(International Stream) PART THURSDAY JUNE 2003 QUESTION PAPER Time allowed hours This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered Section B ALL FIVE questions are compulsory and MUST be answered Paper 1.1(INT) Preparing Financial Statements Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question Each question within this section is worth marks A company pays rent quarterly in arrears on January, April, July and October each year The rent was increased from $90,000 per year to $120,000 per year as from October 2002 What rent expense and accrual should be included in the company’s financial statements for the year ended 31 January 2003? Rent expense $ Accrual $ A 100,000 20,000 B 100,000 10,000 C 97,500 10,000 D 97,500 20,000 Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950 Alpha’s payables ledger account for Beta shows a balance due to Beta of $4,140 Investigation reveals the following: (1) Cash paid to Beta $4,080 has not been allowed for by Beta (2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta (3) Goods returned by Alpha $380 have not been recorded by Beta What discrepancy remains between Alpha’s and Beta’s records after allowing for these items? A $9,310 B $390 C $310 D $1,070 An inexperienced bookkeeper has drawn up the following receivables ledger control account: Receivables Ledger Control Account Opening balance Cash from credit customers Sales returns Cash refunds to credit customers Discount allowed $ 180,000 228,000 8,000 3,300 4,200 ———— 423,500 ———— Credit sales Bad debts written off Contras against payables Closing balance (balancing figure) $ 190,000 1,500 2,400 229,600 ———— 423,500 ———— What should the closing balance be after correcting the errors made in preparing the account? A $130,600 B $129,200 C $142,400 D $214,600 At 31 March 2002 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil bill for $3,600 At 31 March 2003 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of $3,200 Payments made for heating oil during the year ended 31 March 2003 totalled $34,600 Based on these figures, what amount should appear in the company’s income statement for heating oil for the year? A $23,900 B $36,100 C $45,300 D $33,100 At 31 December 2002 a company’s receivables totalled $400,000 and an allowance for doubtful debts of $50,000 had been brought forward from the year ended 31 December 2001 It was decided to write off debts totalling $38,000 and to adjust the allowance for doubtful debts to 10% of the receivables What charge for bad and doubtful debts should appear in the company’s income statement for the year ended 31 December 2002? A $74,200 B $51,800 C $28,000 D $24,200 [P.T.O 6 The plant account of a company is shown below: Plant – Cost 2002 $ January Balance (plant purchased 1999) 380,000 April Cash – plant purchased 51,000 2002 October Transfer disposal account – cost of plant sold 31 December Balance ———— 431,000 ———— $ 30,000 401,000 ———— 431,000 ———— The company’s policy is to charge depreciation on plant at 20% per year on the straight line basis, with proportionate depreciation in years of purchase and sale What should the company’s plant depreciation charge be for the year ended 31 December 2002? A $82,150 B $79,150 C $77,050 D $74,050 In preparing a company’s bank reconciliation statement at March 2003, the following items are causing the difference between the cash book balance and the bank statement balance: (1) Bank charges $380 (2) Error by bank $1,000 (cheque incorrectly debited to the account) (3) Lodgements not credited $4,580 (4) Outstanding cheques $1,475 (5) Direct debit $350 (6) Cheque paid in by the company and dishonoured $400 Which of these items will require an entry in the cash book? A 2, and B 1, and C and D and The closing inventory at cost of a company at 31 January 2003 amounted to $284,700 The following items were included at cost in the total: (1) 400 coats, which had cost $80 each and normally sold for $150 each Owing to a defect in manufacture, they were all sold after the balance sheet date at 50% of their normal price Selling expenses amounted to 5% of the proceeds (2) 800 skirts, which had cost $20 each These too were found to be defective Remedial work in February 2003 cost $5 per skirt, and selling expenses for the batch totalled $800 They were sold for $28 each What should the inventory value be according to IAS Inventories after considering the above items? A $281,200 B $282,800 C $329,200 D None of these A company values its inventory using the first in, first out (FIFO) method At May 2002 the company had 700 engines in inventory, valued at $190 each During the year ended 30 April 2003 the following transactions took place: 2002 July Purchased 500 engines at $220 each November Sold 400 engines for $160,000 February Purchased 300 engines at $230 each 15 April Sold 250 engines for $125,000 2003 What is the value of the company’s closing inventory of engines at 30 April 2003? A $188,500 B $195,500 C $166,000 