES TAX

8 D

Price of goods $750.00

Less: 5% trade discount ($37.50)

––––––––

$712.50

Sales tax $139.65

($712.50 – 2%) × 20%

9 B

Sales tax account

$ $

Input tax 90,000 Balance b/d 27,338

(450,000 × 20%) Output tax(750,000 × 20/120)

125,000

Balance c/d 62,338

––––––– –––––––

152,338 152,338

––––––– –––––––

10 A

Sales tax account

$ $

Input tax

(15,000 × 20%)

3,000.00 Output tax

(26,612.50 × 20/120)

4,435.42

Balance c/d 1,435.42

––––––– –––––––

4,435.42 4,435.42

––––––– –––––––

11 C

($90,000 – $72,000) × 10% = $1,800

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12 A

Sales tax account

$ $

Bank

Input tax

(40,500 × 10/110)

2,200

3,682

Balance b/d

Output tax

(60,000 × 10%)

3,500

6,000

Balance c/d 3,618

–––––– ––––––

9,500 9,500

–––––– ––––––

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INVENTORY

13 A

Inventory should be valued at the lower of cost and net realisable value.

The net realisable value of item 1:$

Sale value: (500 × $20) 10,000

Remedial work (1,800)

Selling expenses (400)

–––––

Net realisable value 7,800

–––––

This is higher than cost, therefore the item should be valued at cost in the statement of

financial position.

The net realisable value of item 2 is (100 × $8) – $150 = $650. This is $350 lower than the cost

of the inventory ($1,000), so the inventory must be reduced in value by $350 to its net

realisable value.

$

Starting value of inventory 284,000

Item 1 – No change

Item 2 (350) Reduce to net realisable value

–––––––

Adjusted inventory value 283,650

–––––––

14 D

Carriage outward is a selling expense. General administrative overheads are not part of the

cost of production.

15 B

Gross profit = 30% of sales, therefore cost of sales = 70% of sales.

Cost of sales = 70% × $64,800 = $45,360.

$

Opening inventory 28,400

Purchases 49,600

–––––––

78,000

Cost of sales (45,360)

–––––––

Lost inventory 32,640

–––––––

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16 B

Taking the lower of cost vs net realisable value for each line of inventory is as follows:

Small 250 units × $5 = $1,250

Medium 100 units × $9 = $900

Large 150 units × $12 = $1,800

Total = $3,950

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NON-CURRENT ASSETS

17 A

Disposal account

$ $

Asset at cost 5,000 Accumulated depreciation 2,440

Bank 2,200

Loss on disposal 360

(balancing figure)

––––– –––––

5,000 5,000

––––– –––––

Asset carrying value = $5,000 × 80% × 80% × 80% = $2,560.

Therefore accumulated depreciation = $5,000 – $2,560 = $2,440.

18 C

Annual depreciation =10

$4,000 –$40,000 = $3,600

Depreciation for the period July – September 20X3 (3 months) = 3/12 × $3,600 = $900.

19 D

Accumulated depreciation at the time of disposal = 3 years × 20% × $12,000 = $7,200.

Carrying value at time of disposal = $12,000 – $7,200 = $4,800.

Trade-in value of asset disposed of = $5,000.

Profit on disposal = $5,000 – $4,800 = $200.

20 D

Plant and machinery held throughout the year =

Opening balance – Assets disposed of in the year =

$381,200 – $36,000 = $345,200.

Depreciation charge

$

Assets held all year 20% × $345,200 69,040

Assets bought on 1 Dec 10/12 × 20% × $18,000 3,000

Assets disposed of 8/12 × 20% × $36,000 4,800

––––––

76,840

––––––

21 A

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ACCRUALS AND PREPAYMENTS

22 D

$

Rental income receipts 49,200

Received in advance in 20X7, for 20X8 2,600

––––––

51,800

Received in advance in 20X8, for 20X9 (2,400)

––––––

49,400

Received in 20X8, relating to 20X7 (1,400)

––––––

48,000

Rent due for 20X8, in arrears and not yet received 1,800 ––––––

Rental income for the year to 31 December 20X8 49,800

––––––

23 C

$

1 January – 30 September: (9/12 × $12,000) 9,000

1 October – 31 December: (2/12 × $16,000) 4,000

––––––

13,000

––––––

24 B

(7/12 × $8,400) + (5/12 × $12,000) = $9,900

$1,000 (1/3 × (3/12 × $12,000)) paid in advance in sundry payables

The rent received in advance is treated as a liability.

25 A

Rent expense for the year: $

1 February – 30 June: (5/12 × $24,000) 10,000

1 July – 31 January: (7/12 × $30,000) 17,500

––––––

27,500

––––––

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RECEIVABLES

26 C

Receivables ledger control account

20X3 $ 20X3 $

1 Jan Balance b/d 284,680 31 Dec Cash 179,790

31 Dec Credit sales 189,120 Contras 800

Discounts allowed 3,660

Irrecoverable debts 1,800

Sales returns 4,920

Balance c/d 282,830

––––––– –––––––

473,800 473,800

––––––– –––––––

20X41 Jan Balance b/d 282,830

27 C


$ $

Opening balance 308,600 Cash 147,200

Credit sales 154,200 Discounts allowed 1,400

Interest charged 2,400 Irrecoverable debts 4,900

Contras 4,600

Closing balance 307,100

––––––– –––––––

465,200 465,200

––––––– –––––––

28 D

$28,500 + ((5% × ($868,500 – $28,500)) – $38,000) = $32,500

29 A

The total charge is the actual amount of Irrecoverable debts written off plus the increase in

the allowance for receivables, or minus the decrease in the allowance.

$

Allowance at end of year (5% of $120,000) 6,000

Allowance at start of year 9,000

–––––

Decrease in allowance (3,000)

Irrecoverable debts written off 5,000

–––––

Charge to profit or loss 2,000 –––––

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PAYABLES

30 B

Payables ledger control account

$ $

Payments to suppliers 68,900 Balance b/d 36,220

Purchase returns 4,700 Credit purchases 74,800

Contra 520

Balance c/d 36,900

––––––– –––––––

111,020 111,020

––––––– –––––––

31 C

Payables ledger control account$ $

Payments to suppliers 235,000 Balance b/d 65,000

Purchase returns 2,200 Credit purchases 215,000

Contra 3,000

Debit balances 800

Balance c/d 39,000

––––––– –––––––

280,000 280,000

––––––– –––––––

32 A

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CAPITAL STRUCTURE

33 B

Ordinary share

capital

Share

premium

$ $

At 30 June 20X2 125,000 100,000

Rights issue (75c premium on (62,500 × 4) shares) 62,500 187,500

––––––– –––––––

187,500 287,500

1 for 5 bonus issue 37,500 (37,500)

––––––– –––––––

At 30 June 20X3 225,000 250,000

––––––– –––––––

34 B

Issued share capital and reserves are credit balances in the nominal ledger accounts (since

capital balances are credit balances). The money raised is 200,000 × $1.30 = $260,000, of

which $200,000 is share capital (nominal value) and $60,000 is share premium.

35 B

$100,000/$0.50 = 200,000 shares

200,000/4 = 50,000 shares × $0.70 = $35,000

Balance on share premium account b/d $30,000 + $35,000 = $65,000

36 C

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BANK RECONCILIATIONS

37 C

Items shown in the bank statement that should subsequently be recorded in the cash book are

items that the business does not learn about until it receives the bank statement. These

include bank charges, dishonoured cheques and standing orders and direct debit payments.

38 C

$

Overdraft per bank statement (68,100)

Outstanding cheque payments (41,800)

–––––––

(109,900)

Deposits not yet credited by bank 141,200

–––––––

Balance per cash book 31,300

–––––––

39 C

40 A

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THE TRIAL BALANCE AND ERRORS

41 D

Discounts received should be recorded as:

Debit PayablesCredit Discounts received.

Here, the discount has been debited instead of credited, so that the balance in the discounts

received account is 2 × $200 = $400 too low. To correct, we must:

Credit Discounts received $400

Therefore Debit Suspense account $400.

