Accounting Workbook Answers

101 c Journal Dr Cr 2016 Details $ $ July 1 Bank 750 000 Ordinary share capital ( 1 3       × 1 800 000 = 600 000) 600 000 Share premium (600 000 × $1.25) 150 000 Rights issue of one ordinary share for every three held d Bonarite Limited Statement of financial position at 1 July 2016, immediately affer the rights issue shares $000 Net assets 2 750 Equity Share capital and reserves Ordinary shares of $1 2 400 Share premium 150 General reserves 120 Retained earnings 80 2 750 Practice exercise 1 a Bracket and Racket Limited Income statement for six months ended 30 September 2016 $000 Revenue (W1 + W2) 2451 Cost of sales $(1540 + W3 − 704) (2132) Gross profit 319 Expenses $(25 + 823 + 103 − 192) (759) Depreciation $(350 − 70) × 25% × 1 2       (six months) (35) Provision for doubtful debts ($420 × 5%) (21) Loss from operations before non-recurring items (496) Loss on disposal of unused buildings (17) (513) Finance cost (20) Loss before tax 533) Taxation (–) Loss for the period (533) Answers to activities, practice exercises and exam practice questions: Chapter 19 101 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

102 Bracket and Racket Limited - Working 1 (W1) Two-column cash book Cash Bank Cash Bank $000 $000 $000 $000 Brought down 3 – – 203 Sales ledger (2 784 − 53) 2 731 Purchase ledger 1 996 Sale of property 53 Expenses 823 Cash sales (balancing figure) 120 Interest 20 Wages 25 Loan repayments 90 Carried down (195 + 63) – 258 Carried down 8 – 123 3 042 123 3 042 Bracket and Racket Limited - Working 2 (W2) Sales ledger $000 $000 Brought down 820 Bank 2 731 Sales (balancing figure) 2 331 Carried down 420 3 151 3 151 Bracket and Racket Limited - Working 3 (W3) Purchase ledger $000 $000 Bank 1 996 Brought down 1 210 Carried down 510 Purchases (balancing figure) 1 296 2 506 2 506 Bracket and Racket Limited Statement of changes in equity for six months ended 30 September 2016 Details Share capital Retained earnings Total $000 $000 $000 At start of year 25 910 1 108 Loss for six months (533) (533) Loan repayments – (90) Balance at 30 Sept 25 377 4 850 Note: Although not specifically asked for, a statement of changes in equity has been shown. Included in the statement of changes in equity is the loan account. The reason for this is that in the original data the loan account was included as part of the equity. However, as we have seen, it is not part of the equity in the new statement of financial position. Cambridge International AS and A Level Accounting 102 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

103 b Bracket & Racket Limited Statement of financial position at 30 September 2016 Net book value $000 $000 Assets Non-current assets Buildings $(250 − 70) 180 Less: depreciation (22.50) 157.50 Fixtures and fittings 100.00 Less: depreciation (12.50) 87.50 245 Current assets Inventory 704 Trade receivables $(420 − 21) 399 Cash 8 1 111 Total assets 1 356 Equity and liabilities Capital and reserves Share capital 25 Retained earnings 377 402 Non-current liabilities Loan accounts $(173 − 90) 83 Current liabilities Trade payables 510 Accruals 103 Bank overdrafi (195 + 63) 258 871 Total equity and liabilities 1 356 Exam practice questions Multiple-choice questions 1 C 2 B 3 B 4 A 5 C 6 A 7 A 8 D 9 D 10 C 11 D 12 B 13 A 14 C Answers to activities, practice exercises and exam practice questions: Chapter 19 103 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

104 Cambridge International AS and A Level Accounting Structured questions 1 a Cash book Bank account (extract) $ $ May 1 Ordinary share capital 60 000 Jun 1 Ordinary share capital 10 000 Share premium 60 000 Share premium 10 000 Jul 1 Ordinary share capital 25 000 Aug 1 Ordinary share capital 25 000 Ordinary share capital account $ $ Jun 1 Bank 10 000 May 1 Bank 60 000 Jul 1 Bank 25 000 Aug 1 Bank 25 000 Share premium account $ $ Jun 1 Bank 10 000 May 1 Bank 60 000 b An ordinary share entitles the holder to a part ownership of the company. They are paid a dividend out of the company’s profits, if sufficient, as a reward on their investment. A debenture is a loan to the company, repayable at some time in the future. The person or company is not an owner of the company but a long-term creditor. They will receive interest on the money lent. This will be payable before any dividends are paid to the ordinary shareholders. c Morecap Limited Statement of changes in equity for the year ended 31 March 2016 Details [1] Share capital Share premium Retained earnings Total $000 $000 $000 $000 At 31 March 2015 400 40 55 495 Issue of ordinary shares 100 50 150 Profit for the year 180 180 Interim dividend (50) (50) At 31 March 2016 500 90 185 [2]775 [1] Apart from the opening and closing balances, the other items can be shown in any order. [2] Notice that the bottom line adds across to $775 000, as does the total column downwards. This is always a useful check to make sure students work is accurate. 104 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

105 2 a Pecnut Limited Income statement for the year ended 31 March 2016 $000 Revenue 2 683 Cost of sales $(85 000 + 1 152 000 − 105 000) (1 132) Gross profit 1 551 Selling and distribution expenses $(540 + 21) (561) Administrative expenses (648) Profit from operations 342 Finance cost (36) Profit before tax 306 Taxation (–) Profit for the year 306 Notes: 1 In this illustration, the calculation of the cost of sales has been shown in brackets afier the label. This is perfectly acceptable. Alternatively, students could have shown the calculation as separate workings. 2 Always show full labels. This is particularly important for gross profit and profit for the year. The notations GP and NP are not acceptable even if the calculations are correct. 3 The question states very plainly that the depreciation of the motor vehicles is to be classed as a distribution expense. Ordinarily the choice would depend on the use made of the vehicles; for example depreciation on salesmen’s cars or delivery vans are selling expenses, but the costs of a company car for the chief accountant would be an administrative expense. 4 The interest on debentures is 10%. That means that a total of $36 000 should be brought into the income statement for finance costs for the year. At the moment there is only $18 000 in the trial balance. Therefore a further $18 000 needs to be provided. This will also need to be brought into the statement of financial position as an other payable. b Pecnut Limited Statement of changes in equity for the year ended 31 March 2016 Details Share capital Share premium General reserve Retained earnings Revaluation reserve Total $ $ $ $ $ $ $000 $000 $000 $000 $000 $000 At start of year 600 – 120 69 – 789 Profit for year 306 306 Dividends paid – final – – Dividends paid – interim – – Share issue – – – Revaluation of assets 680 680 Transfer to reserves 10 (10) – Balance at year end 600 – 130 365 680 1 775 Answers to activities, practice exercises and exam practice questions: Chapter 19 105 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

106 Notes: 1 This answer has used the full format from section 2, although there are quite a few items where there are no entries. Students only need to show the items where an amount needs to be shown. 2 The figure of $1 775 is a check total as the items above it and to the lefi all add to it. This is an important cross check and students should always do it as it will act as a cross check when they prepare the statement of financial position. 3 In the further Information section of the question note 5 mentions the recommendation of a final dividend. Under IAS 1 this is not shown in the accounts for the current year. It is now shown as a note to the accounts. 4 A calculation of the revaluation of the freehold land is as follows: Revaluation reserve account $000 $000 Balance c/d 680 Freehold buildings at cost account 500 Provision for depreciation of freehold buildings account 180 680 680 Balance b/d 680 The figure of $500 is the increase in the cost value for $1 500 to $2 000. However, the provision for depreciation which exists must now be written off as it no longer exists. c Preparation of accounts on a going concern basis is one of the fundamental accounting concepts. It means the business is expected to continue in operation for the foreseeable future. This is at least the next trading period. Thus, assets are valued on this basis, usually at their current net book values, unless any revaluation has taken place. If this is not the case then the assets will be recorded in the accounts at a value which is as close as possible to their value if the company is forced to sell them on the open market. This is likely to be considerably lower that their net book value. Further, provision is made for the expected costs of closing down the business, such as redundancy payments. 3 a Square Limited Income statement for the year ended 30 June 2016 $000 $000 Revenue 1 000 Opening inventories 46 Purchases 630 676 Closing inventories (38) Cost of sales (638) Gross profit 362 Overheads: Sales office salaries 79 Administration wages 36 Delivery vehicle expenses $(38 + 2) 40 Advertising $(34 − 6) 28 Office expenses $(24 + 3) 27 Cambridge International AS and A Level Accounting 106 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

