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ACCA preparing financial statement part 1 2006

(International Stream)
PART 1
THURSDAY 7 DECEMBER 2006

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 TWENTY-FIVE questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1

On 1 September 2006, a business had inventory of $380,000. During the month, sales totalled $650,000 and
purchases $480,000. On 30 September 2006 a fire destroyed some of the inventory. The undamaged goods in
inventory were valued at $220,000. The business operates with a standard gross profit margin of 30%.
Based on this information, what is the cost of the inventory destroyed in the fire?

2

A

$185,000

B

$140,000

C

$405,000

D

$360,000

A company had the following transactions:
1

Goods in inventory that had cost $1,000 were sold for $1,500 cash.

2

A credit customer whose $500 debt had been written off paid the amount in full.

3

The company paid credit suppliers $1,000

What will be the combined effect of these transactions on the company’s total working capital (current assets
less current liabilities)?

3

A

Increase of $1,000

B

Working capital remains unchanged

C

Increase of $2,000

D

Increase of $3,000

On 30 June 2006, H acquired 75% of the ordinary share capital of S for $500,000. At that date the balance sheet
of S showed the following:
Ordinary share capital
Share premium account
Retained earnings

$
200,000
150,000
100,000

What was the goodwill arising on the acquisition?
A

$50,000

B

$162,500

C

$350,000

D

$300,000

2


4

5

Which of the following should appear as items in a company’s statement of changes in equity?
1

Profit for the financial year

2

Income from investments

3

Gain on revaluation of non-current assets

4

Dividends paid

A

1, 3 and 4

B

1 and 4 only

C

2 and 3 only

D

1, 2 and 3

The following information is available about a company’s dividends:
$
2005
Sept.
2006
March
Sept.

Final dividend for the year ended
30 June 2005 paid (declared August 2005)
Interim dividend for the year ended
30 June 2006 paid
Final dividend for the year ended
30 June 2006 paid (declared August 2006)

100,000

40,000
120,000

What figures, if any, should be disclosed in the company’s income statement for the year ended 30 June 2006
and its balance sheet as at that date?

A

Income statement
for the period
$160,000 deduction

Balance sheet
liability
$120,000

B

$140,000 deduction

C

nil

$120,000

D

nil

nil

nil

3

[P.T.O.


6

A and B are in partnership, sharing profits in the ratio 3:2 and preparing their accounts to 30 June each year. On
1 January 2006, C joined the partnership and the profit sharing ratio became A 40%, B 30%, and C 30%.
Profits for the year ended 30 June 2006 were:
6 months ended 31 December 2005
6 months ended 30 June 2006

$
300,000
450,000

A bad debt of $50,000 was written off in the six months to 30 June in computing the $450,000 profit. It was agreed
that this expense should be borne by A and B only, in their original profit-sharing ratios.
What is A’s total profit share for the year ended 30 June 2006?

7

A

$
330,000

B

310,000

C

340,000

D

350,000

At 1 July 2005 a company’s allowance for receivables was $48,000.
At 30 June 2006, trade receivables amounted to $838,000. It was decided to write off $72,000 of these debts and
adjust the allowance for receivables to $60,000.
What are the final amounts for inclusion in the company’s balance sheet at 30 June 2006?
Trade
receivables
$
A 838,000

8

Allowance for
receivables
$
60,000

Net
balance
$
778,000

B

766,000

60,000

706,000

C

766,000

108,000

658,000

D

838,000

108,000

730,000

Which of the following statements about inventory valuation for balance sheet purposes are correct?
1

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.

2

Inventories of finished goods may be valued at labour and materials cost only, without including overheads.

3

Inventories should be valued at the lowest of cost, net realisable value and replacement cost.

4

It may be acceptable for inventories to be valued at selling price less estimated profit margin.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

4


9

A business received a delivery of goods on 29 June 2006, which was included in inventory at 30 June 2006. The
invoice for the goods was recorded in July 2006.
What effect will this have on the business?
1

Profit for the year ended 30 June 2006 will be overstated.

2

Inventory at 30 June 2006 will be understated.

3

Profit for the year ending 30 June 2007 will be overstated.

4

Inventory at 30 June 2006 will be overstated.

