ACCA preparing financial statement part 1 2005

(International Stream)
PART 1
THURSDAY 8 DECEMBER 2005

QUESTION PAPER
Time allowed 3 hours
This paper is divided into two sections
Section A

ALL 25 questions are compulsory and MUST be
answered

Section B

ALL FIVE questions are compulsory and MUST be
answered

Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall

The Association of Chartered Certified Accountants

Paper 1.1(INT)

Preparing Financial
Statements


Section A – ALL 25 questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.

Each question within this section is worth 2 marks.
1

The following information is available for a sole trader who keeps no accounting records:
$
186,000
274,000

Net business assets at 1 July 2004
Net business assets at 30 June 2005
During the year ended 30 June 2005:
Cash drawings by proprietor
Additional capital introduced by proprietor
Business cash used to buy a car for the proprietor’s wife,
who takes no part in the business

68,000
50,000
20,000

Using this information, what is the trader’s profit for the year ended 30 June 2005?

2

A

$126,000

B

$50,000

C

$86,000

D

$90,000

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

Debit:
Credit:

Cash
Share capital
Share premium

$1,100,000
$250,000
$850,000

B

Debit:
Credit:

Share capital
Share premium
Cash

$250,000
$850,000
$1,100,000

C

Debit:
Credit:

Cash
Share capital

$1,100,000
$1,100,000

D

Debit:
Credit:

Cash
Share capital
Retained earnings

$1,100,000

$250,000
$850,000

2


3

P and Q are in partnership, sharing profits equally.
On 1 January 2005, R joined the partnership and it was agreed that from that date all three partners should share
equally in the profit.
In the year ended 30 June 2005 the profit amounted to $300,000, accruing evenly over the year, after charging a
bad debt of $30,000 which it was agreed should be borne equally by P and Q only.
What should be the partners’ total profit shares for the year ended 30 June 2005?

4

A

P
$
95,000

Q
$
95,000

R
$
110,000

B

122,500

122,500

55,000

C

125,000

125,000

50,000

D

110,000

110,000

50,000

At 1 July 2004 a limited liability company’s capital structure was as follows:
Share capital 1,000,000 shares of 50c each
Share premium account

$

500,000
400,000

In the year ended 30 June 2005 the company made the following share issues:
1 January 2005
A bonus issue of one share for every four in issue at that date, using the share premium account.
1 April 2005
A rights issue of one share for every ten in issue at that date, at $1·50 per share.
What will be the balances on the company’s share capital and share premium accounts at 30 June 2005 as a
result of these issues?
Share capital
$
A 687,500

5

Share premium account
$
650,000

B

675,000

375,000

C

687,500

150,000

D

687,500

400,000

Which of the following factors could cause a company’s gross profit percentage on sales to fall below the expected
level?
1
2
3
4

Understatement of closing inventories.
The incorrect inclusion in purchases of invoices relating to goods supplied in the following period.
The inclusion in sales of the proceeds of sale of non-current assets.
Increased cost of carriage charges borne by the company on goods sent to customers.

A

3 and 4

B

2 and 4

C

1 and 2

D

1 and 3

3

[P.T.O.


6

Which of the following journal entries are correct, according to their narratives?
Dr
$
18,000

1

Suspense account
Rent received account
Correction of error in posting $24,000 cash
received for rent to the rent received account
as $42,000
––––––––––––––––––––––––––––––––––––––––––––

Cr
$
18,000

2

B receivables ledger account
A receivables ledger account
Correction of error: cash received
from A wrongly entered to B’s account
––––––––––––––––––––––––––––––––––––––––––––

22,000
22,000

3

Share premium account
Share capital account
1 for 3 bonus issue on share capital
of 1,200,000 50c shares
––––––––––––––––––––––––––––––––––––––––––––

400,000

4

750,000

400,000

Shares in X
Share capital account

Share premium account

250,000
500,000

500,000 50c shares issued at $1·50 per share
in exchange for shares in X
––––––––––––––––––––––––––––––––––––––––––––

7

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

The receivables ledger control account below contains several incorrect entries.
Receivables ledger control account

Opening balance

Cash received from credit customers

$
138,400

78,420

––––––––
216,820
––––––––

$
Credit sales
80,660
Contras against credit
balances in payables ledger
1,000
Discounts allowed to credit customers 1,950
Bad debts written off
3,000
Dishonoured cheques from credit
customers
850
Closing balance
129,360
––––––––
216,820
––––––––

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

$133,840

B

$135,540

C

$137,740

D

$139,840
4


8

A limited liability company’s trial balance does not balance. The totals are:
Debit
Credit

$384,030
$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?