107 $000 $000 Depreciation: Delivery vehicles 13 Office machinery 7 (230) Profit from operations 132 Finance costs $(6 + 6) (12) Profit before tax 120 Tax (16) Profit for the year 104 b Square Limited Statement of changes in equity for the year ended 30 June 2016 Share capital Revaluation reserve General reserve Retained earnings Total $000 $000 $000 $000 $000 Balance at 30 April 2015 900 50 7 957 Profit for the year 104 104 Transfer to general reserve 50 (50) – Revaluation reserve 260 260 Dividends paid (7) (7) Balance at 30 April 2016 900 260 100 54 1 314 c Square Limited Statement of financial position at 30 June 2016 Cost Accumulated depreciation Net book value $000 $000 $000 Assets Non-current assets Freehold premises 1 200 – 1 200 Delivery vehicles 80 41 39 Office machinery 70 28 42 1 350 69 1 281 Current assets Inventories 38 Trade receivables 82 Other receivables 6 Cash and cash equivalents 67 193 Total assets 1 474 Equity and liabilities Capital and reserves Ordinary Share capital 900 General reserve 100 Revaluation reserve $(200 + 60) 260 Retained earnings 54 1 314 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 19 107 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

108 Cambridge International AS and A Level Accounting Cost Accumulated depreciation Net book value $000 $000 $000 Non-current liabilities 12% debentures 2025/2027 100 Current liabilities Trade payables 33 Other payables $(2 + 3) 5 Debenture interest 6 Taxation 16 60 Total equity and liabilities 1 474 Notes: 1 The recommended final dividend on the ordinary shares is shown by way of a note to the accounts. 2 However, the debentures are a long-term loan and the unpaid interest on them is treated as an accrual. 3 Amounts prepaid are shown as other receivables. 4 Similarly, the accrued amounts owing are shown as other payables. Strictly speaking the total should also include the unpaid debenture interest. However, this is shown separately to enable readers to follow the workings. d Two uses of the share premium account are: • to issue fully paid bonus shares • to pay the expenses of a new share issue. e The choice of whether to issue shares or take a debenture to fund the future expansion will depend on a number of factors. If the directors are happy to take additional loans, then a debenture can be considered. It will increase the amount of loan interest, which is a fixed charge on the profit and must be paid before any dividends to ordinary shareholders. But it does mean that that all profit (in excess of the interest charge) that is generated by the expansion will fall to the existing shareholders. At the present time the company is not highly geared and an additional loan of $150 000 may be a good option. The directors may also be able to negotiate a rate of interest below the 12% currently payable on the existing debenture. The principal advantage of a debenture is that the current ownership and control of the company is not diminished. On the other hand, an issue of shares will not increase the gearing. Specifically this means that the additional funds received are not a liability of the business. There will not be any need to have to repay either the capital (which they will have to do with a debenture), or any dividend on the shares, if profits are low in future years. Thus, issuing shares will help future cash flows. 108 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

109 The 100 000 new shares could be issued to the existing shareholders if they have access to the funds necessary to buy the shares. Alternatively, some or all of the new shares could be sold to a third party. It is likely that any large scale investor would expect also to become a director so that they could share in the decision making that will affect the future value of their shares, which the present directors may or may not consider advantageous. The more confident the directors are that their expansion plans will succeed, the more they should favour taking a loan; the more risky the venture they have in mind, the wiser it would be to seek to raise the capital by a share issue. Note: Provided cogent reasoning based on the above arguments is given, students could justify either method of raising the funds. Answers to activities, practice exercises and exam practice questions: Chapter 19 109 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

20 Manufacturing accounts Activities Activity 1 The Fabric Company Manufacturing account and income statement for the year ended 31 March 2016 $000 $000 Raw materials Inventory at 1 April 2015 10 Purchases 130 Carriage in 14 144 154 Less: inventory at 31 March 2016 20 Cost of raw materials consumed 134 Direct labour 170 Direct expenses 16 Prime cost 320 Factory overheads 128 Depreciation of machinery 12 140 460 Work in progress: 1 April 2015 12 31 March 2016 (22) (10) Factory cost of goods produced 450 Factory profit (20%) 90 Transferred to income statement 540 Sales 700 Less: cost of sales Inventory of finished goods at 1 April 2015 24 Transferred from manufacturing account 540 564 Inventory of finished goods at 31 March 2016 36 528 Gross profit 172 Ofiice overheads (96) Ofiice depreciation (3) (99) 73 Add: factory profit 90 Less: Adjustment to provision for unrealised profit $(36 − 24) × 20 120 (2) 88 Profit for the year 161 Cambridge International AS and A Level Accounting 110 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

111 Activity 2 Glue-making company Manufacturing account and income statement for the year ended 30 April 2016 $ $ Direct materials: Inventory at 1 May 2015 11 250 Purchases 132 000 Carriage inwards 11 505 143 505 154 755 Less: inventory at 30 April 2016 13 125 Cost of raw material consumed 141 630 Direct labour 146 250 Prime cost 287 880 Factory overheads Indirect wages 19 500 Rent 3 4 $(45 000 + 3 750) 36 563 Heating and lighting 2 3 $(42 300 + 2 700) 30 000 Insurance 9 10 $(3 150 – 900) 2 025 Motor vehicle expenses ( $6 000 × 1 2 ) 3 000 Depreciation: Factory 3 000 Machinery 10 000 Motor vehicles ( 8 000 × 1 2 ) 4 000 108 088 395 968 Work in progress: at 1 May 2015 18 000 Less: at 30 April 2016 15 750 2 250 Factory cost of goods produced 398 218 Factory profit (20%) 79 644 Transferred to income statement 477 862 Sales 800 000 Less: cost of sales Inventory of finished goods at 1 May 2015 27 000 Transferred from manufacturing account 477 862 504 862 Less: inventory of finished goods at 30 April 2016 24 000 480 862 Gross profit 319 138 Ofiice salaries 51 450 Rent 1 4 $(45 000 + 3 750) 12 187 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 20 111 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

112 $000 $000 Heating and lighting 1 3 $(42 300 + 2 700) 15 000 Insurance 1 10 $(3 150 − 900) 225 Carriage outwards 2 520 Advertising $(7 000 − 3 500) 3 500 Motor vehicle expenses ( $6 000 × 1 2 ) 3 000 Depreciation: Ofiice machinery 4 000 Motor vans ( $8 000 × 1 2 ) 4 000 95 882 223 256 Add: factory profit 79 644 Add: reduction in provision for unrealised profit 1 6 $(27 000 − 24 000) 500 80 144 Profit for the year 303 400 Practice exercises 1 a Television manufacturing company Manufacturing account for the year ended 30 April 2016 $ $ Opening inventory of raw materials 42 000 Add: purchases 390 000 Add: carriage inwards 26 000 416 000 458 000 Less: closing inventory (36 000) Cost of raw materials consumed 422 000 Add: direct wages 280 000 Add: royalty (direct expenses) 40 000 Prime cost 742 000 Factory overheads Indirect wages and labour $(12 000 + 8 000) 20 000 Depreciation: Premises (50% × $12 500) 6 250 Motor vehicles (90% × $8 000) 7 200 Plant and machinery (80% × $14 000) 11 200 44 650 786 650 Opening inventory of work in progress 50 000 Closing inventory of work in progress (46 000) 4 000 Factory cost of finished goods 790 650 Add: factory profit (20% × $790 650) 158 130 Transferred to income statement 948 780 Cambridge International AS and A Level Accounting 112 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

