Answers

Part 1 Examination – Paper 1.1 (INT)

Preparing Financial Statements (International Stream) December 2003 Answers

Section A

1 A
A 16,000 + 14,600 – 18,000
B 18,000 + 14,600 – 16,000
C 18,000 + 14,600 + 16,000
D 16,000 + 14,600
2 B
3 B
4 B
B 16,690 – 9,160 – 3,860
C 16,690 + 3,860 – 9,160
D As B but overdrawn
5 C
A C + 2 x $3,660 discounts allowed
B C + 2 x $1,800 bad debts written off
C Sales ledger control account
$ $
284,680 3,660
189,120 1,800
4,920
179,790
800
Balance 282,830
–––––––– ––––––––
473,800 473,800
–––––––– ––––––––
D C + $1,600 (contras)
6 A
7 D
A 483,700 – 38,400 + 14,800 + 400 – 1,800
B 483,700 + 38,400 – 14,800 + 400 – 1,800
C 483,700 + 38,400 – 14,800 – 400 + 1,800
D 483,700 – 38,400 + 14,800 – 400 + 1,800 (Correct)
8 C
9 B
10 D
11 B
A $181,600 x 40% = 72,640 – 67,600 = $5,040
B $114,000 x 10/6 = $190,000 – 181,600 = $8,400 (correct)
C $181,600 – (114,000 + 40%)
12 B
A P (340,000 – 20,000)/2 + 170,000/2
Q 95,000
B P 180,000 + 90,000 – 20,000 (Correct)
Q 90,000
C P 180,000 + 90,000
Q 90,000
D P 170,000 + 85,000
Q 85,000
13 B
14 D
15 C
16 C
17 D
18 C

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19 C
20 D
21 B
A All rights issue proceeds added to share capital
Bonus issue 75,000
B 125,000 + 62,500 + 37,500; 100,000 + 187,500 – 37,500 (correct)
C As B, but bonus issue added to share premium
D Bonus issue does not allow for previous issue.
22 D
A $80,000 + 7% x $500,000 x 3/12
B As D but including 7% x $500,000 x 6/12 instead of 3/12
C As D but excluding 7% x $500,000 x 3/12
D 8% x $1m x 3/12 + 8% x $750,000 x 9/12 + 7% x $500,000 x 3/12
23 A
24 A
25 A

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Section B

1 (a) Abrador
Balance sheet as at 31 December 2002
Assets $ $
Non-current assets
Property, plant and equipment (W1) 3,000,000
Development costs 570,000 3,570,000
––––––––––
Current assets
Inventory 3,900,000
Receivables (W2) 2,910,000
–––––––––– 6,810,000
––––––––––
10,380,000
––––––––––
Equity and liabilities
Capital and reserves
Issued share capital 1,500,000
Share premium account 700,000
Accumulated profits (W3) 5,780,000
––––––––––
7,980,000
Curent liabilities
Trade payables 1,900,000
Bank overdraft 100,000
6% loan notes 400,000 2,400,000
–––––––––– ––––––––––
10,380,000
––––––––––
Workings
1 Property, plant and equipment per question 5,000,000
less: depreciation at 31 December 2001 1,000,000
––––––––––
4,000,000
less: 25% x 4,000,000 1,000,000
––––––––––
3,000,000
––––––––––
2 Receivables 3,400,000
less: Written off 400,000
––––––––––
3,000,000
less: Allowance 90,000
––––––––––
2,910,000
––––––––––
$
3 Accumulated profit
Per question 7,170,000
less: Depreciation 1,000,000
Bad debts 400,000
Allowance for doubtful debts (10,000) 1,390,000
––––––––– ––––––––––
5,780,000
––––––––––

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 (b)
$
Movements on deferred development expenditure during year
Balance at 31 December 2001 550,000
New expenditure in 2002 120,000
–––––––––
670,000
Amortisation for year (100,000)
–––––––––
Deferred development expenditure at 31 December 2002 570,000
–––––––––
Total expenditure on research and development charged in income statement
Current expenditure 85,000
Amortisation 100,000
–––––––––
185,000
–––––––––

2 (a) Office building – cost/valuation

2002 $ $
1 July Balance 1,600,000
1 July Revaluation 400,000
––––––––––
2,000,000

Office building – accumulated depreciation

2002 $ 2002 $
1 July Revaluation reserve 320,000 1 July Balance 320,000
2003 2003
30 June Balance 50,000 30 June Income statement (W1) 50,000
––––––––– –––––––––
370,000 370,000
––––––––– –––––––––

Revaluation reserve

$ 2002 $
1 July Office building – cost 400,000
1 July Office building – depreciation 320,000
–––––––––
720,000

(b) Plant and machinery – cost

2002 $ 2003 $
1 July Balance 840,000 1 April Transfer disposal 240,000
1 Oct Cash 200,000 30 June Balance 800,000
–––––––––– ––––––––––
1,040,000 1,040,000
–––––––––– ––––––––––
2003
1 July Balance 800,000

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 Plant and machinery – accumulated depreciation

