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paper 1(Y)

Module A Foundation Stage

Accounting
Framework
(International Stream)

December 1999

Question Paper
Time allowed 3 hours
This paper is divided into two sections

Section A BOTH questions are compulsory and


MUST be answered

Section B THREE questions ONLY to be answered


Section A BOTH questions are compulsory and MUST be attempted

1 Atok, a limited liability company, compiles its financial statements to 30 June annually. At 30 June 1999, the companys list of
account balances was as follows:
$000 $000
Sales revenue 14,800
Purchases 8,280
Inventory at 1 July 1998 1,390
Distribution costs 1,080
Administrative expenses 1,460
Land at valuation 10,500
Buildings: cost 8,000
accumulated depreciation at 1 July 1998 2,130
Plant and equipment: cost 12,800
accumulated depreciation at 1 July 1998 2,480
Trade accounts receivable and payable 4,120 2,240
Cash at bank 160
Ordinary shares of 50c each: as at 1 July 1998 10,000
issued during year 4,000
Share premium account: as at 1 July 1998 2,000
arising on shares issued during year 2,000
Revaluation reserve as at 1 July 1998 3,000
Accumulated profits 3,140
10% loan notes (redeemable 2008)
(issued 1 April 1999 with interest payable 31 March and 30 September each year) 2,000
47,790 47,790

The following matters remain to be adjusted for in preparing the financial statements for the year ended 30 June 1999:
(1) Inventory at 30 June 1999 amounted to $1,560,000 at cost. A review of inventory items revealed the need for some
adjustments for two inventory lines:
(i) Items which had cost $80,000 and which would normally sell for $120,000 were found to have deteriorated.
Remedial work costing $20,000 would be needed to enable the items to be sold for $90,000.
(ii) Some items sent to customers on sale or return terms had been omitted from inventory and included as sales in
June 1999. The cost of these items was $16,000 and they were included in sales at $24,000. In July 1999, the items
were returned in good condition by the customers.
(2) Depreciation is to be provided as follows:
Buildings: 2% per year on cost.
Plant and equipment: 20% per year on cost.
80% of the depreciation is to be charged in cost of sales, and 10% each in distribution costs and administrative expenses.
(3) The land is to be revalued to $12,000,000. No change was required to the value of the buildings.
(4) Accrued expenses and prepayments were:
Accrued expenses Prepayments
$000 $000
Distribution costs 190 120
Administrative expenses 70 60
(5) No dividends were paid during the year and no dividend is proposed for the year.

2
Required:
(a) Prepare the companys income statement for the year ended 30 June 1999 and balance sheet as at that
date for publication, complying as far as possible with the provisions of IAS1 Presentation of Financial
Statements and other relevant International Accounting Standards. (20 marks)

(b) Prepare the statement of changes in equity as presented in IAS1. Notes to the financial statements are
not required. (4 marks)
(24 marks)

3 [P.T.O.
2 Otter, a limited liability company, operates a computerised accounting system for its accounts receivable and accounts payable
ledgers. The control accounts for the month of September 1999 are in balance and incorporate the following totals:
$
Accounts receivable ledger:
Balances at 1 September 1999: Debit 386,430
Credit 190
Sales revenue 163,194
Cash received 158,288
Discounts allowed 2,160
Sales returns inwards 590
Credit balances at 30 September 1999 370
Accounts payable ledger:
Balances at 1 September 1999: Credit 184,740
Debit 520
Purchases 98,192
Cash payments 103,040
Discounts received 990
Purchases returns outwards 1,370
Debit balances at 30 September 1999 520

Although the control accounts agree with the underlying ledgers, a number of errors have been found, and there are also
several adjustments to be made. These errors and adjustments are detailed below:
(1) Four sales invoices totalling $1,386 have been omitted from the records;
(2) A cash refund of $350 paid to a customer, A Smith, was mistakenly treated as a payment to a supplier with the same
name;
(3) A contra settlement offsetting a balance of $870 due to a supplier against the accounts receivable ledger account for the
same company is to be made;
(4) Bad debts totalling $1,360 are to be written off;
(5) During the month, settlement was reached with a supplier over a disputed account. As a result, the supplier issued a
credit note for $2,000 on September 26. No entry has yet been made for this;
(6) A purchases invoice for $1,395 was keyed in as $1,359;
(7) A payment of $2,130 to a supplier, B Jones, was mistakenly entered to the account of R Jones;
(8) A debit balance of $420 existed in the accounts payable ledger at the end of August 1999. The supplier concerned
cannot now be traced and it has been decided to write off this balance.