113 b Television manufacturing company Income statement for the year ended 30 April 2016 $ $ Sales 1 240 000 Opening inventory of finished goods 48 000 Add: transfer from manufacturing account 948 780 996 780 Less: closing inventory (62 400) 934 380 Gross profit 305 620 Expenses: Selling expenses 42 000 Administrative expenses 62 000 Depreciation: Premises 6 250 Motor vehicles 800 Plant and machinery 2 800 113 850 Net profit on trading 191 770 Add: factory profit 158 130 Adjustment for unrealised profit (2 400) 155 730 Profit for the year 347 500 Workings: Provision for unrealised profit account $ $ Closing balance c/d (62 400 ÷ 120 × 20) 10 400 Opening balance b/d (48 000 ÷ 120 × 20) 8 000 Income statement 2 400 10 400 10 400 c Inventory must always be shown at the lower of cost and net realisable value, in line with IAS 2. As a result, the closing inventory of finished goods must be shown in the statement of financial position at cost, not the transfer price. The calculation for this is: $ Inventory at transfer price 62 400 Less: provision for unreralised profit 10 400 52 000 d Adding an element of factory profit to the cost of goods manufactured is purely an internal adjustment. It does not mean that the company will make any more overall profit for the year. It is a way of measuring the performance of the factory. For example, the transfer price with the profit added can be compared to the cost of buying in the product ready-made. This comparison will measure the efiiciency of the company’s production department with that of competitors. It may also allow management to focus on areas of the production process where cost savings can be made, or costs are currently not being tightly controlled. Answers to activities, practice exercises and exam practice questions: Chapter 20 113 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

Managers in the manufacturing department can also be motivated by being rewarded with payment of a bonus based on the factory profit. However, this must be done carefully to ensure that factory output is still ideal for the company overall. If, for example, the factory reduced quality to maximise factory profit, that would create other difiiculties for the business. Further, the amount of the factory profit is an arbitrary management decision; if it set at 10% it will appear as if the sales team has made a greater contribution than if it is set at 25%, for example. Thus, adding factory profit may cause friction between the factory manager and the sales manager, who may believe that the factory manager is taking some of his/her profit. Provided the significance and use of factory profit is fair and is explained, then it shouldn’t cause an issue. The calculation is not a difiicult one to make or to adjust based on experience or changes in circumstances. Overall, therefore, the company is probably wise to retain an addition for factory profit to its factory cost of production. 2 a Yendor Manufacturing account for the year ended 31 March 2016 $ $ Opening inventory of raw materials 450 000 Add: purchases 2 250 000 Add: carriage inwards 162 000 2 412 000 2 862 000 Less: closing inventory (440 000) Cost of raw materials consumed 2 422 000 Add: direct wages 900 000 Prime cost 3 322 000 Factory overheads Indirect wages 90 000 Indirect materials 45 000 Other factory overheads 245 000 Depreciation: Premises ( 4% × $1m × 3 4 ) 30 000 Plant and machinery (30% × $250 000) 75 000 485 000 3 807 000 Opening inventory of work in progress 375 000 Closing inventory of work in progress (562 000) (187 000) Factory cost of finished goods 3 620 000 Add: factory profit (20% × $3 620 000) 724 000 Transferred to income statement 4 344 000 Cambridge International AS and A Level Accounting 114 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

115 b Yendor Income statement for the year ended 31 March 2016 $ $ Sales 6 075 000 Opening inventory of finished goods 390 000 Add: transfer from manufacturing account 4 344 000 4 734 000 Less: closing inventory (594 000) 4 140 000 Gross profit 1 935 000 Expenses: Ofiice salaries 391 000 Other administrative expenses 675 000 Depreciation: Premises 10 000 Ofiice equipment 30 000 1 106 000 Net profit on trading 829 000 Add: factory profit 724 000 Adjustment for unrealised profit (34 000) 690 000 Profit for the year 1 519 000 c Provision for unrealised profit account $ $ Closing balance c/d (594 400 ÷ 120 × 20) 99 000 Opening balance b/d (39 000 ÷ 120 × 20) 65 000 Income statement 34 000 99 000 99 000 d Extract from statement of financial position at 31 March 2016 $ $ Current assets Inventory Raw materials 440 000 Work in progress 562 000 Finished goods at transfer price 594 000 Less: provision for unrealised profit 99 000 495 000 1 497 000 e By producing a manufacturing account, Yendor is fully aware of his costs of manufacturing his product. This will allow him to control his costs and compare his transfer price with the cost of competitor’s products. If he doesn’t produce a manufacturing account then the costs of producing his product may get ‘lost’ in with the other costs of the business. Thus, he won’t be able to identify areas where savings can be made or wastage is occurring. Whilst the production of a manufacturing account requires additional work, and possibly additional costs in recording the data and employing stafi to collect it, it is felt that the benefits to be gained are greater than the costs incurred. Thus, Yendor should continue to prepare the manufacturing account. Answers to activities, practice exercises and exam practice questions: Chapter 20 115 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

116 Exam practice questions Multiple-choice questions 1 B 2 C 3 B 4 C Structured question 1 Spinners & Co. Manufacturing account for the year ended 31 December 2015 $ $ Opening inventory of raw materials 8 000 Add: purchases 140 000 148 000 Less: closing inventory (10 000) Cost of raw materials consumed 138 000 Add: direct wages $(40 000 + 600) 40 600 Licence fees (direct expense) 16 000 Prime cost 194 600 Factory overheads Indirect wages $(28 000 + 400) 28 400 Heat and light $(5 000 − 180) 4 820 General expenses $(14 000 + 300) 14 300 Insurance $(6 000 − 400) 5 600 Depreciation of plant and machinery 7 000 60 120 254 720 Opening inventory of work in progress 12 000 Closing inventory of work in progress (9 700) 2 300 Factory cost of finished goods 257 020 Add: factory profit (10% × $257 020) 25 702 Transferred to income statement 282 722 Note: It is very important to show the labels which are in bold. It is important that the label for the figure is also shown. Cambridge International AS and A Level Accounting 116 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

21 Not-for-profit organisations (clubs and societies) Activities Activity 1 a Golf club Subscriptions account Year 3 $ Year 3 $ Balance b/d (4 × $450) 1 800 Balance b/d (3 × $450) 1 350 Income and expenditure account (200 × $450) 90 000 Bank – receipts for year 88 650 Balance c/d (1 × $450) 450 Balance c/d 2 250 92 250 92 250 Year 4 Balance b/d 2 250 Balance b/d 450 b On the assumption that all of the year 2 debtors have now paid, the balance brought down represents five members who owe their subscriptions for year 3, net of the one member’s paid in advance. Activity 2 Entry fees account 2016 2016 $ $ Income and expenditure account (5 × $100) 500 Balance b/d 1 200 Balance c/d (Working) 1 700 Bank – receipts for year 1 000 2 200 2 200 2017 Balance b/d 1 700 Working: Original three members at $300 remaining + two new members with $400 remaining. Activity 3 a Drama club Subscriptions account 2016 2016 $ $ Jan 1 Balance – Subscriptions owing b/d 280 Dec 31 Bank 2 640 Dec 31 Income and expenditure account 2 400 Balance – subscriptions prepaid c/d 360 Balance – subscriptions owing c/d 400 3 040 3 040 2017 2017 Jan 1 Balance b/d 400 Jan 1 Balance b/d 360 Answers to activities, practice exercises and exam practice questions: Chapter 21 117 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