2003 $ 2002 $
1 April Transfer – disposal 180,000 1 July Balance 306,000
2003
30 June Balance 326,000 30 June Income statement (W2) 200,000
–––––––––– ––––––––––
506,000 506,000
–––––––––– ––––––––––

Plant and machinery – disposal

2003 $ 2003 $
1 April Transfer – cost 240,000 1 April Transfer – depreciation 180,000
30 June Income statement Cash 70,000
profit 10,000
–––––––––– ––––––––––
250,000 250,000
–––––––––– ––––––––––

Workings
1 Depreciation of office building
$2m/40 (remaining useful life) = $50,000
2 Depreciation of plant and machinery
25% x ($840,000 – $240,000 + $200,000) = $200,000

3 Cost of control

$ $
Investment 180,000 Share capital 70% 70,000
Accumulated profits 70% 105,000
Accumulated profits –
goodwill amortised 4/5 x $5,000 4,000
Balance for CBS 1,000
–––––––––– ––––––––––
180,000 180,000
–––––––––– ––––––––––

Minority interest

$ $
Balance for CBS 123,000 Share capital 30% 30,000
Accumulated profits 30% 93,000
–––––––––– ––––––––––
123,000 123,000
–––––––––– ––––––––––

Accumulated profits

$ $
Cost of control Eagle 450,000
70% pre-acq 105,000 Oxer 310,000
Minority interest 30% 93,000
Cost of control
goodwill amortised 4,000
Balance for CBS 558,000
–––––––––– ––––––––––
760,000 760,000
–––––––––– ––––––––––

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 Eagle Group
Consolidated balance sheet as at 31 October 2003
$
Goodwill 1,000
Sundry net assets 900,000
––––––––
901,000
––––––––
Share capital 220,000
Accumulated profits 558,000
––––––––
778,000
Minority interest 123,000
––––––––
901,000
––––––––

4 (a) The basic principle for the valuation of inventory according to IAS 2 Inventories is to take the lower of cost and net realisable
value.
The 3,000 skirts should therefore be included at cost $40,000, and the jackets should be valued at net realisable value:
$
$25,000 less $1,800 23,200
$20,000 less $2,000 18,000
–––––––
41,200
–––––––

(b) IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires contingent liabilities of this kind and degree of
probability be disclosed by note, detailing the nature of the contingent liability and an estimate of the financial effect.
The $100,000 should therefore be removed and the note substituted. Provision should be made for legal expenses to be
incurred.

(c) IAS 10 Events after the Balance Sheet Date classifies this as a non-adjusting event but a note giving details of the event and
its financial effect (a loss of $180,000 plus $228,000 = $408,000) is required as the item is material enough to influence
a reader of the financial statements.

5 (a) (i) Profit on a sale is calculated by taking the difference between historical cost and sale proceeds. When prices are rising,
as they usually are, the ‘holding gain’ arising while the goods were held in inventory is included as part of the profit,
ignoring the fact that it will cost more to replace the item.
(ii) Depreciation based on the historical cost of assets understates the real value of the benefit obtained from the use of these
assets if prices have risen since the assets were acquired. Profit is thus overstated.
(iii) The retention of historical values for non-current assets in the balance sheet understates their actual value. This can
mislead shareholders when the balance sheet value of the business is used when calculating return on capital employed.

(b) (i) It is simple and cheap

(ii) Figures used are objective and verifiable.
(iii) Lack of a sound and acceptable alternative.

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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream) December 2003 Marking Scheme

Marks
1 (a) Tangible non-current assets 2 x 1/2 1
Development costs correctly displayed 1/
2
Receivables 2 x 1/2 1
Issued share capital 1
Share premium 1
Accumulated profits 3 x 1/2 11/2
Loan notes in current liabilities 1/
2
Layout 2
––– 81/2 max 8

(b) Movements in deferred development expenditure

Opening balance 1
Movements 2 x 1 2
Income statement 2 x 1/2 1 4
––– –––
12
–––

2 (a) Office building

cost/valuation 2 x 1/2 1
accumulated depreciation:
calculations 1
entries 4 x 1/2 2
revaluation reserve 2 x 1 2 6
–––

(b) Plant and machinery

cost 4 x 1/2 2
accumulated depreciation 4 x 1/2 2
disposal 4 x 1/2 2
––– 6
–––
12
–––

3 Goodwill 5 x 1/2 21/2

Minority interest 2 x 1/2 1
Accumulated profits 5 x 1/2 21/2
Share capital 1/
2
Sundry net assets 1
Heading 1/
2
––– 8
–––

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 Marks
4 (a) Inventory
IAS 2 mentioned 1
IAS 2 Valuation 2 x 1/2 1
––– 2
(b) Contingent liability
IAS 37 mentioned 1
Disclose by note stating nature and financial effect 1
Remove $100,000 and replace with note 1
Provide for legal expenses 1
––– 4
(c) Event after the balance sheet date
IAS 10 mentioned 1
Non-adjusting 1
Note required detailing event and financial effect 1
––– 3
–––
9
–––

5 (a) 3x2 6

(b) 3x1 3
––– 9
–––

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