(International Stream) PART THURSDAY DECEMBER 2006 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 Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall The Association of Chartered Certified Accountants Paper 1.1(INT) Preparing Financial Statements Section A – ALL TWENTY-FIVE 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 On September 2006, a business had inventory of $380,000 During the month, sales totalled $650,000 and purchases $480,000 On 30 September 2006 a fire destroyed some of the inventory The undamaged goods in inventory were valued at $220,000 The business operates with a standard gross profit margin of 30% Based on this information, what is the cost of the inventory destroyed in the fire? A $185,000 B $140,000 C $405,000 D $360,000 A company had the following transactions: Goods in inventory that had cost $1,000 were sold for $1,500 cash A credit customer whose $500 debt had been written off paid the amount in full The company paid credit suppliers $1,000 What will be the combined effect of these transactions on the company’s total working capital (current assets less current liabilities)? A Increase of $1,000 B Working capital remains unchanged C Increase of $2,000 D Increase of $3,000 On 30 June 2006, H acquired 75% of the ordinary share capital of S for $500,000 At that date the balance sheet of S showed the following: Ordinary share capital Share premium account Retained earnings $ 200,000 150,000 100,000 What was the goodwill arising on the acquisition? A $50,000 B $162,500 C $350,000 D $300,000 Which of the following should appear as items in a company’s statement of changes in equity? Profit for the financial year Income from investments Gain on revaluation of non-current assets Dividends paid A 1, and B and only C and only D 1, and The following information is available about a company’s dividends: $ 2005 Sept 2006 March Sept Final dividend for the year ended 30 June 2005 paid (declared August 2005) Interim dividend for the year ended 30 June 2006 paid Final dividend for the year ended 30 June 2006 paid (declared August 2006) 100,000 40,000 120,000 What figures, if any, should be disclosed in the company’s income statement for the year ended 30 June 2006 and its balance sheet as at that date? A Income statement for the period $160,000 deduction Balance sheet liability $120,000 B $140,000 deduction C nil $120,000 D nil nil nil [P.T.O 6 A and B are in partnership, sharing profits in the ratio 3:2 and preparing their accounts to 30 June each year On January 2006, C joined the partnership and the profit sharing ratio became A 40%, B 30%, and C 30% Profits for the year ended 30 June 2006 were: months ended 31 December 2005 months ended 30 June 2006 $ 300,000 450,000 A bad debt of $50,000 was written off in the six months to 30 June in computing the $450,000 profit It was agreed that this expense should be borne by A and B only, in their original profit-sharing ratios What is A’s total profit share for the year ended 30 June 2006? A $ 330,000 B 310,000 C 340,000 D 350,000 At July 2005 a company’s allowance for receivables was $48,000 At 30 June 2006, trade receivables amounted to $838,000 It was decided to write off $72,000 of these debts and adjust the allowance for receivables to $60,000 What are the final amounts for inclusion in the company’s balance sheet at 30 June 2006? Trade receivables $ A 838,000 Allowance for receivables $ 60,000 Net balance $ 778,000 B 766,000 60,000 706,000 C 766,000 108,000 658,000 D 838,000 108,000 730,000 Which of the following statements about inventory valuation for balance sheet purposes are correct? According to IAS Inventories, average cost and FIFO (first in and first out) are both acceptable methods of arriving at the cost of inventories Inventories of finished goods may be valued at labour and materials cost only, without including overheads Inventories should be valued at the lowest of cost, net realisable value and replacement cost It may be acceptable for inventories to be valued at selling price less estimated profit margin A and B and C and D and 4 A business received a delivery of goods on 29 June 2006, which was included in inventory at 30 June 2006 The invoice for the goods was recorded in July 2006 What effect will this have on the business? Profit for the year ended 30 June 2006 will be overstated Inventory at 30 June 2006 will be understated Profit for the year ending 30 June 2007 will be overstated Inventory at 30 June 2006 will be overstated A and B and C only D