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Edition 1,Version 2 ISBN No. 978-1-84808-256-4

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Get Through Guides Ltd. 65 Bedford Street South Leicester LE1 3JR United Kingdom Website: www.GetThroughGuides.com Email: [email protected] Online content feedback form: http://gtgtraining.com/studymaterialfeedback/ For suggestions: [email protected] Student Support Forum: http://GetThroughGuides.co.uk/forum The publisher is grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions and their answers. Limit of liability/Disclaimer of warranty: While the publisher has used its best efforts in preparing this book, it makes no warranties or representations with respect to the accuracy or completeness of contents of this book and specifically disclaims any implied warranties of merchantability or fitness for any specific or general purpose. No warranty may be created or extended by sales or other representatives or written sales material. Each company is different and the suggestions made in this book may not suit a particular purpose. Companies/individuals should consult professionals where appropriate. The publisher shall not be liable for any loss of profit or other commercial damages including but not limited to special, incidental, consequential or other damages. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, scanning or otherwise, without the prior written permission of Get Through Guides Ltd. The various extracts of International Financial Reporting Standards or International Accounting Standards in this training material, are reproduced by the publisher, GTG Holdings with the permission of IFRS Foundation. "IAS", "IASB", "IASC", "IASCF", "IASs", "IFRIC", "IFRS", "International Accounting Standards", "International Financial Reporting Standards" and "SIC" are Trade Marks of the IFRS Foundation. The publisher has made every effort to contact the holders of copyright material. If any such material has been inadvertently overlooked, the publisher will be pleased to make the necessary arrangements at the first opportunity. No responsibility for any loss to anyone acting or refraining from action as a result of any material in this publication can be accepted by the author, editor or publisher. Please check the back of this book for any updates / errata. Further live updates / errata may also be found online on the Get Through Guides Student Support Forum at: http://getthroughguides.co.uk/forum. Students are advised to check both of these locations. © Get Through Guides 2012

About the paper i - iv

Question number Topic Name Marks Page Numbers

Question bank

Solution bank

Section A The Context and Purpose of Financial Reporting

1-13 Multiple choice questions of two marks each 1 - 4 95 - 96

Section B The Qualitative Characteristics of Financial Information

14 - 27 Multiple choice questions of two marks each 5 - 8 97 - 98

Section C The Use of Double-Entry and Accounting Systems


Section D Recording Transactions and Events


Section E Preparing a Trial balance


Section F Preparing Basic Financial Statements

248 - 320 Multiple choice questions of two marks each 57 - 72 141-154

321 Preparation of financial statement Saturn Ltd 15 73 - 74 155-155

322 Preparation of financial statement Adnett Ltd 15 75 - 76 156-156

323 Preparation of financial statement Sondaw Ltd 15 76 - 78 157-157

324 Preparation of financial statement Llama 15 78 - 79 157-157

325 Preparation of financial statement Mitchell Ltd 15 79 - 80 158-158

Section G Preparing Simple Consolidated Financial Statements

326 – 344 Multiple choice questions of two marks each 81 - 84 159 – 161 345 Consolidated SOCI Silicone Ltd 15 84 - 85 161 – 161

346 Consolidated SOFP Polstron Ltd 15 86 - 87 162 – 162

347 Consolidated SOFP Zircon Ltd 15 87 - 88 163 – 163

348 Consolidated SOFP Harbour Ltd 15 88 - 90 164 - 164

Section H Interpretation of Financial Statements


Mock Paper 100 1 – 12 13 – 24

Pilot Paper 1 100 1 – 14 15 – 20 Pilot Paper 2 100 1 – 4 5 – 8

Total Page Count: 224 Examination structure The syllabus for Paper FFA/F3, Foundations of Financial Accounting, introduces the candidate to the fundamentals of the regulatory framework relating to accounts preparation and to the qualitative characteristics of useful information. The syllabus then covers drafting financial statements and to principles of accounts preparation. The syllabus then concentrates in depth on recording, processing, and reporting business transactions and events. The syllabus then covers the use of the trial balance and how to identify and correct errors, and then the preparation of financial statements for incorporated and unincorporated entities. The syllabus then moves in two directions, firstly requiring candidates to be able to conduct a basic interpretation of financial statements; and secondly requiring the preparation of simple consolidated financial statements from the individual financial statements of group incorporated entities The syllabus is assessed by a two hour paper–based or computer–based examination. Questions will assess all parts of the syllabus and will include both computational and non-computational elements. The examination will consist of 50 two mark questions. ACCA will introduce longer style questions in the future and as such approved learning content materials will contain some of these longer style questions. ACCA will provide sufficient notice on when the longer style questions will be introduced. Effective time management – a key to success Remember you have 1.2 minutes per mark. Aim to solve a 2 marks question in 2.40 minutes. Aim to solve a 15 marks question in 18 minutes. About the GTG Question Bank This Question Bank of 469 questions (457 MCQs and 12 Long Questions) covers all important topics of the syllabus ACCA RESOURCES ACCA provides a number of online resources to help students with their studies. They include detailed syllabus, study guides, examiners’ reports, examiners’ guidance, pilot papers, past exam papers, technical articles. They can be found at http://www2.accaglobal.com/students/fia/exam/ffa// A detailed syllabus and study guides of paper F3/FFA is given in the PDF format on ACCA website: http://www2.accaglobal.com/pubs/students/fia/exam/ffa/syllabus/ffa_syllandsg_2011.pdf

1. Roger borrowed a sum of $58,000 from Sandra for business purposes. How will this affect the

accounting equations?

A Increase in asset and decrease in liability B Increase in asset and increase in liability C Decrease in asset and decrease in liability D Decrease in asset and increase in liability

2. What is the role of the International Financial Reporting Interpretations Committee?

A To create a set of global accounting standards B To issue guidance on the application of International Financial Reporting Standards

3. Which of the following are differences between sole traders and limited liability companies?

(i) A sole trader’s financial statements are private; a company’s financial statements are sent to

shareholders and may be publicly filed. (ii) Only companies have capital invested in the business. (iii) A sole trader is fully and personally liable for any losses and debts that the business might incur; a

company’s shareholders are liable for debts and losses of the company only up to the extent of their investment in the business.

A (i) and (ii) B (ii) and (iii) C (i) and (iii) D (i), (ii) and (iii)

4. The following information is available about the transactions of Razil, a sole trader who does not keep

proper accounting records: $

Opening inventory 77,000 Closing inventory 84,000 Purchases 763,000 Gross profit as a percentage of sales 30%

Based on this information, what is Razil's sales revenue for the year?

5. A provider of finance is keen to know which of the following information?

(i) Profit or loss (ii) Quality of goods supplied by the entity (iii) Repayment capacity of loan principal (iv) Ratio of interest to total expenditure A (i) and (ii) B (iii) and (iv) C All the above D None of the above

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A THE CONTEXT AND PURPOSE OF FINANCIAL REPORTING

2: The Context and Purpose of Financial Reporting © GTG

6. Which of the following statements about accounting concepts and policies is / are correct?

(i) The effect of a change in an accounting policy should be disclosed as an extraordinary item, if material. (ii) Information in financial statements should be presented so as to be understood by users with a

reasonable knowledge of business and accounting. (iii) Companies should create hidden reserves to strengthen their financial position. (iv) Consistency of treatment of items from one period to the next is essential to enhance comparability

between companies, and must therefore take precedence over other accounting concepts such as prudence.

A (i) and (iv) B (ii) and (iii) C (iii) and (iv) D (ii)

7. Which of the following will not appear in the SOFP?

(i) Share capital (ii) Proprietor’s capital (iii) Audit fees (iv) Equipment and plant (v) Debentures A (ii) and (iii) B (iii) C (v) D (ii), (iii) and (v)

8. Which of the following equations is correct?

A Total assets – Total liabilities = Capital + Profit B Total assets + Total liabilities = Capital – Profit C Total assets – Total liabilities = Capital – Profit D Total assets + Total liabilities = Capital + Profit

9. Max wants to calculate his profit at the year end. Which equation should he use?

A Closing net assets + Drawings + Capital introduced – Opening net assets B Closing net assets – Drawings + Capital introduced – Opening net assets C Closing net assets – Drawings – Capital introduced – Opening net assets D Closing net assets + Drawings – Capital introduced – Opening net assets

10. An enterprise has made a material change to an accounting policy for preparing its current financial

statements.

Which of the following disclosures are required by IAS 8 Accounting policies, changes in accounting estimates and errors, in these financial statements?

(i) The reasons for the change. (ii) The amount of the consequent adjustment in the current period and in the comparative information for

prior periods. (iii) An estimate of the effect of the change on future periods, where possible.

A (i) and (ii) B (i) and (iii) C (ii) and (iii) D All of them

© GTG Question Bank: 3 11. Which of the following items may appear in a company’s statement of changes in equity, according

to IAS 1 Presentation of Financial Statements?

(i) Unrealised revaluation gains (ii) Dividends paid (iii) Proceeds of equity share issue (iv) Profit for the period

A All of the above B (ii), (iii) and (iv) C (i), (iii) and (iv) D (i), (ii) and (iv)

12. If a company changes a material accounting policy, which of the following statements are correct?

(i) The notes to the financial statements should disclose the reason for the change, and its effect. (ii) The effect of the change should be disclosed in the current year’s SOCI as an extraordinary item. (iii) The opening balance of retained earnings should be adjusted if practicable, as if the change had been

in effect for previous periods. (iv) In the financial statements for the current period, comparative figures for the previous period should be

adjusted to reflect the change. A (i), (iii) and (iv) B (ii), (iii) and (iv) C (i), (ii) and (iii) D (i), (ii) and (iv)

13. SOFP and SOCI are the two principal financial statements prepared by the companies. With reference to these two financial statements, determine whether the following statements are correct. (i) An asset is an amount owed by the business to someone else. (ii) The SOFP is a snapshot of assets, liabilities and capital held by the business at a particular moment. (iii) Capital is the amount that the business owes to its shareholders / owners. (iv) The SOCI is a record of the income and expenditure of a business over a period of time.

A All of the above B (i) C (ii),(iii) and (iv) D (ii) and (iv)

4: The Context and Purpose of Financial Reporting © GTG

14. Listed below are some comments on accounting concepts. (i) In achieving a balance between relevance and reliability, the most important consideration is satisfying,

as far as possible, the economic decision-making needs of the users. (ii) Materiality means only items which have a physical existence may be recognised as assets. (iii) The substance over form convention means that the legal form of a transaction must always be shown

in the financial statements, even if this is different 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 (i) B (ii) C (iii) D None of the above

15. If an entity does not follow the going concern concept, then the assets are carried at:

A Historical cost B Disposal value C Economic value D Replacement cost

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 are both understated B Asset values and profit both are overstated C Asset values understated and profit overstated D Asset values overstated and profit understated

17. Tower Ltd has a pressing machine that was originally purchased for $10,000 in 20X1. To buy the same

machine today it would cost $12,000; plus an installation cost of $1,000. Babel Ltd wants to buy the machine from Tower Ltd. It is willing to pay $11,000; the selling costs that would be incurred by Tower Ltd are $2,000. Which of the following is correct? Replacement cost Realisable value A $12,000 $11,000 B $12,000 $9,000 C $13,000 $11,000 D $13,000 $9,000

18. Which of the following is not a qualitative characteristic of financial reporting? A Reliability B Comparability C Going concern D Relevance

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B THE QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

6: The Qualitative Characteristics of Financial Information © GTG

19. Which of the following concepts means that similar items in a set of accounts should be given similar accounting treatment, and the accounting treatment applied should be the same for all periods? A Going concern B Prudence C Materiality D Consistency

20. Which of the following accounting concepts applies to accruals and pre-payments? A Entity concept B Dual aspect concept C Cost concept D Matching concept

21. Which of the following most closely describes the meaning of prudence, as the term is defined in

the IASB’s Framework for the preparation and presentation of financial statements?

A Ensuring that financial information has very minimum material error. B Understating assets and gains and overstating liabilities and losses. C Ensuring compliance of financial statements to all accounting standards and legal requirements. D Using a degree of caution in making estimates required under conditions of uncertainty

22. Which of the following are the underlying assumptions of financial statements?

A Relevance and reliability B Financial capital maintenance and physical capital maintenance C Accrual basis and going concern D Prudence and conservatism

23. Valuing inventory at the lower of cost or net realisable value is an example of which accounting

concept?

A Accrual B Money measurement C Prudence D Going concern

24. When entities prepare financial statements assuming that the business is a going concern, the assets

included in the financial statements would be the amount of cash or cash equivalents: (i) paid or the fair value of the consideration given to acquire them at the time of their acquisition. (ii) that could currently be obtained by selling the asset in an orderly disposal. (iii) that would have to be paid if the same or an equivalent asset was acquired currently.

Which of the above mentioned are correct?

A All of the above B (i) and (ii) C (ii) and (iii) D (i) and (iii)

© GTG Question Bank: 7

25. Which of the following statements regarding accounting concepts and the characteristics of financial information are correct? (i) The concept of substance over form means that the legal form of a transaction must be reflected in the

financial statements, regardless of the economic substance. (ii) The historical cost concept means that only items capable of being measured in monetary terms can be

recognised in the financial statements. (iii) It may sometimes be necessary to exclude information that is relevant and reliable from financial

statements because it is too difficult for some users to understand. A (i) and (ii) B (ii) and (iii) C (i) and (iii) D None of the above

26. The accounting concept which requires that all transactions and events should be recognised as and when they occur (and not as and when money is received or paid) and recorded in the financial statements of the periods to which they relate, is the:

A Materiality concept B Prudence concept C Consistency concept D None of the above

27. Which of the following statement(s) is/are not correct? (i) The Framework is a financial reporting standard. (ii) In the case of conflict between the Framework and a reporting standard, the Framework will prevail over

the reporting standard. A (i) B (ii) C (i) and (ii) D None of the above


28. Which of the following is not a business transaction and will not be recorded in the accounts?

A Steve purchased goods of $500 from Gamma Ltd B John exchanged $100 for 10,000 cents from Harry C Ralf borrowed $3,000 from the Bank of England D All of the above

29. A sole trader took some goods that cost $800 from inventory for his own use. The normal selling price of the goods is $1,600.

Which of the following journal entries would correctly record this? Dr Cr $ $ A Inventory account 800 Purchase account 800B Drawings account 800 Purchases account 800C Sales account 1,600 Drawings account 1,600D Drawings account 800 Sales account 800

30. Maxamillion Ltd has the following assets and liabilities:

$ $ Land & Building 10,000 Loans 1,000 Cash 5,000 Payable 4,000 Inventory 2,000 Receivable 3,000

What amount of capital is invested in the business?

Based on the following information, answer questions 31, 31 and 33.

� On 3 December 20X5 Alpha Ltd purchased 5 computers for $500 from Bell Computers Ltd. The credit period was ten days.

� On 8 December 20X5 Bell Computers Ltd sold 15 computers for $1,500 to Gamma Ltd. � On 13 December 20X5 Gamma Ltd made a cheque payment of $1,000 to Bell Computers Ltd. � On 13 December 20X5 Alpha Ltd paid cash of $500.

31. On 3 December 20X5 what accounting entry would be posted in the books of Bell Computers Ltd?

A Dr Purchases account $500 Cr Bell Computers Ltd $500

B Dr Bell computers Ltd $500

Cr Sales account $500

C Dr Alpha Ltd $500 Cr Sales account $500

D Dr Purchases account $500

Cr Alpha Ltd $500

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C

THE USE OF DOUBLE-ENTRY AND ACCOUNTING SYSTEMS

10: The Use of Double-Entry and Accounting Systems © GTG

32. Which is the correct entry in the books of Gamma Ltd on 13 December 20X5? A Dr Cash $1,000

Cr Gamma Ltd $1,000

B Dr Bell Computers Ltd $1,000 Cr Bank $1,000

C Dr Cash $1,000

Cr Bell Computers Ltd $1,000

D Dr Gamma Ltd $1,000 Cr Cash $1,000

33. What amount will be posted to the sales account in the ledger of Bell Computers Ltd for December

20X5? A $2,000 B $500 C $1,500 D None of these

34. Happy Ltd maintains a purchase returns daybook and updates the general ledger on a monthly basis.

Which of the following journal entries will update the general ledger from the purchase returns daybook at the end of each month?

A Dr Payables ledger control account

Cr Input sales tax Cr Purchase returns

B Dr Payables ledger control account Dr Input sales tax Cr Purchase returns C Dr Purchases Dr Output sales tax Cr Payables ledger control account D Dr Purchase returns Cr Payables ledger control account

35. On 1 July 20X6, Sigma Ltd purchased a plant worth $25,000. The company’s policy is to charge full

depreciation in the year of purchase. The rate of depreciation is 15%.

What journal entry should Sigma Ltd post to record depreciation for the year ended 31 December 20X6?

A Dr Depreciation $3,750

Cr Accumulated depreciation $3,750

B Dr Accumulated depreciation $1,875 Cr Depreciation $1,875

C Dr Depreciation $1,875 Cr Accumulated depreciation $1,875

D Dr Accumulated depreciation $3,750 Cr Depreciation $3,750


36. Which of the following journal entries may be accepted as being correct according to their narratives?

Dr Cr $ $

(i) Wages account 38,000 Purchases account 49,000 Buildings account 87,000 Labour and materials used in construction of extension to factory

(ii) Directors’ personal accounts: A 30,000 B 40,000 Directors’ remuneration 70,000 Directors’ bonuses transferred to their accounts

(iii) Suspense account 10,000 Sales account 10,000

Correction of error in addition – total of credit side of sales account $10,000 understated

A (i) and (iii) B (i) and (ii) C (iii) D (ii) and (iii)

37. Jarvis maintains a three-column cash book. On the debit side of the cash book, the total in the discount

column showed an amount of $1,500. Which is the correct posting for this total? A Cr Discounts allowed B Cr Discounts received C Dr Discounts received D Dr Discounts allowed

38. Evon, a limited liability company, issued 1,000,000 ordinary shares of 25c each at a price of $1·10 per share, all received in cash.

What should be the accounting entries to record this issue?

$ $

A Dr Cash 1,100,000 Cr Share capital 250,000 Cr Share premium 850,000

B Dr Share capital 250,000 Dr Share premium 850,000 Cr Cash 1,100,000

C Dr Cash 1,100,000 Cr Share capital 1,100,000

D Dr Cash 1,100,000 Cr Share capital 250,000 Cr Retained earnings 850,000


39. Which of the following journal entries are correct, according to their narratives?

Dr Cr $ $ (i) Suspense account 18,000 Rent received account 18,000 Correction of error in posting $24,000 cash received for rent to the rent received account as $42,000 (ii) B receivables ledger account 22,000 A receivables ledger account 22,000 Correction of error: cash received from A wrongly posted to B’s account (iii) Share premium account 400,000 Share capital account 400,000 1 for 3 bonus issue on share capital of 1,200,000 50c shares (iv) Shares in X 750,000 Share capital account 250,000 Share premium account 500,000 500,000 50c shares issued at $1.50 per share in exchange for shares in X

A (i) and (iii) B (ii) and (iii) C (i) and (iv) D (ii) and (iv)

40. Which of the following documents should accompany a payment made to a supplier?

(i) Supplier statement (ii) Remittance advice (iii) Purchase invoice

A (i) and (iii) B (ii) C (i) and (ii) D None of the above

41. A sole trader has opening and closing capital of $20,000 and $9,000 respectively. During the period, the owner introduced capital of $8,000 and withdrew $16,000 for her own use. Calculate the profit or loss during the period? A $21,000 loss B $3,000 profit C $3,000 loss D 21,000 profit

42. The profit of a business may be calculated by using which one of the following formula?

A Opening capital - Drawings + Capital introduced - Closing capital B Opening capital + Drawings + Capital introduced - Opening capital C Opening capital + Drawings - Capital introduced + Closing capital D Closing capital + Drawings - Capital introduced - Opening capital

43. Which of the following are correct?

(i) In the statement of financial position, the value of inventory should be as close as possible to net realisable value.

(ii) The valuation of finished goods inventory must include production overheads. (iii) Production overheads included in valuing inventory should be calculated by reference to the company's

normal level of production during the period. (iv) In assessing net realisable value, inventory items must be considered separately, or in groups of similar

items, and not by taking the inventory value as a whole. A (i) and (ii) B (iii) and (iv) C (i) and (iii) D (ii),(iii) and (iv)

44. At the end of an accounting period, the value of an entity’s inventory is derived by:

A Physical inventory take B Looking in the inventory account in the nominal (general) ledger C Deducting the total of the firm’s purchases from that of its sales D Deducting the firm’s cost of sales from the total of its sales

45. Which of the following statements are correct?

(i) A company can make a rights issue in order to raise more equity capital. (ii) A rights issue might increase the share premium account, whereas a bonus issue is likely to

reduce it. (iii) A bonus issue will increase the cash balance. (iv) A rights issue will always increase the number of shareholders in a company, whereas a bonus

issue will not.

A (i) and (ii) B (i) and (iii) C (ii) and (iii) D (ii) and (iv)

46. Which of the following statements regarding bonus issue is correct?

A A bonus issue will reduce the capital of the company B Bonus shares will increase the capital of the company C A bonus issue is a low risk method of raising funds for the company D Bonus shares are issued for cash; lower than the market value of the shares


(i) Contingent assets are included as assets in the financial statements if it is probable that they will arise in the future, as a result of past events.

(ii) Contingent liabilities must be provided for in the financial statements if it is probable that they will arise in the future, as a result of past events.

(iii) Details of all adjusting events after the reporting period must be given in the notes to the financial statements.

(iv) Material non-adjusting events are disclosed by a note in the financial statements. A (i) and (ii) B (ii) and (iv) C (iii) and (iv) D (i) and (iii)

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D RECORDING TRANSACTIONS AND EVENTS

14: Recording Transactions and Events © GTG


(i) All non-current assets must be depreciated. (ii) If goodwill is revalued, the revaluation surplus appears in the statement of changes in equity. (iii) If a tangible non-current asset is revalued, all tangible assets of the same class should be revalued. (iv) In a company's published statement of financial position, tangible assets and intangible assets must

be shown separately.

A (i) and (ii) B (ii) and (iii) C (iii) and (iv) D (i) and (iv)

49. Claudia is a fruit merchant. Based on past data, Claudia has decreased the amount of her allowance for receivables by $5,000 in the current accounting period. As a result, her profit and net assets would increase by $5,000.

A True B False

50. Katherine purchased goods worth $8,400 from Bear Ltd. As a result of this purchase she crossed the

minimum purchase limit of $100,000 for the year, and she received a trade discount of 10%.

What entry should she post to record this purchase in her books of accounts? A Dr Purchases $8,400

Cr Trade discount $840 Cr Bear Ltd $7,560

B Dr Purchases $7,560 Cr Bear Ltd $7,560

C Dr Purchases $8,400 Cr Cash discount $840 Cr Bear Ltd $7,560

D Dr Bear Ltd $7,560 Cr Purchases $7,560 51. What is the correct treatment of provisions in the financial statements?

A They are not recognised in the financial statements B They are not recognised in the financial statements but are disclosed in the form of notes to the financial

statements C They are recognised in the financial statements D They are not recognised in the financial statements but are included in the audit report

52. Oliver’s inventory showed $10,000 on 31 December 20X8 after a physical inventory count. On the same day, Oliver received an order to deliver inventory worth $2,000 to James by 4 January 20X9. As on 31 December 20X9, Oliver’s inventory still showed $10,000 worth of inventory.

What would be the correct balance in closing inventory on the reporting date (31 December 20X9)?

53. Which of the following statements is\are not correct for a bonus issue?

(i) On the issue of the bonus shares, the cash balance of the company remains unchanged. (ii) It affects the cash flow of the company. (iii) Bonus shares are issued to the general public. (iv) Bonus shares are issued to the existing share holders of the company. A (ii) and (iii) B (i) and (iv) C They are all correct D They are all incorrect


54. The effect of the concept of accruals is that:

A Items which are similar should be accounted for in a similar way from one accounting period to the next B Losses should be provided for as soon as they are foreseen C Net profit is the difference between revenues and expenses arising during the accounting period D None of the above

55. Joker has shown an entry of ‘know-how’ on his SOFP of $10,000. He expects to use the ‘know-how’ over

the next five years.

What are the accounting entries to write off ‘know-how’?

A Dr Amortisation expenses $10,000 Cr Accumulated amortisation $10,000 B Dr Amortisation expenses $10,000

Cr Know-how $10,000 C Dr Amortisation expenses $2,000

Cr Accumulated amortisation $2,000 D No accounting entry is required.

56. A company has 50,000 5% irredeemable preference shares of $2 each, and 40,000 ordinary shares with a

par value of 20 cents each. The ordinary shares were issued at a premium of 30 cents each. Final dividends of 5 cents per ordinary share for the previous year, plus half the preference dividend have been paid during the current year. A final dividend of 15 cents per ordinary share for the current year was paid and declared after the year end.

What are the total dividends for the year shown either within finance costs or as deduction from retained earnings?

57. What is the source document to record a purchase from a supplier?

A Reconciliation with supplier statement B Remittance advice C Purchase invoice D Purchase order

58. Given below are a few statements relating to the issue of bonus shares and share premium.

(i) The share premium account can be used to pay dividend. (ii) The share premium account can be used to issue bonus shares. (iii) Bonus shares can be issued at premium.

Which of the above statements are correct? A All of them B Only (ii) C (i) and (iii) D (i) and (ii)

59. Jersey owns two rental properties. The following balances were extracted from the accounting records in

respect of rent for each property:

Property 1 Property 2 As at 30 June 20X8 $5,000 Dr $10,000 Cr As at 30 June 20X7 $8,000 Cr $2,000 Dr

During the year ended 30 June 20X8, Jersey received $80,000 in cash from Property 1 and $90,000 from Property 2. What total revenue should be included in the statement of comprehensive income for the year ended 30 June 20X8?

A $171,000 B $181,000 C $155,000 D $169,000


60. On 1 July 20X7 a limited liability company had an allowance for doubtful debts of $83,000. During the year, which ended 30 June 20X8, debts totalling $146,000 were written off. On 30 June 20X8 it was decided that a doubtful debt allowance of $218,000 was required. What figure should appear in the company’s SOCI for the year ended 30 June 20X8 for bad and doubtful debts?

61. Carol had receivables of $598,600 at 30 November 2008. Her allowance for receivables at 1 December

2007 was $12,460 and she wishes to change that to 2% of receivables at 30 November 2008. On 29 November 2008 she received $635 in full settlement of a debt that she had written off in the year ended 30 November 2007.

What total amount should be recognised for receivables in the income statement for the year ended 30 November 2008? A $488 credit B $11,972 debit C $1,123 credit D $147 debit

(December 2008)

62. The plant and machinery, shown at cost, of a business for the year ended 30 June 20X8 was as follows:

Plant and machinery – cost Dr Cr

$ $

01/07/20X7 Balance b/d 240,000 30/09/20X7 Transfer disposal account 60,000

01/01/20X8 Cash – purchase of plant 160,000 30/06/20X8 Balance c/d 340,000

400,000 400,000

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal. What should be the depreciation charge for the year ended 30 June 20X8?

63. A business compiling its financial statements for the year, to 31 July each year, pays rent quarterly in

advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from $60,000 per year to $72,000 per year as of 1 October 20X7.

What figure should appear for rent expense in the business SOCI for the year ended 31 July 20X8?

64. Kelly has the following information on inventory which is recorded at cost:

(i) Cassettes $800 (ii) CDs $1,000 (iii) DVDs $825

The following information has been discovered:

1. The cassettes have been damaged and have a net realisable value of $760. 2. The CDs have a selling price of $1,250 with further selling costs of $60. 3. The DVDs are slightly damaged, however they can be repaired at a total cost of $75, and can be sold

for $900.

What is the total value of inventory which Kelly should record in her financial statements?


65. A company with a reporting date of 31 October carried out a physical check of inventory on 4 November 20X7, leading to an inventory value at cost on this date of $483,700. Between 1 November 20X7 and 4 November 20X7 the following transactions took place: (i) Goods that cost $38,400 were received from suppliers. (ii) Goods that had cost $14,800 were sold for $20,000. (iii) A customer returned goods worth $400, which were purchased in October for $600 (iv) The company returned goods that had cost $1,800 in October to the supplier, and received a credit note

for them.

What figure should appear in the company’s financial statements on 31 October 20X7 for closing inventory, based on this information?

66. Turtle Co which purchased 10 tables on credit at a cost of $80 each, less 25% trade discount, is entitled to

deduct a cash discount of 5% if it pays for them, in full, within 14 days of the invoice date.

If the co pays within the above two-week period, it will have to pay:

67. A sole trader fixes his prices to achieve a gross profit percentage on sales revenue of 40%. All his sales are

for cash. He suspects that one of his sales assistants is stealing cash from the sales revenue. His trading account for the month of June 20X7 is as follows:

$ Recorded sales revenue 181,600Cost of sales 114,000Gross profit 67,600

Assuming that the cost of sales figure is correct, how much cash could the sales assistant have taken?

68. Newcastle purchased a factory that was expected to last for 25 years, for $10,000,000 on 1 January 20X4.

The entity depreciates factories at 4% p.a., with a full year’s charge in the year of acquisition and none in the year of disposal. On 1 January 20X8 the building was revalued at $11,550,000, with no change to its estimated useful life. What is the depreciation charge for 20X8 and the revaluation reserve balance at the end of 20X8? A Depreciation charge - $550,000 Revaluation reserve - $3,150,000 B Depreciation charge - $550,000 Revaluation reserve - $1,550,000 C Depreciation charge - $525,000 Revaluation reserve - $2,750,000 D Depreciation charge - $462,000 Revaluation reserve - $3,150,000

69. Which of the following statements concerning the accounting treatment of research and

development expenditure are true, according to IAS 38 Intangible Assets?

(i) Development costs recognised as an asset must be amortised over a period not exceeding five years. (ii) Research expenditure, other than capital expenditure on research facilities, should be recognised as an

expense incurred. (iii) When deciding whether development expenditure qualifies to be recognised as an asset, it is necessary

to consider whether there will be adequate finance available to complete the project.

A (i) B (i) and (ii) C (ii) and (iii) D (i) and (iii)


70. If $1,000 prepaid rent was incorrectly recorded as accruals, net profit is :

A Overstated by $2,000 B Overstated by $1,000 C Understated by $2,000 D Understated by $1,000

71. On 30 June 20X6 a company’s capital structure was as follows: $

Ordinary share capital 500,000 shares of 25c each 125,000 Share premium account 100,000 For the year ended 30 June 20X7 the company made a rights issue of 1 share for every 2 held at $1 per share, which was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the share premium account for the purpose. What was the company’s capital structure on 30 June 20X7?

Ordinary share capital Share premium

72. On 1 July 20X9 a company’s allowance for receivables was $48,000. On 1 July 20X9, 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 statement of financial position on 30 June 20Y0?

Trade receivables Allowance for receivables Net receivables balance $ $ $

A 838,000 60,000 778,000 B 766,000 60,000 706,000 C 766,000 108,000 658,000 D 838,000 108,000 730,000

73. A wholesaler sold 65 items to a retailer at a price of $40 each, less 15% trade discount. The retailer

subsequently returned 14 of the items. As a result of this the wholesaler should send a credit note for:

74. On 30 June 20X9 the capital and reserves of Meredith, a limited liability company, were:

$m

Share capital Ordinary shares of $1 each 100 Share premium account 80

During the year ended 30 June 20Y0, the following transactions took place:

1 September 20X9

A bonus issue of one ordinary share for every two held, using the share premium account.

1 January 20Y0

A fully subscribed rights issue of two ordinary shares for every five held at that date, at $1.50 per share.

What would be the balance on each account on 30 June 20Y0?

Share capital Share premium account $m $m A 210 110 B 210 60 C 240 30 D 240 80


75. All the sales made by a retailer are for cash, her sale prices are fixed by doubling the cost. Details of her transactions recorded for September 20X6 are as follows: $ Inventories 1 September 40,000 Purchases for month 60,000 Cash banked for sales for month 95,000 Inventories 30 September 50,000

Determine the cost of good which are stolen.

A $47,500 B $2,500 C $50,000 D None of the above

76. A company owns a number of properties which have been rented to tenants. The following information is

available for the year ended 30 June 20X8: Rent in advance Rent in arrears

$ $ 30 June 20X7 134,600 4,800 30 June 20X8 144,400 8,700

Cash received from the tenants for the year ended 30 June 20X8 was $834,600. All rent in arrears was subsequently received. What figure should appear in the company’s SOCI for rent received for the year ended 30 June 20X8?

77. On 1 January 20X6, Nalin brought a second- hand delivery van for $8,000 and paid $360 to have his firm’s

name and logo painted on it. The firm uses the straight line method to depreciate the vehicle over a 5 year period. Assume a nil residual value. In the year of acquisition, full year’s depreciation is charged and no depreciation is charged in the year of sale. The accounting year-end of the firm is 31 December. What was the profit on the sale of the van if it was sold for $5,000 on 31 March 20X9?

78. A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent

was increased from $90,000 per year to $120,000 per year from 1 October 20X7.

What rent expense and accrual should be included in the company’s financial statements for the year ended 31 January 20X8?

Expense Accrual

79. Alpha received a statement of account from a supplier, Beta, that shows a balance of $8,950 to be paid.

Alpha’s payables ledger account for Beta shows a balance due to Beta of $4,140. Investigation reveals the following:

(i) Cash paid to Beta of $4,080 has not been recorded for by Beta. (ii) Alpha’s ledger account has not been adjusted for $40 cash discount, disallowed by Beta. (iii) Goods returned by Alpha of $380 have not been recorded by Beta.

What discrepancy remains between the two company’s’ records after allowing for these items?


80. On 31 December 20X2 a company’s receivables totalled $400,000. An allowance for doubtful debts of $50,000 had been brought forward from the year ended 31 December 20X1. 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 SOCI for the year ended 31 December 20X2?

81. On 1 April 20X3 Saligo Ltd purchased a machine for $210,000. At that date, the machine had an expected

useful economic life of 5 years and an expected residual value of $10,000. On 1 April 20X7 the firm spent $120,000 on a major overhaul of the machine which extended its useful life by 3 years, and revised its estimated residual value to $30,000. If the firm uses the straight line method of depreciation, the depreciation charge for this machine in the accounts for the year ended 31 March 20X8, is:

A $35,000 B $40,000 C $50,000 D $5,000

82. The plant account of a company is shown below:

Plant – At cost

Dr CrDate $ Date $

01/01/20X7 Balance (plant purchased) 380,000 1/10/20X7 Transfer disposal account – cost of plant sold 30,000

01/04/20X7 Cash – plant purchased 51,000 31/12/20X7 Balance 401,000 431,000 431,000

The company’s policy is to charge depreciation on plant at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and sale. What should the company’s plant depreciation charge be for the year ended 31 December 20X7?

83. The closing inventory at cost of a company on 31 January 20X7 amounted to $284,700.

The following items were included at cost in the total: (i) 400 coats, which had cost $80 each, and are normally sold for $150 each. Owing to a defect in

manufacture, they were all sold after the reporting date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds.

(ii) 800 skirts, which had cost $20 each, were found to be defective. Remedial work in February 20X7 cost $5 per skirt. The selling expenses for the batch totalled $800. They were sold for $28 each.

What should the inventory value be according to IAS 2 Inventories after considering the above items?


84. A company values its inventory using the first in, first out (FIFO) method. On 1 May 20X7 the company had 700 engines in inventory, valued at $190 each.

The following transactions took place during the year 20X7 and 20X8:

20X7 1 July Purchased 500 engines at $220 each1 November Sold 400 engines for $160,000 20X8 1 February Purchased 300 engines at $230 each15 April Sold 250 engines for $125,000

What is the value of the company’s closing inventory of engines on 30 April 20X7?

85. Which of the following statements about the valuation of inventory are correct, according to IAS 2

Inventories?

(i) Inventory items are normally to be valued at the higher of cost and net realisable value. (ii) The cost of goods manufactured by an enterprise will include only material and labour. Overhead costs

cannot be included. (iii) The First In First Out or weighted average method may be used to determine the cost of inventory. (iv) The selling price less the estimated profit margin may be used to arrive at cost, if this gives a

reasonable approximation to actual cost.

A (i), (iii) and (iv) B (i) and (ii) C (iii) D (iii) and (iv)

86. Ordan received a statement from one of its suppliers, Alta, showing an outstanding balance of $3,980. The

amount due according to the payables ledger account of Alta in Ordan's records was only $230. Comparison of the statement and the ledger account revealed the following differences:

(i) A cheque sent by Ordan for $270 had not been allowed for in Alta's statement. (ii) Alta had not allowed for goods returned by Ordan of $180. (iii) Ordan made a contra entry, reducing the amount due to Alta by $3,200, for a balance due from Alta in

Ordan's receivables ledger. No such entry had been made in Alta's records.

What difference remains between the two companies' records after adjusting for these items?

87. Fancy Ltd commenced business on 1 January 20X6. It rents the premises from which it operates. During

20X7 the firm paid rent of $1,320. This was 10% more than the total rent expense for 20X6 – only half of which was paid by 31 December 20X6. If there is no accrual or prepayment in respect of rent at 31 December 20X7, the rent expense for the year then ended is:

A $600 B $720 C $1,200 D $1,320


88. On 1 January 20X8 a company had an allowance for receivables of $18,000. On 31 December 20X8 the company's trade receivables were $458,000. It was decided:

(i) To write off debts totalling $28,000 as irrecoverable; (ii) To adjust the allowance for receivables to the equivalent of 5% of the remaining receivables based on

past experience.

What figure should appear in the company's SOCI for the total debts written off as irrecoverable, plus the movement in the allowance for receivables for the year ended 31 December 20X8?

A $49,500 B $31,500 C $32,900 D $50,900

89. A cheque collected from a customer for $5,000 was dishonoured. The bank charged $50 for this. The

customer refused to refund the bank charges. What is the accounting entry for this in our accounts? A Dr Receivables $5,000

Cr Cash $4,950 Cr Bank charges $50

B Dr Cash $5,000

Cr Receivables $5,000 C Dr Cash $5,050

Cr Receivables $5,000 Cr Bank charges $50

D Dr Receivables $5,000

Dr Bank charges $50 Cr Cash $5,050

90. The following are extracts of ledger accounts in the books of Lisa (on 31 December 20X8).

Machinery account Dr Cr

Date $ Date $ 01/01/20X8 Balance b/d 100,000

Accumulated depreciation Dr Cr

Date $ Date $ 01/01/20X8 Balance b/d 19,000

Lisa charges depreciation at a rate of 10% per annum on a reducing balance basis. Her policy is to charge depreciation on a proportionate basis in the year of sale and purchase. On 1 April 20X8, she sold her machinery for $72,000. What is the profit / (loss) on sale of the machinery? A $(6,975) B $(9,000) C $(6,500) D $(9,500)


91. During its first financial year, ended 31 December 20X7, a firm started two new insurance policies and paid $1,800 in respect of insurance premiums. All the premiums were paid in advance and except for the following, related to policies with renewal dates similar to the firm’s accounting year-end date.

Policy A Policy B Annual premium $144 $720 Renewal date 30 June 20X8 30 April 20X8 Premiums paid 1 July 20X7 1 May 20X7

The firm’s insurance expense for 20X7 was:

A $1,368 B $1,468 C $1,548 D $1,488

92. A company has sublet part of its offices. In the year ended 30 November 20X7 the rent receivable was:

Until 30 June 20X7 $8,400 per year From 1 July 20X7 $12,000 per year Rent was paid quarterly in advance on 1 January, April, July, and October each year. What amounts should appear in the company’s financial statements for the year ended 30 November 20X7?

SOCI Rent receivable SOFP

A $9,900 $2,000 in sundry payables B $9,900 $1,000 in sundry payables C $10,200 $1,000 in sundry payables D $9,900 $2,000 in sundry receivables

93. On 28 December 20X6, Delta Ltd purchased goods that cost $120,000. According to the terms of the

contract, the seller will incur all the costs until the goods are loaded onto the ship. Some of the costs incurred by the seller on behalf of Delta Ltd which are to be invoiced at a later date are as follows:

Transit insurance $1,800 Special handling charges $2,000 In addition to this Delta Ltd spent $2,100 for unloading the goods at the destination. These goods were received on 31 December 20X6. What amount of cost should be included as closing inventory in Delta Ltd’s SOFP on 31 December 20X6? A $125,900 B $122,100 C $123,800 D $120,000

94. If an item of inventory which originally cost $1,420 can be sold for $1,600, after incurring further costs of

$110 and marketing costs of $130, then it should be included in the statement of financial position inventory valuation at:

A $1,420 B $1,600 C $1,360 D $1,490


95. The invoice shows the following costs:

$ Water treatment equipment 39,800 Delivery 1,100 Maintenance charges 3,980 Sales tax 7,845 Invoice total 52,734

What is the total value of capital expenditure on the invoice? A $39,800 B $40,900 C $44,880 D $52,734

96. In January 20X4, Matthew purchased a mainframe computer for $100,000 for his business. He follows the

straight-line method of depreciation. He estimated that the computer would have a useful life of ten years. It would not have any residual value.

On 1 January 20X7, experts estimated that the computer’s remaining useful life is only two years but that the computer will have a residual value of $12,000.

How much depreciation should Matthew charge in his SOCI for 20X7? A $35,000 B $29,000 C $10,000 D $50,000

97. Terry bought a new car for $12,750. He paid for it by taking a loan of $8,000 and trading in his old car. The

old car had originally cost $8,500 and had been depreciated by $4,148 at the time of purchase.

What is the gain on disposal of the old car? A $102 B $398 C $602 D $500

98. On 31 December 20X6, Quatta, a limited liability company, owned a building that cost $800,000 on 1

January 1997. It was being depreciated at two per cent per year.

On 1 January 20X7, the building was revalued at $1,000,000. On this date, the building had a remaining useful life of 40 years. What is the depreciation charge for the year ended 31 December 20X7, and the revaluation reserve balance as on 1 January 20X7?

Depreciation charge Revaluation reserve for year ended 31 December 20X7 as at 1 January 20X7

$ $ A 25,000 200,000 B 25,000 360,000 C 20,000 200,000 D 20,000 360,000


99. The following information is available for Orset, a sole trader who does not keep full accounting records:

$ Inventory 01/07/20X7 138,600 30/06/20X8 149,100Purchases for year ended 30/06/ 20X8 716,100

Based on these figures, what is Orset’s sales figure for the year ended 30 June 20X8, if the gross profit on sales is 30%?

100. How are the contingent assets and liabilities recognised in the company’s financial statements?

A A contingent asset is recognised in the SOFP, and contingent liability is disclosed in the notes to the financial statements

B Contingent assets and contingent liabilities are not recognised in the financial statements unless they have occurred

C Contingent assets appear in the notes to the financial statements, and contingent liability appears in the SOFP

D A contingent asset and contingent liability must be recognised in the SOFP 101. A company sublets part of its office accommodation. In the year ended 30 June 20X8 cash received from

tenants was $83,700. Details of rent in arrears and in advance at the beginning and end of the year were:

In arrears

$ In advance

$ 30/06/20X7 3,800 2,40030/06/20X8 4,700 3,000

All arrears of rent were subsequently received. What figure for rental income should be included in the company’s SOCI for the year ended 30 June 20X8?

102. On 30 September 20X7 a company’s allowance for doubtful debts amounted to $38,000, which was five

per cent of the receivables on that date.

On 30 September 20X8 receivables totalled $868,500. It was decided to write off $28,500 of debts as bad, and to keep the allowance for doubtful debts at five per cent of receivables.

What should be the charge in the SOCI for the year ended 30 September 20X8 for bad and doubtful debts plus irrecoverable debts?


103. Abel is a sole trader who does not keep full accounting records. The following details relate to her transactions with credit customers and suppliers for the year ended 30 November 20X8:

$ Trade receivables as on 1 December 20X7 130,000Trade payables as on 1 December 20X7 60,000Cash received from customers 686,400Cash paid to suppliers 302,800Discounts allowed 1,400Discounts received 2,960Bad debts 4,160Amount due from a customer who is also a supplier offset against an amount due for goods supplied by him 2,000Trade receivables, 30 November 20X8 181,000Trade payables, 30 November 20X8 84,000

Based on the above information, what figure should appear in Abel’s SOCI for the year ended 30 November 20X8 as sales revenue?