42 B

Total debits = $509,750

Total credits = $517,270

Therefore discounts allowed = $7,520 debit balance

43 C

44 B

45 C

Suspense account$ $

Purchases 150 Opening balance 1,610

Allowance for receivables 480

Closing balance 980

–––––– ––––––

1,610 1,610

–––––– ––––––

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PREPARING BASIC FINANCIAL STATEMENTS

46 B

$


Purchases 989,000

––––––––

1,375,200

Closing inventory (422,700)

––––––––

Cost of sales = 60% of sales revenue 952,500

––––––––

Gross profit = 40% of sales revenue

Sales = $952,500 × 100/60 = 1,587,500

47 D

Payables

$ $

Bank 542,300 Opening balance b/d 142,600

Discounts received 13,200 Purchases (balance) 578,200

Purchase returns 27,500

Closing balance c/d 137,800

––––––– –––––––

720,800 720,800

––––––– –––––––

Opening balance b/d 137,800

48 A

$


Purchases

Carriage inwards

299,000

3,500

Closing inventory (18,160)

––––––––Cost of sales 297,840

––––––––

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INCOMPLETE RECORDS

49 Using mark up

$900 × 140% = $1,260

Using margin

$900 × 60% = $540

50 Accumulated depreciation is $1,000

10,000 + 2,000 – 7,500 – 3,500 = $1,000

The gross profit would be:

11,000 × 25/125 = $2,200

51 The profit is $4,000

Assets 16,500 – Liabilities $10,300 = Capital $3,700 + Profit $4,000 – Drawings $1,500

52 A

Cost of sales = 75,000 + 840,000 – 86,000 = 829,000 × 70% = $580,300

53 D

$ $

Sales (195,230 – 1,230) 194,000

Opening inventory 15,785Purchases

Carriage inwards

147,058

1,500

Closing inventory Bal (9,143)

––––––––

Cost of sales (194,000 × 100/125) 155,200

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GROUP ACCOUNTS

54 A

Tangible non-current assets = $1,918,000 + $1,960,000 = $3,878,000

Note: We do not include the Associates assets and liabilities in the line-by-line consolidation ofthe group statement of financial position.

55 C

Cost of investment $448,000

Post-acquisition reserves

30% × ($896,000 – $296,000) $180,000

––––––––

Investment in associate $628,000

––––––––

56 B

Cost of Investment $2,610,000

Fair value of NCI at acquisition $500,000

Less: Fair value of net assets at acquisition $(2,000,000)

–––––––––

$1,110,000

–––––––––

57 BNon-current assets

Goodwill (per Q56) $1,110,000

Tangible – property plant and equip (per Q54) $3,878,000

Investment in associate (per Q55) $628,000

–––––––––

$5,616,000

Current assets

Inventory (760,000 + 1,280,000) $2,040,000

Receivables (380,000 + 620,000) $1,000,000

Cash (70,000 + 116,000) $186,000

–––––––––

$8,842,000

–––––––––

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58 A

Retained earnings of Pike $2,946,000

Post acquisition retained earnings:

75% × ($1,884,000 – $1,000,000) $663,000

30% × ($896,000 – $296,000) $180,000

–––––––––

$3,789,000

–––––––––

Note: Additional working for information only:

Non-controlling interest:

NCI at acquisition $500,000

NCI share of post-acquisition earnings of Neal

25% × ($1,884,000 – $1,000,000) $221,000

–––––––––$721,000

–––––––––

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STATEMENTS OF CASH FLOWS

59 D

Statement 1 is incorrect: net cash from operating activities is the same, whichever method of

presentation is used.

Statement 2 is incorrect. Companies with high profits can be cash-negative, due to high

spending on new non-current assets and/or a large build-up of net current assets.

Statement 3 is incorrect. Profits and losses on non-current asset disposals are shown in the

section of the cash flow statement that reconciles the net profit before taxation to the net

cash from operating activities.

60 C

$000

Profit for the year 63,400

Depreciation 2,700Non-current asset purchases (17,300)

Loss on disposal 3,000

Increase in inventories (2,500)

Decrease in receivables 600

Increase in trade payables 900

––––––

Net cash inflow 50,800

––––––

61 C

62 A

63 B

$

Loans redeemed (82,000)

Dividends paid (185,000)

Increase in share capital 55,000

––––––––(212,000)

––––––––

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INTERPRETATION OF FINANCIAL STATEMENTS

64 A

Profit after tax = $22 million

Equity shareholders' funds = $500 millionReturn on equity shareholders' capital employed = 22/500 = 0.044 or 4.4%.

65 A

Accepted 'norms' are 2.0 for the 'ideal' current ratio and 1.0 for the 'ideal' acid test ratio or

quick ratio. However, these 'ideal' ratios are only a rough guide, since 'norms' vary greatly

between companies in different industries. In this question, the current ratio is (1,390/420)

3.3 times and the acid test ratio is [(380 + 40)/420) 1.0 times. The current ratio is therefore

high and the acid test ratio is 'ideal'.

66 A

Gearing is usually measured as the ratio of long-term debt to equity (shareholders capital and

reserves).

At 31.10.X8, gearing was 20/(15 + 3 + 22) × 100% = 50%.

At 31.10.X9, gearing was 40/(30 + 18 + 12) × 100% = 66.7%.

Gearing has therefore risen. Higher gearing increases the financial risk for the shareholders.

67 C

This is possibly a confusing question, because the average receivables collection period (indays) can be calculated in different ways. Strictly, the average receivables collection period

should be calculated as (receivables including sales tax/credit sales including sales tax) × 365.

This would give (23,500/50% of 235,000) × 365 = 73 days.

In practice, the average receivables collection period might be calculated as (receivables

including sales tax/total sales revenue including sales tax) × 365. This is because information is

not always available about the division of total sales revenue between cash sales and credit

sales. In this question, the average receivables collection period would then be

(23,500/235,000) × 365 = 37 days.

Even more often in practice, it is usual to measure the average receivables collection period

approximately as (total receivables including sales tax/total sales revenue excluding sales tax)× 365 days. This measurement is often used by stock market analysts, who can extract these

figures easily from the published financial statements of a company. In this question, the

average receivables collection period would then be (23,500/(235,000/1.175)) × 365 days =

43 days.

This means that answers A, B and C could all be correct. However, given the information in the

question, you are probably expected to compare like with like, i.e. receivables including sales

tax should be compared with revenue from credit sales including sales tax.

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68 C

When you are asked to calculate a gearing ratio, you ought to be given information about the

basis on which the ratio is calculated, because there are different ways of measuring gearing.

In particular, gearing might be measured as the percentage ratio of long-term debt to total

share capital and reserves. Alternatively, gearing could be measured as the percentage ratio of

(long-term debt plus some short-term loans) to share capital and reserves.

In this question, the problem is deciding what to do about the short-term borrowings of

$50,000, which the enterprise has apparently had the benefit of for only the second half of the

year.

(1) If gearing is measured as long-term debt to share capital and reserves, the ratio would

be (75/500) × 100% = 15%. This is not an option in the question.

(2) If gearing is measured as (long-term debt plus short-term borrowings) to share capital

and reserves, the ratio would be ((75 + 50)/500) × 100% = 25%. This is not an option in

the question.

(3) It might be assumed that since the short-term borrowings have only been in place forone half of the year, just one half of it ($25,000) should be included in debt, together

with the long-term debt of $75,000. This would give a gearing percentage of ((75 + (1/2

× 50))/500) × 100%. = 20%. This is an option in the question.

Although it is possibly not the best way of measuring gearing, it is the most plausible of the

four available answers.

69 A

Average inventory = $(4,000 + 6,000)/2 = $5,000.

Inventory turnover rate = Cost of sales/average inventory = $24,500/$5,000 = 4.9 times.

70 A

There are different ways of measuring gearing. In particular, gearing might be measured as the

percentage ratio of long-term debt to total share capital and reserves. Alternatively, gearing

could be measured as the percentage ratio of long-term debt plus short-term debt to total

capital and reserves. In a gearing ratio, the figure above the line is always debt, never capital

and reserves. Answer A is a correct definition.

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RECORDING, HANDLING AND SUMMARISING ACCOUNTING DATA

BOOKKEEPING

71 JANE GRIGSON

(a) General ledger

Sales account

$

12 June SDB

12 June CRB

$

3,666

340


12 June SDB

$

3,666

12 June RIB

12 June CRB12 June CRB discounts

allowed

$

141

1,295

68

Returns inwards account

12 June RIB

$

141

$

Cash account

12 June CRB

$

1,635

$

Discounts allowed account

12 June CRB

$

68

$

Receivables ledger

PK

8 June SDB

$

423

12 June RIB

$

141

HS

9 June SDB

12 June SDB

$1,410

940

9 June CRB

9 June CRB discount

11 June CRB

11 June CRB discount

$140

20

680

48

RD Contractors

9 June SDB

$

893 11 June CRB

$

475

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(b) The discounts allowed column in the cash received book is a memorandum column only

and should not be included in the cross-casting of the totals.