and 10 The capital and reserves of Lamb, a limited liability company, are as follows: 10% Loan notes Ordinary share capital Share premium account Retained earnings $m 80 100 60 80 What is the company’s gearing ratio? A 80/100 = 80% B 80/180 = 44·4% C 240/80 = 300% D 80/320 = 25% 11 Which of the following statements are correct? A company’s authorised share capital must be included in its published balance sheet as part of shareholders’ funds If a company makes a bonus issue of ordinary shares, the total shareholders’ interest (share capital plus reserves) remains unchanged A company’s statement of changes in equity must include the proceeds of any share issue during the period A company must disclose its significant accounting policies by note to its financial statements A and only B and only C and only D 2, and [P.T.O 12 Which, if any, of the following statements about intangible assets are correct? Goodwill arising on the acquisition of a subsidiary will appear as an intangible asset in the balance sheet of the acquiring company and in the consolidated balance sheet Deferred development expenditure must be amortised over a period not exceeding five years If the conditions specified in IAS 38 Intangible assets are met, development expenditure may be capitalised, if the directors decide to so Trade investments must appear in a company’s balance sheet under the heading of intangible assets A and B and C and D None of the statements is correct 13 Which of the following characteristics of financial information contribute to reliability, according to the IASB’s Framework for the Preparation and Presentation of Financial Statements? Completeness Prudence Neutrality Faithful representation A All four items B 1, and only C 1, and only D 2, and only 14 Details of a company’s insurance policy are shown below: Premium for year ended 31 March 2006 paid April 2005 Premium for year ending 31 March 2007 paid April 2006 $10,800 $12,000 What figures should be included in the company’s financial statements for the year ended 30 June 2006? A Income statement $ 11,100 Balance sheet $ 9,000 prepayment (Dr) B 11,700 9,000 prepayment (Dr) C 11,100 9,000 accrual (Cr) D 11,700 9,000 accrual (Cr) 15 Which of the following statements about bank reconciliations are correct? In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of cash at bank shown in the bank statement A cheque from a customer paid into the bank but dishonoured must be corrected by making a debit entry in the cash book An error by the bank must be corrected by an entry in the cash book An overdraft is a debit balance in the bank statement A and B and C and D and 16 Extracts from the financial statements of Kafka, a limited liability company, are given below: Balance sheet as at 30 June 2006 Non-current assets Current assets Ordinary share capital Share premium account Retained earnings 10% Loan notes Current liabilities $m 15 14 ––– 29 ––– 10 Income statement for the year ended 30 June 2006 $m Operating profit Finance costs Profit for year (2) ––– ––– ––– 20 ––– 29 ––– Using these figures, which of the following are correct calculations of return on total capital employed (ROCE) and return on owners’ equity (ROOE)? (Tax ignored) A ROCE 8/25 = 32% ROOE 6/10 = 60% B 8/25 = 32% 6/20 = 30% C 6/25 = 24% 8/20 = 40% D 8/20 = 40% 6/20 = 30% [P.T.O 17 On 30 June 2002 H acquired 80% of the share capital of S Extracts from the balance sheets of S at 30 June 2002 and 30 June 2006 are shown below: S balance sheets 30 June 2002 30 June 2006 $ $ 1,000,000 1,000,000 400,000 400,000 4,700,000 5,600,000 Ordinary share capital Share premium account Retained earnings What figure for minority interest should appear in the consolidated balance sheet as at 30 June 2006? A $460,000 B $200,000 C $1,120,000 D $1,400,000 18 At 30 June 2005 the capital and reserves of Meredith, a limited liability company, were: $m Share capital Ordinary shares of $1 each Share premium account 100 80 During the year ended 30 June 2006, the following transactions took place: September 2005 January 2006 A bonus issue of one ordinary share for every two held, using the share premium account A fully subscribed rights issue of two ordinary shares for every five held at that date, at $1·50 per share What would the balances on each account be at 30 June 2006? A Share capital $m 210 Share premium account $m 110 B 210 60 C 240 30 D 240 80 19 The following items have to be considered in finalising the financial statements of Q, a limited liability company: The