A $748,960 B $748,800 C $744,960 D $743,560

104. For the year ending 31 December 20X7 the memos allowance for receivables stood at $20,000. As at 31

December 20X8, the total receivables account showed a balance of $540,000. One of the customers became insolvent and management decided to write off $14,000 as bad debts. On the basis of past experience, management decided to provide for an allowance at the rate of 4% of trade receivables.

What amount will be charged in the statement of comprehensive income for the year ended 31 December 20X8?

105. Samuel prepares financial statements for the year ended 31 December 20X7. Samuel purchased

machinery on 1 January 20X4 for $70,000 and charges depreciation on a straight line basis. The accumulated depreciation is $21,000 as at 31 December 20X6. In 20X7 the machinery is revalued to $65,000. The remaining useful life of the machinery is unchanged.

What is the depreciation charge for 20X7?

106. XYZ Ltd purchased a non-current asset on 1 January 20X8 for $45,000. The company depreciates non-

current assets on a straight line basis over 6 years. On 1 January 20X9, a modification that costs $9,000 was made to the non-current assets to extend its useful life by one year. Routine maintenance that cost $4,500 was also carried out.

How much should be charged for depreciation for the year to 31 December 20X9?

Use the following information to answer questions 107, 108 and 109.

$ Opening inventory as at 01/04/20X7 (50,000 kg @ $2 per kg) 100,000 Sales for the month of April 20X7 250,000 Purchases including carriage inward April 12 40,000 kg @ $1.9 per kg April 25 25,000 kg @ $2.1 per kg

Closing inventory is 35,000 kg as at 30 April 20X7 Other non-production overheads 25,000 Company follows the FIFO method for valuation of inventory.


107. State the value of closing inventory as at 30 April 20X7. 108. Calculate the cost of goods sold during 30 April 20X7. 109. Calculate the profit on the goods sold.

110. Done Well purchased machinery for $10,000 on 1 April 20X3. Machinery is liable to depreciation at 20% on the reducing balance method. On 30 September 20X7, Done Well exchanged old machinery for $4,200 and paid an additional amount of $7,000. The company’s depreciation policy is to charge a full year’s depreciation in the year of purchase, and no depreciation in the year of sale.

What is the profit on the sale of old machinery to be recorded in the financial statements for the year ending 31 March 20X8?

111. The opening trial balance of BCB Ltd as on 1 April 20X7 shows that the machinery account has a balance of $30,000. The depreciation provision for the machinery account shows a balance of $15,125. Depreciation is charged on the reducing balance method @ 20%.

What is the depreciation charged in the SOCI for the year ended 31 March 20X8?

A $15,125 B $18,844 C $2,975 D $7,500

112. Grange Hills (a holiday resort) purchased a building for $500,000 on 1 January 20X0. The building was depreciated at 2.5 per cent per year by the straight line method. On 1 January 20X8, the building was revalued to $700,000 with a remaining useful life of 50 years.

What are the written down values of the building as at 31 December 20X7, the revaluation reserve as at 1 January 20X8 and the depreciation charge for the year ended 31 December 20X8?

Written down value as at 31/12/20X7

Revaluation surplus as at 1/1/20X8

Depreciation charge as at 31/12/20X8

A $412,500 $300,000 $14,000 B $400,000 $200,000 $14,000 C $400,000 $300,000 $12,500 D $400,000 $300,000 $14,000

113. A company’s internal control on inventory is not strong. For the year ended 31 March 20X7, a theft of inventory resulted in a major loss. However the company’s records have not been updated. The company makes a gross profit of 20% on sales.

Calculate the value of the inventory lost from the following information.

$ Opening inventory 212,000Sales during the year 408,000Purchases during the year 274,600Closing inventory 122,600

114. Inventory for the year ended 31 March 20X8 was physically counted on 5 April 20X8 which gave a total inventory valuation of $750,250.

The stores department revealed the following transactions between 31March 20X8 and 5 April 20X8:

$ Purchase of goods 12,500Sale of goods (profit margin 10% on sales) 15,500Purchase return recorded 500Sales return recorded 1,100

What should be the valuation of inventory to be included in the financial statements as at 31 March 20X8?


115. River Ltd was registered with capital of $250,000 (shares of 50 cents each). The company issued 250,000 shares which were taken up in full by the public. The company called up 25 cents on each share on allotment. Allotments were made by the company and all the called up money was received, except on 10,000 shares held by one of the investors. The paid up capital of the company is _______________.

A $60,000 B $62,500 C $250,000 D $125,000

116. Jerry sold goods with a list price of $50,000 to Tom on 2 months’ credit. Tom received a trade discount of

2.5% on the list price for bulk purchases. He paid the invoice within a month and was therefore allowed a cash discount of 4%. The above goods are liable for sales tax of 10%.

What is the net amount paid by Tom to Jerry?

A $53,625 B $53,430 C $51,744 D $51,480

117. Arota owns a large number of properties. Its main source of income is rent received on these properties.

The total amount received during the year, which ended 31 December 20X8, towards rent was $ 85,000. The accountant credited the whole amount to the rent account. What is the income from rent in the SOCI according to the accrual system of accounting?

The following were the amounts of rent in advance and in arrears on 31 December 20X7 and 20X8:

31/12/ 20X7 31/12/ 20X8 $ $

Rent received in advance 10,200 12,000 Rent in arrears (all subsequently received) 27,000 24,000

What amount of rental income should appear in the company’s SOCI for the year ended 31 December 20X8?

118. Danesh has a small business. He does not maintain full accounting records. The following details are

available about the credit customers and suppliers for the year ended 31 December 20X8:

$ Trade receivables, 31 December 20X7 32,500Trade payables, 31 December 20X7 15,000Cash received from customers 171,600Cash paid to suppliers 75,700Discounts allowed 350Discounts received 740Contra between payables and receivables ledgers 500Trade receivables, 31 December 20X8 45,250Trade payables, 31 December 20X8 21,000

What figure should appear in Danesh’s SOCI for the year ended 31 December 20X8 for sales?


119. Jontex pharmaceuticals undertook a project to develop a cheaper but more effective drug to fight malaria. It incurred the following expenditure on the project:

(i) Research expenditure of $ 20,000 as at 31 July 20X7. The research expenditure incurred, resulted in a

unique formula for the drug. (ii) The following are the costs incurred to develop the drug from the unique formula as at 31 March 20X8:

1. Salary to staff exclusively working on the new formula = $20,000 2. Chemicals used to manufacture a sample of the drug = $15,000 3. Tests for the new drug = $30,000

What is the amount that should be capitalised as an intangible asset for the year ended 31 March 20X8?

120. Ramsay is a computer dealer. He purchased a computer for $1,725 inclusive of sales tax. Sales tax of 15%

is charged on the computer.

What is the amount of sales tax included in the invoice for the computer?

121. Maria is in the clothing business. She purchased a computer and printer for her business. The costs

associated with the computer, as reflected in the invoice are as follows:

$ Computer 1,000Printer 250Delivery and installation 30Annual Maintenance 20 1,300Sales tax (10%) (refundable) 130Total 1,430

What amount should Maria capitalise as a non-current asset in relation to the purchase?

A $1,300 B $1,430 C $1,280 D $1,250

122. On 1 January 20X5 a company purchased some machinery. The invoice showed the following details:

$

Cost of machinery 48,000Delivery to factory 400One year warranty covering breakdown during 20X5 800 49,200

Modifications to the factory building which cost $2,200 were necessary to enable the machinery to be installed.

What amount should be capitalised for the machinery in the company's records?

A $51,400 B $49,200 C $50,600 D $48,000

123. A company’s gross profit percentage on sales has decreased by 5% in 20Y0 compared with 20X9.

Which one of the following matters could have caused the decrease?

A The level of sales in 20Y0 is lower than that of 20X9. B There have been more bad debts in 20Y0 than in 20X9. C Inventory at the end of 20Y0 is lying unused in inventory. D The theft of inventory has increased.


124. Which of the following statements about inventory valuation of closing inventory is / are correct?

(i) According to IAS 2 Inventories, average cost and FIFO (first in and first out) are both acceptable methods of arriving at the cost of inventories.

(ii) Inventories of finished goods may be valued at labour and material cost, without including overheads. (iii) Inventories should be valued at the lowest of cost, net realisable value and replacement cost. (iv) It may be acceptable for inventories to be valued at the selling price less the estimated profit margin.


125. Which, if any, of the following statements about intangible assets are correct?

(i) Goodwill arising on the acquisition of a subsidiary will appear as an intangible asset in the statement of financial position of the acquiring company, and in the consolidated statement of financial position.

(ii) Deferred development expenditure must be amortised over a period not exceeding five years. (iii) If the conditions specified in IAS 38, Intangible Assets are met, development expenditure may be capitalised, if the directors decide to do so. (iv) Trade investments must appear in a company’s statement of financial position under the heading of

intangible assets.

A (i) and (iii) B (i) and (iv) C (ii) and (iv) D None of the above.

126. Volatile Inc purchased a plant on 1 January 20X0 for $38,000. The payment for the plant was correctly

entered in the cash book, but was entered on the debit side of the plant repairs account.

Volatile Inc charges depreciation on the straight line basis, at 20% per year, with a proportionate charge in the year of acquisition, and assuming no scrap value at the end of the life of the asset. How will Volatile's profit, for the year ended 31 March 20X0, be affected by the error? A Understated by $30,400 B Understated by $36,100 C Understated by $38,000 D Overstated by $1,900

127. Which of the following statements about goodwill are correct?

(i) Goodwill may only be revalued to a figure in excess of cost if there is relevant and reliable evidence to support the revaluation.

(ii) Internally generated goodwill will not be capitalised. (iii) Impairment of goodwill should always be shown separately on the face of a company’s SOCI. (iv) Purchased goodwill is the difference between the cost of acquiring a company and the fair value of its

identifiable net assets.


128. Which of the following statements is / are correct about the proper accounting treatment for

internal-use software costs?

(i) Expenditure on outsourced software research should be capitalised. (ii) Development costs should be capitalised as incurred.

A (i) B (ii) C Both of the above D None of the above


129. Which of the following relationships is correct?

A Pre-paid expense – current asset : Accrued expense – current liability B Pre-paid expense – current liability : Accrued expense – current asset C Accrued income – current asset : Pre-received income – current asset D None of the above

130. A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent

was increased from $9,000 per year to $12,000 per year as of 1 October 20X8.

What rent expense and accrual should be included in the company’s financial statements for the year ended 31 January 20X9?

Rent expense Accrual $ $

A 10,000 2,000 B 10,000 1,000 C 9,750 1,000 D 9,750 2,000

131. A business compiling its accounts for the year, to 31 January each year, pays rent quarterly in advance on

1 January, 1 April, 1 July and 1 October each year.

After remaining unchanged for some years, the rent was increased from $24,000 per year to $30,000 per year as of 1 July 20X8.

Which of the following figures is the rent expense which should appear in the statement of comprehensive income for the year ended 31 January 20X9? A $27,500 B $29,500 C $28,000 D $29,000

132. Joanna has prepared her draft accounts for the year ended 30 April 2008, and needs to adjust them for the

following items:

(i) Rent of $10,500 was paid and recorded on 2 January 2007 for the period 1 January to 31 December 2007. The landlord has advised that the annual rent for 2008 will be $12,000 although it has not been invoiced or paid yet.

(ii) Property and contents insurance is paid annually on 1 March. Joanna paid and recorded $6,000 on 1 March 2008 for the year from 1 March 2008 to 28 February 2009.

What should the net effect on profit be in the draft accounts for the year ended 30 April 2008 of adjusting for the above items?

A $1,000 decrease B $1,500 increase C $1,000 increase D $1,500 decrease

(June 2008) 133. On 1 July 20X8 the doubtful debt allowance of Quadros plc was $18,000. During the year, which ended 30

June 20X9, debts totalling $14,600 were written off. It was decided that the doubtful debt allowance should be $16,000 as at 30 June 20X9.

What amount should appear in Quadros’ statement of comprehensive income for bad and doubtful debts for the year ended 30 June 20X9?

A $12,600 B $16,600 C $48,600 D $30,600


134. Star Ltd issued 100,000 equity shares with a face value of $1 and a discount of 5c per share. The accountant of the company posted the following entry for this transaction:

Dr Cash $95,000

Cr Equity share capital $95,000

Which of the following journal entries is needed to correct this error?

A Dr Discount on issue of shares $5,000 Cr Equity share capital $5,000

B Dr Cash $5,000 Cr Discount on issue of shares $5,000

C Dr Cash $5,000 Cr Equity share capital $5,000

D The original journal entry is correct. 135. Which of the following errors should be identified by performing receivables control account

reconciliation? A A sales invoice of $500 has been omitted from the sales daybook B A sales return of $45 was entered as $54 in the sales returns daybook C Purchases of $72 were entered as sales returns in the sales returns daybook and the individual account D The total of the sales daybook was miscast by $200

(December 2008) 136. A company gives you the following details on 31 December 20X6. Calculate the profits available to the

equity shareholders.

(i) 10% preference share capital $100,000 (ii) Equity share capital $100,000 (iii) Sales $500,000 and expenses $400,000 (iv) Rate of tax is 30% on profits.

A $90,000 B $60,000 C $70,000 D $100,000

137. Which of the following statements are true during a period of inflation when valuing inventory?

A The cost of sales will be lower under the FIFO method compared to the weighted average method. B The cost of sales will be lower under the weighted average method compared to the FIFO method. C The cost of sales will be the same under FIFO and the weighted average method. D None of the above

138. When preparing its financial statements for the current year, a company’s closing inventory was

understated by $300,000.

What will be the effect of this error if it is not corrected?

A The current year’s profit will be overstated, the following year’s profit will be understated. B The current year’s profit will be understated, but there will be no effect on the following year’s profit. C The current year’s profit will be understated, the following year’s profit will be overstated. D The current year’s profit will be overstated, but there will be no effect on the following year’s profit.

139. Which of the following statements about intangible assets are correct?

(i) If certain criteria are met, research expenditure must be recognised as an intangible asset. (ii) Goodwill may not be revalued upwards. (iii) Internally generated goodwill should not be capitalised.

A (ii) and (iii) B (i) and (iii) C (i) and (ii) D All of the above


140. Which of the following statements are incorrect?

(i) Intangible assets cannot arise because of capitalisation of development expenditure. (ii) Intangible assets do not satisfy the definition of assets mentioned in the IFRS framework. (iii) Intangible assets are shown in the SOFP under the heading non-current assets.

A (i) and (ii) B (ii) and (iii) C (iii) and (i) D None of the above

141. The accountant of Hill and Valley is confused as to which of the following items should be entered in

the cash book:

(i) Bank credited $1,000 incorrectly to the company’s account. (ii) Bank charges $50. (iii) Outstanding cheques $1,400. (iv) Direct debit of $10,000 by the bank, according to the standing order of the company.

A (i) and (ii) B (iii) and (iv) C (ii) and (iv) D (i) and (iii)

142. Imperial Ltd is the guarantor to the bank for a loan taken by its associate company of $50,000. The

likelihood that Imperial Ltd will be called to pay the loan amount is remote.

How should the contingent liability be included in the company’s financial statements?

A Disclose by way of a note with no provision being made. B No disclosure or provision is required.

143. Called-up capital can be more than:

A Issued capital B Authorised capital C Paid up capital D None of the above

144. The trade receivables of Alto Ltd as at 31 March 20X8 stood at $55,000.

Bad debts, for the year ended 31 March 20X8, are $2,150.

What is the correct entry for bad debts?

A Dr Bad debt account 2,150 Cr Trade receivables account 2,150 B Dr Trade receivables account 2,150 Cr Bad debt account 2,150 C Dr Trade receivables account 2,150 Cr Sales account 2,150 D Dr Sales account 2,150 Cr Trade receivables account 2,150


145.

Building account – at cost Dr Cr

Date $ Date $

1/4/20X7 Balance b/d (purchased on 1/4/20X5)

160,000 30/09/20X7 Asset disposal account 25,000

31/12/20X7 New asset bought 27,000 31/03/20X8 Balance c/d 162,000 187,000 187,000

The company’s policy is to charge proportionate depreciation in the year of sale and purchase. Depreciation is charged on the straight line method @ 10% p.a.

What is the depreciation charge for the year ended 31 March 20X8?

146. A decrease in the allowance for doubtful debts will result in:

A Increase in liabilities B Decrease in assets C Decrease in net profit D Increase in net profit

147. Under the FIFO method, issue of materials by the stores department to production are valued at:

A Cost B Market price C Lower of cost and net realisable value D NRV

148. On 1 July 20X8 the doubtful debt allowance of Quinn was $16,000. During the year, which ended 30 June 20X9, debts totalling $14,600 were written off. It was decided that the doubtful debt allowance should be $18,000 as at 30 June 20X9.

What amount should appear in Quinn’s SOCI for bad and doubtful debts for the year ended 30 June 20X9?

149. On 30 September 20X8 the closing inventory of a company amounted to $386,400.

The following items were included in this total at cost:

(i) 1,000 items which had cost $18 each. These items were all sold in October 20X8 for $15 each, with selling expenses of $800.

(ii) Five items which had been in the inventory since 19W8, when they were purchased for $100 each, sold in October 20X8 for $1,000 each, net of selling expenses.

What figure should appear in the company’s SOFP on 30 September 20X8 for inventory?

A $382,600 B $384,200 C $387,100 D $400,600

150. IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories of finished goods.

Which of the following statements about IAS 2 requirements in this area are correct?

(i) Finished goods inventories may be valued on the basis of labour and material cost, without including selling overheads.

(ii) Carriage inwards, but not carriage outwards, should be included in overheads when valuing inventories of finished goods.

(iii) Commission paid to salesman acquire inventory can be included in the cost of inventory

A All of the above B (i) and (ii) C (i) and (iii) D (ii) and (iii)


151. The bookkeeper of Peri made the following mistakes:

Discount allowed $3,840 was credited to the Discounts Received account. Discount received $2,960 was debited to the Discounts Allowed account. Discounts were otherwise correctly recorded.

Which of the following journal entries will correct the errors?

Dr Cr $ $

A Dr Discount allowed 7,680 Cr Discount received 5,920

Cr Suspense account 1,760B Dr Discount allowed 880 Dr Discount received 880 Cr Suspense account 1,760C Dr Discount allowed 6,800 Cr Discount received 6,800D Dr Discount allowed 3,840 Cr Discount received 2,960 Cr Suspense account 880

152. The receivables control account balance was $5,000; however the individual memorandum receivables

ledgers balance totalled $4,500. The following errors were reported.

(i) A contra entry of $500 was received from a customer. It was adjusted in the individual payables and receivables ledger. However no effect was given in the receivables control account.

(ii) Sales of $1,000 were not recorded in the control account; however a correct entry was made in the receivables’ individual account.

(iii) One of the balances in the individual account was reported as $900 instead of $400.

Which of the above entries will have a debit effect in the receivables control account?


153. Listed below are five potential causes of differences between a company’s cash book balance and its bank

statement balance as on 30 November 20X8:

(i) Cheques recorded and sent to suppliers before 30 November 20X8 but not yet presented for payment. (ii) An error by the bank in crediting another customer’s account a lodgement made by the company. (iii) Bank charges. (iv) Cheques issued before 30 November 20X8 but not credited by the bank until 3 December 20X8. (v) A cheque recorded and issued before 30 November 20X8 but dishonoured by the bank.

Which of the following alternatives correctly analyses these items into those requiring an entry in the cash book and those that would feature in the bank reconciliation?

Cash book entry Bank reconciliation

A (i), (ii), (iv) (iii), (v) B (iii), (v) (i), (ii), (iv) C (iii), (iv) (i), (ii), (v) D (ii), (iii) (v), (i), (iv)


154. IAS 38, Intangible Assets governs the accounting treatment of expenditure on research and development.

The following statements relate to the provisions of IAS 38.

(i) Capitalised development expenditure must be amortised over a period not exceeding five years. (ii) If all the conditions specified in IAS 38 are met, development expenditure may be capitalised if the

directors decide to do so. (iii) Capitalised development costs are shown in the SOFP under the heading, Non-current Assets. (iv) Amortisation of capitalised development expenditure will appear as an item in a company’s statement of

changes in equity.

Which of these statements is/are correct?

A (iii) B (ii) and (iii) C (i) and (iv) D (i)and (iii)

155. Which of the following statements are true?

(i) Depreciation is recorded in the cash book. (ii) Depreciation is recorded in the journal. (iii) Bad debts are recorded in the sales book. (iv) Allowance for doubtful debt is recorded in the journal.

A (i) and (iii) B (ii) and (iv) C (iii) and (iv) D (i) and (iv)

156. Johnsons use the imprest method of accounting for petty cash.

The petty cash was counted and there was $57.22 in hand. The following petty cash slips were found for the following:

$ Stamps 16.35Sale of goods to staff 12.00Coffee and tea purchase 18.23Birthday cards for staff 20.20

What is Johnsons’ imprest amount?

A $124 B $100 C $112 D $80

(June 2008)

157. According to IAS 38 Intangible assets, amortisation of an intangible asset with a finite useful life should commence when:

A It is available for use. B It is first recognised as an asset. C The costs can be identified with reasonable certainty. D It is probable that it will generate future economic benefits.

158. Under IAS 37 Provisions, contingent liabilities and contingent assets, a liability of uncertain timing or amount is best described as:

A An accrual B An obligating event C A contingent liability D A provision

159. If the opening inventory is understated by $15,000, the effect of this error in the current period is:

Cost of Goods Sold Net profit A Understated Understated B Overstated Overstated C Understated Overstated D Overstated Understated


160. Jupiter Ltd purchased land for $120,000. The company incurred $7,500 to demolish an old building and received $3,000 from the salvage of the old building. It also paid $18,000 in accrued taxes on the property.

The land will be recorded at:

A $120,000 B $127,500 C $138,000 D $124,500

161. The financial statements of Mercury Ltd, for the year ended 31 December 20X8 show a receivable of $12

million from Mars Ltd. The date of authorisation of the financial statements is 16 February 20X9. Mars Ltd declared bankruptcy on 12 February 20X9.

Mercury will:

A Ignore the event since the bankruptcy declaration took place after the year-end. B Make a disclosure in its footnotes regarding the bankruptcy of Mars Ltd. C Reverse the sale pertaining to this customer in the comparatives figures for the prior period and treat

this as an error under IAS 8. D Make a provision (as opposed to a disclosure) for this event as it is occurring after the end of the

reporting period. 162. Jontex Pharmaceuticals undertook a project to develop a cheaper and more effective drug to fight malaria.

The company recently completed the research and development on the said project and seeks your advice on the accuracy of the following statements:

A Costs incurred during the research phase can be capitalised. B Costs incurred during the development phase can be capitalised if criteria such as technical feasibility of

the project being established are met. C Training costs of lab technicians working on the research of the drug can be capitalised. D Designing of production facilities in order to manufacture the drug commercially, qualify as research

activities. 163. A non-current asset is:

(i) An asset whose value remains constant throughout its life. (ii) An asset which is expected to have a life of atleast 3 years. (iii) An asset whose expected life exceeds more than one accounting period and is used for business

purpose, to earn profits. (iv) A tangible asset whose life is expected to exceed one accounting period.

Which of the above mentioned statement(s) is / are true?

A All the above B (iii) and (iv) C (iii) D None of the above

164. Sama Plc sells cameras. It provides a warranty to exchange the cameras which have technical problems within 6 months of the purchase. It has estimated that warranty claims are 4% of the sales.

How should this transaction be tackled?

A A provision of 4% of sales needs to be provided in the books. B It is a contingent liability and needs to be disclosed in the notes to accounts. C No effect needs to be given in the financial statements. D It is a contingent liability but need not be disclosed in the notes to accounts.


165. Beta Plc purchased a plot of land and constructed a showroom on the land.

The following costs were incurred: Details $ Cost of land 750,000Construction costs 1,750,000Legal fees for land purchase contract 5,000Architect's fees 57,000Expenses for showroom inauguration 3,000Wages paid to workmen involved in construction 60,000

The value of the land and building, which needs to be capitalised is:

A $750,000 and $1,875,000 B $755,000 and $1,867,000 C $750,000 and $1,867,000 D $755,000 and $1,810,000

166. Which of the following statement(s) is / are true?

A liability should be recorded in the accounts only if the following conditions are satisfied:

(i) It is probable that there may be an outflow of economic resources to settle the obligation on the occurrence of a future event.

(ii) The amount of the liability can be reasonably estimated.

A Both (i) and (ii) B Only (ii) C Only (i) D Either (i) or (ii)

167. Larry uses the allowance method for recording bad debts. He received a notification from one of its past customers, Harry, that a payment on a $1,000 receivable would be forthcoming. Larry had previously written off the receivable from his books of accounts.

The proper journal entry to reinstate the receivable into the accounts is:

$ $ A Dr Accounts Receivable 1,000

Cr Allowance for doubtful debts 1,000 B Dr Allowance for doubtful debts 1,000

Cr Sales 1,000 C Dr Accounts Receivable 1,000

Cr Sales 1,000 D Dr Accounts Receivable 1,000

Cr Uncollectible Accounts Expense 1,000

168. The issued share capital of Smith Ltd is as follows: Ordinary shares of $10 each $1,000,000 8% Preference shares of $50 each $500,000

For the year ended 31 October 20X8, the company has paid the preference dividend for the year. An additional interim dividend of 50 cents per share on the ordinary shares was paid. A final ordinary dividend of 50 cents per share is proposed.

Calculate the amount of dividend relating to the year ended 31 October 20X8?

A $40,000 B $140,000 C $90,000 D $100,000

169. Based on the information provided below relating to Jasmine Plc, compute the value of the inventory as on 31 December 20X8:

Inventory as on 1 January 20X8 $20,000Net purchases during 20X8 $45,000 Sales during 20X8 $80,000Gross profit rate 40%

A $17,000 B $32000 C $48,000 D $65,000

170. The profit of Beta Ltd was $52,100 as at 31 March 20X7.

Rent received in advance of $5,010 from the trial balance was credited to the SOCI.

Insurance paid in advance of $2,100 from the trial balance was debited to the SOCI.

What is the actual profit of Beta Ltd for the year ended 31 March 20X7?

171. Which of the following statements about bank reconciliations are correct? (i) When preparing a bank reconciliation statement, unpresented cheques must be deducted from the

balance of cash in the bank and should be shown in the bank statement. (ii) The entry for a cheque from a customer paid into the bank but dishonoured must be corrected by

making a debit entry in the cash book. (iii) An error by the bank must be corrected by an entry in the cash book. (iv) An overdraft is a debit balance in the bank statement.


172. Gwen’s Boutique received a consignment of garments from Kyra textiles on 24 December 20X9. On 26

December, 20X9 Gwen mailed a cheque covering her collection. This cheque was not reflected in Gwen’s statement from the bank.

How would this transaction appear in Gwen’s bank reconciliation statement?

A An adjustment would be made for funds that are not collected B As an unpresented cheque C As an uncredited deposit D It does not appear in the bank reconciliation statement

173. A trial balance has the following equation

A Assets = Liabilities + Capital B Total debits = Total credit C Income – Expenditure = Profit D Assets = Total debt

174. A bank statement shows a debit entry, but this transaction has not been recorded in the cash book. This

debit entry could be: A Bank charges B Interest received from bank C Direct receipt from a customer D Contra transaction

SE

CT

ION

E

QUESTION BANK E

PREPARING A TRIAL BALANCE

40: Preparing a Trial Balance © GTG

175. A balance of $1,000 which is brought down on a provision for depreciation account:

A Will be included in the trial balance as a debit balance B Will be included in the trial balance as a credit balance C Will sometimes be included in the trial balance as a debit balance and sometimes as a credit balance D Will not be included in the trial balance at all

176. As an accountant you are required to make entries in the cash book and then prepare the bank

reconciliation statement. Which entries will you incorporate in the cash book?

(i) Cheques issued totalling $5,000 but not presented of $4,000 (ii) Cheques deposited totalling $10,000 but not credited of $6,000 (iii) Standing order for the payment of telephone bill $500 (iv) Cheque deposited of $2,000 and wrongly credited twice by the bank.

A (i) and (iv) B (i), (ii) and (iv) C (iii) D All of the above

177. Sandra, a fashion designer, has a shop where she retails designer clothes. She took some clothes from the

shop for personal use. The cost of these clothes was $1,500; however, they would have been sold in the shop for $2,500.

What is the journal entry to record this transaction?

$ $ A Dr Drawings account 2,500

Cr Purchases account 2,500 B Dr Drawings account 1,500 Cr Purchases account 1,500 C Dr Drawings account 1,500 Cr Sandra’s account 1,500 D Dr Drawings account 2,500 Cr Sandra’s account 2,500

178. Chandra Inc’s trial balance was agreed with a suspense account. Which of the following errors will require entry in the suspense account?

(i) Last year Chandra Inc issued 10,000 shares of 50 cents each for $1.5. All the shares were fully

subscribed by the public. The accountant recorded the entire proceeds from the issue of shares in the ordinary share capital account.

(ii) Cash of $18,800 paid for plant repairs was correctly accounted for in the cash book, but was debited to the plant asset account.

(iii) The petty cash book balance of $500 was omitted from the trial balance. (iv) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as

$87,400. A (i) B (ii) and (iii) C (iii) and (iv) D (iv)

179. Which of the following transactions highlighted by the bank reconciliation will require entry in the

cash book?

(i) Bank charges (for not maintaining minimum balance) $50 (ii) Unpresented cheque $4,500 (iii) Credit card bill of $1,500 paid but bank credited our account $3,500 (iv) Cheque issued dishonoured $2,650

A (iii) and (iv) B (i) and (iii) C (i) and (ii) D (i) and (iv)


180. Gina purchased furniture worth $9,000 for use in her clinic and recognised it in her accounts as revenue expenditure.

What would be the effect of this transaction on Gina’s profit and non-current assets?

Profits Non-current assets

A Understated Overstated B Overstated Understated C Understated Understated D Overstated Overstated

181. Bash keeps manual books of account. He extracted the trial balance but it did not match. On investigation it

was revealed that: � discounts allowed of $4,500 were credited to the discounts received account � discounts received of $5,000 were debited to the discounts allowed account

Which journal entry will correct the errors?

Dr Cr $ $

A Suspense account 1,000 Discount allowed 500 Discount received 500 B Discount allowed 9,000 Suspense account 1,000 Discount received 10,000 C Discounts allowed 9,500 Discounts received 9,500 D Discounts allowed 4,500

Suspense account 500 Discount received 5,000

182. Galaxy’s accountant is preparing a reconciliation statement for one of its suppliers; Planet Inc. Galaxy’s

payables ledger account shows a balance payable to Planet of $45,000. Planet’s statement shows a balance of $55,000 receivable from Galaxy.

Investigation reveals the following:

(i) Goods returned by Galaxy of $2,700 have not been recorded by Planet. (ii) An invoice for $4,000 has not been recorded by Galaxy. (iii) Galaxy recorded a cash discount of $400 in its books of account, which was disallowed by Planet.

What is the discrepancy after the effects of the above items are given in the books of account?

183. The receivables control account shows a balance of $55,000 as at 31 March 20X8. On reconciliation with the total of all individual memorandum receivables accounts, the following errors

were identified:

(i) Sam’s account was debited twice for $500. (ii) Discount allowed of $1,500 was not recorded in the total receivables control account. (iii) A short payment of $ 1,200 from a customer (i.e. discount allowed) was recorded as a full settlement in

the total receivables control account. What is the adjusted balance in the total receivables control account?


184. From the following information of Dark Horse, you are required to calculate the net cash flows from operating activities for the year ended 31 December 20X8:

$ Opening trade receivables 40,635Sales 421,977Salaries paid to office staff 40,725Pension of factory workers 17,070Payments to suppliers 271,152Administrative expenses 4,920Closing receivables 48,195

185. The following account has been prepared by Jolie, a trainee accountant.

Dr Receivables control account Cr $ $

Balance b/d 21,200 Sales (including cash sales 4,000) 444,000

Bad debts 5000 Sales return account 10800Allowance for doubtful debts 7000 Bad debts recovered 500Cash received 440,800 Balance c/d 18,700 474,000 474,000

What is the correct balance carried forward?

186. After preparing its income statement account for a calendar year, in which it reported a net profit of $60,000, a firm discovered that its inventory at 1 January had been under-valued by $6,000 and that its inventory at 31 December had been over-valued by $9,000.

The firm’s reported net profit for the year should have been:

A 45,000 B 57,000 C 63,000 D 75,000

187. The payables ledger control account below, contains a number of errors:

Dr Payables ledger control account Cr

$ $ Opening balance (amounts 318,600 Purchases 1,268,600owed to suppliers) Contras against debit Cash paid to suppliers 1,364,300 Balances in receivables ledger 48,000Purchases returns 41,200 Discounts received 8,200Refunds received from suppliers 2,700 Closing balance 402,000

1,726,800 1,726,800 All items relate to credit purchases.

What should the closing balance be when all the errors are corrected?


188. Identify which four of the following items should be recorded on the credit side of the receivables control account?

(i) Interest charged on overdue accounts (ii) Cash received from credit customers (iii) Settlement discounts received (iv) Increase in allowance for receivables (v) Sales made on credit (vi) Settlement discounts allowed (vii) Contras against accounts payable (viii) Irrecoverable debts written off

A (i) and (iv) B (iii), (vi) and (viii) C (ii),(vi),(vii) and (viii) D All of the above

189. The draft SOCI 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 statement of financial position for the difference.

The following errors were found on investigation: (i) 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 the sales account. (ii) During the year $8,000 interest received on a holding of loan notes had been correctly entered in the

cash book but debited to the interest payable account. Calculate the revised profit after adjusting for the errors.

190. Miriam Ltd’s SOCI showed a profit of $755,000 for the year ended 30 October 20X7. However, the trial

balance did not balance and hence a suspense account of $32,000 had to be included in the statement of financial position.

The following errors were found on investigation:

(i) In arriving at the net sales and purchase totals for the year, the $48,000 balance on the returns outwards account had been transferred to the debit of sales account. The $64,000 balance on the returns inwards account had been transferred to the credit of purchases account.

(ii) A payment of $4,000 for rent had been correctly recorded in the cash book, but debited to the rent account as $40,000.

What is the revised net profit?

191. At 31 May, Erigo’s owed Fargo, one of his suppliers, $3,036. The balance shown on the statement he

received from Fargo did not agree with this. A purchase by Erigo from Fargo of goods costing $1,040 was recorded in Fargo’s statement but not in Erigo’s ledger. A cheque for $500 paid to Fargo was correctly recorded in Erigo’s ledger but was not shown in the statement from Fargo.

The balance on the statement from Fargo was:

A $1,496 B $2,496 C $3,576 D $4,576


The following information is relevant for questions 192 and 193 A company's draft financial statements for 20X8 showed a profit of $630,000. However, the trial balance did not agree, and a suspense account appeared in the company's draft statement of financial position. Subsequent checks revealed the following errors:

(i) The cost of an item of plant for $48,000 had been entered correctly in the cash book, however, in the

plant account it had been entered as $4,800. Depreciation at the rate of 10% per year ($480) had been charged.

(ii) Bank charges of $440 appeared in the bank statement in December 20X8, but had not been entered in the company's records.

(iii) One of the directors of the company paid $800 due to a supplier in the company's payables ledger by a personal cheque. The bookkeeper recorded a debit in the supplier's ledger account but did not complete the double entry for the transaction. (The company does not maintain a payables ledger control account).

(iv) The payments side of the cash book had been understated by $10,000.

192. Which of the above items would require an entry to the suspense account in order to correct them?

A All four items B (i), (iii) and (iv) C (ii) and (iii) D (i),(ii) and (iv)

193. What would the company's profit be, after the correction of the above errors?

A $634,760 B $624,760 C $624,440 D $625,240

194. When Laura prepares her bank reconciliation she finds that the sum of $500 has been paid directly into her

bank account by a customer, Abel. In addition, a cheque for $40 has been returned as a customer, Barney, did not have sufficient funds in his account. She has not made any bookkeeping entries in respect of this.

What adjustments should Laura make to her cash book when she carries out her reconciliation?

Debit Credit Debit Credit

Direct payment $500

Bank

? Returned cheque $40

?

Bank

195. The following bank reconciliation statement has been prepared by an inexperienced bookkeeper on 31 December 20X8.

Bank reconciliation statement

$

Balance per bank statement 38,640Add: Lodgements not credited 19,270 57,910Less: Unpresented cheques (14,260)Balance per cash book 43,650

What should the final cash book balance be when all the above items have been properly dealt with?

A $43,650 B $33,630 C $5,110 D $72,170


196. Shelly Co bought a machine on 1 January 20X3 for $25,000. Depreciation is charged on a straight-line basis, assuming that the scrap value at the end of the 10 years’ life will be zero. On 31 December 20X3 the depreciation charged on the machine was credited to the accumulated depreciation account, but was incorrectly posted to the debit side of the machinery repairs account. Profit as at 31 December 20X3 is $7,000.

What is the profit after adjusting for this error?

A $7,000 B $9,500 C $4,500 D $5,000

197. Joan’s draft year end accounts were prepared including a pre-payment for rent of $970. The pre-payment

should have been $1,170. When the error is corrected, how will the net profit be affected?

A Net profit will decrease by $200 B Net profit will increase by $200 C Net profit will decrease by $1,170 D Net profit will increase by $1,170

198. The balance on Gastron’s trade receivables ledger account as at 1 January 2009 was $44,560.

� The sales day books showed a total of $28,900 for January 2009. � There were sales returns from credit customers of $1,360. � The settlement discounts of $2,100 were allowed. � Credit customers paid $32,800 during January 2009. � Gastron also wrote off a bad debt of $650 during the month

What was the balance on the receivables ledger control account as at 31 January 2009?

199. The following receivables ledger control account has been prepared by a trainee accountant:

Receivables Control Account Dr Cr

Date $ Date $

01/01/20X9 Balance b/d 284,680 Cash from credit customers 179,790

Credit sales 189,120

Contra against amounts owed by company in payable ledger 800

Discount allowed 3,660

Bad debts written off 1,800

Sales returns 4,920 31/12/20X9 Balance c/d 303,590

484,180 484,180

What should the closing balance on the account after rectification of errors?

A $290,150 B $286,430 C $282,830 D $284,430


200. Epsilon received a statement of account from a supplier, Sigma, showing a balance of $17,900 to be paid. Epsilon’s payables ledger account for Sigma shows a balance of $8,280 due to Sigma.

Investigation reveals the following: (i) Cash paid to Sigma of $8,160 has not been allowed for by Sigma (ii) Epsilon’s ledger account has not been adjusted for the $80 cash discount disallowed by Sigma (iii) Goods returned by Epsilon of $760 have not been recorded by Sigma.

What discrepancy remains between Epsilon’s and Sigma’s records after allowing for these items?

A $18,620 B $780 C $620 D $2,140

201. The following control account has been prepared by a trainee accountant:

Receivables Ledger Control Account as at 31 December 20X8

Dr Cr

$ $

Sales (25% paid for on the spot) 80,000 Cash collected from customer 31,350

Provision for bad-debts 6,050 Discount (2% sales) 1,600

Balance c/d 53,100

86,050 86,050

Payable ledger control account as at 31 December 20X8 Dr Cr $ $ Cash paid to supplier 43,520 Balance b/d 22,700Return inward 5,280 Purchases (35% cash basis) 35,000Discount (3% of purchases) 1,050 Contra against credit receivables 9,640 Interest on overdue balance 9,960Balance c/d 33,150 Bad-debts 5,700

Total 83,000 Total 83,000

What should be the balance in the receivable and payable account in the opening trial balance as at 1 January 20X9?

Receivable Payable $ $

A 27,450 21,268B 6,830 1,567C 33,500 15,568D 31,500 16,568

202. While preparing a company’s bank reconciliation statement in March 20X9, the following items cause a

difference between the cash book balance and the bank statement balance: (i) Bank charges $380 (ii) Error by bank $1,000 (cheque incorrectly debited to the account) (iii) Lodgements not credited $4,580 (iv) Outstanding cheques $1,475 (v) Direct debit $350 (vi) Cheque issued by the company and dishonoured $400


Which of these items will require an entry in the cash book? A (ii), (iv) and (vi) B (i), (v) and (vi) C (iii) and (vi) D (iii) and (v)

203. Which of the following accounting errors would give rise to the creation of a suspense account?

(i) A credit purchase for $1,250 had been debited to the purchases account as $2,150 and credited to the

purchase ledger control account as $2,150 (ii) The stationery account had been overstated by $1,100 (iii) An accrued expense had been entered correctly in the expense account, but shown in the trial balance

as a prepayment. (iv) The purchase of furniture for $3,000 which is for business use had been incorrectly debited to the

purchases account as $3,500, but correctly recorded in cash .

A All of the above B (i), (ii) and (iii) C (I) and (iii) D (Iv)

204. Listed below are five potential causes of a difference between a company’s cash book balance and its bank

statement balance as at 30 November 20X9: (i) Cheques recorded and sent to suppliers before 30 November 20X9 but not yet presented for payment. (ii) An error by the bank in crediting another customer’s account, a lodgement made by the company. (iii) Bank charges (iv) Cheques paid in before 30 November 20X9, but not credited by the bank until 3 December 20X9 (v) A cheque recorded and paid in before 30 November 20X9, but dishonoured by the bank.

Which of the following alternatives correctly analyses these items into those requiring an entry in the cash book and those that would feature in the bank reconciliation?

Cash book Bank reconciliation A (i), (ii), (iv) (iii), (v) B (iii), (v) (i), (ii), (iv) C (iii), (iv) (i), (ii), (v) D (ii), (iii), (v) (i), (iv)

205. Which of the following account balances should appear on the debit side of the trial balance?

(i) Property, plant and equipment (ii) Payables (iii) Staff salaries paid (iv) Rent on property received (v) Purchases (vi) Receivables A (i), (iii), (v) and (vi) B (i), (iii) and (v) C (i), (iii), (iv) and (vi) D All of the above

206. A company’s trial balance failed to agree, the totals being:

Debit $815,602 Credit $808,420

The following errors are found on investigation.

� The omission from the trial balance of insurance expenses $7,182 � Discount allowed of $3,591 debited erroneously to the discount received account � No entries made in the records for cash sales totalling $7,182 � The returns outward totals of $3,591 were recorded in the trial balance as a debit balance


What will be the amount to be recorded in the suspense account in order to agree the trial balance? A $7,182 credit B $3,591 credit C $3,591 debit D $10,773 credit

207. Alpha buys goods from Beta. On 30 June 20X8 Beta’s account in Alpha’s records showed $5,700 being

owed to Beta. Beta submitted a statement to Alpha on the same date showing a balance due of $5,200. Which of the following could fully account for the difference in the books of Alpha?

A Alpha has sent a cheque to Beta for $500 which has not been received by Beta. B The credit side of Beta’s account in Alpha’s records has been undercast by $500. C An invoice for $250 from Beta has been treated in Alpha’s records as if it had been a credit. D Beta issued a credit note for $500 to Alpha, which Alpha has not received.

208. Sigma’s bank statement shows an overdrawn balance of $38,600 on 30 June 20X8. Checking against the company’s cash book revealed the following differences:

(i) Bank charges of $200 have not been entered in the cash book. (ii) Lodgements of $14,700 recorded on 30 June 20X8 but credited by the bank on 2 July 20X8 (iii) Cheque payments of $27,800 entered in the cash book but not presented for payment at 30 June 20X8. (iv) A cheque payment to a supplier of $4,200 charged to the account in June 20X8 was recorded in the

cash book as a receipt. Based on this information, what was the cash book balance BEFORE any adjustments?

A $43,100 overdrawn B $16,900 overdrawn C $60,300 overdrawn D $34,100 overdrawn

209. The following receivables ledger control account prepared by a trainee accountant contains a number of

errors:

Receivables ledger control account Dr Cr

Date $ Date $ 01/01/20X9 Balance b/d 614,000 Credit sales 301,000

Cash from credit customers 311,000 Discounts allowed 3,400

Bad debts written off 32,000

Contras against amounts due to suppliers in payables ledger

Interest charged on overdue accounts 1,600

8,650 31/01/20X9 Balance c/d 595,650 933,650 933,650

What should be the closing balance on the control account after the errors have been corrected?