The discounts allowed total is included in the cash book as a reminder to put through

the double entry for discounts allowed which is

Dr Discounts allowed

Cr Receivables ledger control

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72 RBD

Rents receivable

20X2 $

31 May Profit or loss 4,00431 May Bal c/f 517

–––––

4,521

–––––

20X1 $

1 June Bal b/f 463

20X2

31 May Bank 4,058

–––––

4,521

–––––

Rent payable

20X1 $

1 June Bal b/f 1,246

20X2

31 May Bank – rent 10,296

31 May Bal c/f 382

––––––

11,924

––––––

20X1 $

1 June Bal b/f 315

20X2

31 May Profit or loss 10,100

31 May Bal c/f 1,509

––––––

11,924

––––––

Payables

20X2 $

31 May Bank 75,181

31 May Discounts received 1,043

31 May Bal c/f 4,720

––––––

80,944

––––––

20X1 $

1 June Bal b/f 5,258

20X2

31 May Profit or loss – purchases 75,686

––––––

80,944

––––––

Allowance for discounts receivable

20X1 $

1 June Bal b/f 106

––––

106

––––

20X2 $

31 May Profit or loss 1231 May Bal c/f 94

––––

106

––––

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Tutorial note:

In this example the discounts received during the year of $1,043 have been debited to the

payables account and credited to discounts received, the only entry in the allowance for

discounts account being the decrease in allowance required of $12 being debited to profit or

loss.

An alternative treatment would be to credit the allowance for discounts received account with

$1,043 giving a net transfer to profit or loss from that account of $1,031.

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73 MICHAEL ROBERTSON

(1) Business expenditure is categorised into capital expenditure and revenue expenditure.

Capital expenditure is expenditure on non-current assets or on major improvements to

non-current assets which improve their earning capacity. Capital expenditure is not

charged to profit or loss as an expense but is capitalised in the statement of financial

position and written off over a number of years in the form of depreciation.

Revenue expenditure is expenditure incurred either for the purposes of continuing the

trade of the business or in order to maintain the existing capacity of the non-current

assets of the business. Revenue expenditure is the expenditure necessary to run the

business from day to day and is charged to profit or loss in the period to which it relates.

(2) Trade payables and profits are both credit balances on the trial balance because they

are both liabilities of the business. Trade payables are amounts owed to outside

suppliers. The profit that the business has made is the amount owed to the owner of the

business. Therefore the profit figure is effectively the amount that is owed back to you

just as the trade payables figure is the amount owed to suppliers.

(3) Opening balances on expense accounts are quite common and are due to eitherprepayments or accruals at the end of the previous accounting period.

If there is an opening debit balance on an expense account this means that at the end of

the previous accounting period an amount of that expense was paid that in fact

belonged to this accounting period. Therefore it is brought forward as the opening

balance on the account.

If there is an opening credit balance on the account then this means that at the end of

the previous accounting period an accrual was made for an item of expense that had

been incurred but which had not yet been paid. When the accrued amount is paid in this

accounting period it will not be charged to profit or loss in that period as it is effectively

cancelled by the credit balance brought forward.(4) A credit entry in the statement of profit or loss from the Allowance for Receivables

account is quite valid. It indicates that there has been a decrease in the allowance

necessary for receivables for the period.

(5) Contra entries are neither expense nor income; they are simply a method of settling

amounts due to suppliers and from customers.

In some instances a supplier may also be a customer and therefore you will owe him

money and he will owe you money. The simplest way to settle such a debt is to net off

the amounts that you owe each other and then only the difference will be paid to or by

you. This is what is known as a contra.

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ERROR CORRECTION AND SUSPENSE ACCOUNTS

74 UPRIGHT

Key answer tips

Not all errors have an impact on the suspense account balance. The errors that affect the

suspense account are those that will result in the total of debit balances and the total of credit

balances being different. Errors or omissions that maintain equal debits and credits do not

affect the suspense account balance.

Upright, year ended 31 October 20X5

(a) Adjustments to profit

+−

$ $

Profit per draft accounts 48,200

(i) Insurance: opening balance omitted 1,305

(ii) Profit on sale of vehicle 1,600

Reduction in sales revenue figure 6,000

(iii) Depreciation:

Reduction 20% × $22,000 4,400

(iv) Insurance paid in advance omitted 1,500

(v) Rent receivable understated 400

–––––– ––––––

56,100 7,305

(7,305) ––––––

––––––

Revised profit 48,795

––––––

(b)

Suspense account

$ $

Opening balance 1,175 (i) Insurance account(opening balance

omitted)

1,305

(v) Rent receivable 400

(vi) Purchase ledger account 270

––––– –––––

1,575 1,575

––––– –––––

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Tutorial notes:

(1) Item (i). The opening balance of the prepayment has been omitted. As a result, it has not

been charged against the profit for the period. The adjustment to correct the error will

therefore reduce profit. Since a debit balance has been omitted, the suspense account is

affected. The correction is to enter the opening prepayment balance in the suspense

account, debit Insurance, credit Suspense account.

(2) Item (ii). The profit on the disposal of the non-current asset is the sale proceeds ($6,000)

minus the carrying value of the asset at the time of disposal ($22,000 – $17,600) $4,400.

The profit on disposal is therefore $1,600. The profit has been omitted from the

statement of profit or loss. However, the sale proceeds of $6,000 have been treated as

revenue, which is incorrect. The $6,000 is not revenue, but instead goes into the

calculation of the profit on disposal of the asset. Although the disposal has not been

entered in the accounts, the omission has not put total debits and total credits out ofbalance, so the suspense account is not affected.

(3) Item (iii). The accounts have not recorded the disposal of the asset, which means that

depreciation has been charged on the asset (20% × $22,000 = $4,400). The question

states that we have to make a correction for this, which involves removing the

depreciation charge and adjusting profit accordingly.

(4) Item (iv). A prepayment to carry forward has been omitted. This will reduce the total

insurance expense for the year, and so profit must be adjusted upwards. The omission

does not affect the suspense account.

(5) Item (v). Rent receivable has been understated and so should be increased. As it is

income, the adjustment will add to profit. The total credits have been undercast, so totaldebits and credits differ and the suspense account is affected. To decide which side of

the suspense account needs to show the $400, think in terms of the double entry nature

of the correction. The correction should be credit Rent receivable balance, and so debit

Suspense account.

(6) Item (vi). The error does not affect profit, because it relates to amounts owed, not

revenue or expenses. However, the purchase has been recorded as $630 in the payables

account. Since the company does not maintain an accounts payable ledger control

account, the individual payables accounts are part of the double entry system, and the

total credits have been over-stated by $630 – $360 = $270. Since this puts total debits

and total credits out of balance, the suspense account is affected. The requiredcorrection is to reduce the payables balance, i.e. debit Payables account, credit Suspense

account.

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75 VB

Dr Cr

$ $

(1) Suspense (2 × 246) 492

Sales returns 246

Sales 246

Being the correction of the posting of cash sales to sales returns.

(2) Suspense (1,294 − 1,249) 45

Customer 45

Being the correction of a transposition error in a customer’s account.

(3) Bank charges 37

Bank 37

Being the recording of bank charges omitted from the cash book.

(4) Suspense 45

Purchases 45

Being the correction of a posting error.

(5) Supplier (2 × 129) 258

Customer 258

Being correction of a misposting of a contra entry.

(6) Rent (13,500/6) 2,250

Accruals 2,250

Being correction of the omission of the rent bill in the ledgers.

(7) Carriage inwards 52

Carriage outwards 52

Being correction of the misposting of a carriage invoice.

(8) Irrecoverable debts 40

Customer 40

Being write off of an irrecoverable debt.

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76 YTZ

(a) Suspense account

Receivables ledger control

Cash – bank charges

$

3,200

23

–––––

3,223

–––––

Trial balance difference

(103,457 − 102,113)

Travel expenses

Payables ledger control

$

1,344

9

1,870

–––––

3,223

–––––

(b)

$

Draft net profit 97,499

Travel expenses (9)

Returns outwards undercast 100

Electricity accrued expense (154)

Overdraft interest (28)

Machinery incorrectly charged to repairs 1,450

Depreciation on machinery (20% × 1,450) (290)

Discounts allowed (30)

––––––

Adjusted profit 98,538

––––––

Workings

(W1) The journal entries for the errors are as follows:

$ $

(1) Travel expenses 9

Suspense 9

(2) Payables ledger control 100

Returns outwards/purchases returns 100

(3) Electricity 154

Accruals 154

(4) Payables ledger control 1,870

Suspense 1,870

(5) Interest payable 28

Bank 28

(6) Machinery at cost 1,450

Machinery repairs 1,450

Depreciation charge (20% × 1,450) 290

Allowances for depreciation 290

(7) Discount allowed 30

Receivables ledger control 30

(8) Suspense 3,200

Receivables ledger control 3,200

(9) Suspense 23

Bank 23

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77 WT

Dr Cr

$ $

(1) Machinery at cost 2,000

Payables 2,000

Statement of profit or loss – depreciation 400

Accumulated depreciation – machinery 400

Being the recording of the purchase and depreciation of an item of machinery.

(2) Disposals 8,000

Non-current asset at cost 8,000

Accumulated depreciation 5,000

Disposals 5,000

Revenue 1,400

Disposals 1,400Statement of profit or loss – loss on disposal

1,600

Disposals 1,600

This can be summarised as:

Revenue 1,400

Accumulated depreciation – vehicles 5,000

Statement of profit or loss – loss on disposal 1,600

Vehicles at cost 8,000

Being the correct recording of the disposal of a vehicle.

