Answers Part Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2003 Answers Section A A A B C D B B B B C D C A B C D A D A B C D C B 16,000 18,000 18,000 16,000 + + + + 14,600 – 18,000 14,600 – 16,000 14,600 + 16,000 14,600 16,690 – 9,160 – 3,860 16,690 + 3,860 – 9,160 As B but overdrawn C + x $3,660 discounts allowed C + x $1,800 bad debts written off Sales ledger control account $ $ 284,680 3,660 189,120 1,800 4,920 179,790 800 Balance 282,830 –––––––– –––––––– 473,800 473,800 –––––––– –––––––– C + $1,600 (contras) 483,700 483,700 483,700 483,700 – 38,400 + + 38,400 – + 38,400 – – 38,400 + 14,800 14,800 14,800 14,800 + 400 – + 400 – – 400 + – 400 + 1,800 1,800 1,800 1,800 (Correct) 10 D 11 B A B C 12 B A B C D $181,600 x 40% = 72,640 – 67,600 = $5,040 $114,000 x 10/6 = $190,000 – 181,600 = $8,400 (correct) $181,600 – (114,000 + 40%) P Q P Q P Q P Q (340,000 – 95,000 180,000 + 90,000 180,000 + 90,000 170,000 + 85,000 20,000)/2 + 170,000/2 90,000 – 20,000 (Correct) 90,000 85,000 13 B 14 D 15 C 16 C 17 D 18 C 19 19 C 20 D 21 B A B C D 22 D A B C D All rights issue proceeds added to share capital Bonus issue 75,000 125,000 + 62,500 + 37,500; 100,000 + 187,500 – 37,500 (correct) As B, but bonus issue added to share premium Bonus issue does not allow for previous issue $80,000 + 7% x $500,000 x 3/12 As D but including 7% x $500,000 x 6/12 instead of 3/12 As D but excluding 7% x $500,000 x 3/12 8% x $1m x 3/12 + 8% x $750,000 x 9/12 + 7% x $500,000 x 3/12 23 A 24 A 25 A 20 Section B (a) Abrador Balance sheet as at 31 December 2002 $ Assets Non-current assets Property, plant and equipment (W1) Development costs Current assets Inventory Receivables (W2) 3,000,000 570,000 –––––––––– 3,900,000 2,910,000 –––––––––– Equity and liabilities Capital and reserves Issued share capital Share premium account Accumulated profits (W3) Curent liabilities Trade payables Bank overdraft 6% loan notes 3,570,000 6,810,000 –––––––––– 10,380,000 –––––––––– 1,500,000 700,000 5,780,000 –––––––––– 7,980,000 1,900,000 100,000 400,000 –––––––––– Workings Property, plant and equipment per question less: depreciation at 31 December 2001 2,400,000 –––––––––– 10,380,000 –––––––––– 5,000,000 1,000,000 –––––––––– 4,000,000 1,000,000 –––––––––– 3,000,000 –––––––––– less: 25% x 4,000,000 $ Receivables less: Written off 3,400,000 400,000 –––––––––– 3,000,000 90,000 –––––––––– 2,910,000 –––––––––– less: Allowance $ Accumulated profit Per question less: Depreciation Bad debts Allowance for doubtful debts 7,170,000 1,000,000 400,000 (10,000) ––––––––– 21 1,390,000 –––––––––– 5,780,000 –––––––––– (b) $ Movements on deferred development expenditure during year Balance at 31 December 2001 New expenditure in 2002 550,000 120,000 ––––––––– 670,000 (100,000) ––––––––– 570,000 ––––––––– Amortisation for year Deferred development expenditure at 31 December 2002 Total expenditure on research and development charged in income statement Current expenditure Amortisation (a) 85,000 100,000 ––––––––– 185,000 ––––––––– Office building – cost/valuation 2002 July Balance July Revaluation $ 1,600,000 400,000 –––––––––– 2,000,000 $ Office building – accumulated depreciation 2002 July Revaluation reserve 2003 30 June Balance $ 320,000 2002 July Balance 2003 30 June Income statement (W1) 50,000 ––––––––– 370,000 ––––––––– $ 320,000 50,000 ––––––––– 370,000 ––––––––– Revaluation reserve $ (b) 2002 July Office building – cost July Office building – depreciation $ 400,000 320,000 ––––––––– 720,000 Plant and machinery – cost 2002 July Balance Oct Cash 2003 July Balance $ 840,000 200,000 –––––––––– 1,040,000 –––––––––– 2003 April Transfer disposal 30 June Balance 800,000 22 $ 240,000 800,000 –––––––––– 1,040,000 –––––––––– Plant and machinery – accumulated depreciation 2003 April Transfer – disposal 30 June Balance $ 180,000 2002 July Balance 2003 30 June Income statement (W2) 326,000 –––––––––– 506,000 –––––––––– $ 306,000 200,000 –––––––––– 506,000 –––––––––– Plant and machinery – disposal 2003 April Transfer – cost 30 June Income statement profit $ 240,000 2003 April Transfer – depreciation Cash 10,000 –––––––––– 250,000 –––––––––– $ 180,000 70,000 –––––––––– 250,000 –––––––––– Workings Depreciation of office building $2m/40 (remaining useful life) = $50,000 Depreciation of plant and machinery 25% x ($840,000 – $240,000 + $200,000) = $200,000 Cost of control Investment $ 180,000 Share capital 70% Accumulated profits 70% Accumulated profits – goodwill amortised 4/5 x $5,000 Balance for CBS –––––––––– 180,000 –––––––––– $ 70,000 105,000 4,000 1,000 –––––––––– 180,000 –––––––––– Minority interest Balance for CBS $ 123,000 Share capital 30% Accumulated profits 30% –––––––––– 123,000 –––––––––– $ 30,000 93,000 –––––––––– 123,000 –––––––––– Accumulated profits $ Cost of control 70% pre-acq Minority interest 30% Cost of control goodwill amortised Balance for CBS Eagle Oxer 105,000 93,000 4,000 558,000 –––––––––– 760,000 –––––––––– $ 450,000 310,000 –––––––––– 760,000 –––––––––– 23 Eagle Group Consolidated balance sheet as at 31 October 2003 $ 1,000 900,000 –––––––– 901,000 –––––––– 220,000 558,000 –––––––– 778,000 123,000 –––––––– 901,000 –––––––– Goodwill Sundry net assets Share capital Accumulated profits Minority interest (a) The basic principle for the valuation of inventory according to IAS Inventories is to take the lower of cost and net realisable value The 3,000 skirts should therefore be included at cost $40,000, and the jackets should be valued at net realisable value: $ $25,000 less $1,800 23,200 $20,000 less $2,000 18,000 ––––––– 41,200 ––––––– (b) IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires contingent liabilities of this kind and degree of probability be disclosed by note, detailing the nature of the contingent liability and an estimate of the financial effect The $100,000 should therefore be removed and the note substituted Provision should be made for legal expenses to be incurred (c) IAS 10 Events after the Balance Sheet Date classifies this as a non-adjusting event but a note giving details of the event and its financial effect (a loss of $180,000 plus $228,000 = $408,000) is required as the item is material enough to influence a reader of the financial statements (a) (i) Profit on a sale is calculated by taking the difference between historical cost and sale proceeds When prices are rising, as they usually are, the ‘holding gain’ arising while the goods were held in inventory is included as part of the profit, ignoring the fact that it will cost more to replace the item (ii) Depreciation based on the historical cost of assets understates the real value of the benefit obtained from the use of these assets if prices have risen since the assets were acquired Profit is thus overstated (iii) The retention of historical values for non-current assets in the balance sheet understates their actual value This can mislead shareholders when the balance sheet value of the business is used when calculating return on capital employed (b) (i) It is simple and cheap (ii) Figures used are objective and verifiable (iii) Lack of a sound and acceptable alternative 24 Part Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2003 Marking Scheme Marks (a) (b) (a) (b) Tangible non-current assets x 1/2 Development costs correctly displayed Receivables x 1/2 Issued share capital Share premium Accumulated profits x 1/2 Loan notes in current liabilities Layout 1/ 1 11/2 1/ 2 ––– Movements in deferred development expenditure Opening balance Movements x Income statement x 1/2 ––– Office building cost/valuation x 1/2 accumulated depreciation: calculations entries x 1/2 revaluation reserve x 81/2 max ––– 12 ––– 1 2 ––– Plant and machinery cost x 1/2 accumulated depreciation x 1/2 disposal x 1/2 2 ––– Goodwill x 1/2 Minority interest x 1/2 Accumulated profits x 1/2 Share capital Sundry net assets Heading 21/2 21/2 1/ 1/ ––– 25 6 ––– 12 ––– ––– Marks (a) (b) (c) Inventory IAS mentioned IAS Valuation x 1/2 Contingent liability IAS 37 mentioned Disclose by note stating nature and financial effect Remove $100,000 and replace with note Provide for legal expenses Event after the balance sheet date IAS 10 mentioned Non-adjusting Note required detailing event and financial effect 1 ––– 1 1 ––– 1 ––– (a) 3x2 (b) 3x1 ––– 26 ––– ––– ––– ... Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2003 Answers Section A A A B C D B B B B C D C A B C D A D A B C D C B 16,000 18,000 18,000 16,000 +... IAS 37 mentioned Disclose by note stating nature and financial effect Remove $100,000 and replace with note Provide for legal expenses Event after the balance sheet date IAS 10 mentioned Non-adjusting