118 b Drama club Income and expenditure account for the year ended 31 December 2016 $ $ Income Subscriptions 2 400 Sales of tickets 20 000 Sales of programmes 3 000 Sales of refreshments 3 500 Less: cost of refreshments 2 200 1 300 26 700 Less: expenditure Hire of costumes 4 700 Hire of hall 2 600 Copyright fees 1 400 Printing 180 8 880 Surplus of income over expenditure 17 820 Donation to Actors Benevolent Fund (50%) 8 910 Balance carried to accumulated fund 8 910 17 820 c Drama club Statement of financial position extract at 31 December 2016 $ Current assets Subscriptions owing 400 Current liabilities Subscriptions in advance 360 Activity 4 a Hutt River Dining Club Statement of afiairs at 1 January 2016 $ $ Catering equipment 8 000 Inventory of food 200 Inventory of books 1 100 Subscriptions owing 180 Bank 1 520 11 000 Less: Trade payables for supplies of food 40 Subscriptions in advance 60 100 Accumulated fund at 1 January 2016 10 900 Cambridge International AS and A Level Accounting 118 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

119 b Hutt River Dining Club Receipts and payments account for the year ended 31 December 2016 2016 2016 $ $ Jan 1 Balance b/f 1 520 Dec 31 Stafi wages 39 000 Dec 31 Subscriptions 5 000 Purchase of food 24 980 Restaurant takings 73 760 Purchase of books 4 840 Sales of books 12 150 Catering equipment 3 750 Heating and lighting 8 390 Other operating expenses 2 270 Balance c/d 9 200 92 430 92 430 2017 Jan 1 Balance b/d 9 200 c Hutt River Dining Club Subscriptions account 2016 2016 $ $ Jan 1 Balance b/f 180 Jan 1 Balance b/f 60 Dec 31 Income and expenditure account 4 780 Dec 31 Bank 5 000 Balance c/d 140 Dec 31 Balance c/d 40 5 100 5 100 2017 2017 Jan 1 Balance b/d 40 Jan 1 Balance b/d 140 d Hutt River Dining Club Book trading account for the year ended 31 December 2016 $ $ Sales 12 150 Less: cost of sales Inventory at 1 January 2016 1 100 Purchases $(4 840 + 200) 5 040 6 140 Inventory at 31 December 2016 (965) 5 175 Profit transferred to income and expenditure account 6 975 Answers to activities, practice exercises and exam practice questions: Chapter 21 119 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

120 e Hutt River Dining Club Restaurant account for the year ended 31 December 2016 $ $ Takings 73 760 Less: Cost of food Inventory at 1 January 2016 200 Purchases (24 980 + 360 − 40) 25 300 25 500 Inventory at 31 December 2016 (270) 25 230 Gross profit 48 530 Stafi wages 39 000 Depreciation of catering equipment 10% × $(11 000 + 3 750) 1 475 40 475 Profit transferred to income and expenditure account 8 055 f Hutt River Dining Club Income and expenditure account for the year ended 31 December 2016 $ $ Income Subscriptions 4 780 Profit on sales of books 6 975 Profit on restaurant 8 055 19 810 Expenditure Heating and lighting 8 390 Other operating expenses 2 270 10 660 Surplus of income over expenditure 9 150 g Hutt River Dining Club Statement of financial position at 31 December 2016 $ $ Non-current assets Catering equipment $(11 000 + 3 750) 14 750 Less: depreciation $(3 000 + 1 475) 4 475 10 275 Current assets Inventory: Books 965 Food 270 1 235 Subscriptions owing 40 Bank 9 200 10 475 Total assets 20 750 Cambridge International AS and A Level Accounting 120 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

121 $ $ Financed by: Accumulated fund at 1 January 2016 10 900 Surplus of income over expenditure 9 150 Accumulated fund at 31 December 2016 20 050 Current liabilities Trade payables: Food 360 Books 200 Subscriptions in advance 140 700 Total accumulated fund and liabilities 20 750 Practice exercises 1 a Not-for-profit organisation Trading business Surplus of income over expenditure Profit for the year Accumulated fund Owner's capital b The International Athletics Club Subscription account for the year ended 31 May 2016 2015 2015 $ $ Jun 1 Balance b/f 330 2016 2016 May 31 Income and expenditure account 7 935 May 31 Bank 7 970 Subscriptions written ofi 20 Balance c/d 275 8 265 8 265 Jun 1 Balance b/d 275 c The International Athletics Club Refreshments trading account for the year ended 31 May 2016 $ $ Takings 4 112 Opening inventory 150 Purchases (2 654 − 15 + 40) 2 679 2 829 Less: closing inventory (180) 2 649 Gross profit 1 463 Wages (900) Profit on refreshments 563 Answers to activities, practice exercises and exam practice questions: Chapter 21 121 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

122 d The International Athletics Club Income and expenditure account for the year ended 31 May 2016 $ $ Income Subscriptions 7 935 Profit on refreshments 563 Dance tickets 1 897 Donation 90 Profit in disposal of old equipment (94 − 70) 24 10 509 Less: expenditure Wages (4 000 − 900) 3 100 Rent 540 Travelling expenses 995 Subscriptions written ofi 20 Depreciation of equipment (4 700 + 1 778 − 70 − 6 000) 408 5 063 Surplus for the year 5 446 Notes: 1 In the refreshments trading account it is perfectly acceptable to call the final figure a profit. 2 However, with the income and expenditure account the final figure must always be referred to as a surplus (or deficit if expenditure is greater than income). 3 The exercise does not give any treatment for donations. As it is a small amount there is no reason why it should not be treated as income in the year it is received. e If a life membership scheme is introduced, the club will receive potentially large sums from those members who can afiord it and choose to take out a life membership. This might be a way to raise funds for some capital outlay, such as for the purchase of a new clubhouse. However, the club will never receive any further subscriptions from these life members, so that in future years, subscriptions income may not cover costs. (This would eventually be an issue even if there had been no initial outlay of the life subscriptions; these funds will eventually be used up, so that the club would need new members to keep going.) There is also a difiiculty in determining a fair price for life membership: if it is too low, funds will run out quickly and those members still paying annually will feel unfairly treated; if it is too high, there will be very few takers. So unless there is an urgent need for funds that can be raised in no other way, the club should not consider introducing a life membership. Cambridge International AS and A Level Accounting 122 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

123 Answers to activities, practice exercises and exam practice questions: Chapter 21 2 a The Cooking Club Subscription account for the year ended 30 September 2016 2015 2015 $ $ Oct 1 Balance b/d ($40 × 15) 600 Oct 1 Balance b/d ($40 × 12) 480 2016 2016 Sep 30 Income and expenditure account (150 × $40) 6 000 Sep 30 Bank 6 435 Balance c/d 315 6 915 6 915 Oct 1 Balance b/d 315 b The Cooking Club Club shop trading account for the year ended 30 September 2016 $ $ Takings (7 168 + 20) [1] 7 188 Opening inventory 500 Purchases (3 745 − 1 450 + 1 260) 3 555 4 055 Less: closing inventory (850) 3 205 Gross profit 3 983 Wages (4 000) Loss on shop (17) c The shop has not performed well. Despite making a good gross profit of $3 983 (55%), the wages are too high and this has resulted in an overall loss for the shop. Action needs to be taken to reduce the wages in order to ensure an overall net profit for the shop. d The Cooking Club Income and expenditure account for the year ended 30 September 2016 $ $ Income Subscriptions 6 000 Donations 600 Cash taken at door 3 500 Deposit account interest 800 Grant from council (6 000 + 4 000) 10 000 20 900 Less: expenditure Loss on club shop 17 General expenses (1500 + 65) 1 565 Rent 8 000 Income from annual dance 1 400 Less: costs (1 490) 90 Depreciation of equipment (2000 × 20%) 400 10 072 Surplus for the year 10 828 [1] The cash float for the shop has increased by $20 over the year. This has been treated as unrecorded sales made in the shop and has increased the total takings for the year. 123 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

