Paper 1.

1(INT)
Preparing Financial
Statements
(International Stream)

PART 1

THURSDAY 5 JUNE 2003

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
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 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 as from 1 October 2002.
What rent expense and accrual should be included in the company’s financial statements for the year ended
31 January 2003?
Rent expense Accrual
$ $
A 100,000 20,000
B 100,000 10,000
C 97,500 10,000
D 97,500 20,000

2 Alpha received a statement of account from a supplier Beta, showing a balance to be paid of $8,950. Alpha’s
payables ledger account for Beta shows a balance due to Beta of $4,140.
Investigation reveals the following:
(1) Cash paid to Beta $4,080 has not been allowed for by Beta.
(2) Alpha’s ledger account has not been adjusted for $40 of cash discount disallowed by Beta.
(3) Goods returned by Alpha $380 have not been recorded by Beta.
What discrepancy remains between Alpha’s and Beta’s records after allowing for these items?
A $9,310
B $390
C $310
D $1,070

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3 An inexperienced bookkeeper has drawn up the following receivables ledger control account:
Receivables Ledger Control Account

$ $
Opening balance 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 Closing balance (balancing figure) 229,600
Discount allowed 4,200
———— ————
423,500 423,500
———— ————
What should the closing balance be after correcting the errors made in preparing the account?
A $130,600
B $129,200
C $142,400
D $214,600

4 At 31 March 2002 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil bill
for $3,600.
At 31 March 2003 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of $3,200.
Payments made for heating oil during the year ended 31 March 2003 totalled $34,600.
Based on these figures, what amount should appear in the company’s income statement for heating oil for the
year?
A $23,900
B $36,100
C $45,300
D $33,100

5 At 31 December 2002 a company’s receivables totalled $400,000 and an allowance for doubtful debts of $50,000
had been brought forward from the year ended 31 December 2001.
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 income statement for the year ended
31 December 2002?
A $74,200
B $51,800
C $28,000
D $24,200

3 [P.T.O.
6 The plant account of a company is shown below:
Plant – Cost
2002 $ 2002 $
1 January Balance (plant purchased 1999) 380,000 1 October Transfer disposal
1 April Cash – plant purchased 51,000 account – cost of plant sold 30,000
31 December 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 years of purchase and sale.
What should the company’s plant depreciation charge be for the year ended 31 December 2002?
A $82,150
B $79,150
C $77,050
D $74,050

7 In preparing a company’s bank reconciliation statement at March 2003, the following items are causing the difference
between the cash book balance and the bank statement balance:
(1) Bank charges $380
(2) Error by bank $1,000 (cheque incorrectly debited to the account)
(3) Lodgements not credited $4,580
(4) Outstanding cheques $1,475
(5) Direct debit $350
(6) Cheque paid in by the company and dishonoured $400
Which of these items will require an entry in the cash book?
A 2, 4 and 6
B 1, 5 and 6
C 3 and 4
D 3 and 5

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8 The closing inventory at cost of a company at 31 January 2003 amounted to $284,700.
The following items were included at cost in the total:
(1) 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in manufacture, they
were all sold after the balance sheet date at 50% of their normal price. Selling expenses amounted to 5% of the
proceeds.
(2) 800 skirts, which had cost $20 each. These too were found to be defective. Remedial work in February 2003
cost $5 per skirt, and 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?
A $281,200
B $282,800
C $329,200
D None of these.

9 A company values its inventory using the first in, first out (FIFO) method. At 1 May 2002 the company had 700
engines in inventory, valued at $190 each.
During the year ended 30 April 2003 the following transactions took place:
2002
1 July Purchased 500 engines at $220 each
1 November Sold 400 engines for $160,000

2003
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 2003?
A $188,500
B $195,500
C $166,000
D None of these figures.

5 [P.T.O.
10 Which of the following statements about the valuation of inventory are correct, according to IAS2 Inventories?
(1) Inventory items are normally to be valued at the higher of cost and net realisable value.
(2) The cost of goods manufactured by an enterprise will include materials and labour only. Overhead costs cannot
be included.
(3) If LIFO (last in, first out) is used to value inventory, additional disclosures must be made in the financial
statements.
(4) Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable approximation
to actual cost.
A 1, 3 and 4 only
B 1 and 2 only
C 3 only
D 3 and 4 only.