A

1 and 2

B

2 and 3

C

1 only

D

1 and 4

10 The capital and reserves of Lamb, a limited liability company, are as follows:
10% Loan notes
Ordinary share capital
Share premium account
Retained earnings

$m
80
100
60
80

What is the company’s gearing ratio?
A

80/100 = 80%

B

80/180 = 44·4%

C

240/80 = 300%

D

80/320 = 25%

11 Which of the following statements are correct?
1

A company’s authorised share capital must be included in its published balance sheet as part of shareholders’
funds.

2

If a company makes a bonus issue of ordinary shares, the total shareholders’ interest (share capital plus reserves)
remains unchanged.

3

A company’s statement of changes in equity must include the proceeds of any share issue during the period.

4

A company must disclose its significant accounting policies by note to its financial statements.

A

1 and 2 only

B

1 and 3 only

C

3 and 4 only

D

2, 3 and 4

5

[P.T.O.


12 Which, if any, of the following statements about intangible assets are correct?
1

Goodwill arising on the acquisition of a subsidiary will appear as an intangible asset in the balance sheet of the
acquiring company and in the consolidated balance sheet.

2

Deferred development expenditure must be amortised over a period not exceeding five years.

3

If the conditions specified in IAS 38 Intangible assets are met, development expenditure may be capitalised, if
the directors decide to do so.

4

Trade investments must appear in a company’s balance sheet under the heading of intangible assets.

A

1 and 3

B

1 and 4

C

2 and 4

D

None of the statements is correct

13 Which of the following characteristics of financial information contribute to reliability, according to the IASB’s
Framework for the Preparation and Presentation of Financial Statements?
1

Completeness

2

Prudence

3

Neutrality

4

Faithful representation

A

All four items

B

1, 2 and 3 only

C

1, 2 and 4 only

D

2, 3 and 4 only

14 Details of a company’s insurance policy are shown below:
Premium for year ended 31 March 2006 paid April 2005
Premium for year ending 31 March 2007 paid April 2006

$10,800
$12,000

What figures should be included in the company’s financial statements for the year ended 30 June 2006?

A

Income statement
$
11,100

Balance sheet
$
9,000 prepayment (Dr)

B

11,700

9,000 prepayment (Dr)

C

11,100

9,000 accrual (Cr)

D

11,700

9,000 accrual (Cr)

6


15 Which of the following statements about bank reconciliations are correct?
1

In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of cash at bank shown
in the bank statement.

2

A cheque from a customer paid into the bank but dishonoured must be corrected by making a debit entry in the
cash book.

3

An error by the bank must be corrected by an entry in the cash book.

4

An overdraft is a debit balance in the bank statement.

A

1 and 3

B

2 and 3

C

1 and 4

D

2 and 4

16 Extracts from the financial statements of Kafka, a limited liability company, are given below:
Balance sheet
as at 30 June 2006
Non-current assets
Current assets

Ordinary share capital
Share premium account
Retained earnings
10% Loan notes
Current liabilities

$m
15
14
–––
29
–––
10

Income statement
for the year ended 30 June 2006
$m
Operating profit
Finance costs
Profit for year

8
(2)
–––
6
–––

3
7
–––
20
5
4
–––
29
–––

Using these figures, which of the following are correct calculations of return on total capital employed (ROCE)
and return on owners’ equity (ROOE)? (Tax ignored)
A

ROCE
8/25 = 32%

ROOE
6/10 = 60%

B

8/25 = 32%

6/20 = 30%

C

6/25 = 24%

8/20 = 40%

D

8/20 = 40%

6/20 = 30%

7

[P.T.O.


17 On 30 June 2002 H acquired 80% of the share capital of S.
Extracts from the balance sheets of S at 30 June 2002 and 30 June 2006 are shown below:
S balance sheets
30 June 2002
30 June 2006
$
$
1,000,000
1,000,000
400,000
400,000
4,700,000
5,600,000

Ordinary share capital
Share premium account
Retained earnings

What figure for minority interest should appear in the consolidated balance sheet as at 30 June 2006?
A

$460,000

B

$200,000

C

$1,120,000

D

$1,400,000

18 At 30 June 2005 the capital and reserves of Meredith, a limited liability company, were:
$m
Share capital
Ordinary shares of $1 each
Share premium account

100
80

During the year ended 30 June 2006, the following transactions took place:
1 September 2005
1 January 2006

A bonus issue of one ordinary share for every two held, using the share premium account.
A fully subscribed rights issue of two ordinary shares for every five held at that date, at
$1·50 per share.