9

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.

A draft cash flow statement contains the following calculation of net cash inflow from operating activities:
$m
13
2
(3)
5

4
–––
21

Operating profit
Depreciation
Decrease in inventories
Decrease in trade and other receivables
Decrease in trade payables
Net cash inflow from operating activities

Which of the following corrections need to be made to the calculation?
1
2
3
4

Depreciation should be deducted, not added.
Decrease in inventories should be added, not deducted.
Decrease in receivables should be deducted, not added.
Decrease in payables should be deducted, not added.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

10 Which of the following factors would cause a company’s gearing ratio to fall?
1
2
3
4

A bonus issue of ordinary shares.
A rights issue of ordinary shares.
An issue of loan notes.
An upward revaluation of non-current assets.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

5

[P.T.O.


11 The following information is available for Orset, a sole trader who does not keep full accounting records:
Inventory 1 July 2004
30 June 2005
Purchases for year ended 30 June 2005

$
138,600
149,100
716,100

Orset makes a standard gross profit of 30 per cent on sales.
Based on these figures, what is Orset’s sales figure for the year ended 30 June 2005?
A

$2,352,000

B

$1,038,000

C

$917,280

D

$1,008,000

12 At 1 July 2004 a company had prepaid insurance of $8,200. On 1 January 2005 the company paid $38,000 for
insurance for the year to 30 September 2005.
What figures should appear for insurance in the company’s financial statements for the year ended 30 June
2005?
A

Income statement
$27,200

Balance sheet
Prepayment $19,000

B

$39,300

Prepayment $9,500

C

$36,700

Prepayment $9,500

D

$55,700

Prepayment $9,500

13 Which of the following correctly describes the imprest system for operating petty cash?
A

All expenditure out of petty cash must be supported by a properly authorised voucher.

B

A regular equal amount of cash is transferred into petty cash.

C

The exact amount of expenditure out of petty cash is reimbursed at intervals.

D

A budget is fixed for a period which petty cash expenditure must not exceed.

14 Alpha buys goods from Beta. At 30 June 2005 Beta’s account in Alpha’s records showed $5,700 owing to Beta.
Beta submitted a statement to Alpha as at the same date showing a balance due of $5,200.
Which of the following could account fully for the difference?
A

Alpha has sent a cheque to Beta for $500 which has not yet 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 note.

D

Beta has issued a credit note for $500 to Alpha which Alpha has not yet received.

6


15 Which of the following statements about intangible assets are correct?
1
2
3

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

A

2 and 3 only

B

1 and 3 only

C

1 and 2 only

D

All three statements are correct

16 Which of the following events between the balance sheet date and the date the financial statements are
authorised for issue must be adjusted in the financial statements?
1
2
3
4

Declaration of equity dividends.
Decline in market value of investments.
The announcement of changes in tax rates.
The announcement of a major restructuring.

A

1 only

B

2 and 4

C

3 only

D

None of them

17 A company sublets part of its office accommodation. In the year ended 30 June 2005 cash received from tenants
was $83,700.
Details of rent in arrears and in advance at the beginning and end of the year were:

30 June 2004
30 June 2005

In arrears
$
3,800
4,700

In advance
$
2,400
3,000

All arrears of rent were subsequently received.
What figure for rental income should be included in the company’s income statement for the year ended 30 June
2005?

A

$84,000

B

$83,400

C

$80,600

D

$85,800

18 Which of the following statements about accounting ratios and their interpretation are correct?
1
2
3

A low-geared company is more able to survive a downturn in profit than a highly-geared company.
If a company has a high price earnings ratio, this will often indicate that the market expects its profits to rise.
All companies should try to achieve a current ratio (current assets/current liabilities) of 2:1.

A

2 and 3 only

B

1 and 3 only

C

1 and 2 only

D

All three statements are correct
7

[P.T.O.