The following information is relevant for questions 11 and 12.

When Q’s trial balance failed to agree, a suspense account was opened for the difference. The trial balance totals were:
Debit $864,390
Credit $860,930
The company does not have control accounts for its receivables and payables ledgers.
The following errors were found:
(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 $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 $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.
(5) A contra between the receivables ledger and the payables ledger for $1,200 which should have been credited in
the receivables ledger and debited in the payables ledger was actually debited in the receivables ledger and
credited in the payables ledger.

11 Which of these errors will require an entry to the suspense account to correct them?
A All five items
B 3 and 5 only
C 2, 4 and 5 only
D 1, 2, 3 and 4 only.

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12 What will the balance on the suspense account be after making the necessary entries to correct the errors
affecting the suspense account?
A $2,440 Debit
B $15,560 Credit
C $13,640 Debit
D $3,440 Debit.

13 Which of the following statements about research and development expenditure are correct according to IAS38
Intangible Assets?
(1) If certain conditions are met, an enterprise may decide to capitalise development expenditure.
(2) Research expenditure, other than capital expenditure on research facilities, must be written off as incurred.
(3) Capitalised development expenditure must be amortised over a period not exceeding 5 years.
(4) Capitalised development expenditure must be disclosed in the balance sheet under intangible non-current assets.
A 1, 2 and 4 only
B 1 and 3 only
C 2 and 4 only
D 3 and 4 only.

14 Listed below are some comments on accounting concepts.

(1) In achieving a balance between relevance and reliability, the most important consideration is satisfying as far as
possible the economic decision-making needs of users.
(2) Materiality means that only items having a physical existence may be recognised as assets.
(3) The substance over form convention means that the legal form of a transaction must always be shown in financial
statements, even if this differs 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 1 only
B 2 only
C 3 only
D None of them.

7 [P.T.O.
15 Which of the following explanations of the prudence concept most closely follows that in the IASB’s Framework
for the Preparation and Presentation of Financial Statements?
A The application of a degree of caution in exercising judgement under conditions of uncertainty
B Revenue and profits are not recognised until realised, and provision is made for all known liabilities
C All legislation and accounting standards have been complied with
D Understatement of assets or gains and overstatement of liabilities or losses.

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

17 At 31 December 2002 the following matters require inclusion in a company’s financial statements:
(1) On 1 January 2002 the company made a loan of $12,000 to an employee, repayable on 30 April 2003,
charging interest at 2 per cent per year. On the due date she repaid the loan and paid the whole of the interest
due on the loan to that date.
(2) The company has paid insurance $9,000 in 2002, covering the year ending 31 August 2003.
(3) In January 2003 the company received rent from a tenant $4,000 covering the six months to 31 December
2002.
For these items, what total figures should be included in the company’s balance sheet at 31 December 2002?
Currents assets Current liabilities
$ $
A 22,000 240
B 22,240 nil
C 10,240 nil
D 16,240 6,000

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18 At 31 December 2001 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 2002 the company made a bonus issue of 1 share for every 2 held, using the share premium account for the
purpose, and later issued for cash another 60,000 shares at 80c per share.
What is the company’s capital structure at 31 December 2002?
Ordinary share capital Share premium account
$ $
A 130,000 173,000
B 105,000 173,000
C 130,000 137,000
D 105,000 137,000

19 Listed below are some items that may appear in a company’s income statement, either separately disclosed or
included in another figure.
(1) Profit or loss on discontinuing operations
(2) Profit or loss on the sale of part of the enterprise
(3) Extraordinary items

According to International Accounting Standards, which of these items must always be shown separately if
material to avoid misleading users?
A All three items
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only.