What would the balances on each account be at 30 June 2006?

A

Share
capital
$m
210

Share premium
account
$m
110

B

210

60

C

240

30

D

240

80

8


19 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?

Create a provision

Disclose by note only

1, 2

2, 2

A
B

No action

1, 2

C

2

1, 2

D

1, 2

20 Which of the following errors would cause a trial balance not to balance?
1

An error in the addition in the cash book.

2

Failure to record a transaction at all.

3

Cost of a motor vehicle debited to motor expenses account. The cash entry was correctly made.

4

Goods taken by the proprietor of a business recorded by debiting purchases and crediting drawings account.

A

1 only

B

1 and 2 only

C

3 and 4 only

D

All four items

21 How should interest charged on partners’ drawings be dealt with in partnership financial statements?
A

Credited as income in the income statement

B

Deducted from profit in allocating the profit among the partners

C

Added to profit in allocating the profit among the partners

D

Debited as an expense in the income statement.

9

[P.T.O.


22 All the sales made by a retailer are for cash, and her sale prices are fixed by doubling cost. Details recorded of her
transactions for September 2006 are as follows:
1 Sept.
30 Sept.

Inventories
Purchases for month
Cash banked for sales for month
Inventories

$
40,000
60,000
95,000
50,000

Which two of the following conclusions could separately be drawn from this information?
1

$5,000 cash has been stolen from the sales revenue prior to banking

2

Goods costing $5,000 have been stolen

3

Goods costing $2,500 have been stolen

4

Some goods costing $2,500 had been sold at cost price

A

1 and 2

B

1 and 3

C

2 and 4

D

3 and 4

23 A company owns a number of properties which are rented to tenants. The following information is available for the
year ended 30 June 2006:

30 June 2005
30 June 2006

Rent
in advance
$
134,600
144,400

Rent
in arrears
$
4,800
8,700

Cash received from tenants in the year ended 30 June 2006 was $834,600.
All rent in arrears was subsequently received.
What figure should appear in the company’s income statement for rent receivable in the year ended 30 June
2006?
A

$840,500

B

$1,100,100

C

$569,100

D

$828,700

24 In October 2006 Utland sold some goods on sale or return terms for $2,500. Their cost to Utland was $1,500. The
transaction has been treated as a credit sale in Utland’s financial statements for the year ended 31 October 2006. In
November 2006 the customer accepted half of the goods and returned the other half in good condition.
What adjustments, if any, should be made to the financial statements?
A

Sales and receivables should be reduced by $2,500, and closing inventory increased by $1,500.

B

Sales and receivables should be reduced by $1,250, and closing inventory increased by $750

C

Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory

D

No adjustment is necessary

10


25 The payables ledger control account below contains a number of errors:
Payables ledger control account

Opening balance (amounts
owed to suppliers)
Cash paid to suppliers
Purchases returns
Refunds received from suppliers

$
318,600
1,364,300
41,200
2,700
–––––––––––
$1,726,800
–––––––––––

Purchases
Contras against debit
balances in receivables ledger
Discounts received
Closing balance

$
1,268,600
48,000
8,200
402,000
–––––––––––
$1,726,800
–––––––––––

All items relate to credit purchases.
What should the closing balance be when all the errors are corrected?
A

$128,200

B

$509,000

C

$224,200

D

$144,600
(50 marks)

11

[P.T.O.