(3) Bank 200



Statement of profit or loss – irrecoverable debt recovered 200

This can be summarised as:

Bank 200

Statement of profit or loss 200

Being the recording of the receipt of cash from a previously written off debt.

(4) Closing inventory 4,278

Statement of profit or loss – cost of sales 4,278

Being the inclusion of inventory previously omitted in error.

(5) Statement of profit or loss – rent 125

Suspense 125

Being the recording of the prepaid rent from 30 June 20X1 omitted as an opening

balance on the rent account.

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(6) Payables ledger control 360

Suspense 360

Being the correction of a transposition error in payables ledger control account.

(7) Statement of profit or loss – professional fees 140

Bank 140Being the recording of a standing order omitted from the cash book.

(8) Revenue 175

Suspense 175

Being the correction of a cash sale mistakenly posted twice to the sales account.

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INVENTORY VALUATION

78 MR G

Tutorial notes:

(1) As the examiner has asked for the value of material issues it is necessary to present a

stores ledger account or equivalent working i.e., had we only been asked to value

inventory it would have been possible to take a short cut first-in-first-out.

(2) Care must be taken to record the transaction in date order. In the question the issue on

10 February appears on the line above the receipt on 8 February. Read the question

carefully.

(3) The book figures show a closing inventory of 600 units whereas the physical count

showed 500 units. The conventional way to deal with this loss in the stores ledgeraccount is to treat it as an issue on the last day of the month/period being recorded

(i.e. on the date of the physical count).

(4) When preparing the stores ledger it is recommended that the balances are listed in

chronological order so as to be able to apply the appropriate assumption.

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Calculation of value of issues for the six months and value of closing inventory at the end of

June

(a) First-in-first-out (FIFO)

Date

13 Jan

8 Feb

10 Feb

11 Mar

12 Apr

20 Apr

15 Jun

25 Jun

30 Jun

Receipts

$

200 @ 36 = 7,200

400 @ 38 = 15,200

600 @ 40 = 24,000

400 @ 35 = 14,000

500 @ 28 = 14,000

Value of issues

$

200 @ 36

300 @ 38 = 18,600

100 @ 38

500 @ 40 = 23,800

100 @ 40

300 @ 35 = 14,500

––––––

56,900

––––––

Inventory loss

100 @ 35 = 3,500

––––––

Balance

$

200 @ 36 = 7,200

200 @ 36

400 @ 38 = 22,400

100 @ 38 = 3,800

100 @ 38

600 @ 40 = 27,800

100 @ 38

600 @ 40

400 @ 35 = 41,800

100 @ 40

400 @ 35 = 18,000

100 @ 40

400 @ 35

500 @ 28 = 32,000

100 @ 35

500 @ 28 = 17,500

500 @ 28 = 14,000

Value of closing inventory $14,000

–––––––

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(b) Weighted average

Date

13 Jan

8 Feb

10 Feb

11 Mar

12 Apr

20 Apr

15 Jun

25 Jun

30 Jun

Receipts

$

200 @ 36 = 7,200

400 @ 38 = 15,200

600 @ 40 = 24,000

400 @ 35 = 14,000

500 @ 28 = 14,000

Value of issues

$

500 @ 37.33 = 18,665

600 @ 37.94 = 22,764

400 @ 32.97 = 13,188

––––––

54,617

––––––

Inventory loss

100 @ 32.97 = 3,297

–––––

Balance

$

200 @ 36 = 7,200

600 @ 37.33 = 22,400

100 @ 37.33 = 3,735

700 @ 39.62 = 27,735

1,100 @ 37.94 = 41,735

500 @ 37.94 = 18,971

1,000 @ 32.97 = 32,971

600 @ 32.97 = 19,783

500 @ 32.97 = 16,486

Value of closing inventory $16,486

–––––––

Tutorial note:

(1) Price is recalculated at time of each new receipt, e.g.

8 Feb: Price =400+200

15,200+7,200

11 Mar: Price =600+100

24,000+3,735

(2) Because the figures are not exact under weighted average, care needs to be taken to

ensure that the balance after an issue and the value of the issue add up to the balance

before the issue. This should happen automatically if one calculates the value of the

issue and deducts this from the old inventory balance to arrive at the new inventory

balance.

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Workings

Calculation of unit purchase prices

13 January200

7,200 = $36

8 February400

15,200 = $38

11 March600

24,000 = $4

12 April400

14,000 = $35

15 June500

14,000 = $28

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RECEIVABLES

79 ALLOWANCE FOR RECEIVABLES

Receivables

$ $

1.1.20X1 Balance b/d 10,000 Sales returns 1,000

Sales 100,000 Bank 90,000

Irrecoverable debts 500

Discounts allowed 400

31.12.20X1 Balance c/d 18,100

––––––– –––––––

110,000 110,000

––––––– –––––––

1.1.20X2 Balance c/d 18,100 Sales returns 1,800Sales 90,000 Bank 95,000

Payables 3,000


Discounts allowed 500

31.12.20X2 Balance c/d 6,300

––––––– –––––––

108,100 108,100

––––––– –––––––

1.1.20X3 Balance b/d 6,300

Allowance for receivables

$ $

31.12.20X2 Balance c/d 1.1.20X1 Balance b/d 400

Specific 200 Irrecoverable debts 695

General

5% ×

(18,100 – 200) 895

––––– –––––

1,095 1,095 ––––– –––––

Irrecoverable

debts

780 1.1.20X2 Balance b/d 1,095

31.12.20X2 Balance c/d

(5% × 6,300) 315

––––– –––––

1,095 1,095

––––– –––––

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APPLICATIONS OF ACCOUNTING CONVENTIONS

80 STATEMENT OF FINANCIAL POSITION VALUES

REPORT

To: Managing directorFrom: Accountant

Date: X-X-20XX

Subject: Statement of financial position valuations

The historical cost accounting convention does not produce a statement of financial position

which will show the value of the business, as the following three points will illustrate.

(i) Goodwill

Goodwill has been defined as the difference between the value of the business and the

aggregate of the fair values of its separable net assets. Every business is worth more (or

maybe less) than the value of its individual net assets and this type of goodwill is known

as inherent goodwill (or non-purchased goodwill). It arises because of many factors such

as the business having a good reputation for providing quality goods and services, and

employing skilled and motivated staff. These factors have no direct relationship with

cost and therefore inherent goodwill is subjective to value. Given the absence of a

money measurement or an objective basis for valuation it is not prudent to record

inherent goodwill in the accounts, and IAS 38 Intangible Assets in fact forbids it.

(ii) The valuation of non-current assets at cost

Under the historical cost accounting convention, inflation and changing prices are

ignored and assets are recorded at cost. This has the advantage of being relatively

objective as it is usually certain what the asset cost to buy or construct. However, ininflationary times this can lead to statement of financial position values, say for land and

buildings, being very out of date and understated.

If assets were recorded on the statement of financial position at their ‘value’, the

calculation of the amounts presented in the statement of financial position would be

less objective than it is under the historical cost convention. In effect, recording assets

at their fair values is what current cost accounting advocates, and it can be argued that

such a statement of financial position would be useful to some users of accounts.

(iii) Research

The revenue expenditure on research must be written off to profit or loss in the year of

expenditure.

By its very nature research is concerned with original scientific or technical investigation

to discover new knowledge, whether or not this is actually directed at a particular

objective, e.g., a cure for cancer, nuclear fusion etc. It is virtually impossible to place an

objective value on the benefits research may bring given its preliminary nature. It is not

probable that the research will generate any future economic benefits, one of the

conditions of an item being classified as an asset. So research expenditure must be

recognised as an expense in the period in which it is incurred.

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81 ACCOUNTING TERMS

(a) An expense is a resource of the business that has been used up either through the

passage of time or by actual use. For example, the payment of an insurance premium

for a year’s cover in advance creates an asset to the business; i.e., insurance cover for a

year. This asset expires over time so that by the accounting year end some of the asset

will be an expense of that year and the rest will be carried forward as an asset(prepayment) and will be an expense next year.

(b) An asset is one of the elements presented in the statement of financial position, as

opposed to being classified as an expense in profit or loss. An asset is a resource:

• under the control of an entity as a result of past events

• from which future economic benefits are expected to flow to the entity.

Because it is expected to generate these future benefits, it is carried forward and

written off over the period(s) expected to benefit from the resource.

(c) In preparing financial statements, estimates have to be made to arrive at figures for

inclusion in them. For example, an allowance for receivables may be required, inevitably

without knowledge of the exact figure needed. Prudence demands that in such

conditions of uncertainty, judgement should be used so that assets and gains are not

overstated, and liabilities and losses are not understated.

(d) Objectivity means that the accounting information has been presented under strict rules

that can only be interpreted in one way. Therefore if two different accountants were to

deal with the same transaction they would record the transaction in the same way and

at the same value. For example under the historical cost convention, assets are

recorded at their original cost. As original cost can be precisely defined, the resultant

value placed upon the asset is objective.