124 Cambridge International AS and A Level Accounting e The accumulated fund for a club represents the total of accumulated surpluses less any deficits for the period the club has been operating. It belongs to the members of the club. However, it will not be paid out to them. This is difierent from the capital of a sole trader. The full amount belongs to the sole trader and he/she can withdraw any of it or add to it at any time. Exam practice questions Multiple-choice questions 1 B 2 B 3 C Structured questions 1 a The Retired Actors Club Calculation of accumulated fund at 1 July 2015 $ Shop inventories 1 600 Trade payables (400) Subscriptions owing ($30 × 20) 600 Bank balance 16 800 Equipment (fully depreciated) [1] – Deposit account 10 000 Accumulated fund at 1 July 2015 28 600 b The Retired Actors Club Club shop trading account for the year ended 30 June 2016 $ $ Takings 12 348 Opening inventory 1 600 Purchases (8 220 + 210 − 400) 8 030 9 630 Less: closing inventory (1 850) 7 780 Gross profit 4 568 Wages (6 000) Loss on shop (1 432) c The Retired Actors Club Subscription account for the year ended 30 June 2016 2015 2016 $ $ Jul 1 Balance b/d ($30 × 20) 600 Jun 30 Bank 10 730 2016 Jun 30 Income and expenditure account (200 × $40) 8 000 Balance c/d 2 280 Balance c/d (5 × $30) 150 10 880 10 880 Jul 1 Balance b/d 150 Jul 1 Balance b/d 2 280 [1] Note 4 in the question indicates that the equipment had been depreciated at $1 400 per annum for 5 years = $7 000. This means that at 1 July 2015 it had been fully depreciated and therefore shown at no value when calculating the opening accumulated fund. 124 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

125 d The Retired Actors Club Income and expenditure account for the year ended 30 June 2016 $ $ Income Subscriptions 8 000 Cash taken at door 9 456 Annual dance receipts 3 720 Less: cost of dance (2 600) 1 120 Deposit account interest (10 000 × 4% × 1 2       + 30 000 × 4% × 1 2       ) 800 Grant from council (4 000 + 4 000) 8 000 27 376 Less: expenditure Loss on club shop 1 432 Secretary’s expenses 2 125 Depreciation of equipment (5 000 × 20%) 1 000 4 557 Surplus for the year 22 819 e The Retired Actors Club Statement of financial position at 30 June 2016 $ $ Non-current assets Equipment at cost (7 000 + 5 000) 12 000 Less: depreciation (7 000 + 1 000) (8 000) 4 000 Current assets Inventory 1 850 Subscriptions owing 150 Deposit account interest due 800 Council grant due 4 000 Deposit account 30 000 Bank balance 13 775 50 575 Total assets 54 575 Financed by: Opening accumulated fund at 1 July 2015 28 600 Add: surplus for the year 22 819 51 419 Memorial fund 666 Closing accumulated fund at 30 June 2016 52 085 Current liabilities Trade payables 210 Subscriptions in advance 2 280 2 490 Total accumulated fund and liabilities 56 575 Answers to activities, practice exercises and exam practice questions: Chapter 21 125 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

126 Cambridge International AS and A Level Accounting Notes: 1 The number of members and the annual subscription they should pay is provided. This means that the transfer to the income and expenditure account is the product of those two figures. 2 The loss on the club shop should always be shown under expenditure rather than as negative income. 3 Note that the receipts from the annual dance are netted ofi against the costs of the dance to show a surplus for the year. In this type of exercise this should always be done. 2 a Sailing club Snack bar trading account for the year ended 31 March 2016 $ $ Takings 77 000 Opening inventory 1 250 Purchases (53 000 + 970 − 1 030) 52 940 54 190 Less: closing inventory (1 600) 52 590 Gross profit 24 410 Wages (14 000 + 400) (14 400) Profit on refreshments 10 010 Sailing club Income and expenditure account for the year ended 31 March 2016 $ $ Income Subscriptions for the year (Working 2) 187 600 Profit in refreshments 10 010 Hire of yachts and boats (43 000 + 34 000) 77 000 Training school income 34 500 Less: wages (16 500 + 700) (17 200) 17 300 Yacht racing 28 900 Less: expenses (13 000) 15 900 307 810 Expenditure Repairs and maintenance (23 400 + 1 350) 24 750 Other operating expenses 26 000 Depreciation Freehold premises 17 500 Yacht maintenance shop 4 200 Boatyard and launch 3 700 Fixtures and fittings 2 800 Boats and yachts 26 300 105 250 Surplus for the year 202 560 126 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

127 b Sailing club Statement of financial position at 31 March 2016 $ $ Non-current assets Freehold premises (350 0000 − 17 500) 332 500 Yard and maintenance shop (42 000 − 4 200) 37 800 Boatyard and launch (74 000 − 3700) 70 300 Fixtures and fittings (28 000 − 2800) 25 200 Boats and yachts (465 000 + 61 000 − 26 300) 499 700 965 500 Current assets Inventory 1 600 Subscriptions owing 2 000 Bank balance (opening balance plus all receipts less all payments given in question) 290 500 294 100 Total assets 1 259 600 Financed by: Opening accumulated fund at 1 April 2015 1 050 220 Add: surplus for the year 202 560 Closing accumulated fund at 31 March 2016 1 252 780 Current liabilities Trade payables (700 + 400 + 1350 + 970) 3 420 Subscriptions in advance 3 400 6 820 Total accumulated fund and liabilities 1 259 600 Workings: 1 Calculation of opening accumulated fund at 1 April 2015: $ Non-current assets (350 + 42 + 74 + 28 + 465) 959 000 Subscriptions in arrears 3 000 Subscriptions in advance (6 000) Bank balance 94 000 Inventory of refreshments 1 250 Trade payables for refreshments (1 030) Accumulated fund at 1 April 2015 1 050 220 2 Subscription account: Subscription account for the year ended 30 June 2016 2015 2015 $ $ Apr 1 Balance b/d 3 000 Apr 1 Balance b/d 6 000 2016 2016 Mar 31 Income and expenditure account 187 600 Mar 31 Bank 186 000 Balance c/d 3 400 Balance c/d 2 000 194 000 194 000 Answers to activities, practice exercises and exam practice questions: Chapter 21 127 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

Cambridge International AS and A Level Accounting 22 Published company accounts Activities Activity 1 ABC Stationery Company: 20 boxes × $3 per box = $60 (Lower of cost $100 and net realisable value $60). Activity 2 Weaver Limited $ Direct materials 8 840 Direct labour 6 630 Factory overheads 4 420 Total costs 19 890 Completed units: 2000 completed and sold + 200 completed units in inventory + (20 × 50% part completed units at the month end = 10 equivalent) = 2 210. a Cost per unit = $19 890 / 2 210 = $9. b Value of work in progress = 20 units × (50% × $9) = $90. Value of finished goods = 200 × $9 = $1 800. Activity 3 Approval Limited Non-current assets schedule Freehold land and buildings Plant and machinery Motor vehicles Total [1] $000 $000 $000 $000 Cost At start of year 1 000 600 870 2 470 Additions 320 32 352 Revaluation of land 400 400 Disposals (60) (24) (84) At end of year 1 400 860 878 3 138 Depreciation At start of year 40 250 660 950 Disposals – (50) [2] (22) (72) Charge for the year 4 [3] 172 [4] 60 [5] 236 At end of year 44 372 698 1 114 Net book value at start of year [6] 960 350 210 1 520 Net book value at end of year [6] 1 356 488 180 2 024 [1] 1 A total column has been included. This is normal practice as it provides the link to the figures that will appear in the statement of financial position. However, it may be that a total column is not required. In which case don't waste time preparing one. [2] The cost of the old plant sold was $60 000. It had been sold for $6 000, which had resulted in a loss of $4 000. The net book value must therefore have been $10 000 ($10 000 − $6 000 = $4 000) so that accumulated depreciation on the plant sold must have been $(60 000 − [6000 + 4000]) = $50 000. [3] The cost of land and buildings at the start of the year was $1 000 000. We are told that the land cost $800 000, so the buildings cost was $200 000. The depreciation of 2% is only calculated on this figure. [4] Plant and machinery is calculated at 20% on the cost at the end of the year = 20% × $860 000, in other words afier adjusting for additions and disposals. [5] The depreciation charge on motor vehicles is calculated at 25% on the net book value at the end of the year before charging the depreciation. The net book value at the end of the year before depreciation was: $878 000 − (660 000 − 22 000) = $240 000. The charge for the year was therefore 25% of this figure. [6] The opening and closing net book values must always be included in the schedule. No dates were given so it is perfectly acceptable to identify them as the start and end of year figures. If dates are given then they must be used. 128 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