210. A business purchased a motor car on 1 July 20X9 for $20,000. It is to be depreciated at 20 per cent per

year on the straight line basis, assuming a residual value at the end of five years of $4,000, with a proportionate depreciation charge in the year of purchase.

The $20,000 cost was correctly entered in the cash book, but posted to the debit of motor vehicles repairs account.

How will the business profit for the year ended 31 December 20X9 be affected by the error?

A Understated by $18,400 B Understated by $16,800 C Understated by $18,000 D Overstated by $18,400


211. The bank reconciliation statement prepared by a junior accounts officer of Zebra Ltd is as follows:

$ Bank overdraft according to bank statement 13,620Add: Cheque deposited but not credited 28,240 41,860Less: Cheque issued but not presented (8,360)Overdraft according to cash book 33,500

What should be the correct balance according to the cash book?

212. The bank reconciliation statement shows a balance of $5,000 according to the cash book.

The balance according to the bank statement is $3,028. The amount of deposits not yet credited is $2,682.

What is the amount of unpresented cheques?

213. What effect on a positive cash balance does an adjustment for unpresented paid cheques have on a bank

reconciliation?

A Increase in the cash book balance B Decrease in the cash book balance C Increase in the balance shown by the bank statement D Decrease in the balance shown by the bank statement

214. A sales invoice of $1,542 was recorded in the books of Peter as follows:

Dr Sales $1,254 Cr Receivables $1,254 Being sale of goods The error was not corrected before the trial balance was extracted. How will Peter’s profit for the year be affected?

A Understated by $1,542 B Understated by $288 C Understated by $2,796 D Overstated by $1,542

215. Arrow’s bank statement shows a credit balance of $2,200 as on 30 November 20X9. These figures do not

match Arrow’s cash book balance. The reasons for this difference as explained by Arrow’s accountant are as follows:

� A direct debit of $600 was mistakenly recorded twice � Cheques worth $800 are not yet cleared by the bank � Cheques worth $400 are not yet presented to the bank

What would be the balance in Arrow’s cash book for the month ended 30 November 20X9?

216. The accountant of Lions Ltd could not balance the trial balance for the following reasons:

(i) The purchase return book was undercast by $1,200. (ii) Purchase of an asset for $4,000 was wrongly debited to the repairs account. (iii) A discount of $500 on the receipt side of the cash book was not posted to the ledger account. (iv) A cash sale of $700 made to a customer was not recorded in the cash book.

What is the balance of the suspense account?


217. Jack’s trial balance was extracted as at 31 March 20X7, the total of the debit balances was $2,000 more than the total credit balances.

Which of the following errors could explain the difference?

(i) Cash receipt of $2,000 was not recorded in the books of accounts. (ii) Purchase of goods worth $1,000 was recorded twice in the books of accounts. (iii) Commission received of $1,000 was entered on the debit side of both the commission received account

and the cash account. (iv) Discount received of $2,000 was entered on the debit side of both the discount received account and

the payable ledger.

A (i) and (ii) B ((ii) and (iii) C (iii) and (iv) D (i) and (iv)

218. Rabbit Inc prepared its financial statements for the year ended 31 December 20X8. The directors of Rabbit Inc complained that the machinery purchased during the last financial year was not shown in the SOFP (statement of financial position). On investigation, the accountant discovered that machinery purchased for $10,000 had been debited to the repairs account. Depreciation on similar machinery is charged @ 20% per year on a straight line basis. It is the company’s policy to charge depreciation for the whole year in the year of purchase, and no depreciation in the year of sale.

What will be the effect on the profit of Rabbit Inc after rectification?

A Increase in profits by $8,000 B Decrease in profits by $8000 C Increase in profits by $10,000 D Decrease in profits by $10,000

219. The following payables ledger control account has been prepared by a trainee accountant: Payables ledger control account

Date $ Date $ Return outwards 6,000 01/01/20X9 Balance b/d 50,000 Return inwards 5,800 Cash purchases 25,000 Cash paid to suppliers 40,000 Credit purchases 40,000 Discounts received 10,000 Contra against receivables 10,000 Discounts allowed 6,200 31/01/20X9 Balance c/d 57,000 125,000 125,000

What should be the closing balance at 31 January 20X9 after correcting the errors in the account?

220. A business SOCI for the year ended 31 December 20X9 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account and sales of a plant worth $500 on 30 June 20X9 was recorded as sales of goods. The company has a policy to depreciate motor vans at 25 per cent per year with a full year’s charge in the year of acquisition and plant at 10 per cent per year.

What would the net profit be after adjusting for this error?

221. The following receivables ledger control account has been prepared by a trainee accountant Receivables ledger control account

Dr Cr $ $

Balance b/d 284,680 Cash received from credit customers 179,790Credit sales 189,120 Contras against amounts owing by company in payables ledger 800Discounts allowed 3,660 Bad debts written off 1,800 Sales returns 4,920 Balance c/d 303,590 484,180 484,180


What will be the difference between the closing and opening balances after the rectification of errors?

222. In October 20X9 Utland sold some goods on sale or return terms for $2,500. The 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 20X9. In November 20X9 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.

223. On 31 March 20X7 a company had an inventory of furnace oil that cost $8,200. There was also an unpaid furnace oil bill for $3,600.

On 31 March 20X8 the furnace oil inventory was $9,300 and there was an outstanding furnace oil bill of $3,200.Payments made for furnace oil during the year ended 31 March 20X8 totalled $34,600.

Based on these figures, what amount should appear in the company’s SOCI for furnace oil for the year?

224. A trainee accountant has prepared the following receivables ledger total account, to calculate the credit sales of a business which does not keep proper accounting records (all sales are on credit):

Receivables ledger total account Dr Cr

$ $ Opening receivables Cash received from customers Discounts allowed to credit customers Irrecoverable debts written off Returns from customers

148,200 819,300 16,200

1,50038,700

Credit sales Closing receivables

870,800153,100

1,023,900 1,023,900

The account contains several errors.

What is the sales figure when all the errors have been corrected?

225. Masonica Plc has two bank accounts in Royal bank, Account X and Account Y. At the end of April 20X9, its cashbook shows an overdraft of $500 in Account X and a balance of $1,000 in Account Y.

Bank statement shows different results for both the accounts. Investigation reveals the following errors:

(i) Cheque deposited of $1,000 in Account X has been wrongly credited by bank to Account Y. (ii) A cheque issued of $6,000 from Account Y has been credited as $600 to Account X in the cashbook. (iii) Bank has debited charges of $100 for both the accounts, which had not been entered into the

cashbook. (iv) Dividend received, $600, was wrongly debited by the bank to Account X on 2 May 20X9. It was entered

correctly in Account Y of the cash book on 3 May 20X9.

Which of the following is the correct cash balance on 30 April 20X9?

Account X ($) Account Y ($) A Overdraft $500 Balance $1,000 B Balance $1,000 Overdraft $500 C Balance $200 Overdraft $5,100 D None of the above


226. An inexperienced bookkeeper has drawn up the following receivables ledger control account: Dr Receivables Ledger Control Account Cr

Date $ Date $ Balance b/d 180,000 Credit sales 190,000 Cash from credit customers 228,000 Bad debts written off 1,500 Sales returns 8,000 Contras against payables 2,400 Cash refunds to credit customers 3,300 Balance c/d 229,600 Discount allowed 4,200

423,500 423,500

What should be the closing balance after correcting the errors?

227. A company's trial balance failed to agree, and so a suspense account was opened for the difference.

Subsequent checks revealed that discounts allowed of $13,000 had been credited to the discounts received account. An entry on the credit side of the cash book for the purchase of machinery that cost $18,000 had not been posted to the plant and machinery account.

Which two of the following journal entries would correct the errors?

Debit Credit

$ $ (i) Discounts allowed 13,000 Discounts received 13,000(ii) Discounts allowed 13,000 Discounts received 13,000 Suspense account 26,000(iii) Suspense account 26,000 Discounts allowed 13,000 Discounts received 13,000(iv) Plant and machinery 18,000 Suspense account 18,000(v) Suspense account 18,000 Plant and machinery 18,000

A (i) and (iv) B (ii) and (v) C (ii) and (iv) D (iii) and (v)

228. Which of the following mistakes affect the agreement of the trial balance?

(i) The wrong figure of the purchases account has been carried over to the trial balance (ii) Wages paid have been credited to the wages account (iii) Goods sold to John for $150 have been posted correctly to the sales account, but $510 has been

debited to John’s account. (iv) Salary paid to Sam has been debited to his account. (v) A sale of land worth $500 has been recorded as sale of goods of $5,000

A (i), (iii) and (iv) B (ii) and (iv) C (i), (ii), (iii) and (v) D All the above


229. The accountant of ICC Ltd recorded a sale of $500 correctly in the sales day book. However, he entered the sale to the customer’s ledger account as $5,000. The posting to the receivables ledger control account was correct.

What will be the accounting entry to correct the error?

A Dr Sales A/c $4,500

Cr Receivables A/c $4,500 B Dr Receivables A/c $4,500

Cr Sales A/c $4,500 C Dr Suspense A/c $4,500

Cr Receivables A/c $4,500 D No accounting entry required.

The following information relates to questions 61 and 62

Tony sold a non-current asset with a net book value of $1,500 for $1,600. The cash received was correctly recorded in the bank account, but was credited to the sales account. Tony made no entries in the non-current asset account in the general ledger in respect of the sale.

230. What action should be taken to ensure that the debit and credit totals of the trial balance agree?

A Open a suspense account with a debit balance of $1,500 B Open a suspense account with a debit balance of $1,600 C Open a suspense account with a debit balance of $3,100 D A suspense account is not needed as the totals will agree.

231. If the error is not corrected before the final accounts are prepared, how will the net profit be affected?

A net profit will be correct B net profit will be overstated by $100 C net profit will be overstated by $1,500 D net profit will be overstated by $1,600

232. Q’s trial balance failed to agree. A suspense account was opened for the difference. Q did not maintain

receivables and payables control accounts. The following errors were found in Q’s accounting records: (i) When recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share

capital account as $330,000. (ii) Cash of $2,800 was paid for plant repairs. It was correctly accounted for in the cash book but was

credited to the plant asset account. (iii) The petty cash book balance of $500 had been omitted from the trial balance. (iv) A cheque for $78,400 was paid for the purchase of a motor car; however, it was debited to the motor

vehicles account as $87,400. Which of the errors will require an entry to the suspense account to correct them?

A (i), (ii) and (iv) B (i), (ii), (iii) C (i) and (iv) D All of the above

233. A company’s trial balance totals were:

Debit $387,642 Credit $379,511

A suspense account was opened for the difference.

Which ONE of the following errors would have the effect of reducing the balance of the suspense account when corrected?

A The petty cash balance of $500 has been omitted from the trial balance. B $4,000 received for rent for part of the office has been correctly recorded in the cash book and debited

to the rent account. C No entry has been made in the records for a cash sale of $2,500. D $3,000 paid for repairs to plant have been debited to the plant asset account.


234. A limited liability company’s trial balance does not balance. The totals are: Debit $384,030 Credit $398,580

A suspense account is opened for the difference.

Which of the following pairs of errors could clear the balance on the suspense account when corrected?

A Debit side of cash book undercast by $10,000; $6,160 paid for rent correctly entered in the cash book,

but entered in the rent account as $1,610. B Debit side of cash book overcast by $10,000; $1,610 paid for rent correctly entered in the cash book,

but entered in the rent account as $6,160. C Debit side of cash book undercast by $10,000; $1,610 paid for rent correctly entered in the cash book,

but entered in the rent account as $6,160. D Debit side of cash book overcast by $10,000; $6,160 paid for rent correctly entered in the cash book,

but entered in the rent account as $1,610.

235. Tom’s bank reconciliation statement revealed that cheques deposited but not credited by the bank amounted to $1,900. Cheques issued but not presented for payment amounted to $1,750. The balance according to the bank statement is $12,500.

What is the balance according to the cash book?

A $12,500 B $12,350 C $12,650 D $16,150

236. Which of the following errors would prevent a trial balance from balancing?

(i) An error in addition in the cash book. (ii) Failure to record a transaction at all. (iii) Cost of a motor vehicle debited to the motor expenses account. The cash entry was correctly recorded. (iv) Goods taken by the proprietor of a business, recorded by debiting purchases and crediting the drawings

account. A (i) B (i) and (ii) C (iii) and (iv) D All of the above

237. Which of the following statements is / are correct?

(i) A separate suspense account should be opened for each error in the ledger accounts. (ii) A suspense account is sometimes opened to complete postings while more information is sought on a

transaction A None of the above B (i) C (ii) D Both of the above

238. Which of the following factors could cause a company’s gross profit percentage on sales to fall

below the expected level?

(i) Understatement of closing inventories. (ii) Incorrect inclusion in purchases of invoices relating to goods, supplied in the following period. (iii) Inclusion in sales of the proceeds of sale of non-current assets. (iv) Increased cost of carriage charges borne by the company on goods sent to customers. A (iii) and (iv) B (ii) and (iv) C (i) and (ii) D (i) and (iii)


239. Which of the following errors could result in a suspense account being required to balance the trial balance?

(i) A purchase invoice for $132 recorded as $123 in the purchases account. (ii) Cash received from credit customers treated as cash sale. (iii) Payments to suppliers of $1,647 recorded as $1,674 in the payables ledger. (iv) One page omitted from the sales day book.

A (i) and (ii)

B (i) and (iii)

C (i) and (iv)

D Only (iii)

240. A trial balance extracted from a sole trader’s records failed to agree. A suspense account was opened for the difference.

Which of the following errors would require an entry in the suspense account to correct them?

(i) Discount allowed was mistakenly debited to discount received account. (ii) Cash received from the sale of a non-current asset was correctly entered in the cash book, but was

debited to the disposal account. (iii) The balance on the rent account was omitted from the trial balance. (iv) Goods taken from inventory by the proprietor had been recorded by crediting the drawings account and

debiting the purchases account.

A All of the above B (ii) and (iii) C (ii) and (iv) D (i) and (iii)

241. Which of the following statements about bank reconciliations are correct?

(i) A difference between the cash book and the bank statement must be corrected by means of a journal entry.

(ii) When preparing bank reconciliation, lodgements recorded before the date in the cash book, but credited by the bank after date, should reduce an overdrawn balance in the bank statement.

(iii) Bank charges not yet entered in the cash book should be dealt with by an adjustment in the bank reconciliation.

(iv) If a cheque received from a customer is dishonoured after date, a credit entry in the cash book is required.

(v) Standing orders should be added to the bank overdraft according to the bank statement.

A (ii) and (iv) B (i) and (iv) C (ii) and (v) D (i) and (iii)

242. A sole trader took some goods that cost $800 from inventory for his own use. The normal selling price of the goods is $1,600.

Which of the following journal entries would correctly record this?

Dr Cr $ $

A Inventory account 800 Purchases account 800

B Drawings account 800 Purchases account 800

C Sales account 1,600 Drawings account 1,600

D Drawings account 800 Sales account 800


243. Willy has a balance of $250,000 in the trade payables control account at the end of December 20X9. What does this mean?

A Willy has bought $250,000 of goods in December B Willy is owed $250,000 by his customers C Willy owes $250,000 to his suppliers D Willy has paid $250,000 to his suppliers in December.

244. Which of the following is not a valid reason for maintaining a control account for purchases? A To help prevent or detect fraud B To enable the preparation of monthly accounts more easily C To enable greater control over payables balances to be exercised D To authorise setting of credit limits for suppliers

245. TTA business had an opening inventory of $180,000 and a closing inventory of $220,000 in its financial statements for the year ended 31 December 20X8.

Which of the following entries for these opening and closing inventory figures are made when completing the financial records of the business?

Debit $

Credit $

A Inventory account SOCI 180,000

180,000 SOCI Inventory account 220,000

220,000

B SOCI Inventory account 180,000 180,000

Inventory account SOCI 220,000

220,000

C Inventory account Purchases account 40,000

40,000

D Purchases account Inventory account 40,000 40,000

246. John has extracted a trial balance and created a suspense account with a credit balance of $1,518 to make

it balance. John found the following: (i) A sales invoice for $9,138 has not been entered in the accounting records (ii) A payment of $3,024 has been posted correctly to the payables control account but no other entry has

been made. (iii) A credit sale of $262 has only been credited to the sales account.

What is the remaining balance on the suspense account after these errors have been corrected?

A $7,620 debit B $4,280 credit C $1,780 credit D $1,244 debit

247. Samantha has extracted a trial balance and created a suspense account with a credit balance of $759 to

balance it. Samantha found the following: (i) A sales invoice for $4,569 has not been entered in the accounting records. (ii) A payment of $1,512 has been posted correctly to the payables control account but no other entry has

been made. (iii) A credit sale of $131 has only been credited to the sales account.

What is the remaining balance on the suspense account after these errors have been corrected? A $3,810 debit B $2,140 credit C $890 credit D $622 debit

248. Which of the following will appear on the face of a company’s statement of changes in equity?

(i) Surplus on revaluation of non-current assets (ii) Share premium (iii) Profit for the financial year

A All of the above B (ii) and (iii) C (i) and (iii) D (i) and (ii)

249. According to IAS 10, Events after the Reporting Period, which of the following material events are

adjusting events?

(i) Evidence providing impairment of property. (ii) Inventory held at the end of the reporting period, and sold at less than cost. (iii) Discovery of fraud and error affecting the financial statements. (iv) Recovery of an amount from a customer whose outstanding amount was written off as a bad debt in the

financial statements.

A (i), (ii), (iii) and (iv) B (i), (ii) and (iv) C (ii) and (iii) D (i), (ii) and (iii)

250. An SOCF consists of which of the following items?

(i) Interest received (ii) Proceeds of the issue of shares (iii) Dividends received (iv) Proposed dividends

A (i), (ii) and (iii) B (ii), (iii) and (iv) C (i) and (ii) D (ii) and (iv)

251. State which of the following statements about the statement of cash flows is correct?

A A revaluation of a non-current asset will not affect cash flows B A profit on disposal of non-current assets will cause an increase in cash from operating activities

252. Share premium is shown in the SOFP under:

A Share capital B Reserves C Current liabilities and provisions D Investments

S

EC

TIO

N F

QUESTION BANK

F PREPARING BASIC FINANCIAL STATEMENTS

58: Preparing Basic Financial Statements © GTG

253. The accountant of Ebony Ltd is preparing an SOCF. He states the following facts:

(i) Depreciation is non-cash expenditure, and hence added back to profits through the indirect method. (ii) Under the indirect method, cash flows from operating activities, investment activities and financing

activities are shown under the heading, cash flow from business. (iii) The SOCF ensures that there is no negative cash flow in the business.

Which of the above statements are correct?

A (i) B (ii) C (iii) D (i) and (iii)

254. Charlie is a trader of art works who sells mostly on credit. He does not keep a full set of double entry

accounting records. From the following information available, you are asked to calculate his gross profit for the year:

� Charlie makes his sales at a gross profit margin of 25% on sales � Collections for the year amounted to $186,900 � The increase in trade receivables during the year was $47,250 � Discounts for the year amounted to $5,250

255. Which of the following items are required to be disclosed in a limited liability company’s financial

statements, according to IAS 1 Presentation of Financial Statements?

(i) Authorised share capital (ii) Finance costs (iii) Staff costs (iv) Depreciation and amortisation

A (i), (ii) and (iii) B (i), (ii) and (iv) C (ii), (iii) and (iv) D All of the above

256. Which of the following is a cash equivalent?

A Shares in a listed company B Debentures in a listed company (maturing after three years) C Commercial paper (maturing in one month) D Investment in associates

257. Baker’s Corner is a bakery. Which of the following items will be classified as an operating activity?

(i) Sale of cakes on credit (ii) Sale of cakes for cash (iii) Collection from credit customers (iv) Sale of computers for cash (v) Wages to workers A (i), (ii), (iii) and (iv) B (i), (ii), (iii) and (v) C (ii), (iii), (iv) and (v) D (i), (ii), (iii), (iv) and (v)


258. Which of the following account heads are statements of financial position items?

A Tax expenses B investments C Provision for doubtful debts D Write downs of assets E Bonus issue F Term loan G Spare parts H Dividends paid I Dividends declared

259. Which of the following items could appear in a company’s SOCF?

(i) Proposed dividends (ii) Rights issue of shares (iii) Bonus issue of shares (iv) Repayment of loan

A (i) and (iii) B (ii) and (iv) C (i) and (iv) D (ii) and (iii)

260. Should transfer to various reserves from retained earnings be shown on the face of an entity’s SOCI (income statement)?

A Yes B No

261. If the opening inventory is overstated, the profit will be

A Cancelled B Understated C Overstated D Unchanged

262. Monica, after graduating from an Arts college, set up a new business. Her books of accounts recorded the following balances:

Initial capital introduced $15,000 Bank overdraft $20,000 Vehicle $16,000

Her only other asset is office furniture. She has no other liabilities. What is the book value of her office furniture?

263. How should interest charged on partners’ drawings appear in a partnership’s financial

statements?

A As income in the SOCI. B Added to net profit and charged to partners in the appropriation account. C Deducted from net profit and charged to partners in the appropriation account. D Deducted from net profit in the appropriation account and credited to partners.

264. Which of the following events occurring after the reporting period are classified as adjusting, if

material?

(i) The sale of inventories valued at cost at the SOFP date for a figure in excess of cost. (ii) A valuation of land and buildings providing evidence of impairment in value at the year end. (iii) The issue of shares and loan notes. (iv) Insolvency of a customer with a balance outstanding at the end of the year.

A (i) and (iii) B (ii) and (iv) C (ii) and (iii) D (i) and (iv)


265. Which of the following could appear as separate items in the statement of changes in equity required by IAS I Presentation of Financial Statements, as part of a company’s financial statements?

(i) Gain on revaluation of land. (ii) Loss on sale of investments. (iii) Prior year adjustments. (iv) Proceeds of an issue of ordinary shares. (v) Dividends proposed after the year end.

A (i), (iii) and (iv) B (i), (ii) and (iv) C (i) and (iii) D All of them

266. Which of the following must be disclosed in the financial statements of a quoted (listed) company,

if material?

(i) Total expenditure on research and development. (ii) An analysis of operating profit into continuing and discontinuing activities. (iii) Profit or loss on the disposal of a discontinued operation. (iv) Authorised share capital. (v) Finance costs.

A (ii), (iii) and (iv) B (i), (ii), (iii) and (v) C (i) and (v) D All of the above

267. The following is the statement of financial position as at 31.12.20X7 of Ikeo Ltd.

$ Plant and machinery 70,000Bank overdraft 35,000Trade payables 125,000Trade receivables 380,000Cash 35,000Prepayments 26,000Accruals 18,000Allowance for receivables 22,000*Loan repayment on 31/12/20X9 110,000

* Half of the loan would be repaid before the end of the reporting date.

What are Ikeo Ltd’s net current assets at the year end?

268. Which of the following statements about provisions, contingencies and events after the reporting

period is/are correct? (i) A company expecting future operating losses should make a provision for them as soon as it becomes

probable that they will be incurred. (ii) Details of all adjusting events after the reporting period must be disclosed by a note in a company’s

financial statements. (iii) Contingent assets must be recognised if it is probable that they will arise. (iv) Contingent liabilities must be treated as actual liabilities and provided for, if it is probable that they will

arise. A (iv) B (ii) and (iv) C (i) and (ii) D All of the above


269. According to IAS 1 ‘Presentation of Financial Statements', dividends declared and recognised last year but paid during the current year, should be disclosed in:

A SOCI B Statement of changes in equity C SOFP D None of the above

270. Which of these statements about limited liability companies is/are correct?

(i) A company can make a bonus (capitalisation) issue to raise funds for expansion. (ii) The profit or loss on the disposal of part of a company’s operations must be disclosed in the SOCI

(income statement as an extraordinary item if material.) (iii) Both realised and unrealised gains and losses may be included in the statement of changes in equity,

required by IAS 1 Presentation of Financial Statements.

A (i) and (iii) B (ii) and (iii) C (i) and (ii) D (iii)

271. Which of the following statements about the financial statements of limited liability companies are correct according to International Accounting Standards?

(i) When preparing an SOCF, either the direct or the indirect method may be used. Both lead to the same

figure for net cash from operating activities. (ii) Loan notes can be classified as current or non-current liabilities. (iii) Financial statements must disclose a company’s total expense for staff costs and for depreciation, if

material. (iv) A company must disclose by way of a note, the details of all adjusting events in the financial

statements.

A (i), (ii) and (iii) B (ii) and (iv) C (iii) and (iv) D All of the above

272. Shrouder’s has a financial year end of 31 December. On 10 June 20X8, due to heavy floods some of the

accounting records of the company were destroyed. The accounting staff were able to recover from the undamaged records, information from 31 December 20X7 until 10 June 20X8:

(i) Inventories increased by $32,500 (ii) Sales revenue was $246,500 (iii) The profit mark-up on goods sold was a uniform 25%.

What were the purchases for the period from 31 December 20X7 to 10 June 20X8?

273. A trainee accountant of Narnia Inc prepared the following SOCF:

What is the correct cash flow from the operating activities?

$’000 Cash flow from operating activities Profit before taxation 640Less: Depreciation (40)Add: Investment income 200Add: Increase in trade receivable 50Add: Increase in trade payable 10Net cash from operating activities 860


274. The total of the individual ledger balances in Die Hard Inc’s payables ledger was $345,678 on 31 March 20X9. What amount should Die Hard report in its SOFP as accounts payable as at 31 March 20X9, after considering the following errors?

(i) Sam’s ledger was undercast by $1,111 in the memorandum individual ledger account of suppliers. (ii) Danny’s ledger was overcast by $13,456 in the memorandum individual ledger account of suppliers.

275. Sandra does not maintain complete books of accounts. What is the profit for the year 20Y0 from the

following information?

Net assets on 31 December 20Y0 = $80,000 Net assets on 31 December 20X9 = $40,000 Capital introduced on 31 July 20Y0 = $20,000 Drawings during the year = $15,000 Interest on capital = $4,000 Interest on drawings = $3,000

276. Which of the following statements about a company’s financial statements is / are correct,

according to International accounting standards?

(i) A material profit or loss on the sale of part of the entity must appear in the SOCI as an extraordinary item.

(ii) Dividends paid and proposed should be included in the SOCI. (iii) The SOCI must separately show any material profit or loss from discontinued operations during the

year. (iv) The statement of changes in equity must not include unrealised gains or losses.

A (i), (ii) and (iii) B (ii) and (iv) C (iii) D (i) and (iv)

277. On 30 June 20X8 a company had $1m 8% loan notes in issue, interest was being paid half-yearly on 30

June and 31 December.

On 30 September 20X8 the company redeemed $250,000 loan notes at par, paying interest due to that date. On 1 April 20X9 the company issued $500,000 7% loan notes, interest payable half-yearly on 31 March and 30 September. What figure should appear in the company’s SOCI for interest expense for the year ended 30 June 20X9?

278. On 1 September 20X9, a business had an inventory of $380,000. During the month, sales totalled

$650,000 and purchases, $480,000. On 30 September 20X9 a fire destroyed some of the inventory. The undamaged goods in the 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


279. Domingo’s reporting date is 31 December 20X7. Their financial statements were authorised for issue on 2 June 20X8.

Which two of the following events after the reporting period, should be adjusted in the financial statements for the year ended 31 December 20X7?

A The impairment value of land and buildings due to earthquake which occurred on 3 February 20X8. B A debt of substantial amount was declared bad on 3 April 20X8. C The declaration of an equity dividend of $1 per share on 26 January 20X8. D The imposition of a fine on 16 March 20X8 for health and safety breaches in May 20X7.

280. On 30 June 20X9, Holston Plc acquired 75% of the equity capital of Stormont Inc for $500,000. At that

date the statement of financial position of Stormont Inc showed the following: $

Ordinary share capital 200,000 Share premium account 150,000 Retained earnings 100,000

What was the goodwill arising on the acquisition?

A $50,000 B $162,500 C $350,000 D $300,000

281. The following information is available regarding a company’s dividends:

$ 20X8 Sept: Final dividend for the year ended 30 June 20X8 paid (declared August 20X8) 100,000 20X9 March: Interim dividend for the year ended 30 June 20X9 paid 40,000 Sept: Final dividend for the year ended 30 June 20X9 paid (declared August 20X9) 120,000

What figures, if any, should be disclosed in the company’s SOCI for the year ended 30 June 20X9 and it’s SOFP as at that date?

SOCI for the period SOFP liability

A $160,000 deduction $120,000 B $140,000 deduction nil C nil $120,000 D nil nil

282. On 31 December 20X8 the following matters required inclusion in a company’s financial statements:

(i) On 1 January 20X8 the company made a loan of $12,000 to an employee, repayable on 30 April 20X9, interest charged at 2 per cent per annum. On the due date the employee repaid the loan and paid the whole of the interest due on the loan, to that date.

(ii) The company paid insurance of $9,000 in 20X8, in respect of the year ending 31 August 20X9. (iii) In January 20X9 the company received rent from a tenant of $4,000 in respect of the six months i.e. 1

July 20X8 to 31 December 20X8.

For these items, what total figures should be included in the company’s statement of financial position on 31 December 20X8?


283. A limited liability company has the following balances:

$ Property, plant and equipment 20,000Cash in bank 10,000Bank overdraft 15,000Term loan 35,000Receivables 11,000Payables 19,000

What is the amount of capital in the business?

284. Calculate the cash balance from the following information:

$ $ Share capital 50,000 Trade payables 6,000 Share premium 8,000 Accrued expenses 2,000 Retained earnings 5,000 Inventory 25,000 Debentures 10,000 Cash ?

285. Calculate the gross profit on sales from the following information:

$ $ Sales 150,000 Supplier’s closing balance 15,000Opening inventory 20,000 Closing inventory 20,000Cash purchases 30,000 Supplier’s opening balance 10,000Goods return to suppliers 5,000 Purchase expenses 3,000Cash paid to suppliers 50,000 Selling expenses 7,500

286. Calculate the net profit from the following information for a computer manufacturer:

$ $ Dividend received 5,000 Gross profit 60,000Staff costs 20,000 Loss on sale of vehicle 2,500Finance cost 5,000

287. Energise Inc earned a profit of $50,000 before tax during 20X9. The income tax rate is 30%. During the

year Energise Inc paid $5,000 income tax.

What will be the income tax charged to the SOCI?


288. A draft SOCI of BBG Inc is as follows:

$ $ Sales 700,000 Cost of sales Opening inventory 60,000Purchases 430,000 490,000Closing inventory (90,000) 400,000Gross profit 300,000Expenses (200,000)Profit 100,000

What is the correct profit after the following adjustments? (i) Closing inventory includes goods that cost $20,000 which are expected to realise $19,000. (ii) A customer has taken legal action for a damage of $50,000 against BBG Inc. BBG’s lawyer has

advised the customer that he has a 25% chance of success. (iii) After the SOFP date, a vehicle was damaged in an accident. The cost of the vehicle was $6,000. It was

not insured. (iv) BBG Inc has sued one of its competitors for $60,000. The chances of BBG Inc winning the case are

75%. The outcome will be known in three months. A $103,000 B $45,000 C $100,000 D $99,000

289. Which of the following is not a selling and distribution expenditure?

A Running and maintenance cost of the delivery vehicle B Salary paid to people in the sales department C Advertisement expenditure D Cost of primary packing

290. ICC Ltd manufactures steel. What will be the cash flow from operating activity, based on the following information?

$ $ Issue of shares 50,000 Additional term loan 20,000 Repayment of debentures 30,000 Purchase of additional plant 60,000 Sale of goods on credit 120,000 Bad debts 2,000 Sale of goods on cash 30,000 Receivables 01/01/20X6 50,000 Cash purchases 80,000 Receivables 31/12/20X6 60,000

A $70,000 inflow B $20,000 outflow C $58,000 inflow D None of the above

291. Jennifer is preparing her year end accounts. She has to deal with a pre-payment for rent that is included in

the rent expense, appearing in the trial balance. Which of the following statements are correct?

A The pre-payment will increase the charge in the SOCI. B The pre-payment will reduce the charge in the SOCI. C The pre-payment has no effect on the SOCI. D The pre-payment will only affect the SOCI.


The following information is relevant for questions 292 and 293 Almond is a sole trader who does not maintain full accounting records. The following details relate to her transactions with credit customers and suppliers for the year ended 30 November 20X9:

$ Trade receivables, 1/12/20X8 130,000Trade payables, 1/12/20X8 60,000Cash received from customers 686,400Cash paid to suppliers 302,800Discounts allowed 1,400Discounts received 2,960Bad debts 4,160Amount due from a customer who is also a supplier offset against an amount due for goods supplied by him

2,000

Trade receivables, 30/11/20X9 181,000Trade payables, 30/11/20X9 84,000

292. Based on the above information, what figure should appear in Almond’s SOCI for the year ended

30 November 20X9 for sales revenue?

293. Based on the above information, what figure should appear in Almond’s SOCI for the year ended 30 November 20X9 for purchases?

294. Bob Chappell has taken goods from inventory for his personal use but has kept no records of their cost.

The cost of these goods, when calculated, is to be deducted from purchases. The total of the purchase invoices was $235,000. The following details are available from Bob’s records:

$ Trade receivables, 1/12/20X9 60,000Cash received from customers 280,000Trade receivables, 31/12/20X9 80,000Opening inventory 60,000Closing inventory 75,000Gross mark up (on cost) 50%

What is the amount of goods withdrawn during the year? A $10,000 B $235,000 C $20,000 D None of the above

295. A company receives rent from a large number of properties. The total received for the year ended 31

March 20X9 was $501,200. The following were the amounts of rent in advance and in arrears on 31 March 20X8 and 20X9:

31 March 20X8 31 March 20X9 $ $

Rent received in advance 38,800 51,200 Rent in arrears 11,200 38,100

What amount of rental income should appear in the company’s SOCI for the year ended 31 March 20X9?


296. An extract from an SOCF prepared by a trainee accountant is shown below. Cash flows from operating activities

$’m

Net profit before taxation 28Adjustments for: Depreciation (9)Operating profit before working capital changes 19Decrease in inventories 3Increase in receivables (4)Increase in payables (8)Cash generated from operations 10

Which of the following criticisms of this extract are correct?

(i) Depreciation charges should have been added, not deducted (ii) Decrease in inventories should have been deducted, not added. (iii) Increase in receivables should have been added, not deducted. (iv) Increase in payables should have been added, not deducted

A (ii) and (iv) B (ii) and (iii) C (i) and (iii) D (i) and (iv)

297. The following information is available for a sole trader who keeps no accounting records:

$ Net business assets at 1/08/20X8 186,000 Net business assets at 30/07/20X9 274,000 During the year ended 30/07/20X9:

Cash drawings by proprietor 68,000 Additional capital introduced by proprietor 50,000 Business cash used to buy a car for the proprietor’s wife, who takes no part in the business 20,000

Using this information, what is the trader’s profit for the year ended 30 June 20X9?

A $126,000 B $50,000 C $86,000 D $90,000

298. Wanda keeps no accounting records. The following information is available about her position and transactions for the year ended 31 December 20X9:

$ Net assets at 01/01/20X9 210,000Drawings during 20X9 48,000Capital introduced during 20X9 100,000Net assets at 31/12/20X9 400,000

Based on this information, what will be Wanda’s profit for 20X9?

A $42,000 B $242,000 C $138,000 D $338,000


299. A company had the following transactions:

(i) Goods in inventory that had cost $1,000 were sold for $1,500 cash. (ii) A credit customer whose $500 debt had been written off paid the amount in full. (iii) The company paid credit suppliers $1,000. (iv) Cheques of $2,000 were received from customers.

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

300. On 31 December 20X8 the following matters required inclusion in a company’s financial statements:

(i) On 1 January 20X8 the company made a loan of $24,000 to an employee, repayable on 30 April 20X9, charging interest at 2 per cent per year. The employee repaid the loan on the due date and paid the whole of the interest due on the loan at that date

(ii) The company paid insurance of $18,000 in 20X8, for the year ending 31 August 20X9 (iii) In January 20X9 the company received rent from a tenant of $8,000 for the six months i.e. 1 July 20X8

to 31 December 20X8

For these items, what total figures should be included in the company’s SOFP on 31 December 20X8?

Currents assets Current liabilities $ $

A 44,000 480 B 42,480 nil C 20,480 nil D 32,480 12,000

301. The closing inventory of Creative Ltd amounted to $116,400 excluding the following two inventory lines:

(i) 400 items which cost $4 each. All were sold after the reporting period for $3 each, with selling expenses of $200 for the batch.

(ii) 200 different items which cost $30 each. These items were found to be defective as at the SOFP date. Rectification work after the reporting period amounted to $1,200, after which they were sold for $35 each, with selling expenses totalling $300.

Which of the following total figures should appear in the closing inventory of Creative Ltd? A $122,300 B $121,900 C $122,900 D $123,300


(i) Bonus issues of shares affect the cash flow of the company. (ii) Rights issues of shares do not feature in the SOCF. (iii) A surplus on revaluation of a non-current asset will not appear as an item in the SOCF. (iv) A profit on the sale of a non-current asset will appear as an item under cash flow from financing

activities in the SOCF.

A (i) and (ii) B (iii) and (iv) C (iii) D (i)


303. Part of a company’s draft statement of cash flows (SOCF) is shown below:

$’000 Operating profit 8,640Depreciation charges (2,160)Proceeds of sale of non-current assets 360Issue of debentures at 10% premium (330)Loan repayment along with 10% interest 440

The following criticisms of the above extract have been made: (i) Depreciation charges should have been added, not deducted. (ii) Issue of debentures should have been added, not deducted. (iii) Repayment of loan should have been deducted, not added. (iv) Proceeds of sale of non-current assets should not appear as a part of the SOCF.

Which of these criticisms are valid?

A (ii) and (iii) B (i) and (iv) C (i), (ii) and (iii) D (ii) and (iv)

304. A limited liability company sold a building at a profit.

How will this transaction be treated in the company’s SOCF?

Proceeds of sale Profit on sale A Cash inflow under financing activities Added to profit in calculating cash flow

from operating activities

B Cash inflow under investing activities Deducted from profit in calculating cash flow from operating activities

C Cash inflow under investing activities Added to profit in calculating cash flow from operating activities

D Cash inflow under financing activities Deducted from profit in calculating cash flow from operating activities

305. When finalising the financial statements of a company for the year ended 30 June 20X9, which of

the following material matters should be adjusted for? (i) A customer who owed $180,000 at the end of the reporting period went bankrupt in July 20X9. (ii) The sale in August 20X9 for $400,000 of inventory items valued in the SOFP at $500,000. (iii) A factory with a value of $3,000,000 was seriously damaged by a fire in July 20X9. The factory was

back in production by August 20X9 but its value was reduced to $2,000,000. (iv) The company issued 1,000,000 ordinary shares in August 20X9.

A All of the above B (i) and (ii) C (i) and (iv) D (ii) and (iii)

306. The SOCI of Max Ltd shows a sale for $120,120 with a mark-up of 20% on cost of sales.

What is the gross profit margin on the sales?

A 20% B 16.67% C 25% D None of the above


307. A business received a delivery of goods on 29 June 20X6, which was included in inventory for the year ended 30 June 20X6. The invoice for the goods was recorded in July 20X6.

What effect will this have on the business? (i) Profit for the year ended 30 June 20X6 will be overstated. (ii) Inventory on 30 June 20X6 will be understated. (iii) Profit for the year ending 30 June 20X7 will be overstated. (iv) Inventory on 30 June 20X6 will be overstated.

A (i) and (ii) B (ii) and (iii) C (i) D (i) and (iv)


(i) A company’s authorised share capital must be included in its published statement of financial position as part of the shareholders’ funds.

(ii) If a company makes a bonus issue of ordinary shares, the total shareholders’ interest (share capital plus reserves) remains unchanged.

(iii) A company’s statement of changes in equity must include the proceeds of any share issue during the period.

(iv) A company must disclose its significant accounting policies by a note to its financial statements. A (i) and (ii) B (i) and (iii) C (iii) and (iv) D (ii), (iii) and (iv)

309. When preparing a company’s SOCF, complying with IAS 7 Statement of Cash Flows, which, if any,

of the following items could form part of the calculation of cash flow from financing activities?

(i) Proceeds of sale of premises (ii) Dividends received (iii) Bonus issue of shares


310. Which of the following material events after the reporting period and before the financial

statements, are approved by the directors and should be adjusted in the financial statements?

(i) A valuation of property providing evidence of impairment in value, at the end of the reporting period. (ii) Sale of inventory held at the end of the reporting period, for less than cost. (iii) Discovery of fraud or error affecting the financial statements. (iv) The insolvency of a customer who has an outstanding debt at the end of the reporting period. A All of the above B (i), (ii) and (iv) C (iii) and (iv) D (i), (ii) and (iii)

311. A company’s gross profit as a percentage of sales increased from 24% for the year ended 31 December

20X1 to 27% for the year ended 31 December 20X2.

Which of the following events is most likely to have caused the increase?

A An increase in sales volume B A purchase in December 20X1 which was mistakenly recorded in January 20X2 C Overstatement of the closing inventory on 31 December 20X1 D Understatement of the closing inventory on 31 December 20X1.


312. The draft financial statements of a limited liability company are under consideration. The accounting treatment of the following material events after the reporting period needs to be determined.

(i) The bankruptcy of a major customer, with a substantial debt outstanding at the end of the reporting

period. (ii) A fire destroying some of the company’s inventory (the company’s going concern status is not affected). (iii) An issue of shares to finance an expansion. (iv) Sale, for less than cost of some inventory held at the end of the reporting period.

According to IAS 10 Events After the Reporting Period, which of the above events require an adjustment to the figures in the draft financial statements? A (i) and (iv) B (i), (ii) and (iii) C (ii) and (iii) D (ii) and (iv)

313. Which of the following statements is / are true?

(i) Provision can be classified as either current or non-current liabilities (ii) Share capital should include par value of shares (iii) All reserves can be merged together (iv) Inventories of finished goods must be disclosed on the face of the SOFP

A (i), (ii) B (i), (ii), (iii). C (iii), (iv). D All of the above

314. Which of the following events, between the SOFP date and the date the financial statements are

authorised for issue, must be adjusted for in the financial statements?

(i) Declaration of equity dividends (ii) Decline in market value of investments (iii) The announcement of changes in tax rates (iv) The announcement of major restructuring

A (i) B (ii) and (iv) C (iii) D None of the above

315. Which of the following assertions about SOCF is / are correct?

(i) An SOCF prepared using the direct method produces a different figure for operating cash flow from that produced if the indirect method is used.

(ii) Rights issues of shares do not feature in the SOCF. (iii) A surplus on revaluation of a non-current asset will not appear as an item in the SOCF. (iv) A profit on the sale of a non-current asset will appear as an item under cash flows from investing

activities in the SOCF. A (i) and (iv) B (ii) and (iii) C (iii) D (ii) and (iv)

316. Smith Ltd acquired machinery for cash and the deal was financed in full by issuing 150,000 shares of $1

each for cash at a premium of $2 each.

In the statement of cash flows the above transaction would be reflected as:

A Inflow: $450,000; Outflow: $450,000 B Inflow: $450,000; Outflow: Nil C Inflow: Nil; Outflow: $450,000 D Inflow: $300,000; Outflow: $300,000


317. The financial statements of a company for the year ended 30 April 20X8 were approved by its finance director on 9 July 20X8. A public announcement of its profit for the year was made on 13 July 20X8.