Required:
Prepare the accounts receivable and accounts payable ledger control accounts as they should appear after
allowing, where necessary, for the errors and adjustments listed.
(16 marks)

4
Section B THREE questions ONLY to be attempted

3 A, B and C are in partnership, sharing profits in the ratio 3:2:1 and preparing their accounts to 30 June each year.
At 1 July 1998 their capital accounts showed the following balances:
$
A 335,000
B 280,000
C 310,000
On 31 December 1998, A retired and his place was immediately taken by D. When D entered the partnership, she introduced
$200,000 as capital, and also paid in $150,000 for a one quarter share of the goodwill. The profit shares after Ds entry are
B 50%, C 25% and D 25%.
To arrive at the amount due to A at 31 December 1998, adjustments for the following matters are required:
(1) Goodwill, which is not currently included in the balance sheet, is agreed to be worth $600,000 and this is to be recorded
so that no goodwill balance remains in the accounts.
(2) The partnerships property is to be revalued upwards by $300,000.
(3) The net profit for the partnership for the year ended 30 June 1999 was $400,000 before allowing for items (4) and (5)
below. This profit was agreed to accrue evenly over the year.
(4) A large bad debt of $50,000 relating to the first half year is to be written off in that period.
(5) A left his final agreed capital balance in the partnership as a loan and received interest at 10% per year for the half year
ended 30 June. The interest was paid to him on 30 June 1999.
Partners drawings during the year were:
A $60,000 (all before 31 December)
B $60,000 ($30,000 in each half year)
C $40,000 ($20,000 in each half year)
D $25,000 (all after 31 December)

Required:
(a) Prepare a statement showing the final profit for the year and its division among the partners.
(6 marks)

(b) Show the capital accounts of the four partners to record all of these transactions. Separate current
accounts are not required, nor are the entries on As loan account. (14 marks)
You may work in $000s if you wish. The interest on As loan for the half year should be rounded to the
nearest $1,000 if necessary.
(20 marks)

5 [P.T.O.
4 The balance sheets of Weasel, a limited liability company, at 31 August 1998 and 1999 are given below:
Reference Year ended 31 August
to notes 1998 1999
ASSETS $000 $000 $000 $000
Non-current assets 1 6,400 8,500
Current assets
Inventory 1,200 1,400
Accounts receivable 1,500 1,400
Cash at bank 200 2,900 300 3,100
9,300 11,600

EQUITY AND LIABILITIES


Capital and reserves
Issued share capital 2,000 2,200
Share premium account 2,340 2,540
Revaluation reserve 1,000
Accumulated profits 2,400 2,960
6,740 8,700
Non-current liabilities
10% loan notes 2005 2 1,000 1,500
Current liabilities
Trade payables 800 700
Taxation 400 500
Bank overdraft 360 200
1560 1,400
9,300 11,600
Notes
(1) Movements in non-current assets:
Plant and
Land Buildings Equipment Total
$000 $000 $000 $000
Cost or valuation
At 1 September 1998 2,000 3,000 3,400 8,400
Additions 2,500 2,500
Disposals (1,000) (1,000)
Revaluation 1,000 1,000
At 31 August 1999 3,000 3,000 4,900 10,900

Accumulated depreciation
At 1 September 1998 400 1,600 2,000
Provision for year 60 1,140 1,200
Disposals (800) (800)
At 31 August 1999 460 1,940 2,400

Net book amounts


At 31 August 1999 3,000 2,540 2,960 8,500
At 1 September 1998 2,000 2,600 1,800 6,400

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(2) Issue of loan notes A further $500,000 of 10% loan notes was issued at par on 1 September 1998. Interest on all loan
notes is paid on 28 February and 31 August each year.
(3) The company paid a dividend of $500,000 during the year. In accordance with IAS10 (Revised) Events afterthe Balance
Sheet Date, proposed dividends have not been recognised as liabilities in the balance sheets.
(4) Plant sold during the year realised $250,000.
(5) The tax charge for the year in the income statement was $500,000.

Required:
Prepare a cash flow statement for Weasel for the year ended 31 August 1999, complying as far as possible
with IAS7 Cash Flow Statements, using the indirect method.
(20 marks)

7 [P.T.O.
5 The directors of Stoat, a limited liability company, are reviewing the companys draft financial statements for the year ended
30 June 1999.
Two matters under discussion are depreciation and non-current asset valuation several directors are of the opinion that the
companys depreciation methods and rates are unsatisfactory, and that the balance sheet values of some of the non-current
assets are unrealistic.

Required:
Draft a memorandum for the directors dealing with the following matters:
(a) The purpose of depreciation and the factors affecting the assessment of useful life according to IAS16
Property, Plant and Equipment (Revised). (7 marks)

(b) Three items of evidence obtainable from inside or outside the company, to check whether the
companys depreciation rates are in fact likely to be too low. (3 marks)

(c) The disclosures, if any, which would be required in the financial statements if the company decided to
change its depreciation methods. (4 marks)

(d) The requirements of IAS16 Property, Plant and Equipment (Revised) regarding revaluation of non-
current assets. (6 marks)
(20 marks)

6 Ermine commenced trading on 1 July 1998 with a capital of $100,000 cash. During the year ended 30 June 1999, he operated
from rented premises and at the end of the year he had sold all his inventory. His balance sheet at 30 June 1999 was:
$ $
Cash at bank 100,000
100,000
Capital at 1 July 1998 100,000
Profit for year to date 40,000
140,000

Less drawings 40,000


100,000
100,000

During the year there was inflation of 10% in the country in which he operates.

Required:
(a) Using this simple example where appropriate, define the terms financial capital and physical capital,
and explain why it may be dangerous for an enterprise if it maintains financial capital but does not
maintain physical capital. (8 marks)

(b) List and briefly explain three ways in which the use of historical cost accounting may cause financial
statements to be misleading. (9 marks)

(c) List three advantages of historical cost accounting. (3 marks)


(20 marks)

End of Question Paper

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