129 129 Activity 4 The calculation of earnings per share is to use the profit for the year afier any preference dividend on non-redeemable preference shares. In other words, the profit for the year attributable to the ordinary shareholders. Thus the profit for the year of $1 000 000 must be reduced by the 10% dividend on the 400 000 non-redeemable preference shares = $1 000 000 − (400 000 × 10%) = $960 000. The earnings per share in this case are therefore: $960 000 = $0.48 per share. 2 000 000 Practice exercises 1 a A true and fair view means that the financial statements are free from any material misstatement and error and faithfully represent the financial performance of the business for the period under review. b X Limited Revised statement of financial position at 31 December 2015 $000 Non-current assets Tangible assets (1 810 − 50 − 1) 1 759 Current assets Inventory (105 − 2) 103 Trade receivables (96 − 6) 90 193 Total assets 1 952 Equity and liabilities Share capital and reserves Share capital 1 000 General reserve 130 Retained earnings (342 − 1 − 2 − 6 + 10) 343 Total equity 1 473 Non-current liability Debentures 2 022/24 360 Current liabilities Trade payables 50 Other payables 18 Bank overdrafi 51 119 Total equity and liabilities 1 952 c Non-current assets: The revaluation of the land ($50 000) has been taken out. The valuer was not qualified to make the valuation so there must be at least some doubt as to whether this is a reliable estimate. In principle, IAS 16, Property, Plant and Equipment permits a company to include its land at a revalued amount, but the auditor must be satisfied that there is sufficient evidence for the value adopted. Answers to activities, practice exercises and exam practice questions: Chapter 22 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

130 130 IAS 16, Property, Plant and Equipment requires that assets with a finite useful life, such as buildings, are depreciated over their estimated useful life. In order to illustrate the point, a useful life of 40 years has been assumed, requiring a depreciation charge of $1 000. Goodwill: The goodwill has not been purchased (which occurs when a business is acquired). IAS 38, Intangible Assets does not permit the recognition of internally generated goodwill, so this must be eliminated (even if the amount concerned is considered to be a good estimate). Inventory: The inventory must be valued at the lower of cost and net realisable value. Therefore the $6 000 damaged inventory must be included at the realisable value of $4 000, with the $2 000 written off from retained earnings. Trade receivables: A provision for $6 000 has been made against the receivable as there is some evidence (three missing payments) that the asset may be impaired. Whether this is the correct extent of impairment, or indeed, whether any impairment is necessary, cannot be properly determined from the information given, but an adjustment has been proposed for the amount of the missed payments. The directors and the auditors will each review the available evidence and form their opinion of what the most appropriate level of impairment is (see also part e, below). Revaluation reserve: This has been completely eliminated with the removal of the revaluation of the land and goodwill. Retained earnings: These have been reduced by the depreciation, the loss in value of inventory and the provision for the doubtful debt. However, the proposed dividend should not be included under IAS 1 (IAS 10 makes clear that a proposed dividend is a non-adjusting event), so has been added back and eliminated from the current liabilities. d Proposed dividend: The directors propose that a final dividend of XXc per share, amounting to $10 000 in total is paid to the ordinary shareholders, subject to shareholder approval at the AGM, on [date]. Contingent liability: The company is being sued by a customer that alleges that it has been sold faulty goods and seeks $8 000 in compensation. The directors have not made any provision for this or any other amount as, based on the advice of the company’s solicitors, they believe that the company is more likely than not to win the case. Note: Published financial statements contain many notes but these are the two items amongst those dealt with in the question that appear only as notes. Had there been any dividends paid during the year, the dividend note to the financial statements would have followed the format on page 273 in the coursebook. e The auditors must consider the materiality of the proposed adjustments in deciding what action to take; if material adjustments are necessary to ensure that a true and fair view is given but are not made, then a qualified audit report is required. In the case of X Ltd, of the actual errors, the goodwill ($250 000) is clearly material, but it could be argued that the depreciation ($1 000), the inventory ($2 000) and the dividend ($10 000) are immaterial. The other two matters are a little less clear cut because amounts have been estimated. The auditor is unable to confirm the reliability of the revaluation ($50 000) so should qualify for this matter too, if the amount is considered material. Similarly, there can be no definitive estimate of the necessary provision to be made against the trade receivable, so the auditor must conclude that there is no material uncertainty Cambridge International AS and A Level Accounting Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

131 131 or disagreement (between their own opinion and that of the directors) over the carrying amount, or otherwise treat this as another error. It is quite possible that in this instance their difference of opinion may not be material. Even with these adjustments being made, the accounts show a strong company with good profitability. The directors are better advised to explain the company’s real circumstances to the bank than try to mislead the bank. The bank overdrafi may be simply down to a timing issue. No doubt when the directors approach the bank for a loan, a cash budget will also be presented to show how this can be eliminated or managed. 2 a Y Limited Non-current assets schedule Freehold land Freehold buildings Office equipment Motor vehicles Total $000 $000 $000 $000 $000 Cost At 1 April 2015 250 400 300 360 1 310 Additions 32 32 Revaluation of land 200 200 Disposals (20) (24) (44) At 31 March 2016 450 400 280 368 1 498 Depreciation At 1 April 2015 10 50 150 200 410 Revaluation (10) (10) Disposals (15) (15) Impairment 5 5 Charge for the year – 16 28 92 136 At 31 March 2016 – 66 168 292 526 Net book value at 1 April 2015 240 350 150 160 900 Net book value at 31 March 2016 450 334 112 76 972 Note: Office equipment depreciation is to be charged at 20% of net book value (NBV) as it would be immediately before that charge is calculated. Cost of office equipment at the year end is $300 000 − $20 000 = $280 000. Accumulated depreciation before this last adjustment is $150 000 − $15 000 + $5 000. = $140 000, meaning that the NBV to be depreciated is $280 000 – $140 000.= $140 000. At 20% (per the question) depreciation is $28 000. b Y Limited Statement of changes in equity for the year ended 31 March 2016 Details Share capital Share premium General reserve Retained earnings Revaluation reserve $000 $000 $000 $000 $000 At 31 March 2015 675 425 – 215 – Profit for year 169 Dividends paid – final (60) Dividends paid – interim (35) Bonus share issue 225 (225) (25) Revaluation of land 210 Balance at 31 March 2016 900 200 – 405 210 Answers to activities, practice exercises and exam practice questions: Chapter 22 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

