Answers Part Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) December 2005 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A A B D C D B A D D D C C D A D A C B D B C C A B 17 SECTION B Airn Income statement for the year ended 30 June 2005 $ Sales revenue (Working 1) Opening inventories Purchases (Working 2) $ 517,200 58,900 334,600 –––––––– 393,500 63,200 less: Closing inventories –––––––– Gross profit Wages Rent and general expenses (49,200 + 7,400 – 12,500 + 13,000) Depreciation: shop fittings (45,000 x 10%) motor van (22,000 x 20%) Profit on sale of van (4,500 – 4,000) 74,000 57,100 4,500 4,400 (500) –––––––– Net profit 330,300 –––––––– 186,900 139,500 –––––––– $47,400 –––––––– Workings (1) Calculation of sales Receivables ledger total account Opening balance Sales $ 44,700 Cash banked Payments out of takings $ 418,200 95,100 517,200 –––––––– 561,900 –––––––– Closing balance 48,600 –––––––– 561,900 –––––––– (2) Calculation of purchases Payables ledger total account $ Cash paid for purchases Closing balance 316,300 24,200 –––––––– 340,500 –––––––– Credit purchases Cash purchases 320,900 13,700 –––––––– 334,600 –––––––– Total purchases Opening balance Purchases $ 19,600 320,900 –––––––– 340,500 –––––––– 18 Land – cost/valuation 2004 Jan Balance 30 June Cash 31 Dec Revaluation reserve $000 400 200 300 ––––– 900 ––––– 2004 30 Sept Disposal 31 Dec Balance $000 100 800 ––––– 900 ––––– Buildings – cost/valuation 2004 Jan Balance 30 June Cash 31 Dec Revaluation reserve $000 800 500 200 ––––– 1,500 ––––– 2004 30 Sept Disposal 31 Dec Balance $000 100 1,400 ––––– 1,500 ––––– Buildings – accumulated depreciation 2004 30 Sept Disposal $000 20 31 Dec Revaluation reserve 204 ––––– 224 ––––– 2004 Jan 31 Dec Balance Income statement depreciation 2% x 1,200 $000 200 24 ––––– 224 ––––– Land and Buildings – disposal 2004 30 Sept Land Buildings Income statement – profit $000 100 100 320 ––––– 520 ––––– 2004 30 Sept Depreciation Cash $000 20 500 ––––– 520 ––––– Goodwill Investment in Rye $ 260,000 –––––––– 260,000 –––––––– Share capital 80% Retained earnings 80% Goodwill-retained earnings $ 80,000 144,000 36,000 –––––––– 260,000 –––––––– Minority interest Balance to CBS $ 72,000 –––––––– 72,000 –––––––– Share capital 20% Retained earnings 20% $ 20,000 52,000 –––––––– 72,000 –––––––– Retained earnings $ Cost of control 80% x $180,000 Goodwill Minority interest 20% Balance to CBS 144,000 36,000 52,000 508,000 –––––––– 740,000 –––––––– Balances Kye Rye $ 480,000 260,000 –––––––– 740,000 –––––––– 19 Kye group Balance sheet as at 30 September 2005 $ 780,000 –––––––– 200,000 508,000 –––––––– 708,000 72,000 –––––––– 780,000 –––––––– Sundry net assets (420, 000 + 360,000) Share capital Retained earnings Minority interest (1) The factory was in good condition at 30 June 2005, and thus the fire is a non-adjusting event according to IAS 10 Events after the balance sheet date Details of the fire and an estimate of the loss suffered should be disclosed by note (2) According to IAS 37 Provisions, contingent liabilities and contingent assets, contingencies such as this are to be provided for as soon as it becomes probable that a liability will arise A provision should therefore be made for the best estimate of the loss that will arise (3) This constitutes a ‘probable’ contingent asset under IAS 37, and thus should be disclosed by note, explaining the nature of the contingent asset and, if possible, an estimate of the financial effect (4) It is incorrect to include the revaluation gain in the income statement, because the gain is unrealised It should be credited to revaluation reserve and shown in the balance sheet The gain should also be shown in the statement of changes in equity (IAS 16 Property, Plant and Equipment and IAS Presentation of Financial Statements) Four accounting concepts needed for full marks Examples: (i) Accruals concept The accruals concept is that transactions are reflected in the accounting period in which they occur, rather than the period in which any cash involved is received or paid If this concept is not followed, expenses, income, assets and liabilities are all liable to be misstated and fair presentation will not be achieved (ii) Going concern concept The going concern concept is that financial statements should be prepared on the basis that the business will continue for the foreseeable future If this concept is not followed, assets and liabilities, and hence income and expenses, will be distorted, except, of course, in the rare case that the business is in fact no longer a going concern (iii) Prudence concept Prudence means that a degree of caution should be exercised in making estimates of figures for the financial statements, so that assets are not overstated and liabilities are not understated If the prudence concept is not followed, fair presentation is unlikely to be achieved because assets and liabilities may be shown at unrealistic values (iv) Neutrality Neutrality means that information in financial statements should be free from deliberate or systematic bias If this concept is not followed, information may be presented in a misleading way and a fair presentation will not result (v) Substance over form The legal form of a transaction may not represent the true nature of that transaction The concept of substance over form is that, whenever legally possible, the substance or reality of a transaction should be accounted for rather than its legal form Other concepts considered on their merits 20 Part Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) December 2005 Marking Scheme Section B Heading Sales revenue Opening inventories Purchases Closing inventories Wages Rent and general expenses Depreciation: shop fittings motor van Profit on sale of van 1/ 2 1/ 1/ 2 1 ––––– 11 /2 max 11 21/2 21/2 31/2 21/ –––––2 Land – cost/valuation Buildings – cost/valuation Buildings – accumulated depreciation Land and buildings – disposal 11 11/2 21/2 1 1/ 1/ –––––2 Goodwill Minority interest Retained earnings Heading Sundry net assets Share capital Minority interest in B/S (1) IAS 10 Non-adjusting Details in note x 1/2 1 ––––– (2) IAS 37 Provide for 1 ––––– (3) IAS 37 Disclose by note x 1/2 1 ––––– (4) IASs 16/1 Must not be in income statement Include as revaluation reserve in balance sheet Include in statement of changes in equity 1 1 ––––– ––––– 11 max 10 ––––– 12 max 10 Concepts stated explained 4x1 4x1 21 ... December 2005 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A A B D C D B A D D D C C D A D A C B D B C C A B 17 SECTION B Airn Income statement for the year ended 30 June 2005. .. Kye Rye $ 480,000 260,000 –––––––– 740,000 –––––––– 19 Kye group Balance sheet as at 30 September 2005 $ 780,000 –––––––– 200,000 508,000 –––––––– 708,000 72,000 –––––––– 780,000 –––––––– Sundry... Share capital Retained earnings Minority interest (1) The factory was in good condition at 30 June 2005, and thus the fire is a non-adjusting event according to IAS 10 Events after the balance sheet