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82 MARKETING SERVICES

AN Accountant

Address

Date X-X-20XX

Dear Client

Invoice from Marketing Services

I set out how each item on the above invoice is likely to affect the amount recorded as

expenses in the accounts for the period ended 31 December 20X2.

General advice $3,000

This item is clearly an expense for the current year. The services were received in each of

months falling wholly in the accounting period and no future benefits from them can be

reliably estimated. The fee must therefore be recognised as an expense in the period.

Photocopier $10,000

The photocopier should be treated as a non-current asset of your business because it will beused in the business over a number of accounting periods and generate economic benefits in

each. An annual depreciation charge should spread the cost of the asset (less its estimated

resale value) over the accounting periods in which it will be used. Therefore, part of the cost

will be an expense of the business in the current accounting period.

You need to estimate for how long you intend to use the asset. An estimate then needs to be

made of the resale value. This will depend in part on how long you expect to use the asset.

Finally, a depreciation method needs to be decided which fairly reflects the use of the asset

between accounting periods. The straight line and the reducing balance methods are the most

common.

Assuming that you intend to keep the asset for the 5 year guarantee period, the estimatedresale value is nil and you use the straight-line method, the annual depreciation charge will be

$2,000. As the asset has been in use for 3 months of the current accounting period, a charge of

$500 should be recognised.

Advertising deposit $5,000

As the advertising will not take place until the next accounting period, it should be recognised

as an expense in that period. The cost should be carried forward as a prepayment in the

December 20X2 statement of financial position. There would be no expense recorded in the

current accounting period.

Advertising campaign $50,000

The advertising has been completed in the current accounting period and it is not possible to

estimate reliably any benefits wholly attributable to it which will arise in future accounting

periods. The full amount of the expenditure should be recognised as an expense in the 20X2

accounting period.

Do not hesitate to contact me if there are any points that you wish me to clarify.

SIGNATURE

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83 CAPITAL MAINTENANCE

(a) Capital maintenance

Investors allocate capital to a business in the expectation that the business will protect

(i.e. maintain) the value of that capital and in addition generate a return in the form of a

profit. So the conventional measure of 'profit' for any period is the amount by which the

business' capital has increased over the period. A business cannot be regarded asearning a profit until its capital has been maintained.

There are two definitions of the 'capital' which must be maintained:

• financial capital, which is the money amount of capital at the beginning of the

period. So if a business' net assets (= capital) is $100 at the start of the period and

$120 at the end, it has earned a profit of $20 after maintaining the $100. (A

variant approach is to adjust the opening capital by inflation as measured by a

retail prices index; if inflation was 5% over the period, the capital to be

maintained is $100 × 1.05 = $105, so the profit is only $15.)

• physical capital, which is the operating capacity of the business. If the business

operates in a sector with rapidly falling non-current asset costs, it might be that atthe end of the period, 10% less financial capital is needed to maintain the same

physical capacity as at the start of the period. On this measure the capital to be

maintained is $100 less 10% thereof, so $90; profit is then $30.

(b) Goodwill

Goodwill is the word used to cover the assets of a business which are not individually

identifiable, such as a skilled workforce and a reputation for excellent customer service.

However, there is obviously a difficulty in measuring the goodwill within a business at

any particular time, and, indeed, the inclusion of non-purchased goodwill in financial

statements is not permitted by accounting regulation.

A value for it can, however, be reliably estimated when a business changes hands. The

value paid for the business over and above the value of its net identifiable assets is themeasure of goodwill, and should be included as an intangible asset in the financial

statements.

(c) Fair value

Fair value is the amount for which an asset could be exchanged, or a liability settled,

between knowledgeable, willing parties in an arm's length transaction. Market value is

therefore often an asset's fair value.

Fair value is used as the measure of a number of items in a statement of financial

position (such as property, plant and equipment and financial assets) as an alternative

to historical cost. The rationale is that fair value is a 'today's' value, which is more

relevant to users of financial statements than a historical value.

(d) Research and development costs

For a business to progress, it needs to invest in research and development. Research is

the term used to cover blue sky investigation of possibilities; it is therefore not possible

to estimate reliably any future economic benefits which will be generated from it.

Research costs should be recognised as an expense in the statement of profit or loss in

the year in which they are incurred.

Development is the application of research or other findings to a plan to develop new or

improved products. etc. A business would not move a project from the research phase

to the development phase if it did not expect to earn future economic benefits in excess

of future costs. So, subject to being able to demonstrate those future net benefits, the

business should classify development expenditure as an asset and amortise it over theexpected life of the new or improved products, etc.

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PREPARING FINANCIAL STATEMENTS

INCOMPLETE RECORDS

84 ERNIE

Key answer tips

The examiner's report commented that the calculations for sales and purchases were often

poorly done. If you fell down in these areas remember for the future that these two

calculations, broadly as in this question, feature in almost all incomplete records questions.

Ernie

Statement of profit or loss for the year ended 30 June 20X8$ $

Revenue (W1) 204,490

Less: Cost of sales


Purchases (W2) 84,620

––––––

98,780

Less: Closing inventory 12,170

––––––

(86,610)

Wages (68,200)

–––––––

Gross profit 49,680

Salaries 5,000

Rent (750 + (3 × 750 × 120%) 3,450

Telephone (860 + 240 − 210) 890

Electricity (890 + 220 − 180) 930

Insurance (700 + (1,600 × 50%) 1,500Miscellaneous expenses (1,280 + 490) 1,770


Depreciation: plant (25% × (12,600 – 5,800 + 8,400)) 3,800

motor van (½ × 25% × 12,800) 1,600

Profit on sale of van (3,000 – (9,000 – 6,500)) (500)

Loan interest 250

––––––

19,970

––––––

Net profit for year to date 29,710 ––––––

7/23/2019 03 Answers f3-Ffa Lrp 2014-15




Ernie

Statement of financial position as at 30 June 20X8

Cost Accumulated Carrying

depreciation value

$ $ $

Non-current assets

Plant and equipment (dep'n 5,800 + 3,800) 21,000 9,600 11,400

Motor vans 12,800 1,600 11,200

–––––– –––––– ––––––

33,800 11,200 22,600

–––––– ––––––

Current assets

Inventory 12,170

Trade receivables 9,580

Prepayments (750 × 120%) + (1,600 × 50%) 1,700Cash in hand 890

––––––

24,340

––––––

46,940

––––––

Capital at 30 June 20X7 (W3) 32,640

Add: Net profit for year to date 29,710

––––––

62,350

Less: Drawings (8,000 + 29,800) 37,800

––––––

24,550

Non-current liabilities

Loan 10,000

Current liabilities

Payables: Trade 4,090

Sundry (5,000 + 240 + 220 + 490 + 250) 6,200

Overdraft 2,100

––––––

12,390

––––––

46,940

––––––

7/23/2019 03 Answers f3-Ffa Lrp 2014-15




Workings

(W1) Sales

Sales total account

$ $

Opening receivables 9,490 Received from customers

Refund to customer 400 Cash 52,640

Sales (balancing figure) 204,490 Bank 150,880


Closing receivables

(10,860 – 1,280) 9,580

––––––– –––––––

214,380 214,380

––––––– –––––––

Tutorial note: The irrecoverable debt written off is an expense, not a reduction in sales. It

must therefore be included in the calculation of total sales.

(W2) Purchases

Purchases total account

$ $

Paid to suppliers 83,990 Opening payables 3,460

Closing payables 4,090 Purchases (balancing figure) 84,620

–––––– ––––––

88,080 88,080 –––––– ––––––

(W3) Capital at 30 June 20X7

$ $

Assets

Plant and machinery (12,600 – 5,800) 6,800

Motor van (9,000 – 6,500) 2,500

Inventory of materials 14,160

Receivables 9,490

Rent in advance 750

Insurance in advance 700

Cash at bank 1,860

Cash in hand 230

––––––

36,490

Less: Liabilities

Payables 3,460

Telephone 210

Electricity 180

–––––

3,850

––––––

32,640

––––––

7/23/2019 03 Answers f3-Ffa Lrp 2014-15




85 CART

Workings

$

Opening inventory 0

Purchases (19,500 paid + 1,095 payable) 20,595 ––––––

20,595

Closing inventory 400

––––––

Cost of sales 20,195

Gross profit (20,195 × 30/(100 – 30)) 8,655

––––––

Sales revenue 28,850

––––––

Note: Gross profit = 30% of sales. So cost of sales = 70% of sales and gross profit = 30/70 of

cost of sales.