132 Cambridge International AS and A Level Accounting Notes: 1 The balance on the revaluation reserve is $200 000 added to the cost, plus $10 000 added back for previously charged depreciation. 2 The drafi profit for the year was $175 000. This was afier charging the three items, which totalled $(60 000 + 35 000 + 40 000) = $135 000. However, the proposed dividend should not have been deducted and the other two dividends are presented in the statement of changes in equity (not as deductions in arriving at profit for the year) so they all need to be added back. Thus the drafi profit for the year should be $(175 000 + 135 000) = $310 000. In addition we are told that the drafi profit is ‘before depreciation’, so we must charge $136 000 depreciation as calculated in part a of the question and adjust also for the $5 000 impairment of inventory to lower of cost and net realisable value (additional information item 3). Thus profit for the year is $(175 000 + 135 000 − 136 000 − 5000) = $169 000. As the share capital at 31 March 2016 was $900 000, which included a 1 for 3 issue of bonus shares, then the share capital at the start of the year must have been $900 000 / 4 × 3 = $675 000. The bonus issue therefore amounted to $225 000. As $200 000 remains in the share premium account, and as this an inflexible reserve, it can be assumed that the entire bonus issue was capitalised from the share premium account. We were told to not prepare a total column; if the question is silent on the matter you are recommended to include one as this is the IAS format. The general reserve column has been lefi in as a reminder of another possible column but you should not introduce redundant columns if they are not necessary. c The directors of Y Limited are responsible for the preparation of the financial statements and ensuring that adequate and comprehensive accounting records are kept. It is also their duty to ensure that the financial statements are free from any material misstatement and error. The auditors, on the other hand, are employed by the shareholders to report to them on whether the financial statements prepared by the directors give a true and fair view. d The responsibility for the preparation of the financial statements lies firmly with the directors; this is specified in law. Thus, they must undertake this work or employ someone to do it for them. The role of the auditor has been described above (in part c). It is not the responsibility of the auditor to prepare the financial statements of the business. If they were to do so, then this work is undertaken in the role of accountants, not auditors. Ethical standards permit the auditors of a private company to assist the directors in this way, but this assistance is not permitted if the company is quoted. Exam practice questions Multiple-choice questions 1 D 2 C 3 B 4 A 5 A 6 A 7 D 8 B 9 D 10 D Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

133 133 Additional questions 11 The ordinary shareholder is a financial supporter of the company as they invest money into the business, if asked to do so, through rights issues and/or at the time the company is first formed. They are, therefore, also the owners of the company. As a result, they are entitled to attend and vote at the annual general meeting (AGM). They can vote to elect or re-elect directors and on major decisions when asked to do so. The preference shareholder isn't an owner of the company, but lends the company money through the purchase of preference shares. Ofien these shares can be redeemed by the company. They also do not have the right to attend the AGM. On the other hand, the directors are those responsible for the day-to-day running and management of the company. This is usually because the shareholders lack the expertise to do this. However, in some cases, directors may also be shareholders. In this case, they have dual responsibilities - one as the owner and one as a manager. 12 An internal auditor is an employee of the company, responsible to the directors of the company for the performance of their day-to-day duties. Their work will involve looking at the financial systems in place in the company, ensuring the proper day-to-day management of the company finances. They may also take some involvement in the preparation of the financial statements of the company on behalf of the directors. External auditors are not employees of the company and the process of auditing is separate from the preparation of the financial statements. They are appointed by the shareholders to act on their behalf. Their role is to consider whether the financial statements prepared by the directors and presented to the ordinary shareholders are free from any material misstatement or error and to report their findings. Answers to activities, practice exercises and exam practice questions: Chapter 22 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

23 Statements of cash flows Activities Activity 1 Everyday Limited Statement to show cash flow from operating activities for the year $ Profit from operations 175 000 Depreciation charge for the year 42 100 Profit on disposal of non-current assets (2 300) Decrease in inventories 5 800 Increase in trade receivables (2 600) Increase in trade payables 3 400 Tax paid (27 500) Net cash from operating activities 193 900 Activity 2 Exchange Limited Statement of cash flows for the year ended 31 December 2016 $ $ Cash flow from operating activities: Profit from operations (before tax and interest) 94 Adjustments for: Depreciation charge for the year 50 Profit less losses on sale on non-current assets (10) Decrease in inventories (100 − 85) 15 Increase in trade receivables (40 − 52) (12) Increase in trade payables (60 − 73) 13 56 Cash (used in)/from operations 150 Interest paid (during the year) (7) Tax paid (during the year) from workings (36) Net cash (used in)/from operating activities 107 Cash flows from investing activities: Purchase of non-current assets (90 + 70) (160) Proceeds from the sale of non-current assets (50 + 4 + 1) 55 Net cash (used in)/from investing activities (105) Cash flows from financing activities: Proceeds from issue of share capital 55 Repayment of debentures (30) Dividends paid (46) Net cash (used in)/from financing activities (21) Net increase/(decrease) in cash and cash equivalents (19) Cash and cash equivalents at the beginning of the year 55 Cash and cash equivalents at the end of the year 36 Cambridge International AS and A Level Accounting 134 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

135 135 Workings: Freehold buildings at cost Freehold building disposal $ $ At 31 December 2015 400 Cost (36) Disposal (36) Proceeds 50 At 31 December 2015 364 Profit on disposal 14 Taxation $ $ Tax paid 36 At 31 December 2015 39 At 31 December 2016 43 From income statement 40 79 79 Taxation Plant and machinery at cost Plant and machinery depreciation Plant and machinery disposal $ $ $ At 31 December 2015 80 At 31 December 2015 35 Cost 20 Disposals (20) On disposals (16) Depreciation (16) Additions (balancing figure) 90 Provided in year (balancing figure) 20 Proceeds (1) At 31 December 2016 150 At 31 December 2016 39 Loss on disposal 3 Motor vehicles at cost Motor vehicles depreciation Disposal $ $ $ At 31 December 2015 120 At 31 December 2015 90 Cost 30 Disposals (30) On disposals (30 − 5) (25) Depreciation (25) Additions (balancing figure) 70 Provided in year (balancing figure) 30 Proceeds (4) At 31 December 2016 160 At 31 December 2016 95 Loss on disposal 1 Activity 3 Indus Limited Statement of financial position at 31 July 2016 Cost Accumulated depreciation Net book value $ $ $ Assets Non-current assets Freehold premises 300 142 158 Plant & machinery (Cost: 125 + 48 − 30 Acc Dep: 75 − 18 + 60) 143 117 26 443 259 184 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 23 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

136 136 Cost Accumulated depreciation Net book value $ $ $ Current assets Inventory (36 + 4) 40 Trade receivables (79 + 19) 98 Cash and cash equivalents 112 250 Total assets 434 Equity and liabilities Capital and reserves Share capital (150 + 20) 170 Share premium (20 + 20) 40 General reserve (40 + 30) 70 Retained earnings 50 330 Non-current liability 10% debentures 2023/24 (50 − 20) 30 Current liabilities Trade payables (43 + 6) 49 Tax 25 74 Total equity and liabilities 434 Workings: Calculation of the figure for retained earnings: $ Retained earnings at 1 August 2015 56 Profit for the year 39 95 Transfer to reserves (30) Dividends paid (15) Retained earnings at 31 July 2016 50 Activity 4 Janine Reconciliation of profit from operations to net cash flow from operating activities for the year ended 31 October 2016 $ Profit for the year before interest 21 Adjustments for: Depreciation charge for the year 5 Profit on sale of non-current assets (1) Increase in inventories (5) Decrease in trade receivables 3 Cambridge International AS and A Level Accounting Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