The board of directors authorised the financial statements for issue on 18 July 20X8 and they were approved by the shareholders on 25 July 20X8. Under IAS10 “Events after the reporting period”, after what date no consideration should be given to reflect changes due to adjusting and non-adjusting events? A 9 July 20X8 B 13 July 20X8 C 25 July 20X8 D 18 July 20X8

318. According to IAS 7 Statement of cash flows which of the items can be included in cash?

(i) Short term deposits (less than 2 months) (ii) Petty cash float (iii) Bank overdraft (iv) Bank current account in domestic currency

A All the above B (ii) C (ii),(iii) and (iv) D (ii) and (iii)

319. Smith Ltd reported net income of $75,000 for the year ended 31 December 20X8. The following

information is provided:

$ Depreciation expense 24,000Loss on the sale of land 32,000Increase in accounts receivable 16,000Decrease in inventory 8,000Increase in accounts payable 6,000Increase in taxes payable 4,000

Determine the cash flow from the operating activities.

320. An example of cash flow from a financing activity is:

(i) Receipts of cash from the issuing of shares. (ii) Payment of cash to buy back company shares. (iii) Receipt of cash from the sale of equipment. (iv) Payment of cash to suppliers for inventory. A All of the above B (ii) C (i) D (i) and (ii)


321. The following information has been extracted from the books of Saturn Ltd, a limited liability company, as at 31 December 20Y1.

Ref Dr Cr $’000 $’000

A Cash 32 B Inventory at 01/01/20Y0 400 C Energy expenses 356 D Wages and salaries 752 F Discounts received 65 G Share premium account 800 H Retained earnings at 01/01/20Y0 115 I Sales revenue 4,565 J Land 1,250 K Bank 94 L Returns inward 95 M Trade payables 190 N Trade receivables 124 O Purchases 4,370 P Repair and maintenance 250 Q Share Capital. (Ordinary shares$1 each) 1,800

7,629 7,629

(a)

(i) Saturn has decided to issue 1 bonus share for every 5 share held in company. The double entry to record this transaction is :

Account Debit Credit No Debit or Credit $’000 $’000 Share premium Bank Retained earnings Share capital Shareholders

(2 marks)

(ii) In the adjusted SOFP, the balance in following accounts shall be :

Account $’000 Share premium Bank Retained earnings Share capital

(2 marks)

(iii) If instead of a bonus issue, the company decides to come up with rights issue of 1 share for every 5

shares held at $1.5 each, The journal entry required to record this transaction shall be :

Account Debit Credit No Debit or Credit Share premium $’000 $’000 Bank Retained earnings Share capital Shareholders

(2 marks)


(iv) In the adjusted SOFP, the balance in following accounts shall be :

Account $’000 Share premium Bank Retained earnings Share capital

(2 marks)

(v) Closing inventory as on 31 December 20Y1 was $810,000 which includes some goods that are damaged and can be sold at $1200 after incurring selling expenses of $60. Actual cost of these goods was $1600. Closing inventory value to be taken to SOCI is :

A $810,000 B $809,540 C $811,140 D $809,800

(1 mark)

(b) (i) Calculate the current ratio for Saturn (ignore the impact of bonus and rights issue):

A 3.40 B 5.08 C 4.02 D 3.10

(2 marks)

(ii) Calculate the quick ratio for Saturn (ignore the impact of bonus and rights issue):

A 3.40 B 0.68 C 0.55 D 0.82

(2 marks)

(iii) Based on the ratios calculated above, we can interpret that :

(1) Company`s management is efficient in fund management (2) Liquidity conditions suggest that company is not performing well. (3) Saturn`s fund management strategy is inefficient. (4) Both the ratios are in tune with standard requirements

Which of the statements are correct? A 1 & 4 B 2 and 3 C 3 D 1

(2 marks) (15 marks)


322.

The trial balance of Adnett Ltd, a limited liability company, at 31 May 20Y1 was as follows: Dr Cr $’000 $’000 Revenue 3,500 Discounts received 80 Discounts allowed 70 Bank balance 147 Plant at cost 1,200 Building at cost 1,040 Building accumulated depreciation, 01/06/20Y0 160 Plant, accumulated depreciation, 01/06/20Y0 400 Land at cost 345 Purchases 2,185 Heating and lighting 270 Trade payables 1,030 Trade receivables 700 Carriage inwards 105 Wages and salaries 250 General reserve 35 Allowance for doubtful debts, at 01/06/20Y0 30 Director’s remuneration 60 Retained earnings at 01/06/20Y0 115 $1 Ordinary shares 1537 Inventory at 01/06/20Y0 515 6,887 6,887

(a)

(i) A Plant is depreciated at 25% per annum using the reducing balance method. Buildings are depreciated

at 5% per annum on their original cost. Calculate the following for the year ended 30 May 20Y1? Depreciation charge Balance of Non-current assets

(3 marks)

(ii) At the year end the following debts, out of a total debt figure of $700,000, are found to be bad: a. Sven $250 b. Allen $120 c. Sandy $230, 20 cent per dollar is expected to be received.

It is also estimated that a further provision for bad debts of 4% of trade receiveables is required.

Required:

Show the amount of bad debts to be written-off, the provision for bad debts and the balance in trade receivables to be shown in the SOFP of the business.

Bad debts written-off

Provision for bad debts

Balance in trade receivables

(3 marks)


(iii) Identify for each account from trial balance mentioned below, whether it’s an asset, liability, equity, income or expense and write their balances mentioned in trial balance in appropriate columns.

Particulars Asset Liability Equity Income Expense Heating and Lighting General Reserve Bank balance Directors Remuneration Revenue Discount received

(3 marks)

(b)

(i) Calculate the asset turnover ratio for Adnett

(2 marks)

(ii) Calculate receivable days assuming that credit sales for the year were $3,200.

(2 marks)

(iii) The receivables days calculated above states that :

A On an average it takes79.8 days to receive payment from trade receivables after sales B 79.8 percent of trade receivables remains outstanding throughout the year C 79.8 percent trade receivables make payments on time D Trade receivables of 79.8 days credit sales do not remains outstanding on an average.


323.

You have been provided with the following trial balance as at 31 May 20Y1 for a limited liability company called Sondaw Ltd.

Dr Cr

Ref Particulars $’000 $’000 A Bank 50B Inventory at 01/06/20Y0 1,200C General expenses 690D Marketing and advertising expenses 248E Wages 490F Buildings at cost 5,000G Motor vehicles at cost 160H Plant and equipment at cost 700I Accumulated profits at 01/06/20Y0 880J Trade receivables 438K Purchases 2,230L Revenue 5,876M Discounts received 150N Trade payables 500O $1 Ordinary Shares 1,500 Accumulated depreciation at 01/06/20Y0

P Buildings 2,000Q Motor vehicles 60R Plant and equipment 240 11,206 11,206


The following notes are relevant: 1. Inventory at 31 May 20Y1 was valued at $800,000.which includes some goods that are outdated and can be

sold at $6,000 Selling expenses of $150 would be incurred to complete the sales. Original cost of these goods was $8,000.

2. Marketing and advertising expenses include $6,000 paid in advance for a marketing campaign which will begin in June 20Y1. Payment for last year`s outstanding expenses of $3,000.

3. A customer ceased trading owing the company $38,000; the debt is not expected to be recovered. An allowance for doubtful debts is to be established amounting to 5% of trade receivables.

(a)

(i) What is the value of closing inventory to be taken to SOCI?

A $800,000 B $797,850 C $802,150 D $808,000

(1 mark)

(ii) Which accounts in the trial balance would be shown in SOCI

A B,C,D,E,K,L,M B B,C,D,E,P,Q,R C C,D,E,K,L,M D K,L,M,P,Q,R

(3 marks)

(iii) What are the marketing and advertisement expenses for year ended on 31 May 20Y1

A $239,000 B $258,000 C $242,000 D $245,000

(1 mark)

(iv) Calculate the amount to be written off to profit or loss for bad debts and allowance for bad debt:

(2 marks)

(v) General expenses include $90,000 related to development of new product. Therefore:

A General expenses need to be reduced by $90,000 and intangible asset be recognized for $90,000. B General expenses need not be reduced neither intangible asset be recognized. C General expenses need not to be adjusted and intangible asset to be recognized for $90,000. D General expenses need to be reduced by $90,000 and intangible asset need not be recognized.

(1 mark)

(vi) Building includes a factory that was purchased for$1,000,000 on 1 June 20X6 and expected to last for 25 years. The entity depreciates factories at 4% p.a., with a full year’s charge in the year of acquisition and none in the year of disposal. On 1 June 20Y0 the building was revalued at $1,155,000 with no change to its estimated useful life. What is the depreciation charge for 20Y1 and the revaluation reserve balance at the end of 20Y1? A Depreciation charge - $55,000 Revaluation reserve - $155,000 B Depreciation charge - $55,000 Revaluation reserve - $315,000 C Depreciation charge - $52,500 Revaluation reserve - $275,000 D Depreciation charge - $46,200 Revaluation reserve - $315,000

(2 marks)


(b)

(i) What is the Gross profit and Net profit ratio of Sondaw, assuming depreciation for the year to be charged to SOCI is $586,000: Gross profit ratio

Net profit ratio


324. The following trial balance relates to Llama, a listed company, at 30 September 20Y0

Particulars $’000 $’000

Land and buildings - at valuation 1 October 20Y0 130,000 Plant - at cost 128,000 Accumulated depreciation of plant at 1 October 20Y0 32,000 Investments - at fair value through profit and loss 26,500 Investment income 2,200 Purchases 89,200 Wages 11,000 Administrative expenses 12,500 Loan interest paid 800 Inventory at 30 September 20Y1 37,900 Income tax 400 Trade receivables 35,100 Revenue 180,400 Equity shares of 50 cents each fully paid 60,000 Retained earnings at 1 October 20Y0 25,500 2% loan note 80,000 Trade payables 34,700 Revaluation reserve (arising from land and buildings) 14,000 Deferred tax 11,200 Suspense account 24,000 Bank 6,600 Totals 471,000 471,000

(a) (i) Administrative expenses include $35,000 on research related to development of new technology.

Therefore:

A Administrative expenses need to be reduced by $35,000 and intangible asset be recognized for $35,000.

B Administrative expenses need not be reduced neither intangible asset be recognized. C Administrative expenses need not to be adjusted and intangible asset to be recognized for $35,000. D Administrative expenses need to be reduced by $35,000 and intangible asset need not be recognized.

1 mark

(ii) Identify for each account from trial balance mentioned below, whether it’s an asset, liability, equity, income or expense and write their balances mentioned in trial balance in appropriate columns.

Particulars Asset Liability Equity Income Expense Investment income Investments Distribution costs 2% loan note Revenue Trade payables

(3 marks)


(iii) A legal claim was lodged against Llama by one of its customers before 30 September 20Y1 for $2 million. The claim is confirmed however a provision has not been recognised. What shall be the adjustment entry:

Account Debit Credit No debit/credit Provision (for Legal claim) Administrative expenses Bank Legal claim expenses

(2 marks) (b) (i) Calculate Receivable days assuming that credit sales for the year was $120,000,000:

(2 marks)

(ii) What is the Gross profit and Net profit ratio, assuming depreciation to be charged to SOCI is

$16,000?

Gross profit ratio Net Profit ratio

(5 marks) (iii) What is the asset turnover ratio?

(2 marks)

(15 marks) 325. Mitchell Ltd prepares its financial statements on 30 September every year. The financial statements for the

year ended 30 September 20Y1 are under preparation and you are provided with the following trial balance at that date.

Particulars $’000 $’000 Revenue 390,000 Production costs 225,000 Distribution costs 21,000 Administrative expenses 78,000 Inventories at 30 September 20Y0 54,600 Interest paid and payable on interest bearing borrowings 9,000 Income tax 600 Dividends paid on equity shares 6,000 Property, plant and equipment – at cost 171,000 Accumulated depreciation on property, plant and equipment at 30 September 20Y0 46,770 Suspense account 3,600 Trade receivables 148,000 Cash and cash equivalents 121,370 Trade payables 36,000 Provisions 12,000 Long term interest bearing borrowings 120,000 Lease rentals 24,000 Deferred tax 18,000 Issued equity capital 150,000 Accumulated profits 81,000 857,970 857,970

(a) (i) A legal claim was lodged against Mitchell by one of its customers before 30 September 20Y1 for $3

million. The claim is yet to be confirmed however a provision of $3 million was included in the administrative expenses. What shall be the adjustment entry:

Account Debit Credit No debit no credit

$’000 $’000 Provision (for Legal claim) Administrative expenses Bank Suspense

(2 marks)


(ii) The carrying value of inventories, computed in accordance with the principles of IAS 2 – Inventories, at

3 October 20Y1 was $66 million. Following transactions were entered from 1 October to 3 October: Purchase: $5 million, Sales return: $1 million, sales: $2million. Calculate the value of the closing inventory as on 30 September 20Y1.

(1 mark)

(iii) Calculate the change in inventory figure to be taken to SOCI:

(1 mark)

(iv) Income tax on the profits for the year to 30 September 20Y1 is estimated at $4.5 million.

During the year, full and final settlement of income tax on the profits for the year ended 30 September 20Y0 was made by paying $5.7 million. The statement of financial position at 30 September 20Y0 had included $6 million in respect of this liability. Income tax liability is to be recognised for:

(2 mark)

(v) The balance in the Suspense Account represents the sales proceeds of plant and equipment costing $18 million sold during the year. It had been depreciated by a cumulative amount of $13·5 million at 30 September 20Y0. What will be an appropriate entry to clear suspense account:

(2 marks)

Account Debit Credit $’000 $’000

Plant and equipment Accumulated depreciation Suspense Profit on sale of plant & equipment Loss on sale of plant & equipment

(vi) State whether the accounts mentioned below are to be taken to SOCI or SOFP:

Account SOCI/ SOFP

Deferred tax Provisions Production costs Equity capital Trade receivables Cash and Cash equivalent

(3 marks)

(b) (i) Calculate debt to equity ratio based on trial balance given above:

(2 marks) (ii) The debt to equity ratio calculated above states that:

A The long term debt of company is much more than its equity. B The company`s owned capital is more than its borrowed capital. C The trade receivables of company are low as compared to its share capital. D The share capital is much more than its trade receivables.


326. Sun Co holds 12% shares of Moon Co and Sun Co also holds debt instruments which have the potential to

be converted into ordinary shares of Moon Co. If and when these are converted, Sun Co will acquire power over 10% of the voting rights of Moon Co:

What is the relationship between Sun Co and Moon Co?

A Parent-subsidiary B Parent-Associate C Partnership D Joint venture

327. State which are true or false regarding the effects of fair value adjustments on goodwill.

(a) If the value of asset increases and / or value of liabilities decrease, the value of goodwill decreases. (b) If the value of asset decreases and / or value of liabilities increase, the value of goodwill decreases.

328. Blue Inc is a 60% subsidiary of Ink Inc. Ink Inc sells non-current assets amounting to $30,000 to Blue Inc at

a profit of $4,000.

Determine the correct accounting treatment for the above transaction in the consolidated financial statements.

A Increase the consolidated non-current asset by $4,000 B Increase in consolidated retained earnings by $4,000 C Decrease the consolidated non-current asset by $4,000 D None of the above

329. Wet Co owns 70% share in Dry Co. On 1 July 20X5 the book value of the non-current assets (a non-

depreciating asset) of Dry Co was $8,000 while their fair value was established at $6,200. On 30 June 20X6 the retained earnings of Wet Co was $9,500 and of Dry Co was $2,800.

In preparing the consolidated SOFP of Wet Ltd at 31 December 20X4, what adjustment would be needed to non-current assets for the assets transferred?

A decrease by $1,800 B increase by $1,800 C decrease by $6,200 D decrease by $8,000

330. Heavy Co owns 70% share in Light Co. On 1 January 20X6 the book value of the non-current assets of

Light Co was $16,500 while their fair value was established at $18,000. On 31 December 20X6 the retained earnings of Heavy Co was $24,250 and of Light Co was $22,200.

In preparing the consolidated SOFP of Wet Ltd at 31 December 20X4, what adjustment would be needed to non-current assets for the assets transferred?

A decrease by $1,500 B increase by $1,500 C decrease by $16,500 D decrease by $18,000

SE

CT

ION

G

QUESTION BANK

G PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS

82: Preparing Simple Consolidated Financial Statements © GTG 331. Warm Co owns 70% share in Cool Co. As at 1 April 20X5 the book value of the inventory of Cool Co was

$5,450 while its fair value was established at $5,600. On 31 March 20X6 the retained earnings of Warm Co was $12,050 and of Cool Co was $8,960.

Choose the correct option for treatment of effect of fair value adjustment on group’s consolidated financial statements.

A

Dr Goodwill calculation $150 Cr Group inventory $150Being inventory brought back to fair value, from a group perspective.

B Dr Group inventory $150

Cr Goodwill calculation $150Being inventory brought back to fair value, from a group perspective.

C Dr Group inventory $105 Cr Goodwill calculation $105

Being inventory brought back to fair value, from a group perspective.

D

Dr Group inventory $150 Cr

Cr Goodwill calculation Fair value

$100 $50

Being inventory brought back to fair value, from a group perspective.

332. Finance Inc is a financial institution. It has loans receivable amounting to $20,000 from various institutions. Of this $5,000 is outstanding from its subsidiary Money Inc. The loans receivable in the books of Money Inc amount to $15,000. What will be the amount of loan receivable in the consolidated SOFP?

A $30,000 B $35,000 C $15,000 D $60,000

333. What is the reason to eliminate the intra-group transactions from the consolidation process?

A to avoid doing inflates and misleading in the consolidated financial statements B to make consolidated financial statements for group more simpler C to distinguish parent from its subsidiaries / associates D to assume a group to be a single entity and a single entity cannot have transactions with itself

334. Which of the followings best describes the term 'significant influence' according to IAS 28?

A has the power to participate in the financial and operating policy decisions of the investee, but has no control or joint control over those policies

B the holding of a significant proportion of the share capital in another entity C the contractually agreed sharing of control over an economic entity D none of the above

335. On 1 January 20X8, CIL Ltd, a coal mining co acquired a 70% interest in an Australian co named HCC Ltd.

The details of both these companies during the acquisition are as follows:

CIL Ltd HCC Ltd

Share capital $150,000 $200,000Retained earnings $200,000 $230,000Revaluation reserves - $65,000

What is the figure of non-controlling interest to be included in the consolidated statement of financial position of CIL Ltd?

A $150,000 B $160,000 C $90,000 D $148,500


336. Max Light Co holds 80% interest in Venus Co. At the current year end Max Light holds inventory purchased from Venus Co for $350,000 at cost plus 15%. The group's consolidated statement of financial position has been drafted without any adjustments in relation to this holding of inventory. Under IAS27 Consolidated and separate financial statements, what adjustments should be made to the draft consolidated statement of financial position figures for non-controlling interest and retained earnings?

Non-controlling interest Retained earnings

A Reduce by $9,130 Reduce by $36,521 B No change Reduce by $52,500 C No change Reduce by $40,000 D Reduce by $16,500 Reduce by $27,500

337. An Associate is:

A an undertaking in which the parent has no significant influence B an undertaking in which the parent has ownership of 9-15% of the voting shares. C an undertaking in which the parent has no representation on the Board of Directors. D an undertaking in which the parent has significant influence.

338. Texas Ltd purchased 4.8 million shares of Pixels Ltd for 4,800,000 at 1 December 20X8. The total share capital

of Pixels was $8 million. At the acquisition date, Pixels’ net assets amounted to $6,760,000. The fair value of the non-controlling interests is $2,816,000.

What is the total goodwill on acquisition of Pixels? A $744.000 B $1,960,000 C $856,000 D $1,560,000

339. Sand Ltd is the subsidiary of Sun Ltd holding 75% of its shares. The separate financial statements of Sun

reveal trade receivables of $672,000 which includes $24,000 due from Sand. Likewise, the separate financial statements of Sand shows trade receivables at $172,000 including $40,000 due from Sun.

According to IFRS 3 ‘Business combination’, what figure should appear for trade receivables in Sun's consolidated SOFP?

A $908,000 B $780,000 C $648,000 D $820,000

340. Under IFRS 3, which of the following measurement bases are used in measuring non-controlling

interest at the date of acquisition? (i) Nominal value of aquiree’s shares (ii) Fair value of aquiree’s shares (iii) Non-controlling interest in acquiree's assets and liabilities at fair value (iv) Non-controlling interest in the acquiree's assets and liabilities at book value

A (i) and (ii) B (iii) and (iv) C (i) and (iv) D (ii) and (iii)

84: Preparing Simple Consolidated Financial Statements © GTG

Based on the information given below attempt Questions 341, 342 and 343 Boe Ltd acquired Joe Ltd on 1 January 20X6. Boe purchased 40,000 ordinary shares of $1 each for $90,000. The consideration was paid in cash. The retained earnings and total share capital of Joe as on 1 January 20X6 were $45,000 and $50,000 respectively. The fair value of non-controlling interest at the acquisition date is $15,000. The following are the SOFP of both the companies as at 31 December 20X8

Boe ($) Joe ($) Net assets 115,000 130,000Shares in Joe 90,000 -Total assets 205,000 130,000 Share capital 100,000 50,000Retained earnings 105,000 80,000Total equity 205,000 130,000

341. What should be the goodwill amount in the consolidated financial statements as at 31 December

20X8?

A $10,000 B $5,000 C $15,000 D No goodwill

342. What will be the amount of retained earnings in the group consolidated SOFP as at 31 December

20X8? A $105,000 B $133,000 C $185,000 D $169,000

343. What will be the amount of non-controlling interest in the consolidated SOFP as at 31 December

20X8? A $18,000 B $43,000 C $15,000 D $22,000

344. Which of the following items may appear as current liabilities in a company’s SOFP?

(i) Non-controlling interest in subsidiaries. (ii) Loan due for repayment within one year. (iii) Taxation. (iv) Preference dividend payable

A (i), (ii) and (iii) B (i), (ii) and (iv) C (i), (iii) and (iv) D (ii), (iii) and (iv)

345. Silicone Ltd acquired 75% of the share capital of Darwin Ltd on 1 October 20X8. The summarised draft

income statements for Silicone Ltd and Darwin Ltd for the year end of 30 September 20X9 are shown below:

Silicone Ltd Darwin Ltd $’000 $’000

Revenue 10,500 4,000 Cost of sales (5,750) (2,125)Gross profit 4,750 1,875 Finance costs (1,875) (638)Administrative costs (875) (563)Profit before tax 2,000 675 Tax (750) (175)Profit for the year 1,250 500

During the year Silicone Ltd sold goods costing $1,250,000 to Darwin Ltd for $1,875,000. At 30 September 20X9, 30%of these goods remained in Darwin Ltd’s inventory.


Required

(a) Use the information above to answer the questions below. (i) Which of the formula below show the correct consolidated revenue?

A 10,500 + 4,000 – 1,875 B 10,500 + 4,000 + 1,875 C 10,500 + 4,000 D 10,500 + (75% of 4,000) E 10,500 + 4,000 – 625

(2 marks)

(ii) Which of the formula below show the correct consolidated cost of sales?

A 5,750 + 2,125 – 1,875 B 5,750 + 2,125 + 1,875 C 5,750 + (75% of 2,125) D 5,750 + 2,125 – 1,875 + (30% of 625) E 5,750 + 2,125 – (25% of 625)

(2 marks) (iii) What is the consolidated finance cost?

(1 mark) (iv) What is the consolidated administrative cost?

(1 mark)

(v) What is the consolidated tax expense? (1 mark)

(vi) Calculate the share of profit attributable to the non-controlling interest in the income

statement. (2 marks)

(vii) Which of the following statements are true?

(1) after elimination of URP the consolidated retained will reduce (2) after elimination of URP the consolidated retained will increase (3) after elimination of URP the consolidated inventory will reduce (4) after elimination of URP the consolidated inventory will increase

A 1 and 2 B 1 and 3 C 1 and 4 D Only 1

(2 marks)

(b)

Zodiac Ltd has two investments:

A Ltd 25% Associate S Ltd 80% Subsidiary

The details of revenue are as follows:

$ Zodiac Ltd 500,000 A Ltd 250,000 S Ltd 375,000

Zodiac Ltd sold goods to S Ltd at a price of $30,000 during the financial year. Zodiac made a profit of 25% on the sale.

Required

Calculate the revenue to be disclosed in the consolidated income statement.

(4 marks)


346. On 1 October 20X8 Polstron Ltd acquired 70% share in Smart Ltd when the balance in share capital and retained earnings in Smart Ltd were $28,000 and $8,000 respectively. The fair value of 30% non-controlling interest was determined at $9,375 at the acquisition date.

The statements of financial positions of Polstron and Smart as at 31 December 20X8 are given below:

Polstron Ltd Smart Ltd $ $ $ $

Assets Non-current assets Tangible assets 53,750 - 31,250 - Investments in Smart Ltd 37,500 91,250 31,250 Current assets - - - - Inventories 25,000 - 11,250 - Trade receivables 19,375 44,375 28,750 40,000 Total assets - 135,625 - 71,250

Equity and liabilities - - - -

Capital and reserves - - - -

Ordinary shares 68,750 - 28,000 -

Retained earnings 33,125 101,875 24,000 52,000

Current liabilities - - - -

Payables 33,750 33,750 19,250 19,250

Total equity and liabilities - 135,625 - 71,250

50% of the inventory of Polstron Ltd consists of purchases made from Smart Ltd on 10 October 20X8. Smart Ltd sells goods at a mark-up of 25% over cost.

Required:

Use the above information to answer the following questions.

(i) Calculate the unrealised profit in the inventory.

(1 mark) (ii) Which of the formulae shows the correct consolidated retained earnings as at 31 December

200X8?

A $33,125 + (70% of $24,000) B 33,125 + (70% of $16,000) - $1,750 C 33,125 + (70% of $16,000) D 33,125 + $16,000 - $1,750 E 33,125 + 70% of $24,000 - $1,750

(3 marks)

(iii) From the above calculate the non-controlling interest to be disclosed i the consolidated SOFP as at 31 December 20X8?

(2 marks)

(iv) What is the pre-acquisition retained earnings figure to be used for the calculation of goodwill?

A $24,000 X 3/12 = $6,000 B $24, 000 X 9/12 = $18,000 C $8,000 D ($24,000 - $8,000) x 9/12

(2 marks)

(v) Calculate the value of goodwill to be disclosed in the consolidated SOFP.

(4 marks)


(vi) Calculate the value of inventory to be disclosed in the consolidated SOFP

(2 marks)

(vii) Calculate the share capital in the consolidated SOFP

347. The summarised SOFP’s of Zircon Ltd and Basil Ltd at 30 June 20X9 were as follows

Zircon Ltd Basil Ltd

$ $ $ $ Assets Non-current assets Property, plant and equipment 2,800,000 - 240,000

Land and building 900,000

Investments in Basil Ltd 300,000 4,000,000 - 240,000

Current assets

Inventories 300,000 84,000

Receivables 112,000 34,000

Cash 90,000 502,000 8,0000 126,000

Total assets 4,502,000 366,000

Equity and liabilities

Capital and reserves

Ordinary shares ($1 shares) 100,000 50,000

Share premium account 10,000 -

Retained earnings 3,036,000 200,000

Non-current liabilities

3,146,000 250,000

Loan 800,000 -

Current liabilities

Trade Payables 556,000 116,000

Total equity and liabilities

4,502,000 366,000

Further information:

1 Zircon Ltd acquired 40,000 shares in Basil Ltd when the accumulated reserves of the latter were

$160,000. The fair value of non-controlling interests at the acquisition date was estimated at $45,000.

2 During the year Zircon Ltd sold inventory to Basil Ltd for $25,000 representing cost plus a mark- up of 25%. Two fifths of this inventory remains in Basil Ltd’s warehouse at the year end.

Required:

(a) Use the above information to answer the following questions. (i) Calculate the value of inventory to be disclosed in the consolidated SOFP.

(2 marks) (ii) Goodwill to be disclosed in consolidated SOFP in accordance with IFRS 3 is:

A $135,000 B $177,000 C $132,000 D $130,000

(3 marks)


(iii) Calculate the non-controlling interest to be disclosed in the consolidated SOFP as at 30 June 20X9.

(2 marks) (iv) Determine the consolidated retained earnings of the Zircon group.

(2 marks)

(v) On 30June 20X9 Zircon Ltd sold to Basil Ltd a non-current asset for $200,000. The asset originally cost $500,000 and at the end of the reporting period its carrying amount in Zircon’s books was $160,000.

Under IAS27 Consolidated and separate financial statements, what adjustments should be made to the consolidated statement of financial position figures for non-current assets and retained earnings?

Non-current asset Retained earnings A Reduce by $40,000 Reduce by $26,000 B Reduce by $40,000 Reduce by $40,000 C Reduce by $26,000 Reduce by $26,000 D Reduce by $26,000 Reduce by $40,000

(3 marks)

(vi) Consolidated financial statements show the financial results of all group undertakings:

A Unit by unit, according to size. B Unit by unit, according to currency. C Presented as one unit. D Unit by unit, according to business activity

(2 marks) (vii) Consolidation is performed in:

A The Parent company SOFP. B The Group SOFP C Either.

(1 mark)

(15 Marks)

348. On 1 July 2006 Harbour Ltd acquired 128,000, $1 ordinary shares of Salvador when the balance in share capital and retained earnings were $80,000 and $25,000 respectively. The following statement of financial positions has been prepared as at 31 December 2007. Harbour Salvador $ $ Non-current assets Land 40,000 36,000 Plant 36,000 28,800 Investment in shares of Salvador 101,500 177,500 64,800 Current assets Inventory 56,000 37,200 Receivables 52,000 42,000 Bank balance 20,500 4,000 128,500 83,200 Total assets 306,000 148,000 Equity and liabilities Share capital ($1 each) 200,000 80,000 Retained earnings 80,000 56,000 280,000 136,000 Current liabilities Trade payables 26,000 12,000 Total 306,000 148,000


Other information

1 In fixing the purchase consideration to be paid to Salvador, Harbour valued the land at $45,000.

2 The fair value of non-controlling interests at the acquisition date is estimated at $17,500.

3 The inventory of Salvador includes goods purchased from Harbour for $8,000. Harbour invoiced these good at costs plus 25%. Salvador has not yet paid for these good as on 31 December 2007.

Use the above information to answer the following questions: (a)

(i) From the following choose the correct statement/s

(1) Increase in value of land will increase goodwill (2) Increase in value of land will decrease goodwill (3) Increase in value of land will increase consolidated retained earnings (4) Increase in value of land will increase non-controlling interest A 1 and 2 B 1 and 3 C 1 and 4 D Only 2

(2 marks) (ii) Calculate the value of goodwill to be disclosed in the consolidated SOFP.

(3 marks)

(iii) What is the correct figure of land to be reported in the consolidated SOFP?

(2 marks) (iv) The correct figure of receivables and payables to be disclosed in the consolidated SOFP is:

Receivables Payables

A 94,000 38,000 B 86,000 38,000 C 86,000 30,000 D 86,000 38,000

(2 marks) (b)

(i) For each of the situations described below, determine whether or not the investment would be classified

as an associate or a subsidiary based on the information provided. 1) The investor holds 19% of the share capital, and appoints 4 of the 9 board directors in Company X. 2) The investor holds 43% of the share capital and appoints 6 of the 7 board directors who each have

one vote at the board meetings in Company Y. (2 marks)

(ii) How is goodwill measured under IFRS 3? A Partial goodwill B Full goodwill C Choice of partial or full goodwill on individual transaction basis D Parent company method

(2 marks)


(iii) Which method does IFRS 3 Business Combinations specify for crediting negative goodwill to the income statement?

A Crediting immediately to the statement of comprehensive income B Crediting over the period in which non-monetary assets are depreciated C Crediting over the periods expected receive the benefit from the subsidiary D Adjusting against future losses

(2 marks)

(15 Marks)

349. Zentel Ltd has a 7% return on total assets of $450,000 and an operating profit margin of 5%.

Calculate the sales of the company. A $630,000 B $321,428 C $472,500 D $1,500,000

350. Which of the following would not improve the current ratio?

(i) borrow short term loan to finance purchase of fixed assets. (ii) issue long-term loan to purchase inventories. (iii) sell inventory to reduce current liabilities. (iv) dispose the fixed assets in order to reduce accounts payable.

A all the above B (i) C (i), (iii) and (iv) D (iv)

351. The financial statements of Polstron Ltd show that the gross profit margin has not changed in comparison

to the previous year. However the net profit margin has declined considerably over the period. Which of the following could be the reason for the decline in net profit margin?

(i) The cost of goods sold has increased, whereas the sale price has remained constant. (ii) The finance cost has increased in comparison to the last year. (iii) The tax authorities have increased the tax rate. (iv) The company has declared dividends during the year.

A (i) B (iv) C (ii) and (iii) D none of the above

352. Which of the following statement(s) is / are correct?

(i) A lower receivables turnover is always desirable. (ii) An increase in net profit margin without any change in revenue or assets indicates a weaker return on

investments (ROI). (iii) The interest coverage ratio will be lower if the tax rate of the firm is higher. (iv) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

A all of the above B (iii) C (ii) and (iii) D (iv)

353. Which of the following factors would result in higher gearing?

(i) an upward revaluation of non-current assets. (ii) a bonus issue of shares to the existing shareholders. (iii) obtaining long term loan to finance purchase of non-current assets.

A all of the above B (i) and (ii) C (i) D (iii)

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H INTERPRETATION OF FINANCIAL STATEMENTS

92: Interpretation of Financial Statements © GTG 354. The following would result in the increase in the gearing ratio of the company:

(i) The decrease in long term loans is less than the decrease in the equity capital. (ii) The increase in long term loans is less than the increase in the equity capital. (iii) The interest rates in the markets rise. (iv) The company declares dividends during the year.

A (i) B (ii),(iii) and (iv) C (ii) D none of the above

355. The net accounts receivable were $250,000 as of 31 December, 20X7, and $300,000 as of

31 December, 20X8. Net cash sales for 20X8 were $100,000. The receivable days for 20X8 were 73 days. What were the company’s total net sales for 20X8? (Assume 365 days in a year)

A $1,500,000 B $1,475,000 C $1,375,000 D $1,250,000

356. Greenwood Ltd has issued 4,500,000 equity shares at $10 each. The following is the data provided for

Greenwood Ltd:

Dividends $4,500,000 Market price per share $20 Earnings per share $5

The dividend per share, dividend yield will be:

Dividend

per share Dividend

yield A $10 5% B $1 25% C $1 5% D $1 20%

357. Jupiter Ltd had net income of $200,000, paid income taxes of $60,000 and had interest expense of

$16,000. Calculate the interest coverage ratio of Jupiter Ltd.

A 17.25 B 7.75 C 15.25 D 8.75

358. The following information is provided for Saturn Ltd:

$’000 Cost of good sold 12,000 Average inventory 4,000 Net sales 16,000 Average receivables 6,000 Net income 2,000

Calculate the inventory turnover ratio.

A 4.00 times B 2.67 times C 3.50 times D 3.00 times


359. Below are the extracts of Zodiac Ltd’s SOFP and SOCI (income statement):

SOFP as at 30 June 20X6 $m

SOCI (Income Statement) for the year ended 30 June 20X6

Non-current assets 13 Current assets 17 Operating profit 10 30 Finance costs (5)Ordinary share capital 9 Profit for year 5Share premium account 6 Retained earning 5 Total equity and reserves 20 10% Loan notes 5 Current liabilities 5 30

Using the information, choose the correct calculation of return on total capital employed (ROCE)? (Tax ignored)

A 5/20 = 25% B 10/20 = 50% C 5/25 = 20% D 10/25 = 40%

360. A company’s gearing ratio would go down if the:

A market interest rates goes up B number of shareholder of company’s increases C decrease in long-term loans is less than a decrease in equity for the company D decrease in long-term loans is more than a decrease in equity for the company

361. On 31 December 20X9, Silicon ltd, a pharmaceutical co extracted following details from its SOFP. $/000

Inventories 2,500 Receivables 650 Bank overdraft 50 Payables 800

From the above information, one of its executive of the company prepared a report on liquidity position of company. Current ratio of a similar company working in the same industry is 2.1:1.

Which of the followings can be a possible result from his report?

A Liquidity is well controlled, because its quick assets are more than its current liabilities. B Liquidity is poorly controlled, because its current ratio is significantly higher. C Liquidity is poorly controlled, because it has a bank overdraft which less than payables figure. D Liquidity is well controlled, because the current assets are much more than current liabilities.

362. Fox Sports Entertainment Ltd’s income statement for the year ended 31 December 20X9 showed the following: $’000 Operating profit 2,200 Interest 400 Profit before tax 1,800 Income tax 600 Profit for the period 1,200

Its SOFP extracts at 31 December 20X8 showed the following: $’000 Share capital 7,000 Retained earnings 1,000 8,000 10% debenture 2,000 10,000

From the above what is the return on average capital employed (ROCE) for the year ended 31 December 20X9 for the company?

A 11.54% B 10.71% C 07.69% D 12.00%

94: Interpretation of Financial Statements © GTG

363. Mr Robert is a vendor of cotton goods. On 31 Dec 200X9, he extracted following information from the income statement of his business. $ $ Sales 105,000Opening inventory 10,000Add: Purchases 75,000 Less: Closing inventory (18,200) (66,800)Gross profit 38,200

Calculate the inventory turnover ratio for his business for the year end 200X9?

A 2.71 times B 7.44 times C 1.30 times D 4.74 times

Using the information given below attempt Q 364, Q 365 and Q 366 Pioneer services Ltd extracted following information from its SOFP as on 31 December 20X8.

Assets $ Non-current assets: Land and building 500,000Current assets: Inventory 80,000Trade receivables 220,000 800,000 Equity and liabilities Equity 120,000Non-current liabilities Secured loans 240,000Current liabilities: Trade payables 150,000Bank overdraft 290,000 800,000

Additional information: Sales and purchases for the year are $500,000 and $350,000 respectively. Assume 365 days in a year.

364. Calculate the inventory turnover days and receivable days

Inventory turnover days Receivable days A 83 days 229 days B 161 days 58 days C 58 days 161 days D 229 days 83 days

365. Calculate the quick ratio and current ratio

Quick

ratio Current

ratio A 0.50 0.68B 0.25 0.72C 0.65 1.20D 1.20 0.30

366. Based on the ratios calculated above, which of the following statement / s are true (i) The credit policy in the company is lenient. (ii) The company will not be in a position to pay its liabilities on the due date. (iii) The company is highly liquid. (iv) The company has a shorter working capital cycle.

A (i) and (ii) B (i), (ii) and (iii) C (i) and (iv) D (i) and (iii)

1. The correct option is B.

An increase in asset and an increase in liability


The main roles of IFRIC are: (a) issuing interpretations. (b) issuing guidance on the application of standards. (c) discussing with the local accounting standards setters to reduce the differences between the

international accounting standards and the local accounting standards. (d) asking for public comment on the areas of confusion or dispute in the International Accounting

Standards. The IFRIC is concerned with issuing interpretations and guidance on the application of accounting standards. The International Accounting Standards Board (IASB), an independent standard setting board under the IASC foundation is concerned with setting high quality, understandable and International Financial Reporting Standards (IFRSs) for general purpose financial statements.

3. The correct option is C.

Both, a sole proprietor and a limited liability company are started and need capital to be invested in the business. The only difference is that in a sole proprietor entity, the capital is invested by one person / party, while in the case of a company, the capital is invested by one or more persons through shares. Statements (i) and (iii) are correct.

4. The correct answer is $1,080,000.

The cost of goods sold (COGS) = Opening inventory + Purchases – Closing inventory

= $77,000 + $763,000 – $84,000 = $756,000.

Since gross profit is 30%, COGS = 100 - 30 = 70%.

For a COGS of 70, sales = 100 Therefore for a COGS of 756,000, sales = $756,000 x 100/70 = $1,080,000


The finance provider will be interested in all the information available concerning the company, as this will give him an understanding of the entity’s ability to pay the interest and re-pay the principal. The ratio of interest to total expenditure gives him an idea as to the proportion of the interest to the total expenditure. In fact, even the quality of goods supplied is important as this may provide an indication of the on-going profitability of the business.

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A THE CONTEXT AND PURPOSE OF FINANCIAL REPORTING

96: The Context and Purpose of Financial Reporting © GTG 6. The correct option is D.

Statement (i) is incorrect. Revised IAS 1 prohibits the presentation of any item of income or expense as an extraordinary item in the SOCI or in the notes. Statement (ii) is correct. This statement refers to the concept of understandability. The concept of understandability implies that the financial statements should be expressed in such a way that they are clearly and easily understood. Statement (iii) is incorrect. In this statement, the concept of reliability is not followed. If the company creates hidden reserves to strengthen its financial position, the financial statements will not be free from material error and bias. Statement (iv) is incorrect. Consistency means that financial statements should be prepared in the same manner and the accounting concept or policy should be followed consistently. However, the entity should switch to a new accounting concept or policy, when � The new method is more appropriate or � The new method is prescribed by a standard or interpretation issued by the IASB or � There is a change in the entity’s operations and a new method is needed.


Audit fees are an expense and will not appear in the SOFP. They will be disclosed in the SOCI.

� Plant and equipment is an asset and will appear on the SOFP. � Debentures are a type of loan; they are a liability. They will appear on the SOFP. � Share capital and proprietor’s capital are also liabilities and will appear on the SOFP.

8. The correct option is A.

Total assets – Total liabilities = Capital + Profit 9. The correct option is D.

Closing net assets + Drawings - Capital introduced – Opening net assets 10. The correct option is A.

IAS 8 requires disclosure of the reason for a change in the policy, the adjustments to be made in the current period with regards to the new accounting policy and the comparative information about prior periods.

11. The correct option is A. All the above items should be included in the company’s statement of changes in equity, according to IAS 1 Presentation of Financial Statements.


If a company changes a material accounting policy, the notes to the financial statements should always disclose the reason for and the effect of the change in accounting policy. It should also disclose the adjustments required to the figures for periods before those presented.


Reasons � SOFP is a summary of business transactions at a particular period. � Capital represents the amount invested by the shareholders in the company and is due to them. � SOCI (income statement) helps in the determination of profit and loss over a period of time.

Statement (i) is incorrect because an asset represents the amount owned by the business.

14. The correct option is A. Only statement (i) is correct. Statement (ii) is incorrect. Materiality means relative importance. Material items are important items that the users of the financial statements must know; changes in which would affect their decisions. The financial statements should show all the material items separately. Statement (iii) is incorrect. Faithful representation of any transaction is only possible if it is accounted for according to its substance and economic reality and not merely according to its legal form.


When the entity is not in a position to follow the going concern concept (i.e. it will cease operations in the foreseeable future) then the assets are valued at disposal value. Disposal value is the value for a readily disposal asset under a forced sale. While: � Historical cost is the cost at the date of transaction. � Economic value is the income-generating ability of the asset. � Replacement cost is the value of the consideration required in acquiring a similar asset.

This will include the purchase price, legal costs, installation cost, etc.

16. The correct option is C. Asset values understated and profit overstated. One reason for this is because the depreciation charge will be lower if the higher ‘current’ value is used in the computation of profit. The effect is lower depreciation expenses, thereby overstating profit.

17. The correct option is D.

Replacement cost is the consideration required for acquiring similar assets ($12,000 + $1,000) = $13,000 Realisable value is the estimated selling cost less cost incurred in making the sales ($11,000 - $2,000) = $9,000

18. The correct option is C. Going concern is a concept which indicates that the entity will continue its operations for at least the next twelve months. Unlike the others, it is NOT a qualitative characteristic of financial statements.

19. The correct option is D. According to the consistency concept, the policy adopted should be consistently followed from one period to the next. It also means that similar items in a set of accounts should be treated in a similar manner.

20. The correct option is D. Accrual and pre-payments mean that all transactions are recorded when they are incurred. The timing of the payment is irrelevant. Accruals and pre-payments are an application of the matching concept; all the costs which are applicable to the revenue period should be matched by charging them against that revenue.

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SOLUTION BANK

B THE QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION


On the other hand:

� the entity concept means that the business is treated as a separate entity, apart from its owners. � the dual aspect concept means that every transaction has two effects, one debit and one credit. � the cost concept means an asset is recorded at the price paid to acquire it, i.e. at cost.

21. The correct option is D. Para 37 of the Framework defines prudence as “the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.”

