Bilal Acca

Answers

Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2006 Answers

Section A 1

C

2

D

3

D

4

D

(280,000 x 20%) + (48,000 x 20% x 9/12 ) + (36,000 x 20% x 4/12 ) – (14,000 x 20% x 6/12 ) 5/ 12

x 24,000 + 7/12 x 30,000 = 27,500; 2/3 x 7,500 = 5,000 Receivables ledger control account

Opening receivables Sales

148,200 880,600

Cash received from customers Discounts allowed Irrecoverable debts written off Returns from customers Closing receivables

–––––––––– 1,028,800 –––––––––– 5

D

6

D

7

C

8

B

9

B

10

D

11

A

12

B

13

B

14

A

819,300 16,200 1,500 38,700 153,100 –––––––––– 1,028,800 ––––––––––

3,980 – 270 – 180 – 3,200 = 330 : difference 100

630,000 – 4,320 – 440

430,000 x 5% = 21,500 – 18,000 + 28,000 Payables ledger control account Cash paid to suppliers Discounts received Contras with amounts receivable in receivables ledger Purchases returns Closing balance

988,400 12,600 4,200 17,400 325,200 –––––––––– 1,347,800 ––––––––––

15

A

16

D

17

C

18

A

19

C

20

B

21

D

22

C

23

B

24

C

1,100,000 – 4/5 (400,000 + 500,000)

25

A

20% x (400,000 + 800,000)

756,000 x

Opening balance Purchases

384,600 963,200

–––––––––– 1,347,800 ––––––––––

10/ 7

38,640 + 14,260 – 19,270 = 33,630

48,000 + 400 + 2,200

17

Section B 1

Leon and Mark Statement of division of profit for the year ended 31 December 2005 Six months ended 30 June 2005 $ Leon:

(90,000 – 20,000) (see working)

Six months ended 31 December 2005 Profit Interest on capital Leon 5% x 400,000 x 6/12 Mark 5% x 200,000 x 6/12

$ 70,000 –––––––– 180,000

10,000 5,000 ––––––––

Salary Mark 20,000 x 6/12

(15,000) –––––––– 165,000 (10,000) –––––––– 155,000

Balance of profit Leon 60% Mark 40%

93,000 62,000 ––––––––

Working Profit for year Add: irrecoverable debt

155,000 –––––––– 0 –––––––– $ 250,000 20,000 –––––––– 270,000 ––––––––

Profit for division Six months ended 30 June 2005 less: irrecoverable debt

90,000 20,000 ––––––––

Six months ended 31 December 2005

70,000 180,000 –––––––– 250,000 ––––––––

Current accounts

Drawings Balance

Leon $ 160,000 13,000

173,000

Mark $ 80,000

30 June Profit 31 Dec Interest on capital Salary Share of balance 60:40 Balance

80,000

Leon $ 70,000 10,000 93,000

173,000

18

Mark $ 5,000 10,000 62,000 3,000 80,000

Alternative format Leon and Mark Statement of division of profit for the year ended 31 December 2006 Leon $ Six months ended 30 June 2005 Leon: (90,000 – 20,000)(see working)

Mark $

70,000 –––––––

Six months ended 31 December 2005 Interest on capital Leon 5% x 400,000 x 6/12 Mark 5% x 200,000 x 6/12

Total $ 70,000 –––––––

10,000

Salary Mark 20,000 x 6/12 Balance of profit 60:40

93,000 ––––––– 103,000 –––––––

5,000

15,000

10,000

10,000

62,000 ––––––– 77,000 –––––––

155,000 ––––––– 180,000 –––––––

Current accounts

Drawings Balance

2

Leon $ 160,000 13,000

Mark $ 80,000

173,000

80,000

2005 30 June Profit 31 Dec Share of profit Balance

Leon $ 70,000 103,000

173,000

Mark $ 77,000 3,000 80,000

(a) Net profit adjustments $ 684,000

Profit per draft financial statements (1) Inventory movement Adjustment for sales $36,000 x 60% (2) Goods on sale or return Elimination of profit (3) Reduction in inventory: $18,000 – ($13,500 – $500) (4) Debts written off (5) Increase in allowance for receivables ($11,500 – $10,000)