Cash at bank $

Receipts

Capital 20,000

Cash from sales 26,250

––––––

46,250

Less: Payments (18,000 + 2,000 + 800 + 2,500 + 850 + 19,500) 43,650

––––––Cash at bank 2,600

––––––

Cart

Statement of profit or loss for the year ended 31 December 20X2

$

Revenue (W) 28,850

Cost of sales (W) 20,195

––––––

Gross profit 8,655Wages (700)

Stationery (2,500)

Telephone expenses (800 + 40 accrual) (840)

Sundry expenses (850)

Depreciation: computer (25% of 2,000) (500)

Depreciation: motor vehicles (20% of 18,000) (3,600)

––––––

Loss for the period (335)

––––––

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Statement of financial position as at 31 December 20X2

Non-current assets Cost Accum.

dep'n

Carrying

value

$ $ $

Motor vehicles 18,000 3,600 14,400

Computer 2,000 500 1,500

–––––– –––––– ––––––

20,000 4,100 15,900

–––––– ––––––

Current assets

Inventory 400

Receivables 970

Cash at bank and in hand (2,600 at bank + 80 in hand) 2,680

––––––

4,050 ––––––

Total assets 19,950

––––––

Initial capital 20,000

Loss for the period (335)

Drawings (850)

––––––

Owner's capital 18,815

Current liabilities

Payables 1,095Accrual 40

––––––

1,135

––––––

19,950

––––––

7/23/2019 03 Answers f3-Ffa Lrp 2014-15




COMPANY FINANCIAL STATEMENTS

86 RULERS


Note $000 $000

Revenue 3,500 Cost of sales (W1) (2,551)

–––––

Gross profit 949

Distribution costs (W1) 223

Administrative expenses (W1) 300

–––– (523)

Interest receivable 7

Interest payable (100 × 10%) (10)

–––– (3)

–––––

Profit before tax 1 423Income tax expense (150)

–––––

Profit for year 273

–––––

Statement of financial position as at 31 December 20X2

Note Cost Depn.

Non-current assets $000 $000 $000

Tangible assets 2 470

Current assets

Inventory 600

Receivables (W2) 495 Cash at bank (W3) 398

–––––

1,493

–––––

1,963

–––––

Capital and reserves

Ordinary $1 shares 500

10% Irredeemable preference shares 100

Share premium account 200

Revaluation reserve 30Retained earnings 663

–––––

1,493


10% Loan notes 100

Current liabilities

Payables and accruals (200 + 10) 210

Preference dividend payable 10

Income tax 150 370

––––– –––––

1,963 –––––

7/23/2019 03 Answers f3-Ffa Lrp 2014-15




Statement of changes in equity year ended 31 December 20X2

Ordinary

shares

Irredeemable

preference

shares

Share

premium

Revaluation

reserve

Accumulated

profit

Total

$000 $000 $000 $000 $000 $000

Balances at

31 December

20X1

500 100 200 455 1,255

Surplus on

revaluation of

land

30 30

Profit for year 273 273

Dividends

Preference (10) (10)

Ordinary (55) (55)

–––– –––– –––– –––– –––– –––––

500 100 200 30 663 1,493

–––– –––– –––– –––– –––– –––––

Notes to the financial statements

(1) Profit on ordinary activities before taxation.

This is stated after charging $000

Depreciation 60

(2) Tangible non-current assets Plant and

Land machinery Total $000 $000 $000

Cost

At 1 January 20X2 200 550 750

Revaluation 30 30

–––– –––– ––––

At 31 December 20X2 230 550 780

–––– –––– ––––

Depreciation

At 1 January 20X2 250 250

Charge for the year 60 60

–––– ––––

310 310

–––– ––––

Carrying value at

31 December 20X2 230 240 470

–––– –––– ––––

31 December 20X1 200 300 500

–––– –––– ––––

(3) An ordinary dividend of 14c per share ($70,000) is proposed.

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Workings

(W1) Cost analysis

Cost of sales Dist. Admin

$000 $000 $000

Cost of sales 2,100

Operating expenses 400

Management exp. 280

Selling exp. 220

Irrecoverable debts (W2) 4

Depreciation (550 − 250) × 20% = 60 51 3 6

Bank charges 2

Discounts allowed 8

––––– ––––– –––––

2,551 223 300

––––– ––––– –––––(W2)

Allowance for receivables account

$

Irrecoverable debts (bal fig) 1,000

Balance c/d ((550 – 50) × 1%) 5,000

–––––

6,000

–––––

$

Balance b/d 6,000

–––––

6,000

–––––

Irrecoverable debts account

$

Balance b/d 5,000

–––––

5,000

–––––

$

Allowance for receivables 1,000

Profit or loss 4,000

–––––

5,000

–––––

$

Receivables 550,000 – 50,000 500,000

Less: allowance 5,000

–––––––

495,000

–––––––

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(W3)

Cash book

$

Balance b/d 350,000

Standing order 50,000

–––––––

400,000

–––––––

$

Bank charges 2,000

Balance c/d 398,000

–––––––

400,000

–––––––

Tutorial note:

The dates in respect of dividends are important:

(a) the date the dividend is proposed: no accounting entry, because there is not yet a

commitment to pay the dividend

(b) the date the dividend is declared (directors usually declare interim dividends, but final

dividends declared by shareholders in general meeting): an accrual entered in the

accounts, because there is now a commitment to pay the dividend. So a current liability

in the statement of financial position and a deduction in the statement of changes in

equity.

(c) the date the dividend paid: the accrual is cleared by the payment.

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87 ELLIS ISLAND

It is assumed that the cost of the premises is an administration expense and that the cost of

the motor vehicles and the irrecoverable debt expense are distribution expenses.

Workings

Cost of sales $000Opening inventory 25

Purchases 1,152

–––––

1,177

Closing inventory (29)

–––––

1,148

Manufacturing wages 87

Hire of plant 15

Depreciation of plant 66

–––––

1,316

–––––

Distribution costs $000

Sales persons’ salaries 44

Advertising expenses 73

Depreciation of motor vehicles 22

Irrecoverable debt expense 21

––––

160

––––

Administrative expenses $000

Administration salaries 76

Depreciation of premises 33

Audit fee 9

––––

118

––––

Finance cost

Although only $10,000 in interest has been paid, it is assumed that the loan notes have been

in issue for the full year, and the annual interest charge will be 10% of $200,000 = $20,000.

Staff costs in total = (in $000) 87 + 44 + 76 = 207.

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$000

Revenue 1,920

Cost of sales (1,316)

–––––

Gross profit 604

Distribution costs (160)

Administrative expenses (118)

–––––

Profit from operations 326

Finance cost (20)

–––––

Profit before tax 306

Income tax expense (57)

–––––Net profit for the period 249

–––––

Information to be disclosed

Nature of expenses

Depreciation of plant $66,000

Depreciation of premises $33,000

Depreciation of motor vehicles $22,000

Staff costs $207,000

Notes: Dividends

(1) Dividends are presented in the statement of changes in equity, not as an expense in

profit or loss. Disclosure must be made of:

• the total declared in the year, i.e. $14,000

• the total proposed at the year end, i.e. $28,000.

(2) Disclosure must also be made of the amount of dividends per share, but this is not

possible as the question does not state how many shares of the company are in issue.

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88 MOORFOOT

Statement of profit or loss for the year ended 30 June 20X8

$000

Sales revenue (13,600 + 7) 13,607

Cost of sales (W1) (7,988)

––––––

Gross profit 5,619

Distribution costs (W1) (1,948)

Administrative expenses (W1) (2,156)

––––––

Profit from operations 1,515

Finance costs (100)

––––––

Net profit for the period 1,415

––––––

Statement of financial position as at 30 June 20X8

$000 $000

Non-current assets (W2)

Land 1,510

Buildings 7,114

Warehouse and office equipment 1,240

Motor vehicles 640

––––––

10,504

Current assets

Inventory 1,660

Trade receivables (810−

(6 + 30) + 7) 781Prepayments (60 + 70) 130

Cash 140

–––––– 2,711

–––––––

13,215

–––––––


Called up share capital 1,200

Share premium account 2,470

Retained earnings (6,772 + 1,415 − 480 − 360) 7,347

–––––– 11,017Non-current liabilities

10% loan notes 1,000

Current liabilities

Trade payables (820 + 18) 838*

Accruals (120 + 190 + 50) 360*

–––––– 1,198

–––––––

13,215

–––––––

*Alternatively these items may be shown as:

Trade payables 820Accruals (360 + 18) 378

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Workings

(W1) Statement of profit or loss headings

Cost Distrib'n Admin

of sales costs expenses

$000 $000 $000

Purchases (8,100 + 18) 8,118

Inventory 1 July 20X7 1,530

Distribution costs (1,460 + 120 − 60) 1,520

Administrative expenses (1,590 + 190 − 70) 1,710

Irrecoverable debts 6

Increase in allowance for receivables 12

Depreciation

Buildings 2% × 8,300 83 83

Equipment 15% × 1,800 135 135

Vehicles 25% × 1,680 210 210Inventory 30 June 20X8 (1,660)

––––– ––––– –––––

7,988 1,948 2,156

––––– ––––– –––––

(W2) Non-current assets

Warehouse

and office Motor

Land Buildings equipment vehicles

$000 $000 $000 $000

Per list of account balances

Cost 1,510 8,300 1,800 1,680

Accumulated depreciation b/f – (1,020) (290) (620)

Depreciation for year – (166) (270) (420)

––––– ––––– ––––– –––––

1,510 7,114 1,240 640

––––– ––––– ––––– –––––

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89 LOMOND

(a) An enterprise must be able to demonstrate all of the following:

(i) The technical feasibility of completing the project so that it will be available for

use or sale.