9 [P.T.O.
20 In the course of preparing a company’s cash flow statement, the following figures are to be included in the calculation
of net cash from operating activities.
$
Depreciation charges 980,000
Profit on sale of non-current assets 40,000
Increase in inventories 130,000
Decrease in receivables 100,000
Increase in payables 80,000
What will the net effect of these items be in the cash flow statement?
$
A Addition to operating profit 890,000
B Subtraction from operating profit 890,000
C Addition to operating profit 1,070,000
D Addition to operating profit 990,000

The following information is relevant for questions 21 to 23

On 1 January 2000 Alpha purchased 80,000 ordinary $1 shares in Beta for $180,000. At that date Beta’s retained profits
amounted to $90,000 and the fair values of Beta’s assets at acquisition were equal to their book values.
Three years later, on 31 December 2002, the balance sheets of the two companies were:
Alpha Beta
$ $
Sundry net assets 230,000 260,000
Shares in Beta 180,000 –
———— ————
410,000 260,000
———— ————
Share capital
Ordinary shares of $1 each 200,000 100,000
Accumulated profits 210,000 160,000
———— ————
410,000 260,000
———— ————
The share capital of Beta has remained unchanged since 1 January 2000.
Goodwill on consolidation is being amortised over four years.

21 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for goodwill?
A $25,000
B $28,000
C $7,000
D $14,000

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22 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for minority
interest?
A $52,000
B $20,000
C $34,000
D $32,000

23 What amount should appear in the group’s consolidated balance sheet at 31 December 2002 for accumulated
profits?
A $266,000
B $338,000
C $370,000
D $245,000

24 A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December 2001 to 27%
in the year ended 31 December 2002.
Which of the following events is most likely to have caused the increase?
A An increase in sales volume
B A purchase in December 2001 mistakenly being recorded as happening in January 2002
C Overstatement of the closing inventory at 31 December 2001
D Understatement of the closing inventory at 31 December 2001.

11 [P.T.O.
25 A company’s capital structure at December 2002 is as follows:
$m
Ordinary share capital 380
Accumulated profits 120
——
500
8% Loan notes 100
——
600
——
The company’s income statement shows the following for the year ended 31 December 2002:
$m
Operating profit 40
Interest paid 8
——
32
Taxation 10
——
22
Dividends paid 10
——
Retained profit for year 12
——
What is the return on equity shareholders’ capital employed, using closing capital figures?
A 4·4%
B 2·4%
C 3·7%
D 5·8%

(50 marks)

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

1 Alamute and Brador have been in partnership for several years, compiling their financial statements for the year
ending 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5%
per year.
Extracts from their trial balance at 31 March 2003 are given below:
Reference $
to notes
Capital accounts: Alamute 50,000
Brador 50,000
Current accounts: Alamute 3,800 Credit
Brador 2,600 Debit
Drawings: Alamute 48,400
Brador 36,900
Office equipment: cost 1 48,300
accumulated depreciation, 1 April 2002 12,800
Inventory, 1 April 2002 2 15,600
Trade receivables 3 68,400
Allowance for doubtful debts, 1 April 2002 3 3,800
Sales revenue 448,700
Purchases 184,600
Rent paid 4 30,000
Salaries 88,000
Insurance 5 4,000
Sundry expenses 39,400
Notes:
(1) Office equipment should be depreciated at 20% per year on the reducing balance basis.
(2) Closing inventory amounted to $21,400.
(3) Debts of $2,400 are to be written off, and the allowance for doubtful debts is to be adjusted to 5% of trade
receivables.
(4) Rent paid $30,000 is the amount for the nine months to 31 December 2002. From that date the rent was
increased by 10%.
(5) Insurance paid in advance amounted to $1,500.

Required

(a) Prepare the partnership’s income statement and a statement showing the division of profit among the
partners for the year ended 31 March 2003. (9 marks)

(b) Write up the partners’ current accounts for the year ended 31 March 2003. (3 marks)

(12 marks)

13 [P.T.O.
2 The balance sheets of Paniel at 31 March 2002 and 2003 were as follows:
31 March
Reference 2002 2003
to notes $ $
Non-current assets 2 2,140,000 3,060,000
Less: accumulated depreciation (580,000) (840,000)
————— —————
1,560,000 2,220,000

