Answers Part Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2004 Answers Section A B C D B A 146,000 + 218,000 – 83,000 (240,000 x 20%) + (160,000 x 20% x Balance Sales Interest 6/ ) 12 – (60,000 x 20% x 614,000 301,000 1,600 Cash Discounts Contras Bad Debts Balance –––––––– 916,600 –––––––– 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A A A D D B A C C B A D B D A B B C B C A B C D 5 ––– 25 ––– 9/ ) 12 311,000 3,400 8,650 32,000 561,550 –––––––– 916,600 –––––––– (2 x 5,000) + ( 10 x 6,000) [2/3 x 1/ x (540,000 + 30,000)] – 20,000 + (50% x 285,000) 17 [P.T.O Section B (a) Bob Income statement for the year ended 30 September 2004 Sales Less: Cost of sales Less: Opening inventory Less: Purchases Reference to workings $ 604,200 138,000 410,800 –––––––– 448,800 146,000 –––––––– Less: less: Closing inventory Gross profit Expenses $ 402,800 –––––––– 201,400 194,000 –––––––– 107,400 –––––––– Net profit (b) Calculation of goods taken by Bob: Purchases as above Purchases per information in question: 408,100 – 68,100 + 77,100 + 14,200 410,800 431,300 –––––––– 20,500 –––––––– Goods taken by Bob therefore total Workings Sales Credit sales $519,400 – $119,200 + $125,000 Cash sales Sales for income statement Purchases and cost of sales Cost of sales $604,200 x 2/3 Details Opening inventory Purchases (balancing figure) less: closing stock $ 525,200 79,000 –––––––– 604,200 –––––––– 402,800 38,000 410,800 –––––––– 448,800 46,000 –––––––– Expenses $89,400 + $4,100 – $3,900 + $4,600 + $2,400 – $2,600 Alternative workings for (b) Purchases and cost of sales (before deducting goods taken by Bob) Purchases $408,100 – $68,100 + $77,100 + $14,200 Cost of sales $431,300 + $38,000 – $46,000 Calculation of goods taken by Bob Cost of sales allowing for 50% mark-up $604,200 x 2/3 Cost of sales as above Goods taken by Bob therefore total Purchases total becomes $431,300 – $20,500 18 402,800 –––––––– 94,000 –––––––– 431,300 423,300 402,800 423,300 –––––––– 20,500 –––––––– 410,800 –––––––– (a) At July 2003 Prior year adjustment Arising on issue of shares Surplus on land revaluation, now realised Net profit for year (40 + 6) Dividends paid Cougar Statement of changes in equity Year ended 30 June 2004 Share Share premium Revaluation capital account reserve $m $m $m 100 140 60 11 ––– ––– ––– 100 140 60 100 180 (60) ––– 200 ––– ––– 320 ––– ––– – ––– Accumulated profits $m 120 1((6) ––– 114 Total 160 146 1((8) ––– 212 ––– – 146 1((8) –––– 732 –––– $m 420 1(6) ––– 414 280 Leo Group Consolidated balance sheet as at 30 June 2004 $ 3,100,000 ––––––––––– $3,100,000 ––––––––––– 500,000 800,000 1,470,000 ––––––––––– 2,770,000 330,000 ––––––––––– $3,100,000 ––––––––––– Sundry net assets Share capital Revaluation reserve Accumulated profits Minority interest Workings Cost of control Shares in Pard $ 700,000 Share capital 70% Accumulated profits: 70% pre-acq Accumulated profits: goodwill written off –––––––– 700,000 –––––––– $ 1,140,000 1,420,000 1,140,000 1,–––––––– 1,700,000 1,–––––––– Minority interest $ Balance for CBS 330,000 –––––––– 330,000 –––––––– Share capital 30% Accumulated profits 30% $ 1, 60,000 1,270,000 1,–––––––– 1,330,000 1,–––––––– Accumulated profits $ Cost of control 70% x 600,000 Minority interest 30% x 900,000 Cost of control goodwill written off Balance for CBS Leo Pard $ 1,400,000 1,900,000 1,420,000 1,270,000 1,140,000 1,470,000 ––––––––– 2,300,000 ––––––––– ––––––––– 2,300,000 ––––––––– 19 (a) Research and development Balance at Oct 2003 $ Project Q 1,000,000 1)(200,000) R )))400,000 S –––––––––– 1,200,000 –––––––––– Equipment Balance at Oct 2003 $ 1500,000 ((200,000) –––––––––– 300,000 –––––––––– New expenditure $ Income statement Amortisation Research $ $ Balance sheet 30 Sept 2004 $ (100,000) 1,700,000 1,650,000 250,000 (140,000) ––––––––– (140,000) ––––––––– –––––––– 250,000 –––––––– ––––––––– (100,000) ––––––––– New expenditure $ 180,000 Depreciation $ (136,000) ––––––––– (136,000) ––––––––– –––––––– 180,000 –––––––– –––––––––– 1,350,000 –––––––––– Balance sheet 30 Sept 2004 $ 1,680,000 1,(336,000) –––––––––– 1,344,000 –––––––––– Headings The amortisation of deferred development expenditure ($100,000) and the research expenditure ($140,000) and the depreciation of the research equipment ($136,000) will appear in the income statement under cost of sales The total deferred development expenditure ($1,350,000) will appear in the balance sheet under intangible non-current assets (b) Disclosure notes Income statement The aggregate amount of research and development expenditure recognised as an expense during the period was $376,000, all charged in cost of sales Balance sheet Movements on deferred development expenditure during the year were: Balance at October 2003 Year ended 30 September 2004 Amortisation New expenditure Cost $ 1,400,000 250,000 –––––––––– 1,650,000 –––––––––– Amortisation $ (200,000) Net book value $ 1,200,000 (100,000) (100,000) 250,000 –––––––––– 1,350,000 –––––––––– ––––––––– (300,000) ––––––––– The use of historical cost accounting can mislead users when prices are rising in the following ways: (i) Depreciation is based on the original cost of non-current assets and thus understates the true value obtained by the business from the use of these assets The result is that profit is overstated (ii) Inventory is often valued at cost, using FIFO or average costs If prices are rising, sales in current terms are matched with cost of sales in historical cost terms Profit is again overstated (iii) Balance sheet values of assets may become seriously below their current value (iv) The combined effects of the above three factors mean that return on capital employed is overstated (v) Year on year comparison of results is likely to be misleading as figures will show an automatic increase as prices rise, when in real terms sales and profits may have risen far less, or even have fallen Any four points needed for full marks 20 Part Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2004 Marking Scheme Section B (a) Calculations Heading and layout (b) sales x 1/2 cost of sales purchases as balancing figure expenses x 1/2 x 1/2 Calculation of purchases Correct method (subtraction of net purchases) Opening balances Prior year adjustment Share issue Surplus on revaluation transferred Net profit for year Dividends paid Goodwill Minority interest Accumulated profits Balance sheet Share capital Sundry net assets Revaluation reserve B/S layout heading 4x 1/ 2x1 4x 2x 5x 1/ 1/ 1/ Marks 1 ––– ––– 2 ––– ––– 12 ––– 1 2 1 ––– ––– 21/2 1 1 1/ ––– 41/2 ––– 10 ––– (a) Project Q R S Equipment Cost Depreciation Headings Accumulated profits Balance sheet 1 1/ 1 1/ ––– ––– (b) (b) Income statement Total Income statement heading used Balance sheet ––– ––– 12 ––– 4x2 ––– 50 ––– 21 ... Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) December 2004 Answers Section A B C D B A 146,000 + 218,000 – 83,000 (240,000 x 20%) + (160,000 x 20% x Balance... + (50% x 285,000) 17 [P.T.O Section B (a) Bob Income statement for the year ended 30 September 2004 Sales Less: Cost of sales Less: Opening inventory Less: Purchases Reference to workings $ 604,200... profit for year (40 + 6) Dividends paid Cougar Statement of changes in equity Year ended 30 June 2004 Share Share premium Revaluation capital account reserve $m $m $m 100 140 60 11 ––– ––– –––