19 At 30 June 2004 a company’s allowance for receivables was $39,000. At 30 June 2005 trade receivables totalled
$517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the
equivalent of 5 per cent of the trade receivables based on past events.
What figure should appear in the income statement for these items?
A

$61,000

B

$22,000

C

$24,000

D

$23,850

20 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 the IAS 2 requirements in this area are correct?
1

3

Finished goods inventories may be valued on the basis of labour and materials cost only, without including
overheads.
Carriage inwards, but not carriage outwards, should be included in overheads when valuing inventories of
finished goods.
Factory management costs should be included in fixed overheads allocated to inventories of finished goods.

A

All three statements are correct

B

1 and 2 only

C

1 and 3 only

D

2 and 3 only

2

21 A limited liability company sold a building at a profit.
How will this transaction be treated in the company’s cash flow statement?
Proceeds of sale
Cash inflow under
Financing activities

Profit on sale
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

A

8


22 Which of the following items may appear in a company’s statement of changes in equity, according to IAS 1
Presentation of financial statements?
1
2
3
4

Unrealised revaluation gains.
Dividends paid.
Proceeds of equity share issue.
Profit for the period.

A

2, 3 and 4 only

B

1, 3 and 4 only

C

All four items

D

1, 2 and 4 only

23 The capital structure of a company at 30 June 2005 is as follows:
Ordinary share capital
Share premium account
Retained earnings
10% Loan notes

$m
100
40
60
40

The company’s income statement for the year ended 30 June 2005 showed:
$m

44
(4)
–––
40
–––

Operating profit
Loan note interest
Profit for year

What is the company’s return on capital employed?
A

40/240

=

162/3 per cent

B

40/100

=

40 per cent

C

44/240

=

181/3 per cent

D

44/200

=

22 per cent

24 Sigma’s bank statement shows an overdrawn balance of $38,600 at 30 June 2005. A check against the company’s
cash book revealed the following differences:
1
2
3
4

Bank charges of $200 have not been entered in the cash book.
Lodgements recorded on 30 June 2005 but credited by the bank on 2 July $14,700.
Cheque payments entered in cash book but not presented for payment at 30 June 2005 $27,800.
A cheque payment to a supplier of $4,200 charged to the account in June 2005 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

9

[P.T.O.


25 The following is an extract from the income statement of a business:
$000
Sales revenue
Opening inventories
Purchases

$000
22,000

5,000
15,000
–––––––

20,000
3,000
–––––––

less: Closing inventories

17,000
–––––––
5,000
–––––––

Gross profit

To the nearest day, how many days’ sales are held in the closing inventories?
A

3,000/22,000 x 365

= 50 days

B

3,000/17,000 x 365

= 64 days

C

3,000/15,000 x 365

= 73 days

D

3,000/20,000 x 365

= 55 days
(50 marks)

10


Section B – ALL FIVE questions are compulsory and MUST be attempted
1

Airn is a sole trader who does not keep a full set of accounting records. An analysis of his cash transactions for the
year ended 30 June 2005 is given below:
Reference
to notes

Receipts
$

Overdraft, 1 July 2004
Cash banked
1
Proceeds of sale of old motor van
2,3
Payments for purchases
New motor van (purchased 1 January 2005) 3

Rent and general expenses
Drawings
Overdraft, 30 June 2005

Payments
$
32,400

418,200
4,500
316,300
22,000
49,200
80,400
77,600
––––––––
500,300
––––––––

–––––––––
500,300
–––––––––

Airn’s other assets and liabilities at the beginning and end of the year ended 30 June 2005 were:
Reference
to notes
Shop fittings (cost $45,000)
Motor van (cost $18,000)
New motor van
Trade receivables

Trade payables
Inventories
Owing for rent and general expenses

30 June
2005
$
to be calculated
sold
22,000
48,600
24,200
63,200
13,000

2,3
3

2004
$
35,000
4,000
–
44,700
19,600
58,900
12,500

Notes:
(1) Before banking the cash received from customers, Airn made the following payments:

$
Wages
74,000
Purchases for cash
13,700
General expenses
7,400
–––––––
95,100
–––––––
(2) The motor van held at 30 June 2004 was sold during the year.
(3) Airn’s depreciation policy is to charge depreciation on the straight line basis as follows, assuming no residual
value:
Motor van
Shop fittings

20% per year
10% per year

No depreciation is charged in the year of sale of assets, but there is a full year’s depreciation in the year of
purchase.
Required:
Prepare Airn’s income statement for the year ended 30 June 2005.
(11 marks)

11

[P.T.O.