Net current assets 3 1,520,000 1,570,000

————— —————
3,080,000 3,790,000
————— —————
Ordinary share capital 1,000,000 1,100,000
Share premium account 800,000 900,000
Accumulated profits 480,000 590,000
————— —————
2,280,000 2,590,000
6% Loan notes 4 800,000 1,200,000
————— —————
3,080,000 3,790,000
————— —————
Notes
1 The net cash generated from operating activities for the year is $746,000, before deducting interest paid on the
loan notes.
2 During the year the company sold non-current assets which had cost $480,000 for $280,000.
3 The net current asset figures include cash at bank:
31 March 2002 $14,000
31 March 2003 $18,000
All other movements in net current assets have already been allowed for in computing the net cash inflow from
operating activities given in Note 1 above. Dividends paid, when computed, should be included in financing
activities.
4 The loan note issue during the year took place on 1 April 2002, and all interest for the year ended 31 March
2003 was paid in the year.
5 The profit for the year ended 31 March 2003 before allowing for dividends paid was $260,000.
6 Ignore taxation.

Required:

Prepare the company’s cash flow statement for the year ended 31 March 2003, beginning with the net cash
inflow from operating activities given in Note 1 above.

(9 marks)

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3 (a) The net assets of Altese, a trader, at 1 January 2002 amounted to $128,000.
During the year to 31 December 2002 Altese introduced a further $50,000 of capital and made drawings of
$48,000.
At 31 December 2002 Altese’s net assets totalled $184,000.

Required:

Using this information compute Altese’s total profit for the year ended 31 December 2002. (3 marks)

(b) Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for the year
ended 31 January 2003 from the following information:
$
Trade payables 31 January 2002 130,400
31 January 2003 171,250
Payment to suppliers 888,400
Cost of goods taken from inventory by
Senji for her personal use 1,000
Refunds received from suppliers 2,400
Discounts received 11,200

Required:

Compute the figure for purchases for inclusion in Senji’s financial statements. (3 marks)

(c) Aluki fixes prices to make a standard gross profit percentage on sales of 331/3%.
The following information for the year ended 31 January 2003 is available to compute her sales total for the year.
$
Inventory: 1 February 2002 243,000
31 January 2003 261,700
Purchases 595,400
Purchases returns 41,200

Required:

Calculate the sales figure for the year ended 31 January 2003. (3 marks)

(9 marks)

15 [P.T.O.
4 Extracts from the financial statements of Apillon for the years ended 31 March 2002 and 2003 are given below:
Year ended 31 March
Income statement 2002 2003
$ $ $ $
Sales revenue (including cash sales
$300,000 in 2002 and $100,000 in 2003) 3,100,000 3,800,000
Cost of sales
Opening inventory 360,000 540,000
Purchases (all on credit) 2,080,000 2,580,000
————— —————
2,440,000 3,120,000
Less: closing inventory 540,000 (1,900,000) 720,000 (2,400,000)
————— ————— ————— —————
Gross profit 1,200,000 1,400,000
Expenses (900,000) (1,100,000)
————— —————
Net profit 300,000 300,000
————— —————
Balance Sheet
Current assets
Inventory 540,000 720,000
Trade receivables 450,000 700,000
———— 990,000 ———— 1,420,000
Current liabilities
Trade payables 410,000 690,000
Bank overdraft 20,000 430,000 170,000 860,000
———— ————

Required:

(a) Calculate the following for each of the two years:

(i) Current ratio;
(ii) Quick ratio (acid test);
(iii) Inventory turnover period (use closing inventory);
(iv) Average period of credit allowed to customers;
(v) Average period of credit taken from suppliers.
Calculate items (iii), (iv) and (v) in days. (5 marks)

(b) Make four brief comments on the changes in the position of the company as revealed by the changes in these
ratios and/or in the given figures from the financial statements. (4 marks)

(9 marks)

16
5 (a) The term ‘reserves’ is frequently found in company balance sheets.

Required:

(i) Explain the meaning of ‘reserves’ in this context;

(ii) Give two examples of reserves and explain how each of your examples comes into existence.
(6 marks)

(b) A company’s issued share capital may be increased by a bonus (capitalisation) issue or by a rights issue.

Required:

Define ‘bonus issue’ and ‘rights issue’ and explain the fundamental difference between these two types of
share issue. (5 marks)

(11 marks)

End of Question Paper

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