Answers

Part 1 Examination – Paper 1.1 (INT)

Preparing Financial Statements (International Stream) December 2004 Answers

Section A
1 B
2 C 146,000 + 218,000 – 83,000
3 D (240,000 x 20%) + (160,000 x 20% x 6/ ) – (60,000 x 20% x 9/ )
12 12
4 B
5 A

Balance 614,000 Cash 311,000

Sales 301,000 Discounts 3,400
Interest 1,600 Contras 8,650
Bad Debts 32,000
Balance 561,550
–––––––– ––––––––
916,600 916,600
–––––––– ––––––––
6 A
7 A
8 A
9 D
10 D
11 B
12 A
13 C (2 x 5,000) + ( 10 x 6,000)
14 C
15 B [2/3 x 1/
2 x (540,000 + 30,000)] – 20,000 + (50% x 285,000)
16 A
17 D
18 B
19 D
20 A
21 B
22 B
23 C
24 B
25 C
A 7
B 8
C 5
D 5
–––
25
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17 [P.T.O.
Section B
1 (a) Bob
Income statement for the year ended 30 September 2004
Reference $ $
to workings
Sales 1 604,200
Less: Cost of sales
Less: Opening inventory 138,000
Less: Purchases 2 410,800
––––––––
448,800
Less: less: Closing inventory 146,000 402,800
–––––––– ––––––––
Gross profit 201,400
Expenses 3 194,000
––––––––
Net profit 107,400
––––––––

(b) Calculation of goods taken by Bob:

Purchases as above 410,800
Purchases per information in question:
408,100 – 68,100 + 77,100 + 14,200 431,300
––––––––
Goods taken by Bob therefore total 20,500
––––––––
Workings
1 Sales $
Credit sales $519,400 – $119,200 + $125,000 525,200
Cash sales 79,000
––––––––
Sales for income statement 604,200
––––––––
2 Purchases and cost of sales
Cost of sales $604,200 x 2/3 402,800
Details
Opening inventory 38,000
Purchases (balancing figure) 410,800
––––––––
448,800
less: closing stock 46,000 402,800
–––––––– ––––––––
3 Expenses $89,400 + $4,100 – $3,900 + $4,600 + $2,400 – $2,600 94,000
––––––––
Alternative workings for (b)
Purchases and cost of sales (before deducting goods taken by Bob)
Purchases
$408,100 – $68,100 + $77,100 + $14,200 431,300
Cost of sales
$431,300 + $38,000 – $46,000 423,300
Calculation of goods taken by Bob
Cost of sales allowing for 50% mark-up $604,200 x 2/3 402,800
Cost of sales as above 423,300
––––––––
Goods taken by Bob therefore total 20,500
––––––––
Purchases total becomes $431,300 – $20,500 410,800
––––––––

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2 (a) Cougar
Statement of changes in equity
Year ended 30 June 2004
Share Share premium Revaluation Accumulated Total
capital account reserve profits
$m $m $m $m $m
At 1 July 2003 100 140 60 120 420
Prior year adjustment 11 1((6) 1(6)
––– ––– ––– ––– –––
100 140 60 114 414
Arising on issue of shares 100 180 280
Surplus on land
revaluation, now realised (60) 160 –
Net profit for year (40 + 6) 1 146 146
Dividends paid 1((8) 1((8)
––– ––– ––– ––– ––––
200 320 – 212 732
––– ––– ––– ––– ––––

3 Leo Group
Consolidated balance sheet as at 30 June 2004
$
Sundry net assets 3,100,000
–––––––––––
$3,100,000
–––––––––––
Share capital 500,000
Revaluation reserve 800,000
Accumulated profits 1,470,000
–––––––––––
2,770,000
Minority interest 330,000
–––––––––––
$3,100,000
–––––––––––
Workings
Cost of control
$ $
Shares in Pard 700,000 Share capital 70% 1,140,000
Accumulated profits:
70% pre-acq 1,420,000
Accumulated profits:
goodwill written off 1,140,000
–––––––– 1,––––––––
700,000 1,700,000
–––––––– 1,––––––––
Minority interest
$ $
Share capital 30% 1, 60,000
Balance for CBS 330,000 Accumulated profits 30% 1,270,000
–––––––– 1,––––––––
330,000 1,330,000
–––––––– 1,––––––––
Accumulated profits
$ $
Leo 1,400,000
Cost of control Pard 1,900,000
70% x 600,000 1,420,000
Minority interest
30% x 900,000 1,270,000
Cost of control
goodwill written off 1,140,000
Balance for CBS 1,470,000
––––––––– –––––––––
2,300,000 2,300,000
––––––––– –––––––––