21,600 (4,000) (5,000) (8,000) (1,500) ––––––––– $687,100 –––––––––

Revised net profit

(b) Adjustments to inventory and receivables (i) Inventory Inventories per draft financial statements (1) Inventory movement – as (a) above (2) Goods on sale or return cost introduced into inventory (3) Reduction in inventory (a) above

$ 116,800 21,600 6,000 (5,000) ––––––––– $139,400 –––––––––

Revised closing inventory

$ (ii) Receivables per draft financial statements (2) Deduction of goods on sale or return (4) Debts written off

248,000 (10,000) (8,000) ––––––––– 230,000 (11,500) ––––––––– $218,500 –––––––––

(5) less: allowance for receivables

19

Ganda Cash flow statement for the year ended 31 December 2005 $000

3

Cash flows from operating activities Profit before taxation Adjustment for: Depreciation (W2) Profit on sale of non-current asset (W3) Interest expense

$000

970 310 (20) 120 ––––– 1,380

Increase in inventory Decrease in receivables Increase in payables

(200) 200 100 ––––– 1,480 (120) (200) –––––

Cash generated from operations Interest paid Income taxes paid Net cash from operating activities

1,160

Cash flows from investing activities Purchase of non-current assets (W1) Proceeds of sale of non-current assets (W3) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital (300 + 180) Proceeds from issue of loan notes Dividends paid

(1,500) 80 ––––– 480 200 (250) –––––

Net cash from financing activities Cash at beginning of period Cash at end of period

(1,420)

430 ––––– 170 (230) ––––– (60) –––––

Workings (1)

Non-current assets – cost

Opening balance Purchases (balancing figure)

$000 2,100 1,500

Transfer disposal Closing balance

–––––– 3,600 –––––– (2)

$000 200 3,400 –––––– 3,600 ––––––

Non-current assets - accumulated depreciation

Transfer disposal

Closing balance

(3)

$000 140

Opening balance Income statement – depreciation (balancing figure)

720 –––––– 860 ––––––

$000 550 310 –––––– 860 ––––––

Non-current assets - disposal

Transfer – cost Income statement

$000 200 20 –––––– 220 ––––––

Transfer – depreciation Cash

20

$000 140 80 –––––– 220 ––––––

4

(a) The working capital cycle illustrates the changing make-up of working capital in the course of the trading operations of a business: 1

Purchases are made on credit and the goods go into inventory.

2

Inventory is sold and converted into receivables

3

Credit customers pay their accounts

4

Cash is used to pay suppliers.

(b) Collection period for receivables 250 ––––– x 365 1,000

91 days

Inventory turnover 200 ––––– x 365 700

104 days –––––––– (see Note below) 195 days

Payment period for payables 150 ––––– x 365 800

68 days –––––––– 127 days

Length of working capital cycle

Note. If average inventory is used the inventory turnover becomes: 100 + 200 ––––––––––– ÷ 2 x 365 700

78 days

The length of the cycle becomes 101 days. Either answer is acceptable. (c) The advantage to a company of keeping its working capital cycle short is that fewer resources are tied up in working capital, thus freeing them for other purposes. (Other answers considered on their merits)

5

To the directors of Ambia

8 June 2006

Comments on proposals under consideration (a) Proposed bonus issue. There are several problems in connection with the proposed bonus issue: (i)

A bonus issue would not raise any capital for the company. To raise capital a rights issue (or an issue at full market price) would be necessary.

(ii) For either a bonus issue or a rights issue to be possible, the authorised capital would have to be increased. (iii) There are insufficient reserves to make a bonus issue of $500,000 worth of shares. (b) Paying a dividend of 10c per share. There are insufficient retained earnings to pay a dividend of more than 5c per share. (c) IFRS 3 Business combinations does not allow goodwill to be revalued upwards. (d) It is not possible to combine the reserves as suggested. IAS1 Presentation of financial statements requires retained earnings to be shown seperately from other reserves.