22. The correct option is C. Under accrual basis, the effect of transactions and other events are recognised as and when they occur and not on the basis of cash received or paid. Thus financial transactions are recorded in the financial statements of the periods to which they relate. The financial statements are normally prepared on the assumption that an entity is a going concern and will continue to operate in the foreseeable future. Relevance, reliability, prudence and conservatism are to the qualitative characteristics of the financial statements. Financial capital maintenance and physical capital maintenance are accounting concepts.

23. The correct option is C. According to the framework for the preparation and presentation of financial statements, prudence is the inclusion of a degree of caution in the exercise of judgments which is needed while making estimates under conditions of uncertainty. The intention is to ensure that the assets or income are not overstated and liabilities or expenses are not understated. Accrual and going concern are the underlying assumptions of financial statements, whereas the money measurement concept underlines the fact that every transaction recorded is measured in terms of money.

24. The correct option is B. According to the Framework, while preparing financial statements, assuming the going concern status of the entity is not affected, assets are valued at either historical cost or at current costs. Statement (i) relates to valuation of assets at historical cost. Statement (ii) relates to valuation of assets at current costs. Statement (iii) relates to valuation of assets at the net realisable value. Therefore options A, C and D are incorrect.


Statement (i) is incorrect because faithful representation of any transaction is only possible if it is accounted for according to its substance and economic reality and not according to its legal form. Statement (ii) is incorrect because the historical cost concept tells us exactly what has been paid and what has been received. It fits in perfectly with the Statement of cash flow. It leads to absolute certainty by providing definite values. Statement (iii) is incorrect because information which is relevant and reliable must be included in financial statements. Inability to include necessary information which is difficult for some users to understand means that the financial statements do not have the characteristic of understandability. Financial statements should be clearly and easily understandable to the users.

26. The correct option is D. When transactions are recognised as and when they take place, it adheres to the accrual concept.

27. The correct option is C. Para 2 of the Framework specifically states that it is not an International Accounting Standard. The framework sets out concepts that underlie the preparation and presentation of financial statements. The Framework provides guidance in the case of conflict between the Framework and the IFRS. The requirements of the IFRS would prevail over those of the Framework.


Exchange of $100 into 10,000 cents ($1 = 100 cents) does not increase or decrease the assets or the liabilities. This is merely an exchange of cash for the same amount of cash. Therefore, the asset (cash in hand) remains the same. Hence this transaction is not recorded in the books of accounts.


The drawings account has a debit balance and therefore it will be debited when there is an increase in drawings. In the case of purchases, this account also has a debit balance. In this transaction, the purchases (goods) have decreased and therefore the purchase account is credited.

30. The correct answer is $15,000. Capital + Liabilities = Assets Capital = Total Asset – Total Liabilities

= ($10,000 + $5,000 + $2,000 + $3,000) – ($1,000 + $4,000) = $20,000 – $5,000 = $15,000


Alpha Ltd purchased 5 computers from Bell Computers Ltd on credit. This means that Bell Computers Ltd sold computers to Alpha Ltd on credit. The correct entry is:

Dr Alpha Ltd $500 (Increase in assets) Cr Sales account $500 (Increase in sales) 32. The correct option is B.

Gamma Ltd made a cheque payment to Bell Computers Ltd. The correct entry is:

Dr Bell Computers Ltd $1,000 (Decrease in liability) Cr Bank $1,000 (Decrease in asset) 33. The correct option is A.

Bell Computers Ltd’s sales day book will show the following transactions for the month of December 20X5:

Date Invoice No. Customer's name $ Computers

3/12/20X6 1 Alpha Ltd 500 500 8/12/20X6 2 Gamma Ltd 1,500 1,500

Total 2,000

Bell Computers Ltd will post sales of $2,000 for the month of December 20X5. 34. The correct answer is A.

Dr Payables ledger control account

Cr Input sales tax Cr Purchase returns

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C THE USE OF DOUBLE-ENTRY AND ACCOUNTING SYSTEMS



The correct entry is: Dr Depreciation account $3,750 (increase in expenses)

Cr Accumulated depreciation account $3,750 (decrease in asset) 36. The correct option is C.

Correct entries for the other two would be:

Dr Cr $ $ (i) Buildings account 87,000 Wages account 38,000 Purchases account 49,000 Labour and materials used in construction of extension to factory

(ii) Directors’ remuneration 70,000 Directors’ personal accounts A 30,000 Directors’ personal accounts B 40,000 Directors’ bonuses transferred to their accounts

37. The correct answer is B.

As the discount total is on the debit side, it means the amount has been received. The amount being an income will be posted as discount received, on the credit side.


Evon Ltd issued 1,000,000 shares of 25c, so the share capital account will be credited by $250,000. The share premium account will be credited by $850,000.


� The rent received account should be debited with $18,000, and the suspense account should be

credited with $18,000. � It is correct. As cash received from A was incorrectly entered in B’s account, B’s receivables account

which was previously credited should be debited, and A’s receivables account should be credited. � In the share premium account, 400,000 shares are issued as bonus shares so the amount will be

400,000 x 50c = 200,000. � It is correct. Shares are issued in exchange for shares in X, so the share capital account should be

credited with 50c and the remaining 75c should be transferred to the share premium account.


Very simply defined, a remittance advice is a letter that informs the supplier that the payment has been made. This letter accompanies the cheque, draft or any other mode of payment used by the buyer to clear his debts.


$ Opening capital 20,000Introduced during the year 8,000Drawings during the year (16,000)Loss – balancing figure (3,000)Closing capital 9,000



Statement (i) is the only incorrect statement because according to IAS 2 Inventory, inventory has to be valued at the lower of cost or net realisable value.


Physical inventory count means to count the quantity of each item in inventory, value each item individually and add all the individual values together to get the total value of inventory. In case of nominal (general) ledger, there is no inventory account. Option C: Sales- Purchases is not equal to inventory. Option D: Sales- Cost of sales = Gross profit (not the value of inventory)

45. The correct option is A. � Statement (i) is correct because through a rights issue, a company issues new equity shares to existing

shareholders for a consideration. � Statement (ii) is correct because while raising capital through a rights issue, a company can always

issue shares at a premium. In the case of a bonus issue, the company does not call for money from the shareholders. The shares are issued as a bonus to the existing shareholders by capitalising the reserves. The reserves include the general reserve, retained earnings and the share premium reserve.

� Statement (iii) is incorrect because bonus shares are issued as a bonus to the existing shareholders by

capitalising the reserves which does not involve a cash transaction. Therefore there is no effect on the cash balance.

� Statement (iv) is incorrect because in both cases, the number of shareholders will remain unchanged

because a rights issue as well as a bonus issue is made only to the existing shareholders.


A bonus issue involves a company issuing shares to its existing shareholders not for cash, but based on the shares that they already hold with the company. As a result, the capital of the company will increase without any inflow of cash.

47. The correct option is B. The corrected statements are as follows: (i) Contingent assets are not included as assets in the financial statements even if it is probable that

they will arise. (ii) Contingent liabilities must be provided for in the financial statements if it is probable that they will

arise. (iii) Details of all non - adjusting events after the reporting period must be given in the notes to the

financial statements. (iv) Material non-adjusting events should be disclosed by note in the financial statements.

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SOLUTION BANK

D RECORDING TRANSACTIONS AND EVENTS


48. The correct option is C. � Statement (i) is incorrect because some non-current assets are not depreciable e.g. land, intangible

assets are amortised and goodwill is tested for impairment. � Statement (ii) is incorrect because goodwill in the SOFP is not to be revalued upwards. � Statement (iii) is correct as IAS 16 requires that if a tangible non-current asset is revalued, all tangible

assets of the same class should be revalued. � Statement (iv) is correct because IAS 1 requires that tangible assets and intangible assets must be

shown separately.

49. The correct option is A. By decreasing the allowance for receivables, Claudia has decreased the expense. Hence the profits will increase. Also decreased allowance for receivables will be deducted from receivables, which will increase the amount of receivables and hence the net assets.


Trade discount is never recorded in the books of accounts. Rather, purchases are recorded net of trade discount. Hence, the correct entry for recording this purchase in Katherine’s account is:

Dr Purchases (increase in expenses) $7,560 Cr Bear Ltd (increase in liability) $7,560


Provisions must be recognised in the SOFP under the heading, current liabilities and provisions.

52. The correct answer is $ 8,000.

Given that there are no purchases and sales during the year from 1 Jan 20X9 to 31 Dec 20X9, the balance inventory left as at 31 Dec 20X9 is as follows:

Opening inventory = $10,000 Delivered on 1/1/X9 = $(2,000) Closing inventory on 31/12/X9 $8,000


Bonus issue simply means the transfer of accumulated reserves into share capital. The cash remains unchanged. � There is no actual cash inflow. Accumulated reserves are used for issuing bonus shares. � Only equity shareholders have rights to the accumulated reserves. Bonus shares cannot be issued to

the general public. � Bonus shares are issued to the existing shareholders.


Statement A is the consistency concept. Statement B covers one aspect of the prudence concept. Statement C states the effect of the concept of accruals.

55. The correct option is C. The accounting entries for the amortisation of intangible assets are similar to the depreciation entry on tangible non-current assets. Dr Amortisation expenses $2,000 Cr Accumulated amortisation $2,000

© GTG Solution Bank: 103

56. The correct answer is $4,500.

Dividend on 5% irredeemable preference shares = (50,000 x $2) x 5% = $5,000. Half of preference dividend paid = $5,000/2 = $2,500.

Dividend on ordinary shares paid for the previous year = 40,000 x $0.05 = $2,000.

Total dividend shown as a deduction from retained earnings = $2,500 + $2,000 = $4,500.

The current year final dividend on ordinary shares which is paid and declared after the year end is not reflected in the financial statements, but disclosed in the notes.


The purchase invoice is the source document for recording purchases sent in from the supplier. The purchase order is sent in by the buyer.


The share premium account can be used to issue bonus shares.

Dividend is an appropriation of profits of the company and is paid out of the profits of the company. Hence statement (i) is incorrect.

Bonus shares are paid out of capitalisation of reserves, and therefore there is no question of issuing them at a premium or discount. Hence statement (ii) is incorrect.


Property 1 Account Dr CrDate $ Date $ 01/07/20X7 Opening balance 8,00030/06/20X8 SOCI 93,000 30/06/20X8 Cash received 80,000 30/06/20X8 Closing balance 5,000 93,000 93,000

Property 2 Account Dr CrDate $ Date $ 01/07/20X7 Opening balance 2,000 30/06/20X8 SOCI 78,000 30/06/20X8 Cash received 90,00030/06/20X8 Closing balance 10,000 90,000 90,000

Therefore the total rent amount = $93,000 + $78,000 = $171,000.


$ Bad debts written off 146,000Add: Doubtful debt allowance for June 20X8 218,000 364,000Less: Doubtful debt allowance for July 20X8 (83,000) 281,000


$598,600 x 2% 11,972Opening provision (12,460)Reduction in provision (488)

In the case of subsequent receipt of cash for a debt which is written off earlier and removed from the receivables account, it cannot be credited to receivable account again. Instead, it is credited to the irrecoverable debts account. In this case, the total credit to the income statement for receivables is $1,123 (635 + 488).



$ Depreciation 20X7 Depreciation on disposals (60,000 x 20% x 3/12) 3,000(as asset is sold in middle of the year) On old plant still in hand Balance 180,000 x 20% 36,000Depreciation 20X8 On newly purchased plant (160,000 x 20% x 6/12) 16,000 55,000


($60,000/12 x 2) + ($72,000/12 x 10) = $70,000 64. The correct answer is $2,585.

As per IAS 2, Inventories, the value of the inventory should be cost or NRV whichever is lower. Cost ($) NRV ($) Value to be recorded ($)

Cassettes 800 760 760 CDs 1,000 1,190(1250 – 60) 1,000 DVDs 825 825 (900 – 75) 825

2,585


Inventory account from 1/11/20X7 as at 04/11/20X7 Dr Cr

$ $ Opening inventory (balancing figure) 461,500 Cost of goods sold 14,800Received from supplier 38,400 Return outwards 1,800Return inwards (at cost) 400 Closing inventory 483,700 500,300 500,300

Opening balance of inventory as at 1 November 20X7 is the closing balance of inventory as at 31 October 20X7.

66. The correct answer is $570.

$ 10 tables at $80 each 800Less 25% trade discount (200) 600Less 5% cash discount (5% of the net cost of $600) (30) 570


Assume that all sales are cash sales. Therefore Cost of sales + Gross profit = Sales. For sales of 100, gross profit is 40 Therefore Cost of sales = Sales - Gross profit = 100 – 40 = 60

When cost of sales is 60, sales are 100 Therefore when cost of sales is $114,000, sales will be $114,000 x 100/60 =$190,000.

Therefore the sales assistant must have taken ($190,000 - $181,600) $8,400 in cash.



The carrying value on 1 January 20X8 = $10,000,000 – ($10,000,000 x 4% x 4) = $8,400,000 Revaluated amount = $11,550,000 Upward revaluation reserve $3,150,000 Remaining useful life = 25 – 4 = 21 years. The new depreciation charge = $11,550,000/21 = $550,000.


Development costs recognised as an asset must be amortised on a systematic basis over the best estimate of its useful life. Research expenditure, other than capital expenditure on research facilities should be recognised as an expense as incurred in the SOCI. According to IAS 38, when deciding whether development expenditure qualifies for recognition as an asset in the SOFP, it is necessary to consider whether there will be adequate finance available to complete the project.


$1,000 should have been deducted from rent as it was prepaid but was added to rent as accrual. Therefore the net effect was that rent was overstated by $2,000, thus understating the profit by $2,000.

71. The correct answers are Ordinary share capital $225,000 and share premium $250,000.

Number of shares

Share capital

Share premium

$ $ 500,000 shares of 25c each 500,000 125,000 100,000 Rights issue 1 right share for every 2 shares held 500,000/2 x 1@25c 250,000 62,500 500,000/2 x 1@75c 187,500 Bonus issue 1 bonus share for every 5 shares held (500,000 + 250,000)/5 x 1 i.e. 150,000 shares @25c per share 150,000 37,500 (37,500) 225,000 250,000


$ Trade receivable amount at 30/06/20X6 838,000 Less: Bad debts written off (72,000) Trade receivables balance in the statement of financial position 766,000

The allowance for receivables will be $60,000 which has to be deducted from the trade receivables amount i.e. ($766,000 – $60,000) to derive the net receivable amount of $706,000. The opening allowance for receivables of $48,000 is ignored as it is irrelevant.

73. The correct answer is $476. Sale price = $40 Less: trade discount (15%) = $6 Cost of items returned = $34 each

14 items were returned, hence the total cost of all of the items returned is $34 each x 14 = $476.



Share capital

Bonus issue

Rights issue

Total share capital

Share premium account

$m $m $m $m $m On 30/06/20X5 100 80On 01/09/20X5, a bonus issue was made of 1 share for every two shares held (100/2 x 1)

50 50 (50)

On 01/01/20X6, a rights issue was made of two ordinary shares for every five shares held at $1.5 per share (150/5 x 2)

60 60 30

210 60 75. The correct option is B.

Inventory account

Dr Cr $ $

Opening inventory 40,000Cost of inventory sold (95,000/2) 47,500

Purchases 60,000 Closing inventory 50,000 Balancing figure (goods stolen) 2,500 100,000 100,000


Rent received account as at 30 June 20X8 Dr Cr

$ $

Rent in arrears on 30/06/20X7 4,800Rent received in advance on 30/06/20X7 134,600

SOCI – being rent receivable for 30/06/20X8 (balancing figure) 828,700

Cash received for year ended 30/06/20X8 834,600

Rent in advance on 30/06/20X8 144,400 Rent in arrears on 30/06/20X8 8,700 977,900 977,900

77. The correct answer is $1,656. Annual depreciation charge = ($8,000 + $360) / 5 = $1,672 Total depreciation charged (2006 to 2008) = 3 years x $1,672 p.a. = $5,016 (No depreciation for 2009) Net Book Value = Capital cost – Total depreciation = $8,360 - $5,016 = $3,344 Profit or loss on sale = Sale Proceeds – NBV = $5,000 - $3,344 = $1,656 Profit


78. The correct answers are SOCI $100,000 and accrued rent expenses $10,000.

Rent (expense) account for the year ended 31/01/20X8 Dr Cr

Date $ Date $ 01/04/20X7 Rent paid 22,500 01/02/20X7 Accrued rent 7,500

01/07/20X7 Rent paid in arrears 22,500(for month January 20X7)

01/10/20X7 Rent paid in arrears 22,500 01/01/20X8 Rent paid in arrears 30,000

31/01/20X8 Rent accrued but not paid 10,000

31/01/20X8SOCI - rent expense 100,000

107,500 107,500 79. The correct answer is $310.

$ Receivable from Alpha in the books of Beta 8,950Less: Cash paid to Beta but not allowed for by Beta 4,080Less: Goods returned by Alpha but not recorded 380Balance receivable from Alpha in the books of Beta 4,490

$ Payable ledger balance for Beta in the books of Alpha 4,140Add: Cash discount disallowed 40Balance payable to Beta in the books of Alpha 4,180

Therefore the difference between Alpha and Beta’s records after adjusting for the items is (4,490 -4,180) $310.


$ Opening allowance for doubtful debts 50,000 Less: Closing allowance for doubtful debts (36,200) ($400,000 - $38,000) x 10% Reduction in the allowance 13,800 Bad and doubtful debt chargeable to SOCI $ Bad debt written off 38,000 Less: Reduction in allowance during the year (13,800) Bad debt chargeable to SOCI 24,200


Initial depreciation charge = ($210,000 - $10,000) / 5 = $40,000 p.a.

Depreciation charge for the years ended 31 March 20X4 – 31 March 20X7 (4 years) = $40,000 x 4 = $160,000

Net Book Value at 1 April 20X7 before overhaul = $210,000 - $160,000 = $50,000 Revised annual depreciation = ($50,000 + $120,000 - $30,000) / 4 = $35,000 (1 year of earlier and 3 year of the extended useful life)


$ Depreciation on plant for the whole year ($380,000 - $30,000) x 20%) 70,000 Depreciation on plant purchased on 01/04/20X7 $51,000 x 9/12 x 20% 7,650 Depreciation on the plant sold $30,000 x 9/12 x 20% 4,500 Total depreciation chargeable to SOCI for the year 82,150



Case (1), relates to coats. The net realisable value (NRV) of the inventory is lower than the cost at which it is recorded. Therefore it needs to be written down to NRV. In case (2) the NRV of the skirts is higher than the cost at which they are recorded, therefore we need not adjust the closing inventory to the value of the skirts.

$ Closing inventory at cost at 31/01/20X7 284,700 Cost at which coats are recorded (400 x $80) 32,000 The net realisable value of the goods is (400 x 150/2) - Selling expenses 28,500 Amount to be written down (Cost > NRV) 3,500 Adjusted closing inventory 281,200


Inventory account Dr Cr

Date Quantity Cost per unit

Total cost Date Quantity

Cost per unit

Total cost

$ $ $ $ 01/05/20X7 Balance

b/d 700 190 133,000 01/11/20X7 Sales 400 400 160,00001/07/20X7 Purchase 500 220 110,000 15/04/20X8 Sales 250 500 125,00001/02/20X8 Purchase 300 230 69,000

31/03/20X8

Closing inventory(700-650)

50 190 9,50031/03/20X8 SOCI 161,500

500 220 110,000 300 230 69,000 473500 473,500

Closing inventory is therefore ($9,500 + $110,000 +$ 69,000) $188,500.


Statement (i) is incorrect. Inventory should be valued at the lower of cost or net realisable value. Statement (ii) is incorrect. The cost of goods manufactured by an entity will include materials, labour and overheads and all other costs incurred in the development of inventory to the condition it is at the date of valuation. Statement (iii) is correct. Statement (iv) is correct.


Receivables ledger account of Ordan in Alta's records Dr Cr

$ $ Trade receivables 3,980 Cheque received 270 Return inwards 180 Amount settled in contra transaction 3,200 Closing balance 330 3,980 3,980

The difference between the two companies’ records after adjusting the given items is $330 – $230 = $100.



$1,320 = 20X6 expense + 10% Therefore, 20X6 expense = ($1,320 / 110 x 100) = $1,200 Only half of the 20X6 expense ($600) was paid in 20X6. Therefore the other half ($600) was due at 1 January 20X7. As there is no accrual or prepayment at 31 December 20X7, the $1,320 paid has to be made up of the $600 in respect of 20X6 and the balance - $720 – in respect of the full expense for 20X7.

88. The correct option is B. Adjusted receivables ($458,000 – $28,000) = $430,000 Irrecoverable debt and movement in the allowance, for the year ended 31 December 20X8.

$ $

Debts irrecoverable $28,000Adjusted allowance for receivables ($430,000 x 5%) = $21,500 Less: Opening allowance for receivables $(18,000) Increase in the allowance 3,500Total expense in the SOCI i.e. Irrecoverable debt + Allowance for receivables for the year ended 31/12/20X8 $31,500


The accounting entry on receipt of the cheque is: Dr Bank $5,000 Cr Receivables $5,000

When a cheque is dishonoured, the accounting entry is reversed as follows:

Dr Receivables $5,000 Dr Bank charges $50 Cr Cash $5,050

In the question it is stated that the customer will not pay the bank charges, therefore we will not add bank charges in the receivables. However, if the customer was ready to pay us the bank charges as well, the accounting entry would have been:

Dr Receivables $5,050 Cr Cash $5,050


Lisa’s policy is to charge proportionate depreciation in the year of sale and purchase. She follows the reducing balance method. Therefore the calculation of depreciation in the year of sale is as follows:

$ Opening value of the machinery 100,000 Less: Accumulated depreciation (19,000) Opening balance after depreciation 81,000 Less: Depreciation for three months ($81,000 x 10% x 3/12) (2,025) Book value at the time of sale 78,975 Less: Sale proceeds (72,000) Net effect (loss) (6,975)



Year–end prepayment Policy A = January to June 2008 = 6 months @ $144 p.a. = $72 Policy B = January to April 2008 = 4 months @ $720 p.a. = $240

$312

Insurance Dr Cr Bank 1,800 SOCI 1,488 Balance c/d (above prepayment) 312 $1,800 $1,800


Until June 20X7, rent was $700 per month. From July the rent became $1,000 per month. The company receives rent quarterly in advance i.e.

$ Rent for the period 01/12/20X7 – 30/06/20X7 700 x 7 = 4,900Rent for the period 01/07/20X7 – 30/11/20X7 1,000 x 5 = 5,000 Total = 9,900

The last payment was received in October 20X7 for the months October to December 20X7. Hence, on the SOFP, one month’s rent has been paid in advance. This is a sundry payable of $1,000.


$ Cost of purchases 120,000Add: Transit insurance 1,800Add: Landing charges 2,100Add: Special handling charges 2,000 125,900

The cost of inventory includes all the costs that are incurred to bring the inventory into its present location and condition ready for use in the production process.


The net realisable value of an item is its actual or estimated selling price less all further costs to completion and all costs to be incurred in marketing, selling and distributing the item. In this case, this is $1,600 - $110 - $130 = $1,360. According to IAS 2, when the NRV of an item is less than its cost, the item should be valued at its NRV i.e. $1,360.


The expenses that are capitalised on the purchase of a new asset include all the expenses to bring an asset to the condition of being ready for use. Expenses such as delivery charges and installation charges are capitalised along with the cost of an asset. Normally sales tax paid on machinery is reclaimable, so is not included in the cost of an asset. The capital expenditure is ($39,800 + $1,100) = $40,900. However, maintenance charge constitutes revenue expenditure and should not be capitalised with the other expenses.



Initially depreciation was charged by following the straight line method assuming ten years working life and no residual value. However, in 20X7, there was a change in the estimation of the residual value and useful working life.

The effect for change in the estimation should be given prospectively. $ Cost of the computer 100,000 Less: Depreciation by straight line method [(100,000/10) x 3] (30,000)Opening balance on 01.01.20X7 70,000 Less: Depreciation for the year 20X7 $(70,000 – 12,000)/2 (29,000) Balance 41,000


$ Purchase price of new car 12,750Less: Paid by taking loan (8,000)Sale proceeds of old car 4,750 $ Sale proceeds of old car 4,750Less: WDV of old car (8,500 - 4,148) 4,352Profit on sale of car 398


The effect of revaluation is given prospectively (i.e. looking forward). Hence, the depreciation charge for the year ended 31 December 20X7 is:

$1,000,000 = $25,000 40 years

Calculation of revaluation reserve:

$ Cost of the machinery 800,000 Less: Depreciation for ten years (1/1/1997 to 31/12/20X6) (160,000) (800,000 x 2% x 10 years) 640,000 Asset revalued to 1,000,000 Revaluation reserve / Gain on revaluation 360,000

99. The correct answer is $1,008,000.

Cost of goods sold = $138,600 + $716,100 - $149,100 = $705,600 This is 70% of sales (100% - 30%) Therefore sales = 705,600/70 x 100 = $1,008,000


Contingent asset and contingent liability are not recognised in the financial statements, but they are disclosed in the notes to the financial statements.


101. The correct answer is $84,000. Rent account

Dr Cr $ $

30/06/20X7 Arrears of rent 3,800 30/06/20X7 Advance rent 2,400

30/06/20X8 Rent to be transferred to SOCI (balancing figure)

84,000 Cash received from tenants 83,700

30/06/20X8 Advance rent received 3,000 30/06/20X8 Arrears of rent 4,700

90,800 90,800 102. The correct answer $32,500.

$ Bad debts written off 28,500Add:(868,500 - 28,500) x 5% 42,000 70,500Less: Allowance for doubtful debt 38,000 32,500


Receivables ledger account Dr Cr

$ $ Trade receivables 130,000 Cash received from customers 686,400 Discounts allowed 1,400Sales (Balancing figure) 744,960 Bad debts 4,160

Amount due from a customer who is also a supplier 2,000

Trade receivables 181,000 874,960 874,960


Amount charged to the statement of comprehensive income:

$ A Bad debt for the year ended 31 December 2008 14,000 B Allowance for receivables as at 31 December 2008 Allowance required = 4% x $(540,000 – 14,000) 21,040 Less: Balance in allowance account as at 31 December 20X7 (20,000) Increase in allowance 1,040 Total charge to statement of comprehensive income (A + B) 15,040


$ Purchase price 70,000 Less: Depreciation for the year 20X4, 20X5, 20X6 ($7,000 x 3 years) (21,000) Balance as at 31/12/20X6 49,000 Revaluation surplus 16,000 65,000 Less: Depreciation for the year ended 31/12//20X7 ($65,000/7 years) (9,286) Balance as at 31/12/20X7 55,714

Machinery is depreciated by 10% on the straight line basis. It implies that the useful life of machinery is 10 years (100%/10%). Machinery is revalued at the end of three years, hence the remaining useful life will be seven years. (10 years – 3 years)



Original Depreciation = $45,000/6 = $7,500. Net book value as on 31st Dec 20X8 = $45,000- $7,500 = $37,500.

New carrying value as on 1st Jan 20X9 after cost of modification = $46,500 ($37,500 + $9,000)

New depreciation amount with 6 years useful life = $7,750.


As the inventory is valued using the FIFO method, closing inventory will consist of inventory purchased at the latest price. Therefore the valuation of closing inventory will consist of:

$ 25,000 kg x 2.1per kg 52,50010,000 kg x 1.9 per kg 19,000Valuation of closing inventory as at 30/04/20X7 71,500


Calculation of quantity sold:

kg Opening inventory 50,000Add: Purchases 65,000Less: Sales (balancing figure) 80,000Closing inventory 35,000

Cost of goods sold (Using FIFO method) 50,000 kg x 2 = $100,000 30,000 kg x 1.9 = $57,000 Total cost of goods sold for 80,000 kg = $157,000.


$ Alternatively $ Sales 250,000 Sales 250,000Less: Cost of sales

157,000 Less: Cost of sales

Profit 93,000 Opening Inventory 100,000 Add: Purchases 128,500 Less: Closing inventory 71,500 157,000 Profit 93,000


20X3-20X4 $

20X4 – 20X5 $

20X5 – 20X6 $

20X6 -20X7 $

20X7 - 20X8 $

Cost of Purchase/ Opening WDV 10,000 8,000 6,400 5,120 4,096 Less: Depreciation (2,000) (1,600) (1,280) (1,024) No depreciation in

the year of sale

Closing WDV 8,000 6,400 5,120 4,096 4,096 Less: Exchange 4,200 Profit on exchange

104

Balancing figure



$ Opening balance 30,000Less: Accumulated depreciation (15,125)Balance as at 1 April 20X7 14,875Depreciation @ 20% (2,975)Closing balance as at 31March 11,900


$ Cost of the Machinery as at 01/01/20X0 500,000Less: Depreciation for 8 years ($12,500 x 8 years) (100,000)Written down value as at 31/12/20X7 400,000Add: Revaluation surplus as at 1/01/20X8 300,000Revaluated as at 1 January 20X8 700,000Depreciation for the year ended 31/12/20X8 ($700,000/50 years) 14,000


$

Opening inventory 212,000Add: Purchases 274,600Less: Cost of goods sold (408,000 x 80%) (326,400)Closing inventory 160,200Less: Inventory in stock (122,600)Goods stolen 37,600


$ Balance as at 5 April 20X8 750,250Add: Sales of goods at cost* 13,950Add: Purchase return 500Less: Purchase of goods (12,500)Less: Sales return recorded** (990)Balance as at 31 March 20X8 751,210

* Sale of goods at cost = 15,500 – 10% of 15,500 = $13,950 ** Sales return recorded at cost = 1100 – 10% of 1100 =$990


The authorised capital is $250,000 The issued capital of the company is $125,000 The called up capital of the company is $62,500 The paid up capital is $60,000 (250,000 – 10,000) x 0.25


$ List price 50,000Less: Trade discount – 2.5% (1,250)

48,750Add: Sales tax – 10% 4,875Net sales price 53,625Less: Cash discount – 4% (2,145)Invoice amount 51,480

Sales tax after trade discount and before cash discount

Gross profit of 20% on sales



Rent account Dr Cr

Date $ Date $

01/01/20X8 Rent in arrears 27,000 01/01/20X8Rent received in advance 10,200

13/12/20X8 SOCI (balancing figure) 80,200 31/12/20X8 Cash 85,000

31/12/20X8 Rent received in advance 12,000 31/12/20X8 Rent in arrears 24,000

119,200 119,200


Trade receivables account Dr Cr $ $

Balance b/d 32,500 Cash received from customers 171,600

Sales 185,200 Discount allowed 350 Contra 500 Balance c/d 45,250

217,700 217,700


Recognition of intangible asset

$ Salary for staff 20,000Chemicals to manufacture sample 15,000Testing of drug 30,000Intangible asset 65,000

Research expenditure of $20,000 is not supposed to be capitalised according to IAS 38 Intangible Assets .


(% Rate of sales tax) x Gross amount = Sales tax 100% + % Rate of sales tax

Therefore 1,725 x 15%/115% = $225


$1,280 ($1,000 + $250 + $30) � Annual maintenance is the revenue expenditure to be charged against the SOCI and is not to be

capitalised. � Refunded Sales tax is not included in the cost of the computer.


$48,000 + $400 + $2,200 This question relates to the capitalisation of expenditure. The following expenses are capitalised while recording a non-current asset: � Purchase of a non-current asset � Cost of bringing the non-current asset into the entity � Legal and professional costs of purchasing the non-current asset � Cost needed to make the non-current asset ready for use � Improvement to an existing non-current asset

Therefore the plant should be capitalised at ($48,000 + $400 + $2,200) = $50,600. The warranty costs are not to be capitalised as part of the cost of the computer.


123. The correct option is D. Theft of inventory has increased.

Here we need to assess which of the factors will affect the gross profit percentage i.e. the ratio of sales to profit.

In option D the theft of inventory will have the effect of decreasing the closing inventory and the gross profit.


Option (ii) is incorrect because all these costs are incurred in the development of inventory to the condition it is in at the date of valuation. The cost of inventory includes: � cost of purchase � costs of conversion � other costs incurred in bringing the inventories to their present location and condition

Inventories shall be measured at the lower of cost and net realisable value. Hence option (iii) is incorrect.

Options (i) and (iv) are the only correct options.


(i) Goodwill arising on the acquisition of a subsidiary will appear as an intangible asset only in the

consolidated statement of financial position. (ii) Deferred development expenditure is not an intangible asset. (iii) IAS 38 requires that if the conditions for recognition as an intangible asset are met, development

expenditure has to be capitalised. (iv) Trade investments do not qualify as intangible assets. (They are monetary assets.)


An asset incorrectly debited to repairs reduces the profits by $38,000.

Depreciation not charged ($38,000 x 20% x3/12) $1,900

Hence profit understated by $36,100 ($38,000 - $1,900)


Internally generated goodwill shall not be recognised according to IAS 38. Purchased goodwill = Cost of acquiring company – Fair value of identifiable net assets


According to IAS-38, in all cases, research cost (whether it is incurred by outsourcing or otherwise), should not be recognised as an intangible asset.


Income received in advance Current liability Pre-paid expense Current asset Accrued income Current asset Accrued expense Current liability


The accounting year of the company is 1 February 20X8 to 31 January 20X9. In 20X8 rent per month = (9,000/12) = $750.

From 1 October rent increases to 12,000/12 = $1,000

$ Rent for the period February to September 20X8 (8 months x $750) 6,000 Rent for the period October to January 20X9 (4 months x $1,000) 4,000 Total rent for the year 10,000

In January, the company will pay rent for October to December 20X8. However rent for January 20X9 will be payable in April 20X9. Hence, the SOFP on 31 January will show accrued rent as $1,000.



Until June 2000, the rent payable was $2,000 per month. From July 20X1 the monthly rate rose to $2,500.

Calculation of the total rental expenditure, for the year ended 31 January 20X1: $ February to June 2000 ($2,000 x 5 months) 10,000 July to January 20X1 ($2,500 x 7 months) 17,500 Total rent for the year 27,500


Rent accrual 4/12 x $12,000 = $4,000 additional expense Insurance prepayment 10/12 x $6,000 = $5,000 reduction in expense

Net effect on profit = $5,000 – $4,000 = increase in profit of $1,000.


$ Balance on doubtful debts on 1 July 20X8 18,000 Balance required on 30 June 20X9 16,000 Release of provision (2,000) Bad debts written off 14,600 SOCI - bad and doubtful debts 12,600


The correct entry for the issue of 100,000 equity shares with a face value of $1 at a discount of 5c is as follows:

Dr Cash $95,000 Dr Discount $5,000 Cr Equity share capital $100,000

Hence to rectify the error, you need to post the following entries: Dr Discount $5,000 Cr Equity share capital $5,000 135. The correct option is D.


$ Sales 500,000Expenses (400,000)Profits 100,000Tax (30% on profits) (30,000)Profit after tax 70,000Dividend on preference shares (10,000)Profits available for equity shares 60,000


The cost of sales will be lower under the FIFO method compared to the weighted average method.



The current year’s profit will be understated, and the following year’s profit will be overstated. If, in the current year, the closing inventory is understated, the profit for the current year will decrease. In the following, year, the same figure will appear as an opening balance, which will effectively decrease the expenses. This will lead to an understatement of profit in the current year and an overstatement of profit in the following year.

Trading account Dr Cr $ $ Opening inventory xxx Sales xxxx Purchases xxxx Closing inventory xxx SOCI xxx xxxx xxxx


The research expenditure should not be recognised as an intangible asset according to IAS 38.

140. The correct option is A. 141. The correct option is C.

Recorded in

(i) Bank credited $1,000 incorrectly to the company’s account.

Error by bank Bank reconciliation statement

(ii) Bank charges $50 Cash book

(iii) Outstanding cheques $1,400 Timing differences Bank reconciliation statement

(iv)

Direct debit by bank according to standing order of the company $10,000

Cash book


According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an entity should not recognise a contingent liability. It also states that contingent liabilities need not be disclosed of the possibility of an outflow of resources embodying economic benefits is remote.


Remember this hierarchy:

Authorised capital

Issued Capital

Subscribed capital

Called-up capital

Paid-up capital

Once you are familiar with this hierarchy, it will be very easy to answer questions on capital structure of a company.

From the above table, it can be seen that called-up capital can be more than paid up capital.



Dr Bad debt account $2,150 Cr Trade receivables account $2150


Depreciation on the asset sold, for six months as at 30/09/20X7= $25,000 x 10/100 x 6/12 = $1,250 Depreciation for the full year on the other part as at 31/12/20X7 = $135,000 x 10/100 = $13,500 Depreciation on the new asset for three months as at 31/03/20X7 = $27,000 x 10/100 x 3/12 = $675 Total depreciation is $15,425


Increase in net profit (because decrease in allowance is deducted from an expense of bad debts). 147. The correct option is A.

The FIFO method is used only for the determination of cost. The valuation of inventory requires the concept of prudence to be followed by valuing it at cost or NRV, whichever is lower.


Doubtful debt allowance account for the year ended 30 June 20X9 Dr Cr $ $ Bad debts written off 14,600 Opening doubtful debt allowance 16,000 Doubtful debt allowance 18,000 SOCI (balancing figure) 16,600 32,600 32,600


For 1,000 items a write down is required as follows: $ Cost 1,000 x 18 18,000Sale proceeds 1,000 x 15 15,000Less: Selling expense (800)NRV 14,200Write down 3,800

For the second item NRV is higher, hence no adjustment is required. Total inventory = $386,400 – $3,800 = $382,600


According to IAS 2 Inventories, while valuing the inventories of finished goods held, a manufacturing company has to consider all the costs incurred to bring the inventory to its present location and condition. Therefore the cost of carriage inwards, the depreciation of factory plant and the wages paid to employees for production work are all included. Commission to salesman does not satisfy this requirement.


The rectification of the entries requires the following effects:

The first error Dr Discount allowed $3,840 Dr Discount received $3,840

The second error Cr Discount allowed $2,960 Cr Discount received $2,960

Both the accounts have to be given a net debit effect of $880 ($3,840 – $2,960). The combined second effect is credited to the suspense account (i.e. $880 x 2 = $1,760). Hence option B is correct.



Receivables control account Dr Cr

$ $

Balance b/d 5,000 Contra adjustment in payable and receivable ledger 500

Sales omitted to be recorded 1,000 Balance c/d 5,500 6,000 6,000

* No entry is required for option 3 in the receivables control account. 153. The correct option is B.

Cash book entry � Bank charges have to be recorded in the cash book. � A cheque is drawn before 30 November 20X8, but is dishonoured by the bank. The balance needs to be

adjusted in the cash book.

Bank reconciliation Items which are expected to be reflected in the bank’s records in due course appear in the bank reconciliation. The company does not have to change its cash book for these differences. This is true of the following items from the question: � cheques sent to suppliers before 30 November 20X8 � an error made by the bank in crediting another customer’s account � cheques paid before 30 November 20X8, but not credited by the bank


(i) Capitalised development expenditure must be amortised over its useful life. (ii) Development expenditure can be capitalised only when the criteria specified in IAS 38 are complied

with. (iii) Capitalised development costs are shown in the SOFP under the heading “Non-current assets” (iv) Amortisation is usually recognised in profit or loss.


(i) Depreciation is not a cash expense, hence not recorded in the cash book. (ii) Depreciation is recorded in the journal. (iii) Bad debts are recorded in the receivables ledger control account. (iv) Allowance for doubtful debt is recorded in the journal.


Petty cash Account Dr Cr $ $ Balance b/d 100.00 Stamps 16.35 Coffee and tea 18.23Cash – (ii) 12.00 Birth day cards for staff 20.20 Balance c/d 57.22 112.00 64.15


According to IAS38 para 97 amortisation should begin when the intangible asset is available for use. 158. The correct option is D.

A provision is a liability. However, either the amount or the timing of payment is uncertain.



Opening inventory is a part of the cost of goods sold (COGS) hence the COGS will be understated. If COGS is understated, the net profit will be overstated.


$ Purchase price 120,000Add: Cost of clearing site 7,500Total 127,500


The bankruptcy of a major customer after the end of the reporting period is an example of an adjusting event. Adjusting events are those events which occur after the end of the reporting period but provide evidence of conditions that actually existed at the end of the reporting period. Furthermore as the word suggests, adjusting events require adjustments to financial statements.


Any expenditure incurred during the research phase should be recognised as an expense and not as an asset. The reason is that the company cannot demonstrate the existence of the asset and determine whether future economic benefits will flow from the asset. That is why options A and C are incorrect.

Development expenditure qualifies to be classified as an intangible asset if and only if the company can demonstrate technical feasibility of completing the development of the asset, ability to sell or use the asset and availability of adequate technical, financial and other resources. That is why option B is correct and option D is incorrect.


Non-current assets can be tangible or non-tangible. Their value never remains constant as depreciation is charged at the end of each accounting period. The expected life of a tangible non current asset exceeds one accounting period. Therefore statements (i), (ii) and (iv) are not correct.


Sama Plc has sold cameras, i.e. it is a past event. It is legally obligated to settle warranty claims. This will lead to an outflow of economic resources. Reliable measurement of the obligation is 4% of sales.

Thus Sama Plc has to make a provision for warranty claims instead of declaring it as contingent liability.


The following table provides details of costs which can be capitalised in accordance with the provisions of IAS 16 Property, Plant and Equipment.

Details Land Building Reason

Cost of land $750,000 Purchase price Construction costs $1,750,000 Cost directly attributable

Legal fees for land purchase contract $5,000 Cost directly attributable

Architect's fees $57,000 Cost directly attributable: professional fees

Wages paid to workmen involved in construction $60,000 Cost directly attributable: wages

Total value to be capitalised $755,000 $1,867,000 Expenses for showroom inauguration Not permitted according to IAS 16



IAS 37 specifically states that contingent liabilities can be recognised only when there is a probability of outflow of resources due to existence of future obligations and the amount of liability can be reasonably estimated.


Reinstating previously written-off debts requires a reversal of the entry which was made at the time of the write off.


$1 x 100,000 + 8% x $500,000 = $140,000


Gross profit ratio = 100 revenue Sales

profit Gross × = 40%

Gross profit = Sales revenue x Gross profit ratio

= $80,000 x 40%

= $32,000

Cost of sales = Revenue – Gross profit

= $80,000 – $32,000 = $48,000

Cost of sales = Opening inventory + Purchases – Closing inventory Therefore closing inventory = Opening inventory + Purchases – Cost of sales

= $20,000 + $45,000 – $48,000

= $17,000


Insurance paid in advance is a current asset, hence should not be debited to SOCI and rent received in advance is a current liability, hence should not be credited to SOCI.

$

Profit of Beta 52,100 Add: Insurance paid in advance debited to SOCI 2,100 Less: Rent received in advance credited to SOCI (5,010) Actual profit for the year ended 31 March 2007 49,190


When preparing the bank reconciliation, unpresented cheques must be deducted from the balance of cash at bank shown in the bank statement. Unpresented cheques do not decrease the bank balance.

A cheque from a customer paid into the bank, but dishonoured, must be corrected by making a credit entry in the cash book.

An error by the bank can be corrected by preparing a bank reconciliation statement.

An overdraft is a debit balance in the bank statement


When Gwen mailed the cheque to Kyra, the accounting entry would already have been made in Gwen’s accounts. However, until Kyra deposited the cheque in the bank, this amount would not be debited in Gwen’s bank statements. This would remain as an unpresented cheque for Gwen.


A trial balance lists all the ledger account balances. Under the double entry book-keeping system, when one ledger account is debited, another is credited by the same amount. Hence total debits equal total credits.

� Assets = Liabilities + Capital: it is an accounting equation � Income – Expenditure = Profit: it is the formula to calculate profit


Bank charges are the amount deducted by the bank. It is an expense, and should be credited in the cash book.

Interest received from the bank and direct receipt from a customer, are incomes, hence they should get debited to the cash book. Contra entry must get recorded to both the debit and credit side of the cash book.


The cost of any non-current asset is shown in the trial balance as debit balance. To derive the net book value of the non-current asset, we deduct the total depreciation charged till date from this cost, and show the net figure in the statement of financial position. Hence, the total depreciation will have a credit balance which will be shown on the credit side of the trial balance.