company gives warranties on its products The company’s statistics show that about 5% of sales give rise to a warranty claim The company has guaranteed the overdraft of another company The likelihood of a liability arising under the guarantee is assessed as possible What is the correct action to be taken in the financial statements for these items? Create a provision Disclose by note only 1, 2, A B No action 1, C 1, D 1, 20 Which of the following errors would cause a trial balance not to balance? An error in the addition in the cash book Failure to record a transaction at all Cost of a motor vehicle debited to motor expenses account The cash entry was correctly made Goods taken by the proprietor of a business recorded by debiting purchases and crediting drawings account A only B and only C and only D All four items 21 How should interest charged on partners’ drawings be dealt with in partnership financial statements? A Credited as income in the income statement B Deducted from profit in allocating the profit among the partners C Added to profit in allocating the profit among the partners D Debited as an expense in the income statement [P.T.O 22 All the sales made by a retailer are for cash, and her sale prices are fixed by doubling cost Details recorded of her transactions for September 2006 are as follows: Sept 30 Sept Inventories Purchases for month Cash banked for sales for month Inventories $ 40,000 60,000 95,000 50,000 Which two of the following conclusions could separately be drawn from this information? $5,000 cash has been stolen from the sales revenue prior to banking Goods costing $5,000 have been stolen Goods costing $2,500 have been stolen Some goods costing $2,500 had been sold at cost price A and B and C and D and 23 A company owns a number of properties which are rented to tenants The following information is available for the year ended 30 June 2006: 30 June 2005 30 June 2006 Rent in advance $ 134,600 144,400 Rent in arrears $ 4,800 8,700 Cash received from tenants in the year ended 30 June 2006 was $834,600 All rent in arrears was subsequently received What figure should appear in the company’s income statement for rent receivable in the year ended 30 June 2006? A $840,500 B $1,100,100 C $569,100 D $828,700 24 In October 2006 Utland sold some goods on sale or return terms for $2,500 Their cost to Utland was $1,500 The transaction has been treated as a credit sale in Utland’s financial statements for the year ended 31 October 2006 In November 2006 the customer accepted half of the goods and returned the other half in good condition What adjustments, if any, should be made to the financial statements? A Sales and receivables should be reduced by $2,500, and closing inventory increased by $1,500 B Sales and receivables should be reduced by $1,250, and closing inventory increased by $750 C Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory D No adjustment is necessary 10 25 The payables ledger control account below contains a number of errors: Payables ledger control account Opening balance (amounts owed to suppliers) Cash paid to suppliers Purchases returns Refunds received from suppliers $ 318,600 1,364,300 41,200 2,700 ––––––––––– $1,726,800 ––––––––––– Purchases Contras against debit balances in receivables ledger Discounts received Closing balance $ 1,268,600 48,000 8,200 402,000 ––––––––––– $1,726,800 ––––––––––– All items relate to credit purchases What should the closing balance be when all the errors are corrected? A $128,200 B $509,000 C $224,200 D $144,600 (50 marks) 11 [P.T.O Section B – ALL FIVE questions are compulsory and MUST be attempted The following balances appear in the accounting records of Golding, a limited liability company, at 30 June 2006: $000 Land and buildings: cost accumulated depreciation at July 2005 Plant and equipment: cost accumulated depreciation at July 2005 Receivables Cash at bank Payables Accruals 8% Loan notes Ordinary share capital Share premium account Retained earnings July 2005 10,000 3,600 6,000 3,200 3,600 1,200 2,500 500 1,000 5,000 2,200 4,600 The following further information is available: (1) Inventory at 30 June 2006 was $4,700,000 (2) The company’s land and buildings were revalued at July 2005 The revaluation has not yet been reflected in the balances given above Details: Cost Land Buildings $000 4,000 6,000 Accumulated depreciation $000 – 3,600 Net book value $000 4,000 2,400 Revalued amount $000 5,000 4,000 (3) The draft profit for the year was $2,900,000 However, three adjustments