2009-10 term time self test questions only

8/14/2019 2009-10 Term Time Self Test Questions Only

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The University of Birmingham

College of Social Sciences

Birmingham Business School

Department of Accounting and Finance

Accounting Theory

(07 !7"#

Term Time $uestions 00%&'0

The questions below have been taken from the summer 2009 accounting theory examination

paper. The questions should be attempted in your own time and handed in at the lecture on

the following Mondays

!ate "uestion

0#.02.$0 %urrent purchasing power accounting & 'ames (lc

22.02.$0 )eplacement cost accounting & *liot (lc

0#.0+.$0 %ash flow reporting & %onrad (lc

22.0+.$0 !epreciation & ,usten (lc


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Current urchasing o)er Accounting

On the 1stApril 2008 James Plc, a manufacturing company, was incorporated with an

opening ordinary share capital of 100 million all contributed in cash On the same day, thecompany drew down a long!term loan of "0 million at an interest rate of " per cent per

annum #he first interest is payable on 1stApril 200$ and the company%s financial year ends

on &1 'arch 200$

On 1stJuly 2008, the company signed a 2" year lease on industrial buildings which cost 80

million (epreciation of the lease is on a straight line basis o)er its term

On 1stOctober 2008, the company purchased plant and machinery for *0 million #hesenon current assets ha)e an estimated useful life of 10 years and an estimated residual )alue

of * million (epreciation is charged on a straight line basis o)er the assets% 10 year life

from the moment production commences

Production and trading began on 1stOctober 2008 with the purchase of initial in)entory to

the )alue of 10 million +e)enues a)eraged 1" million each month with customers paying

one month in arrears Purchases a)eraged 10 million each month with payables settled one

month in arrears Other operating epenses, paid in cash, were 1 million each month At &1

'arch 200$, closing in)entory was )alued at 12 million and had been purchased e)enly

o)er the last si months

#he company does not intend to pay a di)idend and because it has in)ested in a depri)ed

area of the country in which unemployment is high the company is eempt from corporation

ta for the first year of its operations

'o)ements in the +etail Price -nde .+P-/ ha)e been as follows

(ate +P-

1 April 2008 100

1 July 2008 10*

1 October 2008 112

&1 'arch 200$ 12


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Required:

a/ Prepare an income statement for the year ended &1 'arch 200$ and abalance sheet as at that date using current .constant/ purchasing power

accounting Pro)e the monetary gain or loss arising for the year. [18]

b/ #o what etent does the income figure calculated in part .a/ abo)e satisfy

ic3s%s definitions of economic income4 [7]

Total Marks: [25]


4/8

Replacement cost accounting

5liot Plc is a high street retailer and detailed below are its summarised historical cost

accounts for the year ended &0 April 200$

-ncome statement year ending &0 April 200$ m m

+e)enues 1,2$*

6ost of sales .opening in)entory ! &" m/ 778

ross profit "18

Other operating epenses 21$

(epreciation of properties 2"

(epreciation of e9uipment "0 2$

Profit before ta 22

#aation 7"

Profit after ta 1$

(i)idends "0

+etained profit for year $$

:alance sheet as at &0 April 200$ m m

;on current assets

Properties *00

59uipment 1"0

7"0

6urrent assets

-n)entory .purchased at a)erage price for the last * months of

year/&0

#rade recei)ables 0

6ash at ban3 &12

782

6urrent liabilities

#rade and other payables "12 270

1,020

59uity


5/8

Ordinary share capital "00

+etained profits "20

1,020

(uring the year ended &0 April 200$, after a period of prolonged price stability, the companyeperienced significant price inflation as detailed in the indices detailed below

-nde 1 'ay 2008 1 ;o)ember 2008 &0 April 200$

Properties 100 110 120

59uipment 100 11" 1&0

-n)entory 100 10" 110

+etail Price -nde 100 10* 112

As a result of the abo)e price rises, the company wishes to maintain its physical capital,

defined as the replacement cost of its property, e9uipment and in)entory Properties had an

opening balance sheet )alue of *2" million and are depreciated o)er a 2" year period on a

straight line basis from 1 'ay 2008 59uipment had an opening boo3 )alue of 200 million

and is being depreciated on a straight line basis o)er a four year period from 1 'ay 2008

+eplacement cost in the income statement is to be charged at the a)erage for the year while

in the balance sheet replacement costs are to be at year end prices

Required:

.a/ Prepare for 5liot Plc an income statement for the year ending &0 April 200$ and abalance sheet as at that date on a replacement cost basis [18]

.b/ #he company%s property manager is concerned that the holding gains shown in theseaccounts for properties will not be


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:alance sheet as at 1 April 2008 m m

+ealised assets

6ash at ban3 10*

+eadily realisable assets

=and and buildings $20

'otor )ehicles 1*2

>inished goods &1*

#rade recei)ables 17"

1,"7&

6urrent liabilities *1* $"7

1,0*&

;ot readily realisable assets

Plant and machinery 1

?or3 in progress 212 *2*

1,*8$

=ong!term loan "1$

1,170

59uity

Ordinary share capital 2"0

+etained profits $20

1,170

#he financial director intends to prepare a set of accounts for the financial year ending &1

'arch 200$ using cash flow reporting #he following additional data ha)e been collected forthis purpose

Additional data m

6ash recei)ed from customers 1,$*

6ash paid to suppliers 1,122

Other operating epenses paid in cash 112


7/8

-nterest paid *

-ncrease in long!term loan "0

6ash purchase of motor )ehicles 72

;et realisable )alues as at &1 'arch 200$

6ash at ban3 &00

=and and buildings $"0

'otor )ehicles 10

>inished goods &

#rade recei)ables 180

6urrent liabilities 720

Plant and machinery &"2

?or3 in progress 2&2

=ong!term loan "*$

Required:

.a/ As far as the gi)en information allows, prepare for 6onrad Plc a set of cash flowreporting accounts for the year ending &1 'arch 200$ [2#]

.b/ #he chief eecuti)e of 6onrad Plc has stated that the cash flow reporting accountsare of little use because the company has no intention of selling its non current

assets Answer this criticism [5]Total Marks: [25]

$epreciation

Austen Plc is a manufacturing company that operates a number of plant and machinery

assets of a similar type #he typical cash flow pattern for one of these assets is as follows

@ear 0 1 2 & "

(etail 000 000 000 000 000


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Purchase price 80

+epairs " " 10 10 2"

(isposal )alue *0 "" "0 0 10

#he production manager wants to 3now the optimum life cycle for this type of machine -n

addition, the manager wants to 3now the financial effect upon the income statement of each

of the different depreciation methods currently being used within the company Assume that

Austen Plc%s cost of capital is 10 per cent per annum Apart from the initial purchase price,

assume all cash flows occur at the end of the year

Required:

.a/ 6alculate how often this type of machine should be replaced [1#]

.b/ 6alculate the annual depreciation charge using the following methods straight line,reducing balance, sum!of!digits and economic depreciation [8]

.c/ 5plain the principle which should determine the depreciation method to be selectedby the production manager [7]

Total Marks: [25]

2009-10 term time self test questions only

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