SE

CT

ION

E

SOLUTION BANK

E PREPARING A TRIAL BALANCE


176. The correct option is C. � Standing order means the amount payable to the bank which the bank has already paid on the entity’s

behalf. It is an expense. Here, telephone bill of $500 should be recorded on the credit side of the cash book

� Cheques issued but not presented, and cheques deposited, but not credited are timing differences. � A deposited cheque incorrectly credited twice by the bank is an error by the bank.

Hence, all these will be included in the bank reconciliation statement.

177. The correct option is B. Dr Drawings account $1,500 Cr Purchases account $1,500 Being goods used for personal purposes

The goods should be recorded at cost, not at the selling price. 178. The correct option is C.

Shares issued at premium is entirely credited to the share capital account

Error of principle

Does not affect trial balance

No need of suspense account

Plant repairs debited to plant’s account Error of principle

Does not affect trial balance

No need of suspense account

Petty cash book balance is omitted from trial balance

Error of omission

Affects trial balance

Requires suspense account

Amount paid is debited by the wrong amount

Transposition error

Affects trial balance

Requires suspense account


Option (i) - Bank charges should be recorded in the cash book. Option (ii) – Unpresented cheque would appear in the bank reconciliation. Option (iii) - Credit card bill paid but bank debited should rectify the error in the bank statement. Option (iv) - Issued cheque dishonoured should be recorded in the cash book.


Profit will be understated, as a capital expenditure of $9,000 has been taken as revenue expenditure. Non-current assets will be understated, as a capital expenditure of $9,000 which should have been recorded as non-current assets, has been recorded as an expense in the accounts.


Dr Suspense account $1,000 Cr Discount allowed $500 Cr Discount received $500

Being discount received and discount allowed adjusted

Correct entry Wrong entry Rectification entry Dr Discount allowed $4,500 Cr TR account $4,500

No Debit Cr Discount received $4,500 Cr TR account $4,500

Dr Discount allowed $4,500 Dr Discount received $4,500 Cr Suspense account $9,000Being rectification entry passed

Dr Supplier account $5,000 Cr Discount received

$5,000

Dr Supplier account $5,000 Dr Discount allowed $5,000 No Credit

Dr Suspense account $ 10,000 Cr Discount received $5,000 Cr Discount allowed $5,000 Being rectification entry passed

Dr Suspense account $1,000 Cr Discount allowed $500 Cr Discount received $500



In the books of Galaxy Planet’s account

Dr CrDate $ Date $ Balance b/f 45,000 Purchase invoice 4,000 Balance c/f 49,400 Discount disallowed 400 49,400 49,400

In the books of Planet

Galaxy’s account Dr Cr

Date $ Date $

Balance b/f 55,000 Sales return (i.e. purchase return for Galaxy) 2,700

Balance c/f 52,300 55,000 55,000

The discrepancy, after giving the effect of the above transaction is ($52,300 – $49,400) = $2,900.


$ Balance according to receivables control account 55,000 Less: Discount allowed 1,500 Add: Short payment recorded as full settlement (1,200) Adjusted balance in total receivables control account 54,700*

* The error in which Sam’s account was debited twice for an amount of $500 will not be rectified in the total receivables control account, but in Sam’s memorandum receivables account.


$ Cash received from trade receivables (W1) 414,417Salaries paid to office staff (40,725)Pension of factory workers (17,070)Payment to suppliers ( 271,152)Administrative expenses (4,920)Cash flow from operating activities 80,550

Working W1 Cash received from trade receivables

Trade Receivables account

Dr Cr $ $

Balance b/d 40,635 Cash received (balancing figure) 414,417Sales 421,977 Balance c/f 48,195 462,612 462,612




$ $ Balance b/d 21,200 Sales return account 10,800Sales 440,000 Cash received 440,800 Bad debts 5000 Balance c/d 4,600 461,200 461,200

Cash sales; allowance for doubtful debts and bad debts recovered will not be recorded in the receivables control account.


$ Profit for the year 60,000Less: Opening inventory undervalued (6,000)Less: Closing inventory overvalued (9,000)Net Profit to be reported 45,000


Dr Payables ledger control account Cr $ $ Cash paid to suppliers 1,364,300 Balance b/d 318,600 Purchase returns 41,200 Purchases 1,268,600 Contras against debit balances in receivables ledger 48,000 Refunds received from

suppliers 2,700

Discounts 8,200 Balance c/d 128,200 1,589,900 1,589,900


Items (ii), (vi), (vii) and (viii) should be recorded on the credit side of the receivables control account.

(i) Interest charged on overdue accounts: debit side of receivables account (ii) Cash received from credit customers: this will be recorded on the credit side of the receivables account (iii) Settlement discounts received: this item will be recorded in the payables account (iv) Increase in allowance for receivables: this item will be routed through allowance for receivables account

to the SOFP (v) Sales made on credit: will appear on the debit side of the receivables account (vi) Settlement discounts allowed: will appear on the credit side of the receivables account (vii) Contras against accounts payable: will appear on the credit side of the receivables account (viii) Irrecoverable debts written off: will appear on the credit side of the receivables account


189. The correct answer is $776,000

Journal entries to rectify the errors

(i) Dr Sales $70,000 Cr Share capital $50,000 Cr Share premium $20,000(ii) Dr Suspense $16,000 Cr Interest payable $8,000 Cr Interest receivable $8,000

OR

Calculation of revised profit

$ Profit according to draft accounts 830,000Adjustments Add: Omission of interest received 8,000 Add: Interest payable wrongly debited 8,000 16,000 846,000Less: Sales (70,000)Revised profit 776,000


Here, � purchase return of $48,000 has been deducted from sales and sales return of $64,000 has been

deducted from purchases � payment of rent has been wrongly recorded by the excess amount of $36,000

Journal entries to rectify the errors

Dr Cr $ $

(i) Suspense 96,000 Sales 48,000 Purchases 48,000

(ii) Purchases 64,000 Sales 64,000

Suspense 128000OR combined entry of (i) and (ii) Sales 16,000 Purchases 16,000

Suspense 32,000(iii) Suspense 36,000

Rent 36,000

Calculation of revised profit

$ Profit according to draft accounts 755,000Adjustments (i) Sales/Purchases (net) (32,000)(ii) Rent 36,000 759,000



$ Balance per Erigo’s ledger 3,036Add: Invoice not yet recorded in the ledger 1,040Amount owed by Erigo to Fargo 4,076Less: Cheque paid to Erigo not yet recorded by Fargo (500)Balance shown on statement from Fargo 3,576


(i) This is an error of transposition, which needs creation of suspense account. (ii) This is an error of omission, which does not require creation of suspense account. (iii) This is an error of posting, which needs creation of suspense account. (iv) This is a casting error, which needs creation of suspense account.

Journal entries Dr Cr $ $

(i) Plant and machinery account 43,200 Suspense account 43,200 Being rectifying entry passed for purchase of machinery

which was earlier recorded as $4,800 ($48,000 – $4,800) Depreciation 4,320 Accumulated depreciation account 4,320 Being depreciation charged

(ii) Bank charges 440 Bank account 440 Being bank charges paid

(iii) Suspense account 800 Director’s personal loan account 800 Being second effect given for the payment made to supplier

(iv) Suspense account 10,000 Cash account 10,000 Being adjustment of total of payment side of cash book


$ Profit for the year 20X8 630,000 Less: Depreciation (4,320) Less: Bank charges (440) Profit after corrections 625,240

Errors (iii) and (iv) will not affect the amount of profit as it relates to SOFP.

194. The correct answer is Credit Abel and Debit Barney.

Credit Abel – As this customer has paid and Laura has not recorded the same. Debit Barney – As the payment from this customer was returned, so debit the account to increase the balance by the amount of the cheque returned.


Rectified bank reconciliation statement $

Balance according to bank statement 38,640Less: Lodgements not credited (19,270)Add: Cheques not presented 14,260Balance according to cash book 33,630


196. The correct option is A. Under the straight line basis, depreciation charged = $2,500 ($25,000/10 years)

Wrong entry is - Dr Plant and machine repairs account $2,500 Cr Plant and machine account $2,500 Correct entry is - Dr Depreciation account $2,500 Cr Plant and machine account $2,500 Rectification of error - Dr Depreciation account $2,500 Cr Plant and machine repairs account $2,500

SOCI (Before correction) SOCI (After correction) $ $ $ $ Income (imaginary) 15,000 Income (imaginary) 15,000Expenses: Expenses: Machine repairs 4,000 Machine repairs 1,500 Others 4,000 (8,000) Depreciation 2,500 Others 4,000 (8,000)Profit 7,000 Profit 7,000

Profit will not be affected, only the classification of expenses within the SOCI will change. This is an example of an error of principle. However, some errors of principle will affect the profits. For example, if the classification error has been made between accounts affecting the SOCI and the SOFP, it will affect the profits.

197. The correct option is B. Pre-paid rent has been recorded at amounts lower than the actual. Pre-paid rent is deducted from the expense rent. If a lower amount is deducted from the expense, the profit will be less than the actual. Hence, after rectification of $200, the profit will increase by $200. (As higher amounts will be deducted from expense) With imaginary figures

SOCI (Before correction) SOCI (After correction)

Sales 10,000 Sales 10,000Cost of sales 5,000 Cost of sales 5,000Gross profit 5,000 Gross profit 5,000Expenses Expenses Rent 2,170 Rent 2,170 Less: Pre-paid rent 970 1,200 Less: Pre-paid rent 1,170 1,000Other expenses 1,000 Other expenses 1,000 Profit 2,800 Profit 3,000

Net profit

Before correction After correction $2,800 $3,000 Increases by $200 198. The correct answer is $36,550.

Trade receivables account Dr Cr $ $ Balance b/d 44,560 Cash received 32,800 Sales in January 2009 28,900 Discounts 2,100 Bad debts 650 Sales returns 1,360 Balance c/d 36,550 73,460 73,460


199. The correct option is C. Dr Receivables control account Cr

Date $ Date $ 01/01/20X9 Balance b/d 284,680 Discounts allowed 3,660 Credit sales 189,120 Bad debts written off 1,800 Sales returns 4,920 Cash received 179,790 Contra against payable ledger 800 31/12/20X9 Balance c/d 282,830 473,800 473,800


$ In the books of Epsilon Balance according to ledger account 8,280 Add: Disallowed cash discount 80 Corrected balance 8,360 In the books of Sigma Balance according to statement of account 17,900 Less: Unrecorded cash receipts (8,160)Less: Unrecorded sales returns (760)Corrected balance 8,980

There still remains an unsorted difference= $620 ($8,360 - $8,980)

201. The correct option is B. Dr Receivables control account as at 31 December 20X8 Cr

$ $ Credit sales (80,000 x 75%) 60,000 Cash collected from customer 31,350 Discount (2% sales) (60,000 x 2% = 1,200) 1,200 Returns inward 5,280 Contra against credit receivable 9,640 Bad debts 5,700 Balance c/d 6,830Total 60,000 Total 60,000

Dr Payable ledger control account as at 31st December 20X8 Cr $ $

Cash paid to supplier 43,520 Balance b/d 22,700Discount (3% of credit purchases) 683 Credit purchases (35,000 x 65%) 22,750Contra against credit receivable 9,640 Interest on overdue balance 9,960Balance c/d 1,567 Total 55,410 Total 55,410

Notes (i) The receivable ledger account should only include credit sales and not cash sales. (ii) The provision for doubtful debts is not recorded in the receivables account. (iii) Discount on sales will depend on credit sales. (iv) Return inward is an item on the receivables account, and not on the payables account. (v) The payables ledger account should only include credit purchases. (vi) Discount on purchase will depend on credit purchases. (vii) Contra between the ledgers will be debited to the payables ledger account and credited to the

receivables ledger account.

Dr Payables control ledger a/c $9,640 Cr Receivables control ledger a/c $9,640

The contra entries mean that the same account appears in the receivables ledger and the payables ledger. E.g. goods sold to Peter, and raw materials purchased from Peter. Here, Peter’s account will appear in both the receivables ledger and the payables ledger.

(viii) Bad debts are recorded in the receivables ledger. (ix) Provision for bad debts is not recorded in the receivables ledger accounts, but it is deducted from the

total receivables account under the heading of current assets in the SOFP.


\


(i) Bank charges need to be entered in the cash book as there is an entry on the bank statement but not in the cash book.

(ii) The bank must correct its own errors. It does not require correction in the cash book. (iii) Lodgements are timing differences. No entry in the cash book is required. (iv) Outstanding cheques are timing differences. No entry in the cash book is required. (v) Direct debits need to be entered in the cash book. (vi) Dishonoured cheques need to be entered in the cash book.

203. The correct options are C. 204. The correct option is B.

(i) Outstanding cheques are timing differences and will appear on the bank reconciliation statement. (ii) Errors made by the bank need no effect in the cash book. The item will remain on the bank

reconciliation until it is corrected by the bank. (iii) Bank charges are valid charges that need to be recorded on the credit side of the cash book. (iv) Uncleared lodgements are timing differences and will appear on the bank reconciliation. (v) Dishonoured cheques need to be reflected on the credit side of the cash book.

205. The correct options are A. 206. The correct option is A.

There is a shortfall of $7,182 on the credit side or, in other words, the suspense account has a credit balance of $7,182.

Trial balance after correction Dr ($) Cr ($)

Others 815,602 808,420Insurance expenses 7,182Discount allowed 3,591Discount received 3,591Sales 7,182Cash 7,182Return outwards ($3,591 x 2) 7,182Suspense a/c 7,182Total 833,557 833,557

Option 1 - Omission of insurance expenses $7,182 (a debit balance) in the trial balance. A correction of this error does not balance the trial balance.

Option 2 - The incorrect posting is: Dr Discount received a/c $3,591 Cr Payable a/c $3,591

The correct entry should be:

Dr Discount allowed a/c $3,591 Cr Payable a/c $3,591

Entry for correction of the error: Dr Discount allowed a/c $3,591 Cr Discount received a/c $3,591

This error does not affect the agreement of a trial balance.

Option 3 - This error (error of omission) does not affect the agreement of a trial balance. Dr Cash account $7,182 Cr Sales $7,182

Option 4 - Returns outwards (purchase return) have a credit balance. After correction of the error, the trial balance balances (Debit = Credit). Entry for correction:

Dr Suspense account $7,182 Cr Return outwards account $7,182



Alpha has sent a cheque to Beta for $500 which has not been received by Beta. It should be entered into the books of Beta.

The credit side of Beta’s account in Alpha’s records has been undercast by $500. By rectifying this error, the closing balance of Beta will increase by $500 and will be $6,200. An invoice for $250 from Beta has been treated in Alpha’s records as if it had been a credit. No rectification required. Beta has issued a credit note for $500 to Alpha, which Alpha has not yet received. By rectifying this error, the closing balance of Beta will be reduced by $500 and will be $5,200.


$ Bank overdraft per bank statement 38,600Less: Bank charges (200)Less: Lodgements recorded (14,700)Add: Cheque payments not presented 27,800 51,500Less: Cheque payment recorded as a receipt (4,200 x 2) 8,400Cash book balance (overdrawn) 43,100


Receivables ledger control account Dr Cr

$ $ Balance b/d 614,000 Cash 311,000Sales 301,000 Discounts 3,400Interest on overdue accounts 1,600 Contras 8,650 Bad debts 32,000 Balance c/d 561,550 916,600 916,600


This is an error of principle, as the correct amount has been posted in the wrong account. When the motor car was treated as an expense, instead of an asset, the profit was understated by $20,000. However, as a result of not charging depreciation, the profit was overstated by $1,600 (see workings). The net effect of the two is that profit was understated by $18,400 (20,000 – 1,600).

$

Cost of motor vehicle 20,000Less: Residual value 4,000 16,000 Depreciation (16,000 x 20% x 6/12) 1,600

211. The correct answer is bank balance of $6,260.

$ Bank overdraft according to bank statement 13,620Add: Cheque issued but not presented 8,360 21,980Less: Cheques deposited but not credited (28,240)Bank balance according to cash book (6,260)

Debit balance in the cash book



Remember the proforma and place the figures, the balancing figure will be the amount of unpresented cheques.

$ Bank balance according to cash book 5,000Add: Cheque issued but not presented 710Less: Cheques deposited but not credited (2,682)Balance according to bank statement 3,028

Alternate method, if we start from the balance per bank statement:

$ Bank balance according to bank statement 3,028Add: Cheques deposited but not credited 2,682 5,710Less: Cheque issued but not presented (710)Balance according to bank statement 5,000

213. The correct option is D. 214. The correct option is C.

Correct entry Wrong entry Rectification entry Dr Receivables $1,542 Cr Sales $1,542

Dr Sales $1,254 Cr Receivables $1,254

Dr Receivables $2,796 Cr Sales $2,796 Being rectification of the incorrect entry

Profit will be understated by $2,796 as sales of $1,254 have been incorrectly debited by a wrong amount of $1,542.

215. The correct answer is $1,200 bank balance.

Bank reconciliation statement for Nov 20X9 $ Balance shown per bank statement 2,200Less: Direct debit recorded twice (600) Uncleared cheques (800) 800Add: Unpresented cheques 400Balance as per cash book 1,200

216. The correct answer is NIL.

Balance of suspense account is NIL.

Dr Suspense account $1,200 Cr Purchase return account $1,200 Being purchase return book undercast Dr Discount allowed account $500 Cr Suspense account $500 Being the total of the discount column on the payment side, not posted. Dr Cash account $700 Cr Suspense account $700 Being cash sales not recorded in the cash book.

Transaction (ii) will not have any effect on the suspense account. However a rectification entry will be passed for that transaction as follows:

Dr Asset account $4,000 Cr Repairs account $4,000

Being purchase of an asset that was incorrectly debited to the repairs account

Balancing figure

Balancing figure

Debit balance in the cash book



Commission received of $1,000 was entered on the debit side of both the commission received account and the cash account.

(a) Will not affect the agreement of the trial balance. (b) Will not affect the agreement of the trial balance. (c) Trial balance will disagree by $2,000, as the debit side will be $2,000 more than the credit side.

Correct entry Wrong entry Rectification entry

Dr Cash account $1,000 Cr Commission received $1,000

Dr Cash account $1,000 Dr Commission received $1000 No credit recorded

Dr Suspense account $ 2,000 Cr Commission received $2,000Being rectification entry passed

(d) Trial balance will disagree by $4,000, as the debit is more than credit by $4,000.


Dr Payables $2,000 Cr Discount received $2,000

Dr Payables $2,000 Dr Discount received $2,000 No credit recorded

Dr Suspense account $4,000 Cr Discount received $4,000 Being rectification entry passed


Increase in profits by $8,000 ($10,000 - $2,000)

(i) Rectification entry to be passed is: Dr Machinery $10,000

Cr Repairs $10,000 (ii) Dr Depreciation $2,000 Cr Machinery account $2,000


Payables ledger account Dr Cr

Date $ Date $ Return outwards 6,000 01/01/20X9 Opening balance 50,000

Contra against receivables 10,000 Credit purchases 40,000

Cash paid to suppliers 40,000

Discounts received 10,000 31/01/20X9 Closing balance 24,000 90,000 90,000


$ Net profit for the year 83,600Add: Purchase of motor van wrongly charged to motor expenses 18,000 101,600Less: Depreciation @ 25% on car (4,500) 97,100Less: Sale of plant wrongly recorded as sales of goods (500) 96,600Add: Reduced depreciation on sold plant (500 x 10% x 6/12) 25 96,625

Net effect on the SOCI is $8,000. ($10,000 Credit - $2,000 Debit = $8,000 Credit))

Depreciation on plant sold, for the period from July 20X9 to December 20X9 should be added back. This is because after the rectification of error, the amount of plant will be reduced by $500 and amount of depreciation on plant will be reduced proportionally by $25



Dr Receivables ledger control account Cr $ $

Balance b/d 284,680 Cash received 179,790Credit sales 189,120 Contras against amounts owing by company in payables ledger 800 Discounts allowed 3,660 Bad debts written off 1,800 Sales returns 4,920 Balance c/d (balancing figure) 282,830 473,800 473,800

Difference between closing and opening balance = $284,680 - $282,830 = $1,850


The goods were sold on a sale or return basis, and by the year end the confirmation of goods sold has not been received. Therefore $2,500 has to be deducted from sales and receivables, and $1,500 has to be added to the closing inventory, as the goods have not yet been sold.


Furnace Oil account Dr Cr

$ $ 01/04/20X7 Balance b/d 8,200 01/04/20X7 Unpaid furnace oil bill 3,600

31/03/20X8 Outstanding furnace oil bill 3,200 31/03/20X8 SOCI -balancing figure 33,100

31/03/20X8 Furnace oil expenses 34,600 31/03/20X8 Balance c/f 9,300

46000 46000


The ledger postings which were previously incorrect have been corrected in the following account. Discount allowed, cash received from customers, bad debts written off and returns from customers wrongly debited earlier, have now been credited.

Receivables ledger control account

Dr Cr $ $

Opening receivables 148,200 Cash received from customers 819,300Sales (balancing figure) 880,600 Discount allowed 16,200 Irrecoverable debts written off 1,500 Returns from customers 38,700 Closing receivables 153,100 1,028,800 1,028,800


Account X Account Y

$ $ Overdraft per cashbook (500) Bank balance per cashbook 1,000Add: Issued cheque, wrongly credited 600 Less: Issued cheques, not recorded (6,000)Add: Bank charges 100 Less: Bank charges (100)Bank balance per cashbook 200 Bank overdraft per cashbook (5,100)

(i) is an error by bank, which should not be rectified in the cashbook (ii) is an error made by the accountant which needs rectification (iii) is an expense, should be entered into the cashbook (iv) in spite of being an error, will not affect cash balance of the month April 20X9.


226. The correct answer is $129,200. Dr Receivables Ledger Control Account Cr

Date $ Date $ Opening balance 180,000 Cash from credit customers 228,000 Credit sales 190,000 Sales returns 8,000 Cash refunds to

credit customers 3,300 Discount allowed 4,200

Bad debts written off 1,500 Contras against payables 2,400 Closing balance (balancing figure) 129,200

Total 373,300 Total 373,300


Journal entry (ii) is correct. The discount allowed was incorrectly credited to the discounts received account which caused an increase in the income. If the transaction had been recorded correctly, there would have been an increase in the expenses. Therefore, to nullify the increase in income, and to record the increase in expenses, the suspense account is credited.

Journal entry (iv) is correct. Originally, for the transaction involving purchase of machinery, only one effect was given to the cash account. Therefore the second effect is given to the plant and machinery account.


(i) Purchase account incorrectly recorded in trial balance. Debit � Credit (ii) Wages paid should have been debited to the wages account; hence two credit entries have been

posted. Debit � Credit (iii) The credit entry to the sales account is correct, but the debit amount is incorrect. Debit � Credit (iv) Salary paid to Sam should have been debited to salary account. Here instead of salary, Sam account is

debited and cash account is credited. However, Debit = Credit (v) A sale of land recorded as sale of goods. Debit � Credit


Under the control account system, if any error is made in the memorandum books of accounts, no accounting entry is required. To correct these errors, the memorandum accounts are amended. The discrepancy will be identified when reconciling the balances on the customer ledger account to the receivable ledger control account.


Tony sold a non-current asset. The cash received was correctly recorded in the bank’s account, but was credited to the sales account instead of the non-current assets account. This is an error of principle (posting wrong class of account) which would not affect the trial balance as debit = credit. Therefore, the suspense accounts will not be affected by this.


An SOCI with imaginary figures except for sales of $1,600 and profit on sale of non-current assets of $100 (bold figures below) will help in understanding this:

SOCI (Wrong) $ SOCI (Correct) $ Sale (included sale of non-current assets) 11,000 Sale (actual sale 11,000 - 1,600) 9,400Cost of sales (5,000) Cost of sales (5,000)Gross profit 6,000 Gross profit 4,400Expenses (2,000) Profit on sale of non-current assets 100Net profit 4,000 4,500

Expenses (2,000) Net profit 2,500

This means that before correcting the error, the net profit had been overstated by $1,500 ($4,000 - $2,500) Alternate method: One could also calculate the answer as follows:

Effect on profit $ Less: Reduction in sale 1,600Add: Profit on sales of assets 100Overstatement of profit 1,500



(i) This is an error where the wrong amount ($330,000 instead of $333,000) is credited. This will affect the trial balance (Debit � Credit).

(ii) This is an error where the posting is made on the wrong side of the wrong account (wrongly crediting the Plant assets account instead of debiting the Plant repairs account). This will affect the trial balance

(Debit � Credit). (iii) This is an error where the transactions have been recorded, but the closing balance has not been

included in the trial balance. This will affect the trial balance (Debit � Credit). (iv) This is an error where the wrong amount has been debited ($87,400 instead of $78,400). It will affect

the trial balance (Debit � Credit). 233. The correct option is B.

The suspense account will have a balance of $387,642 – $379,511 = $8,131 credit.

� Petty cash has a debit balance. After recording the petty cash balance, the differences between both sides of the trial balance will decrease.

� The incorrect posting is:

Dr Cash account $4,000 Dr Rent account $4,000

The correct entry should be: Dr Cash account $4,000

Cr Rent account $4,000 Entry to rectify the error: Dr Suspense account $8,000

Cr Rent account $8,000 After correction, the difference between debit and credit will increase.

� Unrecorded cash sales is an error of omission, and will not affect the trial balance (Debit = Credit).

� This is an error of principle, (wrong class of account has been correctly debited) it will not affect the trail

balance (Debit = Credit) as, during the double entry of this transaction, Debit = Credit.


The total difference between debit and credit is $14,550. The suspense account will have a debit balance since debit was short in the trial balance. To clear the balance in the suspense account, the errors located should cause a debit entry (and credit to the suspense account).

In answer A, the debit side is undercast by $10,000 and the rent amount is incorrectly entered in the rent account as $1,610 instead of $6,160. The cash balance is to be increased by $10,000 and the rent account balance is to be increased by $4,550. Both these are debit effects which will clear the suspense account balance.


$ Balance according to bank statement 12,500Add: Cheques deposited but not credited 1,900Less: Cheques issued but not presented (1,750)Balance according to cash book 12,650



Only in case (i) would the debit and credit of the trial balance not tally. In case (ii) it is an error of omission. Forgetting to record a transaction won’t cause the trial balance not to balance, as both the debit and credit would be reduced by equal amounts. In case (iii) it is an error of principle. The expense of the motor vehicle is debited to the motor expense account, which should have been correctly debited to the motor account. Here the entry is posted incorrectly but the trial balance balances. In case (iv) it is once again an error of principle, because it is a violation of the fundamental principles of accountancy. In this case the debit and credit are wrong but by the same amount, and hence the trial balance balances.


A suspense account should not be opened for each error in the ledgers. It is required for those errors that make debit � credit in a double entry. All the errors can be posted to the same suspense account while they are investigated. In some instances a suspense account may be used to complete posting an item that we require more information on, to post to the correct account. E.g. unknown receipt of $100 can be recorded as:

Dr Cash $100 Cr Suspense $100

However, it is important that this item is investigated in a timely manner so that it is cleared out of the suspense account.


When the closing inventory is understated, it directly lowers the gross profit. It will be lower than expected, particularly when purchases include purchases not only for the current period, but also for the following period. In such cases, the gross profit recorded will be lower than expected.


Options (ii) not affect the trial balance. Instead of credit sale the transaction is treated as cash sale. Option (iv) does not affect the total of debits and credits.


The errors leading to the creation of the suspense account are those that create an imbalance between debit and credit amounts e.g. posting transactions on the wrong side of the correct ledger account. In error (ii), cash received from the sale of a non-current asset is debited to the disposal account instead of being credited to the asset disposal account. Error (iii) i.e. omission of the rent account from the trial balance causes the debit side to be lower. In error (i), the debit effect was given to the wrong account, and in error (iv) the debit and credit were equally wrong. These errors do not create an imbalance between the debit and credit and hence do not affect the suspense account.


In a bank reconciliation statement, lodgements which are recorded before the date in the cash book but credited by the bank after this date will reduce the overdraft balance in the bank statement as they have not yet been deducted by the bank. If a cheque received from a customer is dishonoured after the cash book date, a credit entry to reverse the amount has to be made, in order to reverse the receipt (debit) entry related to the deposit.


242. The correct option is B. The drawings account has a debit balance. Therefore, for an increase in drawings it will be debited. The purchases account has a debit balance. In this transaction the purchases have decreased, therefore the purchases account is credited. It should be recorded at cost only.


Willy owes $250,000 to his suppliers. 244. The correct option is D.

This is a credit control function and the control account does not help with the authorisation of setting of credit limits for suppliers.


The opening balance of inventory will appear on the debit side. Closing inventory will appear on the credit side of the SOCI. Therefore option (ii) is correct.


Suspense Account Dr Cr $ $ Balance b/d 1,518 Receivables – (iii) 262Cash – (ii) 3,024 Balance c/d 1,244 3,024 3,024


Suspense account Dr Cr

$ $ Cash 1,512 Balance b/f 759 Receivables 131 Balance c/d 622 1,512 1,512

Remember, not posting the sales invoice will not result in disagreement of the trial balance totals.



249. The correct option is D. According to IAS 10, Events after the Reporting Period Para 9, (i), (ii) and (iii) are the only adjusting events.

250. The correct option is A. Proposed dividend is not a part of SOCF.

251. The correct answer is A.

A revaluation of a non-current asset is done in order to show non-current assets at its fair value. It does not result in increase or decrease in cash balance, since the revaluation increase is not realised in cash. As a result, cash flows are not affected. On the other hand, a disposal of a non-current asset would result in cash flows from investing activities and would not affect cash flows from operating activities in any way.


Share premium is shown in the SOFP under reserves.


Depreciation is non-cash expenditure and hence added back to profits in the indirect method.

254. The correct answer is $ 59,850. Items having credit balances are added together

$ Collections for the year 186,900Add: Increase in trade receivables 47,250Add: Discounts for the year 5,250Sales for the year 239,400Gross profit margin (25% on sales i.e. 25% x 239,400) $59,850


Authorised share capital will appear in the statement of financial position. Finance costs, staff costs, depreciation and amortisation will appear in the SOCI.

Therefore option D is the correct option.

256. The correct option is C. Any investment with more than 3 month’s maturity is not a cash equivalent. Options A, B and D have more than 3 month’s maturity, i.e. they cannot be converted into cash before three months, so are not classified as cash equivalents. Commercial paper has a maturity of 30 – 90 days.

S

EC

TIO

N F

SOLUTION BANK

F PREPARING BASIC FINANCIAL STATEMENTS


257. The correct option is B. An operating activity is the principal revenue generating activity.

(i) Sale of cakes on credit: we do not consider credit sales in the SOCF, but consider the collection from

credit customers under operating activities. (ii) The sale of cakes for cash: it is cash flow from an operating activity. (iii) Collection from credit customers: it is cash flow from an operating activity. (iv) Sale of computers for cash: it is cash flow from an investing activity of Baker’s Corner. (v) Wages to workers: it is a cash flow from an operating activity.

258. The correct options are B, C, E and F.

Tax expenses; write down of assets, spare parts are part of SOCI. Dividends paid are deducted from retained earnings in Statement of equity. Dividends declared are not reflected in the financial statements but only disclosed in notes.


Transactions which lead to an actual movement of cash will appear in the SOCF. Proposed dividends and bonus issue of shares will not lead to an actual cash movement.


Transfer to various reserves from retained earnings should be shown in the statement of changes in equity.


If the opening inventory is overstated, the profit will be understated.


Equation: Capital = Assets – Liabilities

Capital = Vehicle + Office furniture – Bank overdraft

$15,000 = $16000 + Office furniture - $20,000 Value of Office furniture = $19,000


Interest charged on partners’ drawings should be added to net profit, and should be charged to the respective partner in the division (appropriation) of profit.


Adjusting events after the reporting period are events that necessitate adjustments to the figures in the financial statements. They provide evidence of the conditions that existed at the reporting period.


Loss on sale of investments is presented on the face of SOCI and dividend proposed after the year end is current liability.


The rest must be disclosed in the financial statements of a quoted company.


267. The correct answer is $186,000. Net Current assets = Current assets – Current liabilities Current Assets = Net Trade receivables + Cash + Prepayments = (380,000 – 22,000) + 35,000 + 26,000 = 419,000 Current liabilities = Trade payables + Bank overdraft + Accruals + Current loan liability = 125,000 + 35,000 + 18,000 + (110,000/2) = 233,000 Net current liabilities = 419,000 – 233,000 = 186,000 Loan to be repaid on 31/12/20X9, which means there are 2 more years to repay. Hence, the current liability of the loan for next 12 months is 110,000/2 = $55,000.



When the dividend was declared last year, it was recognised in the SOCI by the following entry: Dr Dividend (as appropriation in the SOCI or deduction in equity) Cr Dividend payable (disclosed in the current liabilities) In the current year, when the dividend is paid the accounting entry is: Dr Dividend payable Cr Cash No disclosure is required as the item no longer appears on the SOFP, as it is fully paid.


� A bonus issue does not bring in cash. � No item is to be disclosed as an extraordinary item according to the revised IAS 1.

271. The correct option is A. 272. The correct answer is $229,700.

Cost of goods sold = 100 Mark-up = 25 Sales = 125 Given that sales = 246,500 Cost of goods sold = 246,500 x 100/125 = $197,200. Formula for cost of goods sold = Opening inventory + Purchases – Closing inventory Cost of goods sold + Closing inventory – Opening inventory = Purchases 197,200 + 32,500 = 229,700.


Net cash flow from operating activities is $440,000.

$’000 Cash flow from operating activities Profit before taxation 640Add: Depreciation 40Add: Increase in trade payable 10 690Less: Investment income (200)Less: Increase in trade receivable (50)Net cash from operating activities 440



$ Balance according to payables ledger account 345,678Add: Undercasting of Sam’s ledger 1,111Less: Overcasting of Danny’s ledger (13,456)Balance according to payables control account 333,333


Profit = Closing net assets + Drawings + Interest on drawings - Capital introduced – Interest on capital – Opening net assets

= $80,000 + $15,000 + $3,000 – $20,000 – $4,000 - $40,000 = $34,000

276. The correct option is C. Statement (i) is incorrect.

The presentation of items of income and expense as extraordinary items is prohibited by the revised IAS 1.

Statement (ii) is incorrect.

Dividends should be included in the SOCE (statement of changes in equity). Statement (iii) is correct.

$

Profit before tax X Income tax expense (X) Profit for the year from continuing operations X Loss for the year from discontinued operations (X) Profit for the year X

This table is a part of the proforma of an SOCI, where profit or loss from discontinued operations during the year is shown separately. Statement (iv) is incorrect. The statement of changes in equity presents the movement in revaluation surplus / (loss) along with share capital, share premium and retained earnings. Therefore option C is the correct option.


Redeemed Interest expense

$ $ 1,000,000 8% loan notes issued at $1each on 30/06/20X8 250,000 8% loan notes redeemed at par on 30/09/20X8 (3 months i.e. 1 July to 30 September) 250,000 5,000750,000 8% loan notes interest payable (12 months) 60,000500,000 7% loan notes issued on 01/04/20X9 (3 months) 8,750Total 73,750

It’s only newly introduced capital, and not the opening capital.



$ Inventory at 31/09/20X9 (W2) 405,000 Remaining inventory (Undamaged goods) (220,000) Inventory lost on 31/09/20X9 185,000

Workings W1 Cost of goods sold

$ Sales for the month of September 20X9 650,000 Less: Gross profit margin @ 30% on 650,000 (195,000) 455,000

W2 Closing inventory at 31/09/20X9

$ Opening inventory at 01/09/20X9 380,000 Add: Purchases during September 20X9 480,000 860,000 Less: Closing inventory at 31/09/20X9 (balancing figure) (405,000)Cost of goods sold (W1) 455,000

279. The correct options are B and D.


Goodwill = Consideration – Value of net assets acquired Note: net assets (equity) can be calculated either as assets – liabilities, or as the total of all the items to form the equity. Here, the net assets are equal to the total of components of equity i.e. 200,000 + 150,000 + 100,000. However, Holston Plc acquired 75% of the equity. Therefore, we will consider 75% of this total. Therefore goodwill = ($500,000 – 75% of ($200,000 + $150,000 + $100,000)) = $500,000 – $337,500 = $162,500


Dividends are to be presented in the statement of changes in equity, and not in the SOCI. SOFP: since the first two items ($100,000 and $40,000) are not unpaid at the reporting date, they do not appear in the SOFP. The final dividend for the year ended 30 June 20X9 is declared after the reporting date. It does not meet the definition of a liability and therefore, it is not recognised.

282. The correct answer is current assets, $22,240.

Current asset

Current liability

$ $ Loan to employee 12,000Interest receivable on loan ($12,000 x 2%) 240Prepaid insurance premium ($9,000 x 8/12) 6,000Rent receivable 4,000 22,240


283. The correct answer is $28,000 drawings.

$ Assets

In normal circumstances, capital has a credit balance because generally assets are more than liabilities. However, in this instance, liabilities are more than assets; hence the capital has a debit balance. This must be a result of large retained losses in the past.

Plant, equipment 20,000 Cash at bank 10,000 Receivables 11,000 Total 41,000 Capital and Liabilities Bank overdraft 15,000 Term loan 35,000 Payables 19,000 Capital (Dr) (28,000) Total 41,000

This is an application of the accounting equation: Asset = Capital + Liabilities


Let us put the details in an SOFP as follows:

SOFP

$ $ Inventory 25,000Cash Total 25,000Equity Share capital 50,000Share premium 8,000Retained earnings 5,000 63,000Debentures 10,000Trade payables 6,000Accrued expenses 2,000 18,000Total 81,000

The SOFP equation is: Total liabilities + Capital = Total assets $63,000 + $18,000 = $81,000 Cash + Inventory = Total Assets Cash + $25,000 = $81,000 Cash = $56,000

285. The correct answer is $62,000. Step 1: Calculate credit purchases

Payable ledger control account

Dr Cr $ $

Purchase returns 5,000 Balance b/d 10,000

Cash paid to suppliers 50,000Purchases (balancing figure) 60,000

Balance c/d 15,000 70,000 70,000


Step 2: Calculate gross profit


$ Gross profit 60,000Dividend received 5,000 65,000Staff costs (20,000)Finance cost (5,000)Loss on sale of vehicle (2,500)Profit 37,500


The charge is calculated at $50,000 x 30% = 15,000. The timing of the payment is irrelevant to the decision of adding it to the SOCI.

$ $ Sales Cost of sales Gross profit Expenses Profit before tax 50,000Income tax Paid 5,000Provision 10,000 15,000Net profit 35,000

Total charge means the total amount recorded as expenses. In this case, total charge comprises tax paid during the year and provision for tax.

Provision of taxation $10,000 will be shown as liability in SOFP.

$ $ Sales 150,000Less: Cost of goods sold Opening inventory 20,000 Cash purchase 30,000 Credit purchases 60,000 Purchase returns (5,000) Net purchases 85,000 Purchase expenses 3,000 108,000 Less: Closing inventory (20,000) (88,000)Gross profit 62,000


288. The correct option is D. Method - 1

$ $ Sales 700,000 Cost of sales Opening inventory 60,000Purchases 430,000 490,000Closing inventory (89,000) 401,000Gross profit 299,000Expenses (200,000)Profit 99,000

Adjustments (a) Inventory should be valued at the lower of cost and net realisable value. Cost = $20,000 and NRV =

$19,000. Therefore we need to reduce the total inventory of $90,000 by $1,000. (b) It is a contingent liability because there is a possible obligation. A contingent liability requires

disclosure in the notes to accounts, but no recognition in the financial statements. (c) It is an event after the reporting period that requires no adjustments. (d) It is a contingent asset which need not be recognised in the financial statements.

Method - 2

$ Profit in given SOCI 100,000Reduction in closing inventory valuation (1,000) 99,000

289. The correct option is D. The cost of primary packing is not a selling expenditure; however, secondary packing is a selling expenditure.


Cash flow from operating activity $ Sale of goods on cash 30,000Collection from credit customers 108,000Cash purchases (80,000)Total 58,000

Receivables account

Dr Cr $ $ Balance b/d 50,000 Bad debts 2,000

Credit sales 120,000 Collection (balancing figure) 108,000

Balance c/d 60,000Total 170,000 Total 170,000



Rent shown in the trial balance will have a debit balance as it is an expense. Prepayments are subtracted from the expenses paid, in order to arrive at the actual expense amount for a specific year. Hence, prepaid rent is deducted from the rent expense, which, in other words, is known as reduction in the expenses of the current year. Prepayment will have an effect on both SOCI and SOFP. For example, Jennifer has debited $50,000 to the rent account which includes pre-paid rent of $5,000. The effect of this entry on the financial statements will be as follows:

SOCI with imaginary figures

Prior to adjustment

$ After adjustment

$ Sales 1,000,000 1,000,000 Cost of sales 800,000 800,000 Gross profit 200,000 200,000 Rent 50,000 45,000 Profit 150,000 155,000

The pre-payment will reduce the charge in the SOCI. As the other effect of the accounting entry will be to pre-payments in the SOFP, solution ‘D’ is incorrect.


Receivable account Dr Cr $ $ Balance b/d 130,000 Cash collected 686,400 Sales (bal. fig) 744,960 Discount allowed 1,400 Bad debts 4,160 Offset against payables 2,000 Balance c/d 181,000 Total 874,960 Total 874,960


Payables accountDr Cr

$ $ Balance b/d 60,000 Cash paid 302,800 Purchases (bal. fig) 331,760 Discount received 2,960 Offset against receivables 2,000 Balance c/d 84,000 Total 391,760 Total 391,760


294. The correct option is C. Receivables account

Dr Cr $ $

Balance b/d 60,000 Cash Collected 280,000Sales (bal. fig) 300,000 Balance c/d 80,000Total 360,000 Total 360,000

As the sales figure and the gross mark up is known, the cost of the sales figure can be calculated. These figures can then be used to calculate the drawings of purchases, which are the only unknown figure in the gross profit calculation.

$ $ $ Sales 300,000 150% Cost of sales Opening inventory 60,000 Add: Purchases 235,000 Less: Goods withdrawn (Bal. fig) (20,000) 275000 Less: Closing inventory (75,000) (200,000) 100% Gross profit 100,000 50%


$ Amount received during the year 501,200Prepaid at the close of previous year 38,800Outstanding of current year 38,100Outstanding at the close of previous year (11,200)Prepaid of current year (51,200)Income earned during the year 515,700


� The asset on which depreciation is charged was purchased in the past. Depreciation is disclosed as an expense in the SOCI, but it is not a cash expense during the period. It is a non-cash expense recorded by a journal entry, hence it is added back in order to find the cash inflow from operations during a period.

� If operating payables are increased, this indicates an additional inflow, as the company does not have to pay cash to its suppliers.


$ Net business assets at 30/07/20X9 274,000Less: Net business assets at 01/08/20X8 (186,000) 88,000Add: Cash drawings by proprietor 68,000Business cash used to buy a car for the proprietor's wife, who takes no part in the business (indirect drawings) 20,000 176,000Less: Additional capital introduced by proprietor (50,000) 126,000


$ Net assets at 31 December 20X9 400,000Less: Net assets at 1 January 20X9 (210,000)Capital introduced during 20X9 (100,000)Add: Drawings during 20X9 48,000 138,000



Transactions $ Sold goods for $1,500 which cost $1,000 Increase in current asset i.e. cash $1,500 and decrease in inventory $1,000 (↑ in net current assets ($1,500 – $1,000) therefore ↑ in working capital) 500 Customer paid the debt in full Increase in current asset i.e. Cash (↑ in current asset therefore ↑ in working capital) 500 Decrease in trade suppliers and decrease in cash Net, no change as both current liability and current asset has decreased ($1,000 – $1,000) Decrease in trade receivables and increase in bank Net, no change as current asset has both increased and decreased($2,000 – $2,000) - ↑ in working capital 1,000


Current asset

$

Current liabilities

$ Principal amount of loan 24,000 - Interest on loan from January to December 20X8 ($24,000 x 2%)

480

-

Insurance paid in advance for 8 months (January 20X9 to August 20X9) $18,000 x 8/12

12,000 -

Rent receivable from July to December 20X8 8,000 - Total 42,480 -

301. The correct option is C. In accordance with IAS 2, closing inventory should be valued at the lower of cost and Net realisable

value. Transactions after the year end indicate that this has not occurred. This is an adjusting event. Let us calculate the cost and net realisable value (NRV) of the items:

Product a

Cost b

Sales price c

Additional costs d

NRV e (c - d)

Valuation (lower of b and e)

$ $ $ $ $ 1. 400 items 1,600

($4 x 400)1,200

($3 x 400)200 1,000 1,000

2. 200 items 6,000($30 x 200)

7,000($35 x 200)

1,500 (1,200 + 300)

5,500 5,500

Total 6,500 Thus total inventory value = ($116,400 +$1,000 + $5,500) = $122,900.