(ii) The intention to complete the project and use or sell the result.

(iii) Its ability to use or sell the product.

(iv) The ability of the product to generate future economic benefits.

(v) The availability of adequate technical, financial and other resources to use or sell

the product.

(vi) The ability to measure the expenditure attributable to the project reliability

during its development.

Note: Broadly, these points are worded as they appear in IAS 38. Answers using your

own words to express them are obviously acceptable.

(b)

IS SoFP

$ $

Project A

Amortisation of development cost ($200,000/5) 40,000

Statement of financial position ($120,000 – $40,000) 80,000

Project B

Expenditure written off ($175,000 + $55,000) 230,000 Nil

Project CDevelopment expenditure to date Nil 255,000

Project D

Research expenditure (cannot be capitalised) 80,000 Nil

––––––– –––––––

350,000 335,000

––––––– –––––––

(c) Disclosure requirements

(i) Total research and development expenditure recognised as an expense was

$350,000 analysed as follows:$

Expenditure during the year 135,000

Amortised or written off from deferred expenditure 215,000

–––––––

350,000

–––––––

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Tutorial note:

Total expenditure in the year = $55,000 on Project B and $80,000 on Project D. Amortised or

written off = $40,000 on Project A and $175,000 on Project B.

(ii) Movements on unamortised development costs

$

Balance at 1 July 20X7 (120 + 175 + 85) 380,000

Expenditure recognised as an asset in current year 225,000

–––––––

605,000

Amortised during year (40,000)

Expenditure on abandoned project written off (230,000)

–––––––

Balance at 30 June 20X8 335,000

–––––––

Tutorial note:

Total expenditure recognised as an asset in the current year = $55,000 on Project B plus

$170,000 on Project C.

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90 IAS 10 EVENTS AFTER THE REPORTING PERIOD

(a) Events after the reporting period should be adjusted in the financial statements if they

provide additional evidence to assist with the estimation of amounts relating to

conditions existing at the reporting date.

Events after the reporting period which do not affect conditions at the reporting date

should be disclosed by note if they are of such importance that non-disclosure would

affect the ability of users of the financial statements to make proper evaluations and

decisions.

(b) (i) (Disclosure by note)

The company issued 100,000 50c ordinary shares at $1.80 per share on [date].

The purpose of the issue was to [explanation].

(ii) (Adjusted in financial statements)

The $50,000 should be included as an expense in the calculation of operating

profit, with disclosure of the details by note. The $50,000 will also appear in the

statement of financial position as a current liability.

(iii) (Adjusted in financial statements)

Assuming that the loss in value is not due damage occurring after the reporting

date, the inventory at the statement of financial position date should be reduced

by $10,000, thus reducing operating profit and the statement of financial position

inventory figure by this amount.

(iv) (Disclosure by note)

A fire on 1 February 20X6 completely destroyed one of the company's factories

valued at $250,000. Half of this sum was covered by insurance and the insurance

company has agreed to pay $125,000 under the policy.

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CONSOLIDATED ACCOUNTS

91 PIXIE AND DIXIE

Pixie and its subsidiary

Consolidated statement of financial position as at 31 December 20X9$

Assets

Non-current assets

Intangible – goodwill (W3) 25,000

Other (210 + 110.6) 320,600

–––––––

345,600

Current assets (113.1 + 43.4) 156,500

–––––––

502,100

–––––––

Equity and liabilities

Issued share capital (100,000 + 37,500(W3)) 137,500

Share premium (W3) 37,500

Retained earnings (W5) 163,000

–––––––

338,000

NCI (W4) 22,000

–––––––Total equity 360,000

Current liabilities (76.1 + 66) 142,100

–––––––

502,100

–––––––

Workings

(W1) Group structure – shareholdings in Dixie

Ordinary

Group 75%Non-controlling interest 25%

–––––

100%

–––––

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(W2) Net assets of Dixie

At

Acquisition

date

At

reporting

date

$ $

Share capital 50,000 50,000Retained earnings 30,000 38,000

––––––– –––––––

80,000 88,000

––––––– –––––––

(W3) Goodwill

$

Cost of investment in Dixie:

Cash 10,000

Fair value of shares issued 37,500 × $2 75,000

(share capital 37,500 × $1 = $37,500)

(share premium 37,500 × $1 = $37,500) –––––––

85,000

Fair value of NCI in Dixie at acquisition 20,000

–––––––

105,000

Less: Net assets at acquisition (W2) (80,000)

–––––––

Goodwill at acquisition 25,000

–––––––(W4) Non-controlling interest

$

Fair value of NCI in Dixie at acquisition 20,000

NCI share of post-acquisition retained

earnings: 25% × (88,000 – 80,000)(W2)

2,000

–––––––

22,000

–––––––

(W3) Group retained earnings

$

Pixie: Retained earnings (given) 157,000

Dixie: 75% × (88,000 − 80,000)(W2) 6,000

–––––––

163,000

–––––––

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INTERPRETING/USING FINANCIAL STATEMENTS

STATEMENTS OF CASH FLOWS

92 SH

SH – Cash flow statement for year ended 30 June 20X6

$000 $000

Cash flows from operating activities

Net profit 250

Adjustments for:

Depreciation 255

Loss on sale of non-current assets (W) 30

––––

Operating profit before working capital changes 535

Increase in inventories (350)Decrease in receivables 135

Decrease in payables (645)

––––

Net cash used in operating activities (325)

Cash flows from investing activities

Purchase of property, plant and equipment

(3,500 – (3,000 – 230)) (730)

Proceeds of sale 145

––––

Net cash used in investing activities (585)

Cash flows from financing activities

Proceeds from issuance of share capital (3,200 + 400 – 2,800) 800

Dividends paid (80)

––––

Net cash from financing activities 720

–––––

Net decrease in cash and equivalent balances (190)Cash and equivalent balances at 1 July 20X5 2,350

–––––

Cash and equivalent balances at 30 June 20X6 2,160

–––––

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Working

$000

Calculation of profit/loss on disposal

Accumulated depreciation at 30 June 20X6 2,300

Less: Charge for the year (255)

–––––

2,045

Accumulated depreciation at 30 June 20X5 (2,100)

–––––

Therefore, cumulative depreciation relating to disposal (55)

–––––

Proceeds 145

CV (230 – 55) 175

–––––

Therefore, loss on disposal (30) –––––

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93 AMS

AMS – Statement of cash flows for the year ended 31 August 20X8

$000 $000

Cash flows from operating activities

Net profit (W1) 80Adjustments for:

Depreciation (50 + 25) 75

Loss on sale of plant 10

Interest expense 30

––––

Operating profit before working capital changes 195

Decrease in inventory 100

Increase in receivables (20)

Decrease in payables (33)

––––

Cash generated from operations 242

Interest paid (30)

Income taxes paid (12 + 10 – 10) (12)

––––

Net cash from operating activities 200


Purchase of non-current assets (W3) (265)

Proceeds of sale of plant 50

––––Net cash used in investing activities (215)

Cash flows from financing activities

Proceeds from issuance of share capital (W2) 600

Repayment of loan notes (200)

Dividends paid (45)

Net cash from financing activities –––– 355

––––

Net increase in cash and equivalents for the year 340

Cash and equivalents at 1 September 20X7 (40)

––––

Cash and equivalents at 31 August 20X8 300

––––

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Workings

(W1)

$000

Gross profit 239

Expenses (159)

––––

80

––––

(W2) Issue of ordinary shares

$000

20X7 Ordinary shares

Share premium

1,300

300

–––––

1,600

–––––20X8 Ordinary shares

Share premium

1,800

400

–––––

2,200

–––––

Therefore proceeds of fresh issue 600

–––––

(W3) Tangible non-current assets

$000 $00020X8 NVB 2,000

20X7 NVB 1,870

–––––

Increase in CV 130

Add back: Depreciation 75

Disposal at cost 85

Less: depreciation (25)

––––

60

–––––Additions in the year 265

–––––

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94 ADDAX

(a)

Plant and equipment – cost

20X2 $ 20X2 $

1 April Opening balance 840,000 10 Dec Disposal account 100,0001 Oct Cash (purchase) 180,000

20X3

31 Mar Closing balance 920,000

–––––––– ––––––––

1,020,000 1,020,000

–––––––– ––––––––

Plant and equipment – depreciation

20X2 $ 20X2 $

10 Dec Disposal account 60,000 1 April Opening balance 370,000

20X3 20X331 Mar Closing balance 393,000 31 Mar Profit or loss 83,000

––––––– –––––––

453,000 453,000

––––––– –––––––

Depreciation charge for the year = 10% of (840,000 – 100,000) + (6/12 × 10% of

180,000) = 74,000 + 9,000 = 83,000.