2

The following land and buildings account for the year ended 31 December 2004 has been written up by a bookkeeper
who has since been dismissed. The notes under the account explain each entry.
Land and buildings
2004
1 Jan
Balance
30 June Cash
31 Dec

Revaluation reserve

Notes
1
2

$000
1,000
700

5

2,200

2004

30 Sep Cash proceeds of sale
31 Dec Income statement
31 Dec Balance

Notes

$000

3
4

500
20
3,380
––––––
3,900
––––––

––––––
3,900
––––––

Notes
1 This is the net balance appearing in the company’s balance sheet at 1 January 2004. It is made up as follows:
$000
Land-cost
Buildings-cost
Buildings-accumulated depreciation

2

Cash paid for new land and building:
Land

Building

3

Cash received on sale of land and buildings:
Details of the transaction were:

800
(200)
––––

$000
400
600
––––––
1,000
––––––
$000
200
500
––––
700
––––

$000
Proceeds of sale
Cost: Land
Building
Accumulated depreciation at 1 January 2004

$000

$000
500

(100)
(100)
20
––––

Profit

(80)
––––

(180)
––––
320
––––

4

This is the depreciation charge for the year, calculated as 2 per cent of the opening balance $1,000,000.
It is the company’s policy to charge depreciation on buildings only, at 2 per cent per year on the straight line
basis, with a full year’s depreciation in the year of purchase and none in the year of sale.

5

This entry was made to reflect a revaluation of the land and buildings held at 31 December 2004.
The valuer placed the following values on the property:

$000
800
1,400
––––––
2,200
––––––

Land
Buildings

The revaluation is not to be reflected in the depreciation charge for the year to 31 December 2004.

12


Required:
Prepare the following ledger accounts for the year ended 31 December 2004 correctly recording the above
transactions:
– Land, cost or valuation;
– Buildings, cost or valuation;
– Buildings, accumulated depreciation;
– Disposal of land and buildings.
(11 marks)

3

On 1 October 1999 Kye, a limited liability company, purchased 80 per cent of the share capital of Rye for $260,000.
The retained earnings balance of Rye at this date was $180,000.
At 30 September 2005 the balance sheets of the two companies were:

Investment in Rye
Sundry net assets

Ordinary share capital
Retained earnings

Kye
$
260,000
420,000
–––––––––
680,000
–––––––––
200,000
480,000
–––––––––
680,000
–––––––––

Rye
$
–
360,000
–––––––––
360,000
–––––––––
100,000
260,000
–––––––––
360,000

–––––––––

Goodwill arising on the acquisition has been fully written off.
Required:
Prepare the consolidated balance sheet of Kye and the subsidiary as at 30 September 2005, showing workings
for the retained earnings figure in the consolidated balance sheet.
(8 marks)

4

The directors of Umbria, a limited liability company, are reviewing the company’s draft financial statements for the
year ended 30 June 2005. The following material matters are under discussion:
(1) After the balance sheet date one of the company’s factories was seriously damaged by fire. Insurance will only
cover part of the loss suffered. The company’s going concern status is not affected.
(2) Umbria guaranteed the overdraft of another company in 2003. No disclosure has been made in previous
financial statements, but events in the latter part of the year ended 30 June 2005 suggest that it is probable that
a liability will fall on Umbria in 2006.
(3) One of the company’s directors was dismissed during 2005 for disclosing confidential information to a
competitor. Umbria has commenced an action against this director, and the company has been advised that it is
probable that substantial damages will be awarded.
(4) One of the company’s buildings was revalued during the year. The directors are uncertain as to how the
revaluation surplus should be included in the financial statements. The surplus has been separately disclosed as
an item in the draft income statement.
Required:
Explain how each of these four matters should be dealt with in the financial statements for the year ended
30 June 2005, stating in each case the relevant accounting standard.
(10 marks)

13

[P.T.O.


5

State four accounting concepts, and explain how each one contributes to fair presentation in the financial
statements.
(10 marks)

End of Question Paper

14