Note: the full valuation of these items must be added to the total inventory valuation as the closing inventory of $116,400 excluded these items.

302. The correct option is C. (i) Bonus issues of shares do not affect the cash flow of the company. (ii) Rights issues of shares appear as a feature in the SOCF. (iii) A surplus on the revaluation of a non-current asset will appear as an item in the SOCIE. (iv) A profit on the sale of a non-current asset will appear as an item under cash flows from investing

activities in the SOCF.


303. The correct option is C. This is an indirect method of computing cash flows from operating activities. Criticism (i) has correctly stated that depreciation should have been added because it is a non-cash expense and there is no outflow of cash. In criticism (ii), an issue of debentures leads to an increase in current liability and will also increase the cash balance. Therefore it should have been added in the SOCF. In criticism (iii), repayment of loan means decrease in the liability. Hence the cash balance will also decrease. Therefore, it should have been deducted in the SOCF. In criticism (iv), the proceeds from the sale of non-current assets come under cash flows from investing activities. Criticisms (i), (ii) and (iii) are the only correct criticisms.


Proceeds from sale (including profit) will be treated as cash inflow under investing activities. Profit on sale will be deducted from (operating) profit, when calculating cash flow from operating activities.


Non-adjusting events are events that do not necessitate adjustments to the figures in the financial statements. They relate to conditions arising after the reporting period. Items (iii) and (iv) are non-adjusting events

306. The correct option is B. When cost of sale is 100, mark up (gross profit) is 20 and sales 120 (100+20)

For a sale of 120, gross profit is 20 Hence, for a sale of $120,120, profit is 120,120

x 20% = 20,020 120% Gross profit margin on sales = Gross profit/Sales x 100

= 20,020/120,120 x 100 =16.67%


The goods were included in inventory on 30 June 20X6, but the invoice was recorded in July 20X6, which was the next financial year. Therefore, there is an increase in inventory without a corresponding decrease in cash or increase in liability. Option (i) correctly states that the profit for the year ended 30 June 20X6 will be overstated.


A bonus issue is made by converting a part of the reserves into share capital. In a way, funds are transferred from one ‘pocket’ to another i.e. from reserves to share capital. The shareholders’ interest remains unchanged. Components of statement of changes in equity refer to the changes in shareholders’ funds. It may be the share capital itself or any of the reserves or retained earnings. Revised IAS 1 requires that financial statements should include in the notes a summary of significant accounting policies and other explanatory information.


(i) Proceeds from sale of premises will appear in the statement of cash flows from investing activities. (ii) Dividend received is an income from investing or operating activity. Therefore it will appear in the

statement of cash flows from investing or operating activities. (iii) A bonus issue of shares does not involve a cash transaction; therefore it will not appear in the

statement of cash flows. Therefore option D is the correct option.


310. The correct option is A. Adjusting events are defined as events that necessitate adjustments to the figures in the financial statements. They provide evidence of the conditions that existed at the end of the reporting period. An entity simply adjusts the amounts originally recognised in its financial statements in order to reflect the effect of adjusting events after the reporting period. All the events provide evidence of the conditions that existed at the end of the reporting period.

311. The correct option is D. Statement A is incorrect. An increase in the volume of sales will have no effect on the gross profit ratio. Statement B is incorrect. If a purchase in December 20X1 is incorrectly recorded in January 20X2, it will reduce the profit amount and the gross profit ratio. Statement C is incorrect. Overstatement of closing inventory on 31 December 20X1 will increase the profit for the year 2001, but the profit for the year ended 31 December 20X2 will be understated. Statement D is correct. The understatement of closing inventory on 31 December 20X1 will understate the profit for that year, but the profit for the following year, i.e. the year ended 31 December 20X2, will be overstated. This must have caused the increase in the gross profit percentage from 24% to 27%. Therefore option D is correct.

312. The correct option is A. Items (ii) and (iii) are non-adjusting events.


(i) Correct – categorisation on the face of the SOFP is dependent on when the liability is expected to

occur.

(ii) Correct – share capital should be included in the accounts at its par value. If shares are sold at a higher price then the share premium a/c is credited. If they are sold at a lower price a share discount a/c is created.

(iii) All reserves should be presented separately.

(iv) Inventories include raw material, work in progress and finished goods. The total of all of these should be presented on the face of the SOFP. There is no requirement for a separate disclosure.


All events are non-adjusting events as they do not provide evidence of conditions that existed on the SOFP date. They therefore do not need to be recorded in the financial statements. However, these events should be disclosed in the notes to the financial statements, as this knowledge will increase understanding for users of the accounts.



Statement (i) is incorrect.

IAS 7 Statement of Cash Flows, Para 18, states that an entity shall report cash flows from operating activities using either:

a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

Both methods produce the same figure. Statement (ii) is incorrect. The proceeds from a rights issue of shares will appear in the SOCF, under cash flow from financing activities. Statement (iii) is correct. An asset is revalued but not sold, hence there is no cash flowing in. Therefore the surplus on revaluation of a non-current asset will not appear as an item in the SOCF. Statement (iv) is incorrect. The proceeds from sale of a non-current asset will appear as an item under cash flows from investing activities in a statement of cash flows, and not just the profit.

Therefore option C is the correct option.

316. The correct option is A. The outflow is on account of purchase of machinery and the inflow is on account of proceeds received on issuing the share capital.


IAS 10 para 7 states that the cut-off date for incorporating adjusting and non-adjusting events is the date on which the financial statements are authorised for issue. In addition para 5 of IAS 10 confirms that it is not the date on which the shareholders approve the financial statements. Therefore 18 July 20X8 is the correct answer.


The reason for exclusion of short term deposits is that it normally has a fixed maturity date and cannot be withdrawn earlier than that date. In case of early withdrawal, a penalty is imposed. Therefore it falls outside the definition of cash but comes under the definition of cash equivalents.


$ Net income 75,000Add: Depreciation 24,000Loss on sale of land 32,000Decrease in inventory 8,000Increase in accounts payable 6,000Increase in tax payable 4,000Less: Increase in accounts receivables (16,000)Cash flow from the operating activities 133,000


The other statements are incorrect since: � Statement (iii) to investing activity. � Statement (iv) relates to an operating activity.


321.

(a)

(i) Account Debit Credit No Debit or Credit

$’000 $’000 Share premium 360 Bank No Debit or Credit Retained earnings No Debit or Credit Share capital 360 Shareholders No Debit or Credit

(ii)

Account $’000 Share premium 440Bank 94Retained earnings 115Share capital 2,160

(iii) Account Debit Credit No Debit or Credit

$’000 $’000 Share premium 180 Bank 540 Retained earnings No Debit or Credit Share capital 360 Shareholders No Debit or Credit

(iv)

Account $’000 Share premium 980Bank 446Retained earnings 115Share capital 2,160

(v) The correct option is B.

$810,000-$1,600 + ($1200-$60) = $809,540

(b)

(i) The correct option is A. Current ratio = current assets/ current liability = (32,000+124,000+809,540)/(190,000+94,000) = 3.40

(ii) The correct option is C.

Quick ratio = current assets- inventory/current liabilities,

= (32,000+124,000+809,540)-809,540/(190,000+94,000) = 0.55

(iii) The correct option is C.

The current and quick ratios state that the company`s funds are unnecessarily lying idle. These funds could have been invested or utilised in a manner that maximises the returns.


322. (a) (i) $252,000 and $1,773,000

Land Buildings Plant Total $’000 $’000 $’000 $’000

Cost 345 1,040 1,200 2,585 Less: Accumulated depreciation - (160) (400) (560)

345 880 800 2,025 Depreciation for the year Buildings ($1,040 x 5%) (52) Plant ($800 x 25%) (200) (252)Carrying value 345 828 600 1,773

(ii) Bad debts to be written-off = $250+$120+$184 (230- (230*20/100)) = $554 Provision for bad debts =($700,000-$554)*4% = $27,978 Balance for trade receivables to be shown in SOFP = $700,000-$554-$27,977.84= 671,468 (iii)

Particulars Asset Liability Equity Income Expense

$’000 $’000 $’000 $’000 $’000

Heating and Lighting 270

General Reserve 35

Bank balance 147

Directors Remuneration 60

Revenue 4237

Discount received 80

(b)

(i) Asset turnover ratio = p.a.) (times assets Totalrevenue Sales

= $3,500 =1.97 times $1,773

(ii) Receivable days = days 365 sales Credit

Recievable ×

= 700 x 365 = 79.8 days

3,200

(iii) Correct option is A.


323. (a)

(i) The correct option is B. (ii) The correct option is C. (iii) The correct option is A. (iv) $58,000, ($438,000-$38,000)*5% + $38,000 = $58,000 (v) The correct option is A. (vi) The correct option is B.

Depreciation = 1,155,000/21 = $55,000 Revaluation reserve= 1,155,000- (1,000,000 – (1,000,000*4%*4))= $315,000

(b) (i) 46.9% and 20.90%

Gross profit ratio: Gross profit\ Sales *100 = ( 5876-490-2230-(1200+797.85))\ 5876*100 = 46.9% Net profit ratio: Net profit\ Sales *100 = ( 2753.85-690-248-586 )\ 5876*100= 20.9 %

324.

(a)

(i) The correct option is B.

(ii)

Particulars Asset Liability Equity Income Expense $’000 $’000 $’000 $’000 $’000

Investment income 2,200 Investments 26,500 Distribution costs 11,0002% loan note 80,000 Revenue 180,400 Trade payables 34,700

(iii)

Account Debit Credit No debit/credit

$’000 $’000 Provision (for Legal claim) 2,000,000 Administrative expenses No debit/credit Bank No debit/credit Legal claim expenses 2,000,

000

(b)

(i) days 365 sales Credit

Recievabledays Receivable ×=

days 106.76120,000

36535,100=

×=

(ii) Gross profit ratio: Gross profit\ Sales *100 = ( 180,400- 89,200- 11,000)\ 180,400*100 = 44.46% Net profit ratio: Net profit\ Sales *100 = (80,200-12,500-800-16,000)\ 180,400*100= 28.22 %

(iii) Asset turnover ratio = p.a.) (times assets Total

revenue Sales

times 0.859=1$6,000)+($32,000$128,000+($130,000

$180,400=


325. (a) (i)

Account $’000 $’000 No debit or credit

Provision (for Legal claim) 3,000 Administrative expenses 3,000 Bank No debit or credit Suspense No debit or credit

(ii) The value of closing inventory is $62,000.

$66,000-$5,000-$1,000+$2,000= $ 62,000

(iii) The change in inventory to be taken to SOCI is $7,400.

$62,000- $54,600=$7,400

(iv) Income tax liability to be recognised is $4,200.

$4,500- ($6,000-$5,700)= $4,200 (v)

Account Debit Credit No debit no credit $’000 $’000

Plant and equipment 18,000Accumulated depreciation 13,500Suspense 3,600Profit on sale of plant and equipment No debit no credit Loss on sale of plant and equipment 900

(vi)

Account SOCI/ SOFP Deferred tax SOFP Provisions SOFP Production costs SOCI Equity capital SOFP Trade receivables SOFP Cash and Cash equivalent SOFP

(b) (i) Total long term debt/ Total equity = $120,000/($150,000+$81,000) =0.52 (ii) The correct option is B.


If and when these are converted, Sun Co will acquire power over 10% of the voting rights of Moon Co, Sun Co has the potential to acquire power over 22% (12% + 10%) of the voting rights of Moon Co.

Then, by passing the ‘test of control due to potential voting rights’ Moon Co is an associate of Sun Co, even though Sun Co holds less than 20% shares of Moon Co.

327. The correct answer is

(a) true (b) false

Option (a) is correct, because, with the same investment, an investor is getting more assets or fewer liabilities while option (b) is incorrect, because with the same investment, an investor is getting fewer assets or more liabilities and hence the value of goodwill will increase and not decrease.


The consolidated non-current assets will be reduced with the unrealised profit from the sale transaction within the group.


Dr Goodwill calculation $1,800 Cr Group non-current asset $1,800 Being a reduction in book value of non-current


Dr Group non-current asset $1,500

Cr Goodwill calculation $1,500 Being a non-current asset bought to fair value, from a group


B

Dr Group inventory $150 Cr Goodwill calculation $150 Being inventory brought back to fair value, from a group perspective.


$ $ Outstanding loans in the books of Finance Inc $20,000 Less: outstanding from Money Inc ($5,000) $15,000 Outstanding loans in the books of Money Inc $15,000 Outstanding loans in the consolidated SOFP $30,000


(a) true (b) false (c) false (d) true

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SOLUTION BANK

G PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS

160: Preparing Simple Consolidated Financial Statements © GTG 334. The correct option is A.

According to IAS 28 investment in associate, 'significant influence' is the power to participate in the financial and operating policy decisions of the investee, but without control or joint control over those policies

335. The correct option is D

Non-controlling interest = 30% of the current (share capital plus revaluation reserve plus retained earnings) = 30% X (200,000+230,000+65,000) = $148,500


Non-controlling interest Retained earnings Reduce by $9,130 Reduce by $36,521

Calculations: Cost of inventory = $350,000 x 100/115 = $304,348 URP = 350,000 – 304,348 = $45,652 Non-controlling interest (NCI) reduced by the purchase price of inventory x margin % x the NCI %. = $45,652 x 20% = $9,130 Retained earnings are reduced by the purchase price of inventory x margin% x the parent company's interest %. = $45,652 x 80% = $36,521

The cost-plus % needs to be converted to a margin % as follows: CP / (100+CP) %.


A False B False C False D True


$ Consideration transferred 4,800,000Fair value of non-controlling interest: 3,200,000 x $0.88 2,816,000 7,616,000Less: Fair value of net assets at acquisition (6,760,000)Goodwill 856,000


Extract of Consolidated SOFP Assets $ $ Current assets Trade receivables Sun 672,000Sand 172,000 844,000Less: Inter-company transactions Sun (24,000)Sand (40,000) (64,000) 780,000

© GTG Solution Bank: 161 340. The correct option is D.

The non-controlling interest shall be measured either at fair value or at its proportionate share of the acquiree's identifiable net assets, which are measured at fair value.


$ $ Cost of acquisition 90,000 Fair value of NCI 15,000 105,000 Less: Fair value of net assets acquired (95,000) Goodwill 10,000


Retained earnings $ Boe – Per SOFP 105,000 Joe – group share of post-acquisition profits ($80,000 - $ 45,000) x 80% 28,000 Total 133,000


Calculation of NCI $ Fair value of NCI 15,000Add: post acquisition profit 20% of ($80,000 - $45,000) 7,000NCI 22,000


Statement (i) is incorrect since non-controlling interest in subsidiaries is disclosed as a part of equity capital.

345. (a)

(i) The correct option is A.

(ii) The correct option is D.

(iii) The consolidated finance cost is $1,875 + $638 = $2,513.

(iv) The consolidated administrative costs is $875 + $563 = $1,438.

(v) The consolidated tax expense is $750 + $175 = $925.

(vi) Share of NCI in the income statement is 25% of $500 = $125.

(vii) The correct option is B.

(b) The correct answer is $907,500

Calculation of consolidated revenue $ Revenue - Zodiac Ltd 500,000

- S Ltd 375,000- A ltd (25% of 250,000) 62,500

Less: Inter-company sales (30,000) 907,500

162: Preparing Simple Consolidated Financial Statements © GTG 346.

(i) The correct answer is $2,500

Inventory as at 31 December 20X8 in Polstron = $25,000 50% of inventory is purchase from Smart Ltd = $12,500 Therefore, cost price of this inventory is $12,500 x 100/125 = $10,000 URP = $12,500 - $10,000 = $2,500

(ii) The correct option is B.

33,125 + 70% of $16,000 - $1,750

Retained earnings in the consolidated SOFP

Polstron Smart $ $ According to question 33,125 24,000Less: pre-acquisition retained earnings ($17,000 x 9/12) (8,000)Post-acquisition retained earnings 16,000Add 70% share in Smart Ltd (70% of $16,000) 11,200 Less: Parents share in URP in inventory (70% of $2,500) 1,750 To consolidated SOFP 42,575

(Profit is in the books of the subsidiary, so URP is deducted from retained earnings of the subsidiary. Hence, non-controlling interest is involved).

(iii) Share of NCI = $13,425

$ Fair value of non-controlling interest of 30% 9,375Post acquisition profits 16,000 x 30% 4,800Less: URP in inventory (30% of $2,500) (750) 13,425

(iv) The correct option is C.

The retained earnings figure at the acquisition date is to be used for the calculation of goodwill. i.e. $8,000

(v) The correct answer is $10,875.

$ Consideration paid 37,500Add : Fair value of NCI 9,375 46,875Less: Fair value of net assets represented by - Share Capital 28,000- Retained earnings 8,000

36,000Goodwill 10,875

(vi) The correct answer is $33,750.

$25,000 + $11,250 - $2,500 (URP) = $33,750

(vii) The correct answer is $68,750.

© GTG Solution Bank: 163 347.

(i)

$ Inventory Zircon 300,000Inventory Black 84,000Less: URP (2,000)Inventory in consolidated SOFP 382,000

URP in inventory- $25,000 good sold during the year to Basil Ltd. 2/5 goods lying in inventory are $10,000. Therefore URP = $10,000 – ($10,000 x 100/125) = $2,000

(ii) The correct option is A.

$ $

Consideration paid 300,000 Add: fair value of NCI 45,000 345,000 Less: Fair value of net assets - Share capital 50,000 - Retained earnings 160,000 (210,000)

Goodwill 135,000

(iii) The correct answer is $53,000

$

Fair value of NCI 45,000 Add: Post acquisition profit 20% of ($200,000 - $160,000) 8,000 NCI 53,000

(iv) The correct answer is $3,066,000.

Consolidated Retained earnings $

Zircon Ltd 3,036,000

Less: URP in inventory (2,000)

Basil Ltd (80% of ($200,000 – $160,000) 32,000

3,066,000

(v) The correct option is A.

IAS27 require the profit on intra-group assets to be eliminated in full. Only the group share of the profits of the subsidiary are taken to group retained earnings.

(vi) The correct option is C.

(vii) The correct option is A.


348. (a)

(i) The correct option is D.

(ii) The correct answer is $5,000.

$ $

Purchase consideration 101,500Add: Fair value of NCI 17,500 119,000Less: fair value of net assets Share capital 80,000Retained earnings 25,000Add: Fair value adjustment for land

9,000 (114,000)

Goodwill 5,000

(iii) The correct answer is $85,000.

$40,000 + $36,000 + $9,000 (increase) = $85,000 (iv) The correct option is C.

All intra-group trading item need to be eliminated while preparing the consolidated SOFP.

(b) (i)

1. The correct answer is Associate.

The percentage holding is below 20%, but this is only an indicator level for associate status. With three of the board directors it is likely to have significant influence over the financial and operating decisions of the business.

2. The correct answer is Subsidiary.

The percentage holding falls in the range of 20% and 50% which indicates that the investment is an associate status. However, since the investor has major voting rights in Company Y, this suggests full control over the entity which will be categorised as a subsidiary.

(ii) The correct option is C.

(iii) The correct option is A.


100 x assets Total

profit Operating ROI =

ROI is 7% and total assets are $450,000.

Therefore net profit = 7% × $450,000 = $31,500

The net profit margin = 100revenue Sales

(PBT) profit Net × = 5%.

Therefore sales = $630,000 5%

$31,500 =


This is because borrowing short term loan to finance fixed assets will increase the current liabilities, thereby deteriorating the current ratio further.

Statements (ii), (iii) and (iv) are incorrect because:

� Issuing long-term loans to purchase inventories will increase inventories, thereby improving the current

ratio. � Selling the inventory to reduce current liabilities will reduce current liabilities, thereby improving the

current ratio. � Disposing the fixed assets in order to reduce accounts payable will reduce the current liabilities, thereby

improving the current ratio. 351. The correct option is C.

Increase in finance costs and tax rate will always affect the net profit margin of the company. Statement (i) is incorrect because if the cost of goods sold increases, the gross profit will also change during the year. Statement (iv) is incorrect because dividends are appropriations of the profit and not expenses. Declaration of dividends does not affect the net profit margin ratio.


This is because the lower the debt equity ratio, the lower will be the capital gearing.

� Statement (i) is incorrect since the company always desires to convert its receivables into liquid cash. Therefore higher receivables turnover is always desirable.

� Statement (ii) is incorrect because an increase in net profit margin without any change in revenue or assets will always indicate a stronger ROI.

� Statement (iii) is incorrect because profit for the purpose of interest coverage ratio is always calculated before tax. Therefore increase or decrease in tax rate does not affect the calculation of the ratio.

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SOLUTION BANK

H INTERPRETATION OF FINANCIAL STATEMENTS

166: Interpretation of Financial Statements © GTG 353. The correct option is D.

This is because obtaining long term loan will increase the non-current liabilities thereby increasing the gearing. On the other hand and upward revaluation and a bonus issue increases the equity capital therefore it will result in lower gearing ratio.


The gearing ratio is calculated as a proportion of long-term loans to shareholders’ funds. Therefore if the decrease in long-term loan is less than the decrease in equity, the gearing ratio will rise.


Receivables days = days 365 sales Credit

Receivable ×

sales Creditdays 365 x *$275,000 73 =

Therefore credit sales = $1,375,000.

Total sales = credit sales + cash sales = $1,375,000 + $100,000 = 1,475,000

* Note: Receivables = 220X8 at as sReceivable 20X7 at as sReceivable +

= 2$300,000 $250,000 +

= $275,000 356. The correct option is C.

Dividend per share = shares of No.

paid Dividend

= 4,500,000

$4,500,000 = $1 per share

Dividend yield = 100 share per price Market

share per Dividend ×

= 100 $20

$1 × = 5%


Interest coverage ratio = expenses Interesttax and interest before Profit

= $16,000 $16,000 $60,000 $200,000 ++ = 17.25 times


Inventory turnover ratio = p.a.) (times Inventory

sales of Cost

= $4,000,000

0 $12,000,00 = 3 times


Debt Equity

profits Operating ROCE +=

40% 2510 ==



The gearing ratio indicates the proportion of long-term loans to shareholders funds, so if a decrease in long-term loans is more than decrease equity, then company’s gearing ratio will go down.


The current ratio is current assets: current liabilities, that is 3,150:850 = 3.70

Here, the current ratio is too high compared with the industry standard of 2:1, and is indicating higher inventories level than required, hence liquidity is poorly controlled.


ROCE = Profit before interest and tax/Average capital employed×100 Average capital employed=Opening capital + closing capital/2

Closing capital employed=Opening capital plus profit for the year

=10,000 + 1,200 = $11,200

Average capital employed = 10,000 + 11,200+/2 = $15,600

Thus ROCE = 1,200/15,600×100 = 7.69%


Inventory turnover ratio = Cost of goods sold / Average inventory Average inventory = (10,000 + 18,200) / 2 = $14,100

Cost of goods sold is $66,800

Now, Inventory turnover ratio = $66,800 / $14,100 = 4.74 times


Calculations

Inventory turnover days Receivable turnover days Turnover / inventory = 500,000 / 80,000 = 6.25 times

Turnover / receivables = 500,000 / 220,000 = 2.27 times

Inventory turnover days = 365 days / 6.25 = 58 days

Receivable days = 365 days / 2.27 = 161 days


Calculations

Quick ratio Current ratio Quick assets / Current liabilities = 220,000 / 440,000 = 0.50

Current assets / Current liabilities = 300 / 440 = 0.68


The credit policy in the company is lenient because the receivables turnover days are calculated at 161 days. This indicates a longer collection period of debts. Further this also indicates longer working capital cycle. A current ratio of 0.68 times and a quick ratio of 0.50 times indicate that indicates that the company will not be in a position to pay the liabilities on due date. Therefore statements (i) and (ii) are true.

168: Interpretation of Financial Statements © GTG

2: Mock Paper © GTG

ALL 50 questions are compulsory and MUST be attempted 1. Which of the following equations is wrong?

A Net assets = Proprietor’s capital B Net assets = Capital + Profit + Drawings C Net assets = Capital + Profit – Drawings D Fixed assets + Net current assets = Capital + Profit – Drawings

2 marks 2. A limited liability company has the following balances: $

Plant, equipment 20,000 Cash in bank 10,000 Bank overdraft 15,000 Term loan 35,000 Receivables 11,000 Payables 19,000

What is the capital balance?

A $28,000 Credit B $28,000 Debit C $41,000 Debit D $41,000 Credit

2 marks

3. Peri’s bookkeeper made the following mistakes:

� Discount allowed $3,840 was credited to the Discounts Received account. � Discount received $2,960 was debited to the Discounts Allowed account. � All the other discounts were correctly recorded.

Which of the following journal entries will correct the errors?

Dr Cr $ $

A Discount allowed 7,680 Discount received 5,920

Suspense account 1,760 B Discount allowed 880 Discount received 880 Suspense account 1,760 C Discount allowed 6,800 Discount received 6,800 D Discount allowed 3,840 Discount received 2,960 Suspense account 880

2 marks

4. Enterprise Co provided the following information:

$ Cash paid for wages during 20X6 50,000Outstanding wages 1 January 20X6 2,000Advance wages 1 January 20X6 7,000Outstanding wages 31 December 20X6 5,000

What is the wages expense for 20X6?

A $60,000 B $50,000 C $55,000 D $58,000

2 marks

© GTG Mock Paper: 3

5. Eagle Ltd specialises in the manufacture of moulding machines, which it produces at a cost of $100,000.

On 1 January 20X5 it sold two of these machines to Kite Ltd, a 60% owned subsidiary, for $250,000. The depreciation policy of this company is to depreciate straight line over 10 years with a full years’ charge in the year of acquisition. In preparing the consolidated SOFP of Freedom plc at 31 December 20X7, what adjustment would be needed to non-current assets for the assets transferred? A Decrease by $50,000 B Decrease by $35,000 C Decrease by $30,000 D Decrease by $21,000

2 marks

6. B, a limited liability company, receives rent for subletting part of its premises to a number of tenants. For the year ended 31 December 20X8, B received cash of $318,600 from its tenants. Details of rent in advance and in arrears at the beginning and end of 20X8 are as follows:

31/12/20X8

$ 31/12/20X7

$ Rent received in advance 28,400 24,600Rent owed by tenants 18,300 16,900

All rent which was owed was subsequently received.

What figure for rental income should be included in the SOCI of B for 20X8?

A $341,000 B $336,400 C $300,800 D $316,200

2 marks

7. On 1 July 20X8 a limited liability company’s capital structure was as follows:

$ Share capital 1,000,000 shares of 50c each 500,000Share premium account 400,000

In the year ended 30 June 20X9 the company made the following share issues:

1 January 20X9 A bonus issue of one share for every four in issue on that date, utilising the share premium account

1 April 20X9 A rights issue of one share for every ten in issue on that date, at $1·50 per share

What will be the balances on the company’s share capital and share premium accounts on 30 June 20X9 as a result of these issues?

Share capital Share premium account $ $ A 687,500 650,000 B 675,000 375,000 C 687,500 150,000 D 687,500 400,000

2 marks


8. A company’s plant and machinery ledger account for the year ended 30 September 20X8 was as follows:

Plant and machinery – at cost Dr Cr

$ $ 1/10/20X7 Balance (all plant

purchased after 20X5) 381,2001/06/20X8 Disposal account -

cost of assets sold 36,0001/12/20X7 Cash-additions 18,000 30/09/20X8 Balance 363,200 399,200 399,200

The company’s policy is to charge depreciation at 20% per year on the written down balance basis, with proportionate depreciation in the years of purchase and sale.

What is the depreciation charge for the year ended 30 September 20X8?

A $74,440 B $84,040 C $72,640 D $76,840

2 marks

9. A draft SOCF contains the following calculation of net cash inflow from operating activities:

$mOperating profit 13 Depreciation 2 Decrease in inventories (3)Decrease in trade and other receivables 5 Decrease in trade payables 4 Net cash inflow from operating activities 21

Which of the following corrections need to be made to the calculation?

(i) Depreciation should be deducted, not added. (ii) Decrease in inventories should be added, not deducted. (iii) Decrease in receivables should be deducted, not added. (iv) Decrease in payables should be deducted, not added.


2 marks

10. Daredevils Co’s financial statements are to be approved on 31 July 20X7 for the year ended 31 March 20X7. The following issues arose before the financial statements were approved.

(i) A case for damages was pending against Daredevils in court as at 31 March 20X7. Accordingly, a

provision of $50,000 was made in the financial statements. However, on 25 May 20X7, the court ruled that Daredevils was liable to pay $65,000.

(ii) The auditor unveiled cash embezzlement of $10,500 in the financial statements for the year ended 31 March 20X7.

(iii) Inventory which was valued at $12,000 on 31 March 20X7 was sold for $10,000 on 31May 20X7.

Which of these events are adjusting events according to IAS 10 Events after the Reporting Period?

A (i), (ii) and (iii) B (i) and (ii) C (i) and (iii) D (ii) and (iii)

2 marks


Berry Co owns nominal share capital of $2,000 in Cherry Co. Cherry Co has a total share capital of $6,000. Berry Co also owns shares worth $3,000 in Greedy Co and $5,500 in Waxen Co. The total share capital of Greedy Co is $3,000 and that of Waxen Co is $10,000. Based on the information given above answer Question 11, 12 and 13 11. The relationship between Cherry Co and Berry Co is that

A Subsidiary B Not a subsidiary C None of the above

2 marks

12. The relationship between Waxen Co and Berry Co is that

A Subsidiary B Fully – owned subsidiary C Partially – owned subsidiary D Investment

2 marks

13. The relationship between Greedy Co and Berry Co is that

A Fully – owned subsidiary B Partially – owned subsidiary C Investment D Associate

2 marks

14. Which of the following material events after the reporting period and before the financial statements, are approved by the directors and should be adjusted for in the financial statements?

(i) A valuation of property providing evidence that the property is not worth the value attributed to it in the

SOFP (ii) Sale of inventory held on the SOFP date for less than the cost (iii) Discovery of fraud or error affecting the financial statements. (iv) The insolvency of a customer with an outstanding liability on the SOFP date.

A All of the above B (i), (ii) and (iv) C (iii) and (iv) D (i), (ii) and (iii)

2 marks

15. Which of the following concepts is used to value inventory at the lower of its net realisable value or cost?

A Going concern concept B Consistency concept C Prudence concept D Matching concept

2 marks

16. The plant and machinery account (at cost) of the Voila Group on 31 December 20X6 is as follows:

Date $ Date $ 01/01/20X6 Balance

b/d 285,000 30/09/20X6 Plant disposal

account 22,50001/04/20X6 Cash 38,250 31/12/20X6 Balance c/d 300,750

323,250 323,250

The company’s policy is to charge depreciation at 15% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal.


What should be the depreciation charge for the year ended 31 December 20X6? A $47,788 B $46,209 C $45,113 D $48,488

2 marks

17. A company values its inventory using the first in first out (FIFO) method. On 1 May 20X2 the company had 700 engines in inventory, valued at $190 each.

During the year, which ended 30 April 20X3, the following transactions took place:

20X2 1 July: purchased 500 engines at $220 each 1 November: sold 400 engines for $160,000 20X3 1 February: purchased 300 engines at $230 each 15 April: sold 250 engines for $125,000

What is the value of the company’s closing inventory of engines on 30 April 20X3?

A $188,500 B $195,500 C $166,000 D None of the above

2 marks 18. The following bank reconciliation statement has been prepared by a trainee accountant:

Bank reconciliation 30 September 20X2

$ Balance in bank statement (overdrawn) 36,840 Add: Lodgements credited after date 51,240 88,080Less: Outstanding cheques 43,620Balance in cash book (credit) 44,460

Assuming the amounts stated for items other than the cash book balance are correct,

What should the cash book balance be? A $44,460 credit as stated B $60,020 credit C $29,220 debit D $29,220 credit

2 marks

19. Barbara’s draft financial statements are ready. However the following errors were reported by the chief accountant. Last year debt of $1,500 was written off as irrecoverable, however the amount was recovered in the current financial year, but no entry has been made. The closing inventory consists of two items of inventory which cost $12,120 at the SOFP date. However the demand for one of the items fell. The value of its potential sales is only $5,000 as against the previous valuation of $6,120.

The profit of the entity before making the above adjustment was $54,200. What profit should be reported in the financial statements?

2 marks




$ $ Opening balance 308,600 Cash received from credit customers 147,200Credit sales 154,200 Discounts allowed to credit customers 1,400Cash sales 88,100 Interest charged on overdue accounts 2,400Contras against credit balances in Bad debts written off 4,900payables ledger 4,600 Allowance for doubtful debts 2,800 Closing balance 396,800 555,500 555,500

What should the closing balance be when all the errors made in preparing the receivables ledger control account have been corrected?

A $395,200 B $304,300 C $307,100 D $309,500

2 marks

21. Matrix is a manufacturing company. The accountant of Matrix is unsure of what he should include in the cost of finished goods inventory. Which of the following items should he include?

(i) Carriage inwards (ii) Carriage outwards (iii) Depreciation of factory plant (iv) General administrative overheads

A All four items B (i), (ii) and (iv) C (ii) and (iii) D (i) and (iii)

2 marks

22. Annie sold goods to Anna with list price of $5,000 before sales tax. Annie offered a trade discount of $100 and a cash discount of $200 if payment is made within 15 days. Anna paid for the goods within 7 days.

What should be recorded by Annie?

A Discount allowed $300 B Discount received $300 C Discount allowed $200 D Discount received $200

2 marks 23.

Receivables control account Dr Cr $ $ Balance b/d (1/1/X6) 10,000 Cash received 40,000Bad debts 500 Sales 50,000 Sales return 2,000 Contra adjustment 1,000 Balance c/d (31/12/X6) 23,500 63,500 63,500

What is the correct balance of the Receivables control account as on 31/12/20X6?

2 marks


24. Harbour Ltd has a current ratio of 3:1.

Which of the following would result in a decrease to this ratio?

A A trade receivable, previously provided for, is written off due to a bad debt B A trade payable balance is settled in cash C Short term investment in a liquid asset D Receiving cash on a current loan

2 marks 25. Clinton’s accountant prepared a trial balance as follows.

Debit $

Credit $

Plant and Machinery 13,000Furniture 11,000Capital 35,000Accounts payable 15,000Purchases 13,000Sales 22,500Purchase return 500Sales return 1,000Accounts receivable 20000Cash 15000

At what amount will the trial balance agree?

2 marks

26. Details of a company’s insurance policy are shown below:

Premium for the year ended 31 March 20X6 paid on April 20X5 $10,800 Premium for the year ended 31 March 20X7 paid on April 20X6 $12,000 What figures should be included in the company’s financial statements for the year ended 30 June 20X6?

SOCI $

SOFP $

A 11,100 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)

2 marks

27. The following items have to be considered when finalising the financial statements of Q, a limited liability company:

(i) The company gives warranties on its products. The company’s statistics show that about 5% of sales

give rise to a warranty claim. (ii) 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 No action A (i) (ii) B (i) (ii) C (i),(ii) D (i),(ii)

2 marks


28. Solutions Ltd has developed a software package to sell in the market. Which of the following costs in relation to the software should be capitalised?

(i) Expenditure incurred on training staff to operate software generating tools (ii) Selling and administration expenses incurred in relation to software (iii) Interest paid on borrowed money which is used for buying computers for the development of software A (i)and (ii) B (ii) and (iii) C (i) and (iii) D All of the above

2 marks 29. On 31 December 20X1 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 20X2 the company made a bonus issue of 1 share for every 2 held, using the share premium account. It went on to issue an additional 60,000 shares for cash at 80c per share. What is the company’s capital structure on 31 December 20X2?

Share capital account Share premium account 2 marks

30. Nancy Co pays $10,000 to buy 80% shares in Baggy Co. The net identifiable asset is $8,500 and the fair

value of 20% of the non-controlling interest is $4,200. Then the amount of goodwill will be:

A $14,200 B $2500 C $4300 D $5,700

31. Discount received of $500 was incorrectly posted to the discount allowed column. However the correct

postings were made to the payables ledger and cash book. What entry should be made to rectify the error?

A Dr Discount received account $500

Cr Discount allowed account $500

B Dr Discount allowed account $500 Cr Discount received account $500

C Dr Suspense account $1000 Cr Discount allowed account $500 Cr Discount received account $500

D Dr Discount received account $500 Dr Discount allowed account $500

Cr Suspense account $1,000 2 marks

32. A company’s trial balance failed to agree; the totals were:

Debit $815,602 Credit $808,420 Which one of the following errors could fully account for the difference?

A The omission from the trial balance of the insurance expense account, $7,182 B Discount allowed of $3,591, debited erroneously to the discount received account C No entries made in the records for cash sales totalling $7,182 D The returns outwards total of $3,591 was included in the trial balance as a debit balance

2 marks


33. Purchase of machinery of $40,000 (non current asset) was recorded in the purchase day book.

Which of the following entries should be passed?

A Dr Machinery account $40,000 Cr Purchases account $40,000

B Dr Machinery account $35,000 Cr Purchases account $35,000

C Dr Machinery account $40,000 Cr Suspense account $40,000

D Dr Purchases account $40,000 Cr Machinery account $40,000

2 marks 34. Duck sold goods at a gross price (inclusive of sales tax) of $611.

The rate of sales tax is 17.5%. How much sales tax will be included in the invoice?

2 marks

35. Fancy Inc is a 60% subsidiary of Beauty Inc. Beauty Inc sells non-current assets amounting to $40,000 to

Fancy Inc at a profit of $5,000. The rate of depreciation is 10%. State the NCI share in the reduced depreciation according to the above transaction.

A $400 B $300 C $200 D $500

2 marks

36. Which type of business will include the VAT column in its columnar sales book?

A A registered person conducting an exempted business under VAT rules B A registered person conducting business liable to VAT. C Small dealers whose turnover of sales is below a certain minimum, and are not required to be registered

under VAT D None of the above

2 marks

37. Which of the following is considered a profitability measure?

A Price-earnings ratio B Fixed asset turnover C Cash coverage ratio D Return on assets

38. Which is a possible reason for the existence of a suspense account?

A Machinery purchased for $6500 was incorrectly credited to the machinery repairs account. However the correct effect is given in the cash book

B Bad debts of $540 were recovered and credited to the trade receivables account. C Cash paid for the purchase of stationery was incorrectly recorded in the purchase day book D A discount received of $500 was recorded on the credit side of the commission received account.

2 marks 39. Cash of $200 received from Monty was omitted to be recorded in the books of accounts.

What rectification entry should be passed?

A Dr Cash account $200 Cr Monty’s account $200

B Dr Suspense account $200 Cr Monty’s account $200

C Dr Cash account $200 Cr Suspense account $200

D Physically verify the cash and inflate the balance of cash. 2 marks


40. Which of the following equations is wrong?

A Net assets = Proprietor’s capital B Net assets = Capital + Liabilities + Drawings C Net assets = Capital + Profit – Drawings D Fixed assets + Net current assets = Capital + Profit – Drawings

2 marks 41. From the following information calculate the cash flow from operating activities.

The net profit of the company can be assumed to be $100,000

Balances 01/01/20X6 ($) 31/12/20X6 ($)Non-current assets 90,000 65,000Inventories 63,000 27,000Receivables 58,000 45,000Cash in bank 12,000 6,500Payables 35,000 30,000Share capital 220,000 120,000

A $42,500 B $(53,500) C $144,000 D $56,000

2 marks

42. An Ltd acquires B Ltd at $50,000 and the fair value of net assets of B Ltd is 60,000. The accounting for the difference between the above is done as follows:

A Adjusted with future losses. B Recorded in the SOCI C Recorded as tangible assets in SOFP D Recorded as intangible assets in SOFP.

2 marks 43. Dizzy Ltd acquires 65 % of Ample Ltd.

Following is the extract from the SOFP of Dizzy ltd and Ample Ltd. (i) Dizzy ltd has trade payable of $150,000 (includes $26,000 due to Ample Ltd) (ii) Ample Ltd has trade payable of $45,000 (includes $15,000 due to Dizzy ltd) Which of the below would be the balance of trade payable in the consolidated financial statements.

A $154,000 B $195,000 C $109,000 D $41,000

2 marks

44. To measure a firm's solvency as completely as possible, we need to consider:

A The firm's relative proportion of debt and equity in its capital structure B The firm's capital structure and the liquidity of its current assets C The firm's ability to use net working capital to pay off its current liabilities D The firm’s leverage and its ability to make principal repayments, interest payments on its long-term debt

2 marks

45. Harry has started his own business and set up a workshop to manufacture trolleys. He introduced $15,000 of his own savings, equipment worth $3,750 and obtained a bank loan of $1,500.

What is the correct balance on Harry’s capital account following these transactions? A $15,000 B $20,250 C $18,750 D $16,500

2 marks


46. The formula for calculating the rate of inventory turnover is

A average inventory at cost divided by cost of goods sold B cost of goods sold divided by average inventory at cost C sales divided by average inventory at cost D sales divided by average inventory at selling price

2 marks

47. Sing is a sole trader who does not maintain complete accounting records.

The following are the details of transactions related to credit customers and suppliers for the year ended 30 June 2008:

$ Trade receivables on 1 July 2007 40,000Trade payables on 1 July 2007 50,000Cash received from customers 686,400Cash paid to suppliers 305,800Discounts allowed 1,500Discounts received 2,950Contra between payables and receivables ledgers 2,600Trade receivables, 30 June 2008 183,000Trade payables, 30 June 2008 85,600

What figure should appear in Edgar’s SOCI (income statement) for the year ended 30 June 2008 for purchases?

A $344,000 B $346,950 C $349,900 D $275,750

2 marks 48. Which of the following assertions about statement of cash flow is/are incorrect?

(1) A cash flow statement prepared using the direct method produces a different figure for operating cash flow from that produced if the indirect method is used.

(2) Rights issues of shares do not feature in cash flow statements. (3) A surplus on revaluation of a fixed asset will not appear as an item in a cash flow statement. (4) The proceeds on the sale of a fixed asset will appear as an item under cash flows from financing in a

cash flow statement.

A 1,2 and 4 B 1.2 and 3 C Only 3 D 1,3 and 4

2 marks 49. The quick ratio is considered more useful than the current ratio for:

A Evaluating the profitability of business which liquidates its inventory faster B Evaluating the profitability of business which converts inventory into cash slowly C Evaluating long term credit risk D Evaluating investor expectation regarding future earnings

2 marks 50. A firm has a higher asset turnover ratio than the industry average, which implies

A The firm is utilizing assets less efficiently than other firms in the industry B The firm is more profitable than other firms in the industry C The firm is utilizing assets more efficiently than other firms in the industry D The firm has higher spending on new assets than other firms in the industry

2 marks

14: Solution to Mock © GTG

1. The correct option is B. Net assets = Capital + Profit + Drawings is an incorrect equation. Drawings are reduced from capital and never added to capital.


The amount of capital balance in the business is 28,000 debit.

Assets $

Plant, equipment 20,000Cash at bank 10,000Receivables 11,000 41,000

Capital and Liabilities $ Bank overdraft 15,000Term loan 35,000Payables 19,000Capital (Dr) (28,000) 41,000

In a normal case, capital has a credit balance, because normally assets are more than liabilities. However, in this instance, liabilities are more than assets; hence capital has a debit balance. This must be a result of large retained losses in the past. This is an application of the accounting equation: Asset = Capital + Liabilities

3. The correct option is B. The rectification of the entries requires the following effects:

Rectification entry for the first error: Dr Discount allowed $3,840 Dr Discount received $3,840 Cr Suspense a/c $7,680 Rectification entry for the second error: Dr Suspense a/c $5,920

Cr Discount allowed $2,960 Cr Discount received $2,960

Both the accounts have to be given a net debit effect of $880 ($3,840 – $2,960). The combined second effect goes to the credit side of the suspense account (i.e. $880 x 2 =$1,760). Hence option B is correct.