D None of these figures [P.T.O 10 Which of the following statements about the valuation of inventory are correct, according to IAS2 Inventories? (1) Inventory items are normally to be valued at the higher of cost and net realisable value (2) The cost of goods manufactured by an enterprise will include materials and labour only Overhead costs cannot be included (3) If LIFO (last in, first out) is used to value inventory, additional disclosures must be made in the financial statements (4) Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable approximation to actual cost A 1, and only B and only C only D and only The following information is relevant for questions 11 and 12 When Q’s trial balance failed to agree, a suspense account was opened for the difference The trial balance totals were: Debit $864,390 Credit $860,930 The company does not have control accounts for its receivables and payables ledgers The following errors were found: (1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capital account as $330,000 (2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant asset account (3) The petty cash book balance $500 had been omitted from the trial balance (4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as $87,400 (5) A contra between the receivables ledger and the payables ledger for $1,200 which should have been credited in the receivables ledger and debited in the payables ledger was actually debited in the receivables ledger and credited in the payables ledger 11 Which of these errors will require an entry to the suspense account to correct them? A All five items B and only C 2, and only D 1, 2, and only 12 What will the balance on the suspense account be after making the necessary entries to correct the errors affecting the suspense account? A $2,440 Debit B $15,560 Credit C $13,640 Debit D $3,440 Debit 13 Which of the following statements about research and development expenditure are correct according to IAS38 Intangible Assets? (1) If certain conditions are met, an enterprise may decide to capitalise development expenditure (2) Research expenditure, other than capital expenditure on research facilities, must be written off as incurred (3) Capitalised development expenditure must be amortised over a period not exceeding years (4) Capitalised development expenditure must be disclosed in the balance sheet under intangible non-current assets A 1, and only B and only C and only D and only 14 Listed below are some comments on accounting concepts (1) In achieving a balance between relevance and reliability, the most important consideration is satisfying as far as possible the economic decision-making needs of users (2) Materiality means that only items having a physical existence may be recognised as assets (3) The substance over form convention means that the legal form of a transaction must always be shown in financial statements, even if this differs from the commercial effect Which, if any, of these comments is correct, according to the IASB’s Framework for the Preparation and Presentation of Financial Statements? A only B only C only D None of them [P.T.O 15 Which of the following explanations of the prudence concept most closely follows that in the IASB’s Framework for the Preparation and Presentation of Financial Statements? A The application of a degree of caution in exercising judgement under conditions of uncertainty B Revenue and profits are not recognised until realised, and provision is made for all known liabilities C All legislation and accounting standards have been complied with D Understatement of assets or gains and overstatement of liabilities or losses 16 In times of rising prices, what effect does the use of the historical cost concept have on a company’s asset values and profit? A Asset values and profit both understated B Asset values and profit both overstated C Asset values understated and profit overstated D Asset values overstated and profit understated 17 At 31 December 2002 the following matters require inclusion in a company’s financial statements: (1) On January 2002 the company made a loan of $12,000 to an employee, repayable on 30 April 2003, charging interest at per cent per year On the due date she repaid the loan and paid the whole of the interest due on the loan to that date (2) The company has paid insurance $9,000 in 2002, covering the year ending 31 August 2003 (3) In January 2003 the company received rent from a tenant $4,000 covering the six months to 31 December 2002 For these items, what total figures should be included in the company’s balance sheet at 31 December 2002? Currents assets $ Current liabilities $ A 22,000 240 B 22,240 nil C 10,240 nil D 16,240 6,000 18 At 31 December 2001 the capital structure of a company was as follows: $ Ordinary share capital 100,000 shares of 50c each 50,000 Share premium account 180,000 During 2002 the company made a bonus issue of share for every held, using the share premium account for the