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

The following balances appear in the accounting records of Golding, a limited liability company, at 30 June 2006:
$000
Land and buildings:
cost
accumulated depreciation at 1 July 2005
Plant and equipment:
cost
accumulated depreciation at 1 July 2005
Receivables
Cash at bank
Payables
Accruals
8% Loan notes
Ordinary share capital
Share premium account
Retained earnings 1 July 2005

10,000
3,600
6,000
3,200
3,600
1,200
2,500
500
1,000
5,000
2,200
4,600

The following further information is available:
(1) Inventory at 30 June 2006 was $4,700,000
(2) The company’s land and buildings were revalued at 1 July 2005. The revaluation has not yet been reflected in
the balances given above.
Details:
Cost

Land
Buildings

$000
4,000
6,000

Accumulated
depreciation
$000

3,600

Net book
value
$000
4,000
2,400

Revalued
amount
$000
5,000
4,000

(3) The draft profit for the year was $2,900,000. However, three adjustments are required:
(a) Receivables totalling $280,000 are to be written off
(b) Provision is to be made for bonuses to the directors totalling $250,000
(c) Depreciation charges for the year, based on revalued amounts:
Buildings
Plant and equipment

$200,000
$1,200,000

Required:
Prepare the company’s balance sheet as at 30 June 2006, using the format and headings in IAS 1 Presentation
of Financial Statements.
(11 marks)

12


2

The draft income statement of Lorca, a limited liability company, showed a profit of $830,000. However, the trial
balance did not balance and a suspense account with a credit balance of $20,000 has been included in the balance
sheet for the difference.
The following errors were found on investigation:
(1) The proceeds of issue of 100,000 50c shares at 70c per share were correctly entered in the cash book but had
been credited to sales account.
(2) During the year $8,000 interest received on a holding of loan notes had been correctly entered in the cash book
but debited to interest payable account.
(3) In arriving at the net sales and purchases totals for the year, the $48,000 balance on the returns outwards
account had been transferred to the debit of sales account and the $64,000 balance on the returns inwards
account had been transferred to the credit of purchases account.
(4) A payment of $4,000 for rent had been correctly recorded in the cash book but debited to the rent account as
$40,000.
Required:
(a) Prepare journal entries to correct the errors. Narratives are NOT required.

(7 marks)

(b) Calculate the revised profit after adjusting for the errors.

(4 marks)
(11 marks)

13

[P.T.O.


3

The balance sheets of Joyce, a limited liability company, at 30 June 2005 and 2006 are as follows
Balance sheets
Reference
to notes
Non-current assets (net book value) 1
Current assets
Inventories
Receivables
Cash at bank

Ordinary share capital
Share premium account
Revaluation reserve
Retained earnings

30 June 2006
$000
$000
148,000
14,000
21,400

–––––––

1

Total equity
Non-current liabilities
8% Loan notes
Current liabilities
Payables
Current tax payable
Bank overdraft

9,100
12,500
4,600
–––––––
35,400
––––––––
183,400
––––––––

26,200
––––––––
156,200
––––––––

110,000
5,000
14,000
28,000
––––––––
157,000

109,000
4,000
2,000
18,000
––––––––
133,000

10,000

8,000

3

2

30 June 2005
$000
$000
130,000

7,100
8,000
1,300
–––––––

9,200
6,000

–––––––
16,400
––––––––
183,400
––––––––

15,200
––––––––
156,200
––––––––

Notes:
(1) The depreciation charge for the year was $13,000,000
(2) $6,200,000 was paid during the year to settle the income tax liability at 30 June 2005.
(3) The additional loan notes were issued on 1 January 2006. All interest due was paid on 31 December 2005 and
30 June 2006.
(4) Dividends paid during the year totalled $4,000,000.
Required:
Prepare a cash flow statement for the company for the year ended 30 June 2006, using the format in IAS 7 Cash
flow statements.
(12 marks)

14


4

The directors of a recently formed company are unsure as to the policies they should adopt as regards depreciation.
Required:
Advise the directors on the following points:
(a) The fundamental objective of depreciation;

(1 mark)

(b) The extent to which land and buildings should be depreciated;

(3 marks)

(c) Two possible methods of calculating depreciation, with explanations.

(4 marks)
(8 marks)

5

IAS 10 Events after the balance sheet date defines the accounting treatment of material events occurring after the
balance sheet date.
Required:
(a) Explain what determines whether an event after the balance sheet date must be adjusted in the financial
statements.
(3 marks)
(b) Explain what changes would have to be made to the following items in the balance sheet if it became clear,
shortly after the balance sheet date, that the going concern basis was no longer appropriate.
(i)

Non-current assets;

(2 marks)

(ii) Inventory;

(2 marks)

(iii) Loan notes.

(1 mark)
(8 marks)

End of Question Paper

15



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