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4 (a) Research and development
Balance at New Income statement Balance sheet
1 Oct 2003 expenditure Amortisation Research 30 Sept 2004
$ $ $ $ $
Project Q 1,000,000
1)(200,000) (100,000) 1,700,000
R )))400,000 250,000 1,650,000
S (140,000)
–––––––––– –––––––– ––––––––– ––––––––– ––––––––––
1,200,000 250,000 (100,000) (140,000) 1,350,000
–––––––––– –––––––– ––––––––– ––––––––– ––––––––––

Equipment Balance at New Depreciation Balance sheet

1 Oct 2003 expenditure 30 Sept 2004
$ $ $ $
1500,000 180,000 1,680,000
((200,000) (136,000) 1,(336,000)
–––––––––– –––––––– ––––––––– ––––––––––
300,000 180,000 (136,000) 1,344,000
–––––––––– –––––––– ––––––––– ––––––––––
Headings
The amortisation of deferred development expenditure ($100,000) and the research expenditure ($140,000) and the
depreciation of the research equipment ($136,000) will appear in the income statement under cost of sales.
The total deferred development expenditure ($1,350,000) will appear in the balance sheet under intangible non-current
assets.

(b) Disclosure notes

Income statement
The aggregate amount of research and development expenditure recognised as an expense during the period was $376,000,
all charged in cost of sales.
Balance sheet
Movements on deferred development expenditure during the year were:
Cost Amortisation Net book value
$ $ $
Balance at 1 October 2003 1,400,000 (200,000) 1,200,000
Year ended 30 September 2004
Amortisation (100,000) (100,000)
New expenditure 250,000 250,000
–––––––––– ––––––––– ––––––––––
1,650,000 (300,000) 1,350,000
–––––––––– ––––––––– ––––––––––

5 The use of historical cost accounting can mislead users when prices are rising in the following ways:
(i) Depreciation is based on the original cost of non-current assets and thus understates the true value obtained by the business
from the use of these assets. The result is that profit is overstated.
(ii) Inventory is often valued at cost, using FIFO or average costs. If prices are rising, sales in current terms are matched with
cost of sales in historical cost terms. Profit is again overstated.
(iii) Balance sheet values of assets may become seriously below their current value.
(iv) The combined effects of the above three factors mean that return on capital employed is overstated.
(v) Year on year comparison of results is likely to be misleading as figures will show an automatic increase as prices rise, when
in real terms sales and profits may have risen far less, or even have fallen.
Any four points needed for full marks.

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Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream) December 2004 Marking Scheme

Section B
Marks
1 (a) Calculations sales 4 x 1/2 2
cost of sales 1
purchases as balancing figure 1
expenses 6 x 1/2 3
Heading and layout 2 x 1/2 1
–––
8
–––
(b) Calculation of purchases 4x 1/ 2
2
Correct method (subtraction of net purchases) 2
–––
4
–––
12
–––

2 Opening balances 1
Prior year adjustment 1
Share issue 2x1 2
Surplus on revaluation transferred 2
Net profit for year 1
Dividends paid 1
–––
8
–––

3 Goodwill 4x 1/ 2
2
Minority interest 2x 1/ 1
2
Accumulated profits 5x 1/ 21/2
2
Balance sheet
Share capital 1
Sundry net assets 1
Revaluation reserve 1
B/S layout 1
heading 1/
2
–––
41/2
–––
10
–––

4 (a) Project Q 1
R 1
S 1
Equipment Cost 1/
2
Depreciation 1
Headings
Accumulated profits 1
Balance sheet 1/
2
–––
6
–––
(b) Income statement Total 2
(b) Income statement heading used 1
Balance sheet 3
–––
6
–––
12
–––

5 4x2 8
–––
50
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