purpose, and later issued for cash another 60,000 shares at 80c per share What is the company’s capital structure at 31 December 2002? Ordinary share capital $ Share premium account $ A 130,000 173,000 B 105,000 173,000 C 130,000 137,000 D 105,000 137,000 19 Listed below are some items that may appear in a company’s income statement, either separately disclosed or included in another figure (1) Profit or loss on discontinuing operations (2) Profit or loss on the sale of part of the enterprise (3) Extraordinary items According to International Accounting Standards, which of these items must always be shown separately if material to avoid misleading users? A All three items B and only C and only D and only [P.T.O 20 In the course of preparing a company’s cash flow statement, the following figures are to be included in the calculation of net cash from operating activities $ Depreciation charges 980,000 Profit on sale of non-current assets 40,000 Increase in inventories 130,000 Decrease in receivables 100,000 Increase in payables 80,000 What will the net effect of these items be in the cash flow statement? $ A Addition to operating profit 890,000 B Subtraction from operating profit 890,000 C Addition to operating profit 1,070,000 D Addition to operating profit 990,000 The following information is relevant for questions 21 to 23 On January 2000 Alpha purchased 80,000 ordinary $1 shares in Beta for $180,000 At that date Beta’s retained profits amounted to $90,000 and the fair values of Beta’s assets at acquisition were equal to their book values Three years later, on 31 December 2002, the balance sheets of the two companies were: Sundry net assets Shares in Beta Share capital Ordinary shares of $1 each Accumulated profits Alpha $ Beta $ 230,000 180,000 ———— 410,000 ———— 260,000 – ———— 260,000 ———— 200,000 210,000 ———— 410,000 ———— 100,000 160,000 ———— 260,000 ———— The share capital of Beta has remained unchanged since January 2000 Goodwill on consolidation is being amortised over four years 21 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for goodwill? A $25,000 B $28,000 C $7,000 D $14,000 10 22 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for minority interest? A $52,000 B $20,000 C $34,000 D $32,000 23 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for accumulated profits? A $266,000 B $338,000 C $370,000 D $245,000 24 A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December 2001 to 27% in the year ended 31 December 2002 Which of the following events is most likely to have caused the increase? A An increase in sales volume B A purchase in December 2001 mistakenly being recorded as happening in January 2002 C Overstatement of the closing inventory at 31 December 2001 D Understatement of the closing inventory at 31 December 2001 11 [P.T.O 25 A company’s capital structure at December 2002 is as follows: $m Ordinary share capital Accumulated profits 8% Loan notes 380 120 —— 500 100 —— 600 —— The company’s income statement shows the following for the year ended 31 December 2002: $m Operating profit Interest paid Taxation Dividends paid Retained profit for year 40 —— 32 10 —— 22 10 —— 12 —— What is the return on equity shareholders’ capital employed, using closing capital figures? A 4·4% B 2·4% C 3·7% D 5·8% (50 marks) 12 Section B – ALL FIVE questions are compulsory and MUST be attempted Alamute and Brador have been in partnership for several years, compiling their financial statements for the year ending 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5% per year Extracts from their trial balance at 31 March 2003 are given below: Reference to notes Capital accounts: Alamute Brador Current accounts: Alamute Brador Drawings: Alamute Brador Office equipment: cost accumulated depreciation, April 2002 Inventory, April 2002 Trade receivables Allowance for doubtful debts, April 2002 Sales revenue Purchases Rent paid Salaries Insurance Sundry expenses $ 50,000 50,000 3,800 Credit 2,600 Debit 48,400 36,900 48,300 12,800 15,600 68,400 3,800 448,700 184,600 30,000 88,000 4,000 39,400 Notes: (1) Office equipment should be depreciated at 20% per year on the reducing balance basis (2) Closing inventory amounted to $21,400 (3) Debts of $2,400 are to be written off, and the allowance for doubtful debts is to be adjusted to 5% of trade receivables (4) Rent paid $30,000 is the amount for the nine months to 31 December 2002 From that date the rent was increased by 10% (5) Insurance paid in advance amounted to $1,500 Required (a) Prepare the partnership’s income statement and a statement showing the division of profit among the partners for the year ended 31 March 2003 (9 marks) (b) Write up the partners’ current accounts for the year ended 31 March 2003 (3 marks) (12 marks) 13 [P.T.O 2 The balance sheets of Paniel at 31 March 2002 and 2003 were as follows: 31 March Reference to notes 2002 $ 2003 $ Non-current assets Less: accumulated depreciation 2,140,000 (580,000) ————— 1,560,000 3,060,000 (840,000) ————— 2,220,000 Net current assets 1,520,000 ————— 3,080,000 ————— 1,570,000 ————— 3,790,000 ————— 1,000,000 800,000 480,000 ————— 2,280,000 800,000 ————— 3,080,000 ————— 1,100,000 900,000 590,000 ————— 2,590,000 1,200,000 ————— 3,790,000 ————— Ordinary share capital Share premium account Accumulated profits 6% Loan notes Notes The net cash generated from operating activities for the year is $746,000, before deducting interest paid on the loan notes During the year the company sold non-current assets which had cost $480,000 for $280,000 The net current asset figures include cash at bank: 31 March 2002 31 March 2003 $14,000 $18,000 All other movements in net current assets have already been allowed for in computing the net cash inflow from operating activities given in Note above Dividends paid, when computed, should be included in financing activities The loan note issue during the year took place on April 2002, and all interest for the year ended 31 March 2003 was paid in the year The profit for the year ended 31 March 2003 before allowing for dividends paid was $260,000 Ignore taxation Required: Prepare the company’s cash flow statement for the year ended 31 March 2003, beginning with the net cash inflow from operating activities given in Note above (9 marks) 14 (a) The net assets of Altese, a trader, at January 2002 amounted to $128,000 During the year to 31 December 2002 Altese introduced a further $50,000 of capital and made drawings of $48,000 At 31 December 2002 Altese’s net assets totalled $184,000 Required: Using this information compute Altese’s total profit for the year ended 31 December 2002 (3 marks) (b) Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for the year ended 31 January 2003 from the following information: $ 130,400 171,250 888,400 Trade payables 31 January 2002 31 January 2003 Payment to suppliers Cost of goods taken from inventory by Senji for her personal use Refunds received from suppliers Discounts received 1,000 2,400 11,200 Required: Compute the figure for purchases for inclusion in Senji’s financial statements (3 marks) (c) Aluki fixes prices to make a standard gross profit percentage on sales of 331/3% The following information for the year ended 31 January 2003 is available to compute her sales total for the year Inventory: February 2002 31 January 2003 Purchases Purchases returns $ 243,000 261,700 595,400 41,200 Required: Calculate the sales figure for the year ended 31 January 2003 (3 marks) (9 marks) 15 [P.T.O 4 Extracts from the financial statements of Apillon for the years ended 31 March 2002 and 2003 are given below: Year ended 31 March Income statement 2002 $ Sales revenue (including cash sales $300,000 in 2002 and $100,000 in 2003) 2003 $ $ 3,100,000 $ 3,800,000 Cost of sales Opening inventory Purchases (all on credit) Less: closing inventory 360,000 2,080,000 ————— 2,440,000 540,000 ————— 540,000 2,580,000 ————— 3,120,000 (1,900,000) 720,000 ————— ————— 1,200,000 (900,000) ————— 300,000 ————— 540,000 450,000 ———— 720,000 700,000 ———— Gross profit Expenses Net profit Balance Sheet Current assets Inventory Trade receivables Current liabilities Trade payables Bank overdraft 410,000 20,000 ———— 990,000 430,000 690,000 170,000 ———— (2,400,000) ————— 1,400,000 (1,100,000) ————— 300,000 ————— 1,420,000 860,000 Required: (a) Calculate the following for each of the two years: (i) (ii) (iii) (iv) (v) Current ratio; Quick ratio (acid test); Inventory turnover period (use closing inventory); Average period of credit allowed to customers; Average period of credit taken from suppliers Calculate items (iii), (iv) and (v) in days (5 marks) (b) Make four brief comments on the changes in the position of the company as revealed by the changes in these ratios and/or in the given figures from the financial statements (4 marks) (9 marks) 16 (a) The term ‘reserves’ is frequently found in company balance sheets Required: (i) Explain the meaning of ‘reserves’ in this context; (ii) Give two examples of reserves and explain how each of your examples comes into existence (6 marks) (b) A company’s issued share capital may be increased by a bonus (capitalisation) issue or by a rights issue Required: Define ‘bonus issue’ and ‘rights issue’ and explain the fundamental difference between these two types of share issue (5 marks) (11 marks) End of Question Paper 17 ... company’s capital structure at 31 December 2002? Ordinary share capital $ Share premium account $ A 13 0,000 17 3,000 B 10 5,000 17 3,000 C 13 0,000 13 7,000 D 10 5,000 13 7,000 19 Listed below are some items... recorded as happening in January 2002 C Overstatement of the closing inventory at 31 December 20 01 D Understatement of the closing inventory at 31 December 20 01 11 [P.T.O 25 A company’s capital structure... and profit understated 17 At 31 December 2002 the following matters require inclusion in a company’s financial statements: (1) On January 2002 the company made a loan of $12 ,000 to an employee,