4. The correct option is A. Wages account

Dr Cr Date $ Date $

01/01/20X6 Advance wages 7,000 01/01/20X6 Outstanding wages 2,000 Cash paid 50,000 31/12/20X6 Outstanding wages 5,000

Amount to be shown in SOCI 60,000

Total 62,000 Total 62,000

© GTG Solution to Mock: 15

5. The correct option is B. Unrealised profit on transfer was originally $50,000, but this is reduced by three years depreciation of $5,000 per annum.


Rent received account Dr Cr

$ $ Balance c/d 16,900 Rent received last year 24,600SOCI 316,200 Cash received 318,600Rent advance received 28,400 Balance b/d 18,300 361,500 361,500


Number of shares

Share capital

$

Share premium

$ 01/07/20X8 Balance 1,000,000 500,000 400,00001/01/20X9 Bonus issue 1,000,000 x ¼ x 0.50 250,000 125,000 (125,000) Subtotal 1,250,000 625,000 275,00001/04/20X9 Rights issue 1,250,000 x 1/10 x 0.50 125,000 62,500 1,250,000 x 1/10 x 1.00 125,000

Total 1,375,000 687,500 400,000 8. The correct option is D.

The company’s policy is to charge proportionate depreciation on items purchased or sold during a year.

$

Depreciation on the plant and machinery which was with the business throughout the year (opening balance – plant and machinery sold during the year) (i.e. $381,200 - $36,000) = $345,200 x 0 .20

$69,040

Depreciation on the value of the plant and machinery which is sold during the year (used for eight months; from 01/10/ 20X1 to 01/06/20X2) = $36,000 x 0.20 x 8/12

$4,800

Depreciation on the plant and machinery which is purchased during the year (used for ten months i.e. 01/12/ 20X1 to 30/09/ 20X2) = $18,000 x 0.20 x 10/12)

$3,000

Total depreciation for the year $76,840 9. The correct option is D.

$m Operating profit 13Depreciation 2Decrease in inventories 3Decrease in trade and other receivables 5Decrease in trade payables (4)Net cash inflow from operating activities 19


Options (i), (ii) and (iii) are the adjusting events according to IAS 10 Events after the Reporting Period.


Cherry Co Waxen Co Greedy Co

Total share capital ($) 6,000 10,000 3,000 Berry Co share of share capital ($) 2,000 5,500 3,000 Berry Co share of share capital 33.33% 55% 100%

11. The correct option is B

Cherry Co is not a subsidiary of Berry Co as it as on 33.33% share in Cherry Co.

12. The correct option is C

Waxen Co is a partially-owned subsidiary of Berry Co as it has 55% share in Waxen Co.

13. The correct option is A Greedy Co is a fully-owned subsidiary of Berry Co as it has 100% share in Berry Co.

14. The correct option is A. According to IAS 10 Events After the Reporting Period, all of the above items must be recognised in the financial statements. All of them are adjusting events as: � they provide evidence of conditions that already existed at the end of the reporting period. � they provide additional information that will help to quantify the amount of the loss.


The prudence concept is used to value inventory at the lower of its net realisable value or cost.

16. The correct option is B. The amount of depreciation charged for the year ended 31 December 20X6 should be $46,209. Calculation of depreciation

$ Depreciation on 262,500 at the rate of 15% for one year = 262, 500 x 15/100 39,375Depreciation on 22,500 at the rate of 15% for 9 months = 22,500 x 15/100 x 9/12 2,531Depreciation on 38,250 at the rate of 15% for 9 months = 38,250 x 15/100 x 9/12 4,303 46,209


Valuation of inventory under the FIFO method:

Total value of inventory = (50 x 190) + (500 x 220) + (300 x 230) = $188,500

Date Receipts Issues Closing balance

No. of units

Price per unit ($)

No. of units

Price per unit ($)

No. of units

Price per unit ($)

01/05/20X2 Opening balance 700 190 - - 700 190

01/07/20X2 Purchases 500 220 - - 700 500

190220

01/11/20X2 Sales - - 400 190 300 500

190220

01/02/20X3 Purchases 300 230 - -300 500 300

190220230

15/04/20X3 Sold - - 250 19050

500 300

190220230



Bank reconciliation on 30 September 20X2:

$ Balance in bank statement (overdrawn) 36,840 Less: Lodgements credited after date (51,240) 14,400 Add: Outstanding cheques 43,620 Balance in cash book (credit) (29,220)


$ Profit as reported by draft financial statements 54,200Add: Bad debts recovered 1,500Less: Write down of inventory to NRV 1,120*Net profit after adjustment 54,580

$

Value of inventory in draft statement of financial position 12,120 NRV of the inventory before approval of financial statements 11,000 Write down of inventory to NRV charged to SOCI 1,120



$ $ Balance b/d 308,600 Cash from credit customers 147,200Credit sales 154,200 Bad debts written off 4,900

Interest charged on overdue accounts 2,400Discount allowed to credit customers 1,400

Contras against credit balances in payables ledger 4,600

Balance c/d 307,100 465,200 465,200


In the manufacturing industry, the cost of the finished goods inventory includes carriage inward and depreciation of factory plant. Carriage outward is a selling expense. Administration expense is an office expense, hence not included in the cost of the finished goods inventory.


Trade discount is not recorded in the books of accounts. Hence only cash discount of $200 is recorded, as discount allowed of $200 in the books of Annie.



$ $ Balance b/d (1/1/X6) 10,000 Cash received from debtors 40,000 Bad debts 5,00 Sales 50,000 Sales return 2,000 Contra adjustment 1,000 Balance c/d (31/12/X6) 16,500 60,000 60,000


24. The correct option is D. Option A - A trade receivable, previously provided for, is written off – Has no net affect on net assets as both receivables and the provision are reduced. Option B - A trade payable balance is settled in cash – This increases the current ratio. Option C - Short term investment in a liquid asset - As one current asset increases so cash is reduced. Therefore there is no net effect.


Debit ($) Credit ($) Plant and Machinery 13,000Furniture 11,000Capital 35,000Accounts payable 15,000Purchases 13,000Sales 22,500Purchase return 500Sales return 1,000Accounts receivable 20,000Cash 15,000 73,000 73,000


Premium paid Year ending 30/06/20X5

Year ending 30/06/20X6 Prepayments

For the year ended 31/03/20X6 paid in April 20X5 3 months 9 months

$10,800 x 3/12 $10,800 x 9/12 = $2,700 = $8,100 For the year ended 31/03/20X7 paid in April 20X6 3 months 9 months

$12,000 x 3/12 $12,000 x 9/12 = $3,000 = $9,000

Therefore the premium chargeable to SOCI for the year ended 30/6/20X6 is $8,100 + $3,000 = $11,100 and prepayments total $9,000.

27. The correct option is A. In situation (i) the liability is assessable, as warranty claims in the normal course of business are 5% of sales, for which the net amount of provision can be made. In situation (ii) there is the possibility of a liability arising, but it cannot be assessed monetarily, therefore such a liability can be only disclosed in the notes.


In the case of an internally-generated intangible asset, the following expenses are never capitalised: (i) Expenditure on training staff to operate the asset. (ii) Selling and administration expenses or allocation of overhead expenses. (iii) Inefficiencies identified and initial operating losses incurred before the asset achieves planned

performance.

However, in this question, the expenses for staff are for training them to operate the software generating tools i.e. for developing software. These expenses should be capitalised.

The company had borrowed the funds in order to purchase computers. The computers were used in software development. Hence, the interest on borrowed funds should be capitalised.


29. The correct answer is share capital $105,000 and share premium $173,000.

Share capital ($)

Share premium ($)

Ordinary share capital as at 31/12/20X1 50,000 180,000Bonus shares issued 1 share for every 2 shares held 100,000/2 x 1x 50c 25,000 (25,000)Shares issued for cash 60,000 shares x 80c 30,000 18,000 105,000 173,000

30. The correct option is D

$

Investment in shares of Baggy Co 10,000Fair value of non-controlling interest 4,200 14,200Less: Net assets acquired (8,500)Positive balance – to be treated as intangible asset 5,700

Positive goodwill amounting to $ 5,700 will be reflected as an intangible asset in the consolidated SOFP.

31. The correct option is C. Dr Suspense account $1000 Cr Discount allowed account $500 Cr Discount received account $500


Dr Supplier account $XXX Cr Cash account $XXX Cr Discount received $500

Dr Supplier account $XXX Dr Discount allowed $500 Cr Cash account $XXX

Dr Suspense account $1000 Cr Discount received $500 Cr Discount allowed $500 Being rectification entry passed


� Option A is incorrect because the debit balance is higher than the credit balance. If insurance expenses had been added to the debit side of the trial balance, the difference would have been greater.

� Option B is incorrect because posting an amount to the wrong account won’t have any effect on the debit or credit of the trial balance.

� Option C is incorrect because if cash sales had been recorded, the debit balance and credit balance would have increased by the same amount, as cash received would be debited and sales would be credited.

� Option D is correct because a purchase return should be recorded on the credit side and not on the debit side of the trial balance. Including this figure on the debit side causes a double effect, i.e. 3,591 x 2 = 7,182.

33. The correct option is A. Dr Machinery account $40,000

Cr Purchase account $40,000 Being rectification of machinery purchased. 34. The correct answer is $91.

Sales tax = 17.5 x 117.5

$611= $91



Reduced depreciation = $500 (5,000 x 10%). Hence, non-controlling interest’s share in reduced depreciation (500 x 40% = $200).


A registered person carrying on business liable to VAT will include the VAT column in his columnar sales book.

37. The correct option is D. Return on assets reflects the relationship between the profits earned by a company and its total assets. The higher the ratio, the more efficiently the assets are managed. This means the entity is generating optimum profits from the available resources.


Machinery purchased for $6500 was wrongly credited to the machinery repairs account. However the correct effect is given in the cash book. This is a possible reason for the existence of a suspense account.


This is an error of omission. Dr Cash account $200 Cr Monty’s account $200 40. The correct option is B.

Net assets = Capital + Liabilities + Drawings is a wrong equation.


Cash flow from operating activities:

$ Net profit 100,000 Decrease in inventories (63,000 – 27,000) 36,000 Decrease in receivables(58,000 – 45,000) 13,000 Increase in payables (35,000 – 30,000) (5,000) Net cash flow from operating activity 144,000


As the purchase consideration paid is less than the net fair value of B Ltd it is a gain on bargain purchase which is recorded in SOCI.


= $150,000 + $45,000 – $26,000 – $15,000 = $154,000


In order to assess the solvency of an entity, we need to consider the ability of the entity to repay the interest and the principal and also the capital structure of entity.



Capital = Capital introduced + equipment’s brought in = $15,000 + $3,750 = $18,750 The loan obtained is obtained from bank and not given by Harry and therefore will not impact capital.


47. The correct option is B. Payables ledger

Dr Cr $ $ Cash Paid 305,800 Opening balance 50,000 Discounts received 2,950 Purchases (bal figure) 346,950 Contra 2,600 Closing balance 85,600 396,950 396,950


Statement (1) is incorrect as both methods produce the same figure. Statement (2) is incorrect as the proceeds from a rights issue of shares will appear in the cash flows from financing. Statement (3) is correct as an asset is revalued but not sold; there isn’t cash flowing in. Therefore the surplus on revaluation of a fixed asset will not appear as an item in a cash flow statement. Statement (4) is incorrect as the proceeds from the sale of a fixed asset will appear as an item under cash flows from capital expenditure in a cash flow statement and not from financing.



The higher the asset turnover ratio the more efficiently the firm is using assets.


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2: Pilot Paper © GTG

ALL 50 questions are compulsory and MUST be attempted. 1. Which of the following calculates a sole trader’s net profit for a period?

A Closing net assets + drawings - capital introduced - opening net assets B Closing net assets - drawings + capital introduced - opening net assets C Closing net assets - drawings - capital introduced - opening net assets D Closing net assets + drawings + capital introduced - opening net assets

2. Which of the following explains the imprest system of operating petty cash?

A Weekly expenditure cannot exceed a set amount B The exact amount of expenditure is reimbursed at intervals to maintain a fixed float C All expenditure out of the petty cash must be properly authorised D Regular equal amounts of cash are transferred into petty cash at intervals

3. Which of the following statements are TRUE of limited liability companies?

(1) The company’s exposure to debts and liability is limited (2) Financial statements must be produced (3) A company continues to exist regardless of the identity of its owners

A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3

4. Annie is a sole trader who does not keep full accounting records. The following details relate to her

transactions with credit customers and suppliers for the year ended 30 June 20X6:

$ Trade receivables, 1 July 20X5 130,000Trade payables, 1 July 20X5 60,000Cash received from customers 686,400Cash paid to suppliers 302,800Discounts allowed 1,400Discounts received 2,960Contra between payables and receivables ledgers 2,000Trade receivables, 30 June 20X6 181,000Trade payables, 30 June 20X6 84,000

What figure should appear for purchases in Annie’s income statement for the year ended 30 June 20X6?

A $325,840 B $330,200 C $331,760 D $327,760

5. Which TWO of the following errors would cause the total of the debit column and the total of the

credit column of a trial balance not to agree?

(1) A transposition error was made when entering a sales invoice into the sales day book (2) A cheque received from a customer was credited to cash and correctly recognised in receivables (3) A purchase of non-current assets was omitted from the accounting records (4) Rent received was included in the trial balance as a debit balance

A 1 and 2 B 1 and 3 C 2 and 3 D 2 and 4

© GTG Pilot Paper: 3

6. At 31 December 20X5 the following require inclusion in a company’s financial statements:

(a) On 1 January 20X5 the company made a loan of $12,000 to an employee, repayable on 1 January 20X6, charging interest at 2% per year. On the due date she repaid the loan and paid the whole of the interest due on the loan to that date.

(b) The company paid an annual insurance premium of $9,000 in 20X5, covering the year ending 31 August 20X6.

(c) In January 20X6 the company received rent from a tenant of $4,000 covering the six months to 31 December 20X5.

For these items, what total figures should be included in the company’s statement of financial position as at 31 December 20X5?

A Current assets $10,000Current liabilities $12,240 B Current assets $22,240Current liabilities $nil C Current assets $10,240Current liabilities $nil D Current assets $16,240Current liabilities $6,000

7. A company’s income statement for the year ended 31 December 20X5 showed a net profit of $83,600. It

was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the company’s policy to depreciate motor vans at 25% per year on the straight line basis, with a full year’s charge in the year of acquisition.

What would the net profit be after adjusting for this error?

A $106,100 B $70,100 C $97,100 D $101,600

8. Xena has the following working capital ratios:

20X9 20X8 Current ratio 1·2:1 1·5:1 Receivables days 75 days 50 days Payables days 30 days 45 days Inventory turnover 42 days 35 days

Which of the following statements is correct?

A Xena’s liquidity and working capital has improved in 20X9 B Xena is receiving cash from customers more quickly in 20X9 than in 20X8 C Xena is suffering from a worsening liquidity position in 20X9 D Xena is taking longer to pay suppliers in 20X9 than in 20X8

9. Which of the following statements is/are correct?

(a) A statement of cash flows prepared using the direct method produces a different figure to net cash from operating activities from that produced if the indirect method is used

(b) Rights issues of shares do not feature in a statement of cash flows (c) A surplus on revaluation of a non-current asset will not appear as an item in a statement of cash flows (d) A profit on the sale of a non-current asset will appear as an item under cash flows from investing

activities in the statement of cash flows

A 1 and 3 only B 3 and 4 only C 2 and 4 only D 3 only


10. A company receives rent from a large number of properties. The total received in the year ended 30 April 20X6 was $481,200.

The following were the amounts of rent in advance and in arrears at 30 April 20X5 and 20X6:

30 April 20X5 30 April 20X6 $ $ Rent received in advance 28,700 31,200 Rent in arrears (all subsequently received) 21,200 18,400

What amount of rental income should appear in the company’s income statement for the year ended 30 April 20X6?

A $486,500 B $460,900 C $501,500 D $475,900

11. Which of the following are differences between sole traders and limited liability companies?

(1) A sole trader’s financial statements are private and never made available to third parties; a company’s financial statements are sent to shareholders and may be publicly filed

(2) Only companies have share capital (3) A sole trader is fully and personally liable for any losses that the business might make (4) Only drawings would appear in a sole trader’s financial statements

A 1 and 4 only B 2, 3 and 4 C 2 and 3 only D 1, 3 and 4

12. Which of the following statements is true?

A The interpretation of an entity’s financial statements using ratios is only useful for potential investors B Ratios based on historical data can predict the future performance of an entity C The analysis of financial statements using ratios provides useful information when compared with

previous performance or industry averages D An entity’s management will not assess an entity’s performance using financial ratios

13. X has a 40% shareholding in each of the following three companies:

P: X has the right to appoint or remove a majority of the directors of P. Q: X has significant influence over the affairs of Q. R: X has the power to govern the financial and operating policies of R.

Which of these companies are subsidiaries of X for financial reporting purposes?

A Q and R only B P and R only C P and Q only D P, Q and R

14. Which TWO of the following items must be disclosed in the note to the financial statements for

intangible assets?

(1) The useful lives of intangible assets capitalised in the financial statements (2) A description of the development projects that have been undertaken during the period (3) A list of all intangible assets purchased or developed in the period (4) Impairment losses written off intangible assets during the period



15. Bob acquired 80% of the voting equity shares of Bill. Bill had the following equity at the date of acquisition:

$ Ordinary shares $1 1,000,000 Retained earnings 800,000

The cost of the investment was $1,500,000 and the fair value of the non-controlling interest at acquisition was $360,000.

What was the goodwill on acquisition of Bill?

A $420,000 B $60,000 C $300,000 D $48,000

16. The following transactions relate to Rashid’s electricity expense ledger account for the year ended 30 June

20X9: $ Prepayment brought forward 550Cash paid 5,400Accrual carried forward 650

What amount should be charged to the income statement in the year ended 30 June 20X9 for electricity?

A $6,600 B $5,400 C $5,500 D $5,300

17. At 30 June 20X5 a company’s allowance for receivables was $39,000. At 30 June 20X6 trade receivables

totalled $517,000. It was decided to write off debts totaling $37,000 and to adjust the allowance for receivables to the equivalent of 5% of the trade receivables based on past events.

What figure should appear in the income statement for the year ended 30 June 20X6 for receivables expense?

A $61,000 B $52,000 C $22,000 D $37,000

18. The total of the list of balances in Valley’s payables ledger was $438,900 at 30 June 20X6. This balance did

not agree with Valley’s payables ledger control account balance. The following errors were discovered:

(1) A contra entry of $980 was recorded in the payables ledger control account, but not in the payables ledger.

(2) The total of the purchase returns daybook was under cast by $1,000. (3) An invoice for $4,344 was posted to the supplier’s account as $4,434.

What amount should Valley report in its statement of financial position for accounts payable at 30 June 20X6?

A $436,830 B $438,010 C $439,790 D $437,830

19. According to IAS 2 Inventories, which TWO of the following costs should be included in valuing the

inventories of a manufacturing company?

(1) Carriage inwards (2) Carriage outwards (3) Depreciation of factory plant (4) General administrative overheads



20. Prisha has not kept accurate accounting records during the financial year. She had opening inventory of

$6,700 and purchased goods costing $84,000 during the year. At the year-end she had $5,400 left in inventory. All sales are made at a markup on cost of 20%.

What is Prisha’s gross profit for the year?

A $13,750 B $17,060 C $16,540 D $20,675

21. Exe Co acquired 70% of the ordinary share capital of Barle Co six years ago. The following information

relates to Barle Co for the year ended 30 September 20X3. $ Sales revenue 480,000Cost of sales 270,000Administration expenses 90,000Taxation 30,000

What is the profit attributable to the non-controlling interest in the consolidated income statement? A $27,000 B $63,000 C $36,000 D $84,000

22. Which of the following should appear in a company’s statement of changes in equity?

(1) Total comprehensive income for the year (2) Amortisation of capitalised development costs (3) Surplus on revaluation of non-current assets

A 1, 2 and 3 B 2 and 3 only C 1 and 3 only D 1 and 2 only

23. The plant and machinery account (at cost) of a business for the year ended 31 December 20X5 was as

follows:

Plant and machinery - cost

20X5 $ 20X5 $

1 Jan Balance b/f 240,000 31 Mar Transfer to disposal account

60,000

30 Jun Cash purchase of plant 160,000 31 Dec Balance c/f 340,000

4,00,000 4,00,000

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal.

What should be the depreciation charge for the year ended 31 December 20X5?

A $68,000 B $64,000 C $61,000 D $55,000


24. The following extracts are from Hassan’s financial statements:

$ Profit before interest and tax 10,200Interest (1,600)Tax (3,300)Profit after tax 5,300 Share capital 20,000Reserves 15,600 35,600Loan liability 6,900 42,500

What is Hassan’s return on capital employed?

A 15% B 29% C 24% D 12%

25. Which of the following statements about sales tax is/are true?

(1) Sales tax is an expense to the ultimate consumer of the goods purchased (2) Sales tax is recorded as income in the accounts of the entity selling the goods

A 1 only B 2 only C Both 1 and 2 D Neither 1 nor 2

26. Q’s trial balance failed to agree and a suspense account was opened for the difference. Q does not keep

receivables and payables control accounts. The following errors were found in Q’s accounting records:

(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 of $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 of $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.

Which of the errors will require an entry to the suspense account to correct them?

A 1, 2 and 4 only B 1, 2, 3 and 4 C 1 and 4 only D 2 and 3 only

27. Prior to the financial year end of 31 July 20X9, Cannon Co has received a claim of $100,000 from a supplier

for providing poor quality goods which have damaged the supplier’s plant and equipment. Cannon Co’s lawyers have stated that there is a 20% chance that Cannon will successfully defend the claim.

Which of the following is the correct accounting treatment for the claim in the financial statements for the year ended 31 July 20X9?

A Cannon should neither provide for nor disclose the claim B Cannon should disclose a contingent liability of $100,000 C Cannon should provide for the expected cost of the claim of $100,000 D Cannon should provide for an expected cost of $20,000


28. Gareth, a sales tax registered trader purchased a computer for use in his business. The invoice for the computer showed the following costs related to the purchase:

$

Computer 890

Additional memory 95

Delivery 10

Installation 20

Maintenance (1 year) 25

1,040

Sales tax (17·5%) 182

Total 1,222

How much should Gareth capitalise as a non-current asset in relation to the purchase?

A $1,193 B $1,040 C $1,222 D $1,015

29. The following bank reconciliation statement has been prepared by a trainee accountant:

$

Overdraft per bank statement 3,860

Less: Unpresented cheques 9,160

5,300

Add: Outstanding lodgements 16,690

Cash at bank 21,990

What should be the correct balance per the cash book?

A $21,990 balance at bank as stated B $3,670 balance at bank C $11,390 balance at bank D $3,670 overdrawn

30. The IASB’s Framework for the Preparation and Presentation of Financial Statements gives qualitative

characteristics that make financial information reliable.

Which of the following are examples of those qualitative characteristics?

(1) Accruals (2) Faithful representation (3) Going concern (4) Neutrality




Receivable ledger control account $ $ Opening Balance 308,600 Cash 1,47,200 Credit sales 154,200 Discount allowed 1,400 Cash Sales 88,100 Interest charged on overdue accounts 2,400 Irrecoverable debts 4,900 Allowance for receivables 2,800 Contras 4,600 Closing Balance 396,800 555,500 555,500

What should the closing balance be when all the errors made in preparing the receivables ledger control account have been corrected?

A $395,200 B $304,300 C $309,500 D $307,100

32. Which of the following material events after the reporting date and before the financial statements

are approved are adjusting events?

(1) A valuation of property providing evidence of impairment in value at the reporting date. (2) Sale of inventory held at the reporting date for less than cost. (3) Discovery of fraud or error affecting the financial statements. (4) The insolvency of a customer with a debt owing at the reporting date which is still outstanding.

A 1, 2 and 4 only B 1, 2, 3 and 4 C 1 and 4 only D 2 and 3 only

33. A company values its inventory using the FIFO method. At 1 May 20X5 the company had 700 engines in

inventory, valued at $190 each. During the year ended 30 April 20X6 the following transactions took place:

20X5 1 July Purchased 500 engines at $220 each 1 November Sold 400 engines for $160,000 20X6 1 February Purchased 300 engines at $230 each 15 April Sold 250 engines for $125,000

What is the value of the company’s closing inventory of engines at 30 April 20X6?

A $188,500 B $195,500 C $166,000 D $106,000

34. Amy is a sole trader and had assets of $569,400 and liabilities of $412,840 on 1 January 20X8. During the

year ended 31 December 20X8 she paid $65,000 capital into the business and she paid herself wages of $800 per month.

At 31 December 20X8, Amy had assets of $614,130 and liabilities of $369,770. What is Amy’s profit for the year ended 31 December 20X8?

A $32,400 B $23,600 C $22,800 D $87,800


35. Bumbly Co extracted the trial balance for the year ended 31 December 20X7. The total of the debits exceeded the credits by $300.

Which of the following could explain the imbalance?

A Sales of $300 were omitted from the sales day book B Returns inward of $150 were extracted to the debit column of the trial balance C Discounts received of $150 were extracted to the debit column of the trial balance D The bank ledger account did not agree with the bank statement by a debit of $300

36. Are the following statements correct or incorrect?

(1) Discount received should be recorded on the debit side in the payables ledger account (2) Discount received should be recorded on the debit side in the general ledger

Statement 1 Statement 2 A Correct Correct B Correct Incorrect C Incorrect Correct D Incorrect Incorrect

37. Which TWO of the following will be classified as non-current assets for a dealer in computer

equipment?

(1) Computers for resale (2) Vehicles for delivering computers (3) Business capital (4) Office furniture


38. The following items have to be considered in finalising the financial statements of Q, a limited liability

company: (1) The company gives warranties on its products. The company’s statistics show that about 5% of sales

give rise to a warranty claim. (2) 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? Item 1 Item 2

A create a provision disclose by note only B disclose by note only no action C create a provision create a provision D disclose by note only disclose by note only

39. A company’s motor vehicles cost account at 30 June 20X6 is as follows:

$ $ Balance b/d 35,800 Disposal 12,000Additions 12,950 Balance c/d 36,750 48,750 48,750

What opening balance should be included in the following period’s trial balance for Motor vehicles - cost at 1 July 20X6?

A $36,750 Dr B $48,750 Dr C $36,750 Cr D $48,750 Cr


40. On 30 June 20X2, H acquired 80% of the share capital of S. The non-controlling interest had a fair value of

$1,300,000.

Extracts from the statement of financial position of S at 30 June 20X2 and 30 June 20X6 are shown below: Statement of financial position

30 June 20X2 30 June 20X6 $ $ Ordinary share capital 1,000,000 1,000,000Share premium account 400,000 400,000Retained earnings 4,700,000 5,600,000

What figure for non-controlling interest should appear in the consolidated statement of financial position as at 30 June 20X6?

A $1,220,000 B $1,300,000 C $1,480,000 D $1,400,000

41. Which of the following statements regarding the method of consolidation is true?

(1) Subsidiaries are consolidated in full (2) Associates are equity accounted

A Neither statement B Statement 1 only C Both statements D Statement 2 only

42. Which of the following statements about the valuation of inventory is correct, according to IAS2

Inventories?

A Inventory items are normally to be valued at the higher of cost and net realisable value B The cost of goods manufactured by an enterprise will include materials and labour only. Overhead costs

cannot be included C LIFO is an accepted valuation method for inventory. FIFO is not an accepted valuation method for

inventory D Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable

approximation to actual cost 43. A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December

20X1 to 27% in the year ended 31 December 20X2.

Which of the following events is most likely to have caused the increase?

A An increase in sales volume B A purchase in December 20X1 mistakenly being recorded as happening in January 20X2 C Overstatement of the closing inventory at 31 December 20X1 D Understatement of the closing inventory at 31 December 20X1


(1) Capitalised development expenditure must be amortised over a period not exceeding five years (2) Capitalised development costs are shown in the statement of financial position under the heading of

non-current assets (3) If certain criteria are met, research expenditure must be recognised as an intangible asset

A 2 only B 2 and 3 C 1 only D 1 and 3


45. IAS 28 Investments in Associates governs the identification of associates.

Which of the following would suggest that an entity is an associate of another entity?

A The investing entity has owned its share since the incorporation of the investee entity B The investor holds greater than 20% but less than 50% of the voting power of the investee C The investing entity has some influence over other entities in the same industry D The investor often trades with the investee

46. Theta prepares its financial statements for the year to 30 April each year. The company pays rent for its

premises quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was $84,000 per year until 30 June 20X5. It was increased from that date to $96,000 per year.

What rent expense and end of year prepayment should be included in the financial statements for the year ended 30 April 20X6?

Expense Prepayment

A $93,000 $8,000 B $93,000 $16,000 C $94,000 $8,000 D $94,000 $16,000

47. Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950.

Alpha’s purchase ledger account for Beta shows a balance due to Beta of $4,140.

Investigation reveals the following:

(1) cash paid to Beta of $4,080 has not been accounted for by Beta (2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta

What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?

A nil B $690 C $770 D $730

48. The inventory value for the financial statements of Q for the year ended 31 May 20X6 was based on an

inventory count on 4 June 20X6, which gave a total inventory value of $836,200.

Between 31 May and 4 June 20X6, the following transactions took place: $

Purchase of goods 8,600 Sales of goods (profit margin 30% on sales) 14,000 Goods returned by Q to supplier 700 What adjusted figure should be included in the financial statements for inventories at 31 May 20X6?

A $838,100 B $853,900 C $818,500 D $834,300


49. Wheddon Co purchased 60,000 ordinary shares in Raleigh Co for $85,000 five years ago, when Raleigh Co’s retained earnings were $20,000.

Raligh Co’s equity and reserves at 31 July 20X9 were as follows: Ordinary shares $180,000 Retained earnings 70,000 The fair value of the non-controlling interest at acquisition was $22,000. What was the goodwill arising on acquisition of Raleigh Co?

A $7,000 B $10,000 C $25,000 D $43,000

50. At 31 December 20X4 a company’s capital structure was as follows:

$

Ordinary share capital 125,000 (500,000 shares of 25c each) Share premium account 100,000

In the year ended 31 December 20X5 the company made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the share premium account for the purpose.

What was the company’s capital structure at 31 December 20X5?

Ordinary share capital Share premium account A $450,000 $25,000 B $225,000 $250,000 C $225,000 $325,000 D $212,500 $262,500

End of Question Paper


16: Solution to Pilot Paper © GTG

1. The correct option is A. The accounting equation is represented by: Closing net assets + drawings - capital introduced - opening net assets


Under the imprest system, certain amounts of funds are issued to the petty cash cashier in order to pay for the petty expenses of business. This fixed amount is referred to as a float The petty cashier is reimbursed at regular with the amount of expenses incurred by him, in order to maintain the float.


A company can raise unlimited debts and liabilities. However they have to prepare financial statements at the end of each reporting period. Also a company has a separate legal identity from its owners.


Payables $ Balance b/d 60,000Cash paid to suppliers (302,800)Discounts received (2,960)Contra (2,000)Balance c/d (84,000)Purchases 331,760

5. The correct option is D 6. The correct option is B

Current assets $ Loan asset 12,000Interest (12,000 x 12%) 240Prepayment (8/12 x 9,000) 6,000Accrued rent 4,000 22,240


$ Profit 83,600Purchase of van 18,000Depreciation 18,000 x 25% (4,500) 97,100


The receivables days have increased in comparison to previous years which indicate that Xena is unable to liquidate money from its customers quicker. Also inventory turnover has increased which indicates that Xena is unable to realize its inventory faster. The decline in payable days indicates that the suppliers are granting a shorter credit limit in terms of days.


A surplus on revaluation of a non-current asset is a non-cash gain and appears under the head “Other comprehensive income” in the income statement. Therefore revelation surplus will not appear as an item in a statement of cash flows.

© GTG Solution to Pilot Paper: 17


$ Balance b/f (advance) 28,700Balance b/f (arrears) (21,200)Cash received 481,200Balance c/f (advance) (31,200)Balance c/f (arrears) 18,400 475,900


A sole trader’s financial statements can be made available to third parties if the sole trader wishes. For example if it has to avail loan from bank, then it may have to disclose its financial statements to the bank

12. The correct option is C. 13. The correct option is B. 14. The correct option is A. 15. The correct option is B.

$000 Cost 1,500NCI 360Shares( 1,000)Retained earnings (800) 60


$ Balance b/f 550Expense incurred (cash) 5,400Accrual c/f 650 6,600


$ $ Debts written off 37,000Movement in allowance: (517 - 37) x 5% 24,000Less opening allowance 39,000 (15,000)Receivables expense 22,000


$ Balance per ledger 438,900Less contra (980)Posting error (90)Corrected balance 437,830


Carriage outwards and general administrative overheads are not related to bring the inventory to their present location and condition.



(6,700 + 84,000 - 5,400) x 20% = $17,060 21. The correct option is A.

Profit (480 - 270 - 90 - 30) x 30% = 27,000 22. The correct option is C.

Amortisation of capitalised development costs appears in the income statement as an expense.


$ Depreciation: Jan-Mar 240,000 x 20% x 3/12 12,000Apr-Jun (240,000 - 60,000) x 20% x 3/12 9,000Jul-Dec (180,000 + 160,000) x 20% x 6/12 34,000 55,000


10,200 / 42,500 25. The correct option is A. 26. The correct option is B. 27. The correct option is C. 28. The correct option is D.

$1,040 - $25 = $1,015 29. The correct option is B.

$ Overdraft per bank statement (3,860) Less: Unpresented cheques (9,160) Add: Outstanding lodgements 16,690 Cash at bank 3,670


Accruals and going concern are the fundamental accounting concepts according the Framework.


Receivable Ledger Control Account

$ $ Opening balance 308,600 Cash 147,200Credit Sales 154,200 Discount allowed 1,400Interest charged on overdue accounts 2,400 contras 4,600 Irrevocable debts 4,900 Closing Balance 307,100 465,200 465,200


Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period.

© GTG Solution to Pilot Paper: 19


Closing inventory:

$ 50 x $1909, 500500 x $220 110,000300 x $230 69,000 188,500


$ Opening assets 569,400Opening liabilities (412,840)Capital introduced 65,000Drawings (800 x 12) (9,600) 211,960Profit (bal fig) 32,400Closing net assets (614,130 - 369,770) 244,360

35. The correct option is C

Options A, B and D would not affect the trail balance. Discount received is an income item and needs to be credited. Therefore debiting the discount received of $150 would result in an imbalance of $300.

36. The correct option is B. 37. The correct option is C. 38. The correct option is A. 39. The correct option is A. 40. The correct option is C.

$000At acquisition 1,300% Post acquisition (5,600 - 4,700) x 20% 180 1,480

41. The correct option is C. 42. The correct option is D. 43. The correct option is D.

Understatement of closing inventory will result in overstatement of the profit.


In accordance with the provisions of IAS 38 Intangible assets research costs are expensed and development costs are capitalised when certain criteria are met. The development costs are amortised over the useful life of the intangible asset.



If an investor holds 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence. The investee in such cases can be presumed to be an associate.


Expense $84,000 x 2/12 x $96,000 x 10/12 = $94,000 Prepayment $96,000 x 2/12 = $16,000


Beta Alpha

$ $ 8,950 4,140

(4,080) 40 4,870 4,180 (difference $690)


$ Count 836,200Purchases (8,600)Sales 14,000 x 70%Returns 700 838,100


$ Cost 85,000NCI 22,000Shares (80,000)Retained Earnings (20,000) 7,000


Share capital Share premium $ $ Balance b/d 125,000 100,000 Rights issue 62,500 187,500 Bonus issue 37,500 (37,500) Balance c/d 225,000 250,000

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Section A – ALL 35 questions are compulsory and MUST be attempted. Refer to Pilot paper 1 for Questions 1 to 35.

70 marks Section B - BOTH questions are compulsory and MUST be attempted Please write your answer within the answer booklet in accordance with the detailed instructions provided within each of the questions in this section of the exam paper. 1. Keswick Co acquired 80% of the share capital of Derwent Co on 1 June 20X5. The summarised draft

income statements for Keswick Co and Derwent Co for the year end of 31 May 20X6 are shown below:

Keswick Co Derwent Co $’000 $’000

Revenue 8,400 3,200Cost of sales (4,600) (1,700)Gross profit 3,800 1,500Distribution costs (1,500) (510)Administrative costs (700) (450)Profit before tax 1,600 540Tax (600) (140)Profit for the year 1,000 400

During the year Keswick Co sold goods costing $1,000,000 to Derwent Co for $1,500,000. At 31 May 20X6, 30% of these goods remained in Derwent Co’s inventory.

Required:

a) Use the information above to answer the questions below. Write your answers in the answer book provided.

(i) Which of the formulas below shows the correct consolidated revenue?

A 8,400 + 3,200 - 1,500 B 8,400 + (80% x 3,200) - 1,500 C 8,400 + 3,200 D 8,400 + (80% x 3,200) E 8,400 + 3,200 + 1,500 F 8,400 + 3,200 - 1,000

(2 marks)

(ii) Which of the formulas below shows the correct consolidated cost of sales?

A 4,600 + 1,700 - 1,500 + (30% x 500) B 4,600 + (80% x 1,700) - 1,500 C 4,600 + 1,700 D 4,600 + (80% x 1,700) E 4,600 + 1,700 - 1,500 - (30% x 500) F 4,600 + 1,700 - 1,000

(2 marks)

(iii) What are consolidated distribution costs? (1 mark)

(iv) What are consolidated administrative expenses? (1 mark)

(v) What is the consolidated tax expense? (1 mark)

(vi) Which of the following formulas shows the correct formula for the amount to be entered in the consolidated income statement as ‘Profit attributable to: Equity owners of Keswick Co’?

A Group profit after tax - non controlling interest B Group profit after tax + non-controlling interest C Keswick Co’s profit after tax D Group profit after tax

(2 marks)

(vii) What amount is shown in the consolidated income statement for the non-controlling interest?

(2 marks)


b) The following table shows factors (A to H) to be considered when determining whether a parent-subsidiary relationship exists.

Required:

In your answer book list letters A to H to represent each of the factors, and write ‘Yes’ if the factor illustrates the existence of a parent-subsidiary relationship and ‘No’ if it does not.

Factor A Significant influence B Control C Non-controlling interest D Greater than 50% of the equity shares being held by an investor E 100% of the equity shares being held by an investor F Greater than 50% of the preference shares being held by an investor G 50% of all shares and all debt being held by an investor H Greater than 50% of preference shares and debt being held by an investor (4 marks)

15 marks

2. Malright, a limited liability company, has an accounting year end of 31 October. The accountant is preparing

the financial statements as at 31 October 20X7 and requires your assistance.

The trial balance below contains items which belong on either the statement of financial position as at 31 October 20X7 or statement of comprehensive income for the year ended 20X7. The bookkeeper is uncertain as to which statement the balances belong.

Required:

a) For each of the items listed below (A to P), determine whether they belong in the statement of financial

position as at 31 October 20X7. In your answer book list the letters A to P to represent each of the ledger account balances and write ‘Yes’ if the ledger account belongs on the statement of financial position as at 31 October 20X7 and ‘No’ if it does not.

Item Account Dr Cr ref $’000 $’000 A Buildings at cost 740 B Buildings accumulated depreciation, 1 November 20X6 60 C Plant at cost 220 D Plant accumulated depreciation, 1 November 20X6 110 E Bank balance 70 F Revenue 1,800 G Net Purchases 1,140 H Inventory at 1 November 20X6 160 I Cash 20 J Trade payables 250 K Trade receivables 320 L Administrative expenses 325 M Allowance for receivables at 1 November 20X6 10 N Retained earnings at 1 November 20X6 130 O Equity shares, $1 415 P Share premium account 80

2,925 2,925 (4 marks)


b) The bookkeeper has been given information relating to depreciation and allowance for receivables and is uncertain about the double entry:

� The allowance for receivables is to be increased to 5% of trade receivables. The allowance for

receivables is treated as an administrative expense. � Plant is depreciated at 20% per annum using the reducing balance method and buildings are

depreciated at 5% per annum on their original cost. Depreciation is treated as a cost of sales expense.

Required:

(i) What is the double entry to record the increase in the allowance for receivables?

In your answer book, list A, B, C and D and write ‘Debit’ if the corresponding ledger account is debited, ‘credit’ if the item is to be credited and ‘None’ if the ledger account does not require an entry.

Item ref Ledger account Debit Credit No Debit or Credit

A Trade receivables B Administrative expenses C Allowance for receivables D Revenue

(2 marks)

(ii) What is the allowance for receivables expense for the year? (1 mark)

(iii) What is the double entry to record the buildings and plant depreciation for the year?

In your answer book, list A to F and write ‘Debit’ if the ledger account is debited, ‘Credit’ if the item is to be credited and ‘None’ if the ledger account does not require an entry. Item ref Ledger account Debit Credit No Debit or Credit

A Administrative expenses B Cost of sales C Buildings cost D Plant cost E Buildings accumulated depreciation F Plant accumulated depreciation

(3 marks)

(iv) What is the depreciation charge for buildings for the year? (1 mark)

(v) What is the depreciation charge for plant for the year? (1 mark)

c) Here is some additional information: � Closing inventory has been counted and is valued at $75,000 � An invoice of $15,000 for energy costs relating to the quarter ended 30 November 20X7 was received

on 2 December 20X7. Energy costs are included in administrative expenses.

Required:

(i) Ignoring the depreciation charge in part (b) what is the cost of sales for the year? (1·5 marks)

The energy costs need to be adjusted for the year ended 31 October 20X7. (ii) Which account is debited to account for the year-end adjustment for energy costs?

(0·5 marks) (iii) Which account is credited to account for the year-end adjustment for energy costs?

(0·5 marks) (iv) What is the amount to be posted within the year-end adjustment double entry above? (0·5 marks)

15 marks

End of Question Paper

6: Solution to Pilot Paper © GTG Section B 1

(a) (i) The correct option is A. 2 marks

(ii) The correct option is A. 1 mark

(iii) The consolidated distribution cost is $1,500 + $510 = $2,010 1 mark

(iv) The consolidated administrative cost is $700 + $450 = $1,150 1 mark

(v) The consolidated tax expense is $600 + $140 = $740 2 marks

(vi) The correct option is A. 2 marks

(vii) NCI share in the consolidated income statement is $400 x 20% = $80 2 marks

(b)

Marks

A No E Yes 1.0

B Yes F No 1.0

C Yes G No 1.0

D Yes H No 1.0

Maximum Marks 15

2 (a) Marks Marks

A Yes 0·25 I Yes 0·25

B No 0·25 J Yes 0·25

C Yes 0·25 K Yes 0·25

D No 0·25 L No 0·25

E Yes 0·25 M No 0·25

F No 0·25 N No 0·25

G No 0·25 O Yes 0·25

H No 0·25 P Yes 0·25 4 marks

(b) (i)

Marks A None 0·5 B Debit 0·5 C Credit 0·5 D None 0·5 2 marks

(ii) The allowance for receivables expense for the year is $6,000 .

$Closing allowance: 320,000 x 5% 16,000Opening allowance per TB (10,000)Receivables expense 6,000 1 mark

© GTG Solution to Pilot Paper: 7 (iii)

Marks A None 0·5 B Debit 0·5 C None 0·5 D None 0·5 E Credit 0.5 F Credit 0.5 3 marks

(iv) The depreciation charge for buildings for the year is $37,000 $740,000 x 5% = $37,000

1 mark

(v) The depreciation charge for plant for the year is $22,000 1 mark

($220,000 - $110,000) x 20% = $22,000 (c) (i) Cost of sales for the year = $1,225,000

$160,000 + $1,140,000 - $75,000 = $1,225,000

1.5 marks

(ii) The account to be debited is aadministrative expenses 0·5 mark

(iii) The account to be credited is accrual.

0·5 mark

(iv) The amount to be posted within the year-end adjustment is $10,000. $15,000 x 2/3 = $10,000

0.5 mark

Maximum Marks 15


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