Plant and equipment – disposal

20X2 $ 20X2 $

10 Dec Plant and equipment – cost 100,000

10 Dec Plant andequipment –

depreciation 60,000

Cash 45,000

20X3

31 Mar Profit or loss 5,000

––––––– –––––––

105,000 105,000

––––––– –––––––

The transfer to profit or loss on 31 March is the profit on the disposal of the plant.

(b)Cash flow statement for the year ended 31 March 20X3 (extracts)

Cash flow from operating activities $

Net profit before taxation

Adjustments for:

Depreciation 83,000

Profit on sale of plant (5,000)


Purchase of plant (180,000)Proceeds from sale of plant 45,000

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RATIO ANALYSIS

95 MBC

(a) Gearing ratio = 100%×

debttotal+ reserves and capital Share

debtTotal

= 100%×48

10

= 20.8%

Alternatively the gearing ratio can be calculated as:

= 100%×reserves and capital Share

debt Total

= 100%×

38

10

= 26.3%

(b) Return on capital employed = 100%×2)employed(W capital Average

(W1)tax and interest before Profit

= 100%×46.25

5.6

= 12.1%

An alternative method of calculating ROCE is:

100%×employed capital Closing

tax and interest before Profit = 11.7%=100%×485.6

Tutorial note:

Wherever possible use average figures for capital employed, because this will give a more

representative picture than using year-end figures.

(c) If shares are issued to raise the additional $10 million of finance, then there will be no

additional interest cost in future years. However the purpose of the raising of the

finance is to fund research and development. This means that it is unlikely that there

will be any increase in profit in the following year or even the next few years.

If profit remains at the same level and the funds are raised by issuing additional share

capital, then the gearing ratio and ROCE are likely to appear as follows:

Gearing = 100%×capital Total

debt Total

= 100%×

58

10

= 17.2%

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ROCE = 100%×employed capital Average

tax and interest before Profit

=( )

100%×/258+48

5.6

= 100%×53

5.6

= 10.6%

If the additional finance is raised by the issue of further loan notes, then there are two

matters to consider. Firstly, the gearing will increase as the proportion of debt finance in

the capital structure increases. Secondly, the profit after tax will decrease as additional

interest is payable on the additional debt finance, but this does not affect ROCE which is

calculated by reference to profit before interest and tax.

The likely effect on gearing can be illustrated:

Gearing = 100%×capitalTotal

debtTotal

= 100%×58

20

= 34.5%

Workings

(W1) Profit before interest and tax

$m

Net profit 4.0

Add: Tax 1.0

Add: Interest (10 × 6%) 0.6

–––

5.6

–––

(W2) Average capital employed:

$m

Closing capital employed 48.0

Opening capital employed (48 – (4 – 0.5)) 44.5

Average capital employed = $46.25m=2

44.5+48

Note: This answer is fuller than could be expected from a candidate for ten marks,

but it provides useful tutorial material.

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96 PETER JACKSON

Statement of profit or loss for the year ended 31 May 20X2

$ $

Sales 300,000

Opening inventory (W3) 40,000Purchases (bal fig) 220,000

–––––––

260,000

Less: Closing inventory (W4) 60,000

–––––––

Cost of sales (W2) 200,000

–––––––

Gross profit 100,000

Less: Expenses (bal fig) 70,000

–––––––

Net profit (10% × 300) 30,000

–––––––

Statement of financial position as at 31 May 20X2

$ $

Non-current assets (bal fig) 31,288

Current assets

Inventory 60,000

Receivables (W7) 36,986

Cash (bal fig) 7,890 –––––––

(W9) 104,876

Payables (W8) (36,164)

–––––––

68,712

–––––––

Capital employed 30,000 × 30100 100,000

–––––––

Financed by

Opening capital (bal fig) 70,000

Net profit 30,000

–––––––

100,000

–––––––

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Workings

(W1) The first step in this question is to set out a simple proforma statement of profit or loss

and statement of financial position so that you can see which figures you need to

calculate.

(W2) Cost of sales – Profit mark-up on cost is 50%

Sales $300,000

Cost of sales 300,000 × 150100 $200,000

(W3) Opening inventory 300,000 × 36573 $60,000

This is at selling price so cost of opening inventory is $60,000 × 150100 = $40,000.

(W4) Closing inventory 300,000 × 3655.109 $90,000

At cost 90,000 × 150100 $60,000

(W5) After calculating the cost of sales (W2), opening inventory (W3) and closing inventory

(W4) the purchases figure can be filled in as the balancing figure.

You are given the net profit margin as a percentage of sales therefore the expenses are

also a balancing figure.

(W6) In the statement of financial position you already know the amount of closing inventory

and both receivables and payables can be calculated using the payment days given.

Current assets to current liabilities can then be calculated and cash filled in as the

balancing figure.

Finally, you are told the ratio of net profit to capital employed and as net profit is known

capital employed can be calculated and non-current assets slotted in as the final

balancing figure.

(W7) Receivables (based upon sales) 300,000 × 36545 $36,986

(W8) Payables (based upon purchases) 220,000 × 36560 $36,164

(W9) Current assets: current liabilities is 2.9

Current assets = 36,164 × 2.9 = $104,876

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COMPREHENSIVE EXAMPLE

97 TYR

(a) Statement of profit or loss for the year ended 31 October 20X7

$000 $000Revenue (2,569 – 12) 2,557

Less: Cost of sales

Opening inventory 210

Purchases (1,745 + 15 – 34) 1,726

Closing inventory (194 + 7) (201)

–––––

1,735

–––––

Gross profit 822

Less Expenses

Administration (264 – 12 + 17) 269

Selling and distribution (292 – 28) 264

Loan note interest (W2) 30

Carriage outwards 18

Depreciation (W1) 36

–––––

(617)

–––––

Net profit before tax 205

Income tax expense (40)

–––––

Net profit for the year 165

–––––

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(b) Statement of financial position as at 31 October 20X7

Cost Accumulated

depreciation

$000 $000 $000

Non-current assets

Land (495 + 55) 550 – 550Premises (350; 20 + 14) 350 34 316

Plant and equipment (220;30 + 22) 220 52 168

Patents and trade marks 200 – 200

––––– ––––– –––––

1,320 86 1,234

Current assets ––––– –––––

Inventory (194 + 7) 201

Receivables (875 – 12) 863

Prepayment (12 + 28) 40

Cash 12

–––––

1,116

–––––

2,350

–––––


1,600,000 Ordinary 50c shares 800

200,000 5% $1 Irredeemable preference shares 200

–––––

1,000

Share premium 100

Revaluation reserve (135 + 55) 190

Retained earnings ((425 – 100 – 135) + 165 – 20 – 5) 330

–––––

1,620


12% Loan notes 250

Current liabilities

Payables 318

Bank overdraft 85Accruals (17 + 15 (W2)) 32

Income tax 40

Preference dividend (5% × 200 × 1/2) 5

–––––

480

–––––

2,350

–––––

Note: A final ordinary dividend of 5c per share ($80,000) is proposed.

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Workings

(W1) Depreciation

$000

Premises 4% × $350 = 14

Plant and machinery 10 % × $220 22

––––

36

––––

(W2) Loan note interest

$250,000 @ 12% = $30,000

$15,000 paid, so accrual for $15,000 is needed.

(c) (i) Gross profit mark up = 47.4%=1,735

822=

salesofCost

profit Gross

Gross profit mark up has fallen slightly from last year’s 50%. This may be due to:

• Increased competition preventing the ‘passing on’ of supplier’s price

increases;

• A policy of price restriction (or even reduction) to try to increase market

share;

• A lack of control in the purchasing department which resulted in purchases

being at higher prices.

(ii) Net profit percentage = 8%=

2,557

205=

sales

profit net

Net profit percentage has risen from last year’s 3%. Given the fall in mark up, this

must be due to reduced expenses. This could be due to:

• Improved control over expenses

• Gains from economies of scale as the organisation expanded

(iii) Current ratio =

Current assets : current liabilities

= 1,116 : 480

= 2.3 : 1

This is slightly below last year’s 2.4:1. This could be because there are improved

controls over inventory, leading to lower levels of inventory.

(iv) Acid test ratio

Current assets – inventory : current liabilities

= (1,116 – 201) 915 : 480

= 1.9 : 1

This has increased slightly from last year’s figure, and probably indicates an

increase in receivables and cash compared to last year.

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03 answers f3-ffa lrp 2014-15

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