are required: (a) Receivables totalling $280,000 are to be written off (b) Provision is to be made for bonuses to the directors totalling $250,000 (c) Depreciation charges for the year, based on revalued amounts: Buildings Plant and equipment $200,000 $1,200,000 Required: Prepare the company’s balance sheet as at 30 June 2006, using the format and headings in IAS Presentation of Financial Statements (11 marks) 12 The draft income statement of Lorca, a limited liability company, showed a profit of $830,000 However, the trial balance did not balance and a suspense account with a credit balance of $20,000 has been included in the balance sheet for the difference The following errors were found on investigation: (1) The proceeds of issue of 100,000 50c shares at 70c per share were correctly entered in the cash book but had been credited to sales account (2) During the year $8,000 interest received on a holding of loan notes had been correctly entered in the cash book but debited to interest payable account (3) In arriving at the net sales and purchases totals for the year, the $48,000 balance on the returns outwards account had been transferred to the debit of sales account and the $64,000 balance on the returns inwards account had been transferred to the credit of purchases account (4) A payment of $4,000 for rent had been correctly recorded in the cash book but debited to the rent account as $40,000 Required: (a) Prepare journal entries to correct the errors Narratives are NOT required (7 marks) (b) Calculate the revised profit after adjusting for the errors (4 marks) (11 marks) 13 [P.T.O 3 The balance sheets of Joyce, a limited liability company, at 30 June 2005 and 2006 are as follows Balance sheets Reference to notes Non-current assets (net book value) Current assets Inventories Receivables Cash at bank Ordinary share capital Share premium account Revaluation reserve Retained earnings 30 June 2006 $000 $000 148,000 14,000 21,400 – ––––––– Total equity Non-current liabilities 8% Loan notes Current liabilities Payables Current tax payable Bank overdraft 9,100 12,500 4,600 ––––––– 35,400 –––––––– 183,400 –––––––– 26,200 –––––––– 156,200 –––––––– 110,000 5,000 14,000 28,000 –––––––– 157,000 109,000 4,000 2,000 18,000 –––––––– 133,000 10,000 8,000 30 June 2005 $000 $000 130,000 7,100 8,000 1,300 ––––––– 9,200 6,000 – ––––––– 16,400 –––––––– 183,400 –––––––– 15,200 –––––––– 156,200 –––––––– Notes: (1) The depreciation charge for the year was $13,000,000 (2) $6,200,000 was paid during the year to settle the income tax liability at 30 June 2005 (3) The additional loan notes were issued on January 2006 All interest due was paid on 31 December 2005 and 30 June 2006 (4) Dividends paid during the year totalled $4,000,000 Required: Prepare a cash flow statement for the company for the year ended 30 June 2006, using the format in IAS Cash flow statements (12 marks) 14 The directors of a recently formed company are unsure as to the policies they should adopt as regards depreciation Required: Advise the directors on the following points: (a) The fundamental objective of depreciation; (1 mark) (b) The extent to which land and buildings should be depreciated; (3 marks) (c) Two possible methods of calculating depreciation, with explanations (4 marks) (8 marks) IAS 10 Events after the balance sheet date defines the accounting treatment of material events occurring after the balance sheet date Required: (a) Explain what determines whether an event after the balance sheet date must be adjusted in the financial statements (3 marks) (b) Explain what changes would have to be made to the following items in the balance sheet if it became clear, shortly after the balance sheet date, that the going concern basis was no longer appropriate (i) Non-current assets; (2 marks) (ii) Inventory; (2 marks) (iii) Loan notes (1 mark) (8 marks) End of Question Paper 15 ... June 2006? A Income statement $ 11 ,10 0 Balance sheet $ 9,000 prepayment (Dr) B 11 ,700 9,000 prepayment (Dr) C 11 ,10 0 9,000 accrual (Cr) D 11 ,700 9,000 accrual (Cr) 15 Which of the following statements... –––––––– 18 3,400 –––––––– 26,200 –––––––– 15 6,200 –––––––– 11 0,000 5,000 14 ,000 28,000 –––––––– 15 7,000 10 9,000 4,000 2,000 18 ,000 –––––––– 13 3,000 10 ,000 8,000 30 June 2005 $000 $000 13 0,000 7 ,10 0... $200,000 $1, 200,000 Required: Prepare the company’s balance sheet as at 30 June 2006, using the format and headings in IAS Presentation of Financial Statements (11 marks) 12 The draft income statement