21

Part 1 Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream)

June 2006 Marking Scheme Marks

Section B 1

Statement of division of profit Leon profit for first six months Profit for second six months Interest on capital Salary Balance of profit

2 1 1 1/ 2 1 –––– 51/2

Current accounts Drawings 2 x 1/2 Leon profit 70,000 Interest on capital 2 x 1/2 Salary Share of balance

1 1/ 2

1 1/ 2 1/ 2

–––– 9 –––– Alternative marking scheme (if statement of division of profit shows partners’ total shares) Leon : profit for first six months Profit for second six months (as total) Interest on capital Salary Balance of profit Total shares

2 1 1 1/ 2 1 1 –––– 61/2

Current accounts Drawings 2 x 1/2 Leon profit 70,000 Total profit shares

2

1 1/ 2

1 –––– 9 ––––

(a) Profit adjustments 1 mark per item 5 x 1

5

(b) Adjustments to inventory and receivables Inventory Movements Goods on sale or return Reduction to net realisable value

1 1 1 –––– 3

Receivables Goods on sale or return Debts written off Allowance for receivables

1 1 1 –––– 3 ––––

23

6 –––– 11

Marks 3

Cash flows from operating activities 1/ mark per item other than interest 2 Interest added and deducted Cash flows from investing activities 1/ mark per item 2 Cash flows from financing activities 1/ mark per item 2 Cash movement

31/2 1/ 2

2 x 1/2

1

3 x 1/2 2 x 1/2

11/2 1 11/2 11/2 11/2 1/ 2 1 –––– 131/2 ––––

Workings: non-current assets – cost – depreciation – disposal Heading Layout

4

(a) Purchases into inventory Inventory into recievables Receivables into cash Cash to pay suppliers

1 1 1 1 ––––

(b) per ratio 1 3x1 correct calculation

3 1 ––––

(c) Up to

5

max12

4

4

2 –––– 10

(a) (i) (ii) (iii)

2 1 1

(b)

1

(c)

1

(d) 2 x 1

2 ––––

24

8 –––– 50 ––––

5D–GBRAA Paper T3GBR

Workings for MCQ answers 1

4

6

10

13

14

16

C

280,000 x 20% + 48,000 x 20% x 9/12 + 36,000 x 20% x 4/12 – 14,000 x 20% x 6/12

A

as C, but plus 1,400

B

350,000 x 20%

D

as B, but – 1,400

A

as D, but discounts on wrong side

B

as D, but irrecoverable debts on wrong side

C

as in Q, but with discounts and irrecoverable debts on credit side

D

all items on debit side except opening balance moved to credit side

A

as D, but 180 adjusted in wrong direction

B

as D, but 270 adjusted in wrong direction

C

as D, but 3,200 adjusted in wrong direction

D

3,920 – 270 – 180 – 3,200 = 330 : 100 difference

A

630,000 – 4,320 + 440

B

630,000 – 4,800 – 440

C

630,000 – 4,320 – 440 – 800

D

630,000 – 4,320 – 440

B

430,000 x 5% = 21,500 – 18,000 + 28,000

A

as B but 18,000 not deducted

C

as B but provision based on 458,000

D

as B but provision based on 458,000 and 18,000 not deducted

A

Purchase returns Cash Discounts Contras c/bal

17,400 988,400 12,600 4,200 325,200 ––––––––– 1,347,800 –––––––––

O/Bal Purchases

384,600 963,200

––––––––– 1,347,800 –––––––––

B

as A but discounts on wrong side

C

as A but contras and discounts on wrong side

D

as in Q but contras and discounts on credit side (410,000 – 33,600)

A

(77 + 763 – 84) = 756 + 30%

B

763 x

10/ 7

C

756 x

10/ 3

D

756 x

10/ 7

25

5D–GBRAA Paper T3GBR

20

22

24

A

as in question

B

(38,640 – 19,270 + 14,260)

C

as B but plus 140

D

as B but minus 140

A

48,000 + 400 + 800 + 2,200

C

48,000 + 400 + 2,200

D

48,000 + 400

A

(1,100,000 – (400,000 + 500,000))

B

(1,100,000 – 4/5 x 400,000)

C

(1,100,000 – 4/5 (400,000 + 500,000))

D

4/ 5

x 1,100,000

26