137 137 $000 Decrease in trade payables (8) Cash (used in)/from operations 15 Interest paid (during the year) (1) Net cash (used in)/from operating activities 14 Workings: The profit for the year before interest is: $000 Profit for the year from the income statement extract 25 Less: depreciation (5) Add: profit on disposal 1 Profit for the year before interest 21 Note: The profit on the revaluation of land is not included as this increases the value of the land and is included in Janine’s capital on the statement of financial position. Also, of course, this is a book entry and does not give rise to any cash flow, so we do not expect it to appear in the statement of cash flows. The calculation of loss on the sale of the plant and machinery and the purchase of new machinery is as follows: Plant and machinery at cost account $ $ Opening balance 39 Closing balance 55 Bank – purchases (balancing figure) 22 Asset disposal 6 61 61 Plant and machinery accumulated depreciation account $000 $000 Asset disposal account (balancing figure) 1 Opening balance 21 Closing balance 25 Charge for the year 5 26 26 Asset disposal account $000 $000 Cost of plant scrapped 6 Depreciation 1 Profit on disposal 1 Sale proceeds (balancing figure) 6 7 7 Note: In this case we have found/calculated that the items were sold for scrap. Our initial reaction might have been to assume that there were no proceeds from scrapping plant and machinery. Answers to activities, practice exercises and exam practice questions: Chapter 23 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

138 Cambridge International AS and A Level Accounting Janine Statement of cash flows for the year ended 31 October 2016 $000 $000 Net cash (used in)/from operating activities 14 Cash flows from investing activities: Purchase of non-current assets (plant) (22) Sale of non-current assets 6 Net cash (used in)/from investing activities (16) Cash flows from financing activities: Capital introduced 10 New loan 8 Drawings (21) Net cash (used in)/from financing activities (3) Net increase/(decrease) in cash and cash equivalents (5) Cash and cash equivalents at the beginning of the year 3 Cash and cash equivalents at the end of the year (2) The possible reasons why Janine has an overdrafi are: • The purchases of non-current assets ($22 000) have been financed from the loan ($8 000), capital introduced ($10 000) and the proceeds of the sale of non-current assets ($6 000), so this is not the issue. • The high drawings figure ($21 000) is higher than the cash generated from operations, but is in broadly line with the profit for the year, so it is clear that Janine did not make the mistake of believing that the revaluation of the land is a cash profit rather than a book adjustment. • Although Janine has reduced her trade receivables, she has increased her inventory and reduced her trade payables. The net effect of this has been to reduce the cash in the business. Although all these factors combined to affect the overall cash flow, it seems that the latter two items, Janine’s drawings and her management of working capital (short term assets and liabilities), have been the causes of more cash leaving the business than coming in. Practice exercises 1 a A statement of cash flows is based on historical information and is required to be prepared for a limited company in line with the format set out in IAS 7. It is published as part of the annual financial statements. It shows how cash has been generated by a business and how it has been applied. A cash budget is an internal document prepared by the management of the company. It is an estimated projection or forecast used for planning and control (monitoring) purposes and may be presented to bankers and other lenders when the company is seeking additional finance. b i Working: Asset disposal account $000 $000 Cost of disposals (balancing figure) 34 Depreciation 20 Sale proceeds 10 Loss 4 34 34 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

139 139 DH plc Non-current assets at cost account $000 $000 Opening balance b/d 9 000 Closing balance c/d 10 000 Purchases (balancing figure) 1 034 Asset disposal (working above) 34 10 034 10 034 Purchases made during the year = $1 034 000. ii Working: DH plc Non-current assets accumulated depreciation account $000 $000 Disposal 20 Opening balance b/d 1 500 Closing balance c/d 1 800 Income statement (balancing figure) 320 1 820 1 820 Depreciation charge for the year = $320 000. c DH plc Net cash from operating activities for the year $000 Profit from operations 1 998 Depreciation charge for the year [1] 320 Loss on sale of non-current assets 4 Increase in inventories (85 − 70) (15) Decrease in trade receivables (250 – 270) 20 Increase in trade payables (105 − 80) 25 Dividends paid [2] (150) Tax paid (280 + 700 − 290) (690) Net cash from operating activities 1 512 d Cash refers to money in the bank or cash in hand and is affected by receipts and payments on the day that those transactions take place. However, profit is the difference between the income and expenditure of the business. When calculating income and expenditure, the accruals and prudence principles are applied. These have the effect of allocating income and expenditure to the most appropriate accounting period (or of apportioning income and expenditure over several accounting periods) which will therefore ofien not coincide with the date or accounting period of the related receipts and payments. Accordingly, the increase (or decrease) in cash in a period will not equal the profit (or loss) for a period except in the simplest of circumstances. e DH plc has made a good profit for the year. However, the cash and cash equivalents has only increased by $10 000. The cash has been boosted by the issue of ordinary shares at a premium. However, all of this cash, and most of the cash generated from operating activities, has been spent on purchasing new non-current assets and the repayment of the loan. [1] From above [2] Under IAS 7, dividends paid can be shown either as part of the calculation of net cash from operating activities, or under cash flows from financing activities. Answers to activities, practice exercises and exam practice questions: Chapter 23 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

140 140 2 a Two advantages of preparing a statement of cash flows are: • It links the income statement and statement of financial position, showing the areas where the business has generated and spent its cash. • It may indicate potential going concern problems. • It may indicate whether the business is generating enough cash to fund its investment or dividends, and also therefore give an indication of whether these situations might be likely to change. There are no real disadvantages to preparing a statement of cash flows except for the minor matter of the effort involved. Publishing a statement of cash flows voluntarily also gives away some information that might otherwise have remained private to the company. Some disadvantages of a statement of cash flows are: • It can be distorted by large receipts or payments made just before or just afier the year end. • (By definition) important transactions that have not involved cash flows, such as impairments and revaluations, are not included but might be necessary to an understanding and interpretation of the cash position. • It only shows the inflow and outflow of cash but gives only a limited indication of why they have occurred (although it may just as reasonably be said that an income statement gives only a limited indication of why income and expenditure has occurred). b Woodpecker Limited Statement of cash flows for the year ended 31 December 2016 $000 Cash flow from operating activities: Loss from operations (before tax and interest) (119) Adjustments for: Debenture interest paid 1 Depreciation charge for the year 10% × (500 + 85 − 35) 55 Loss on sale on non-current assets 3 Cash (used in)/from operations (60) Increase in current assets ([72 − 6] − 68) (2) Decrease in current liabilities (54 − [36 − 3]) (21) Interest paid (during the year) (1) Net cash (used in)/from operating activities (84) Cash flows from investing activities: Purchase of non-current assets (85) Net cash (used in)/from investing activities (85) Cash flows from financing activities: Proceeds from issue of share capital 120 Issue of debentures 40 Net cash (used in)/from financing activities 160 Net decrease in cash and cash equivalents (9) Cash and cash equivalents at 1 January 2016 6 Cash and cash equivalents at 31 December 2016 (3) c Woodpecker has made a significant loss for the year and so lost cash on its trading activities for the year ($60 000). It has also not managed its working capital very well as Cambridge International AS and A Level Accounting Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

141 141 changes in both current assets and current liabilities have resulted in cash outflows for the business. However, the issue of additional shares and a debenture have generated sufficient cash to cover the deficit on trading, the poor management of working capital and the purchase of additional non-current assets. The final result has meant that the net effect of these cash movements has only had a small impact on the final bank balance. There is work for the directors to do in terms of better management of working capital and reversing their negative trading activities. d If the directors issue additional shares to fund the company’s increased operations it will have both positive and negative effects. The positive effects are that the money does not have to be repaid. Neither do the directors have to pay dividends on the shares if profits are not sufficient. However, the issue of shares may give new shareholders significant influence if the shares are not issued to existing shareholders by a rights issue. New owners could have a serious impact on the future plans of the directors and may even replace them. The issue of a further debenture will increase the gearing of the company. It will also create future strains on the cash flow as both interest and capital will have to be repaid. The lender may also require some security on the company's assets. The two positive aspects are that the debenture holder gets only a fixed return, and that issuing a debenture will not change the ownership of the business. Overall, the company does not appear to be performing well. The directors could consider postponing the raising of more finance until such time as the future profitability of the business is assured. However, if they are set on raising additional finance (because the proposed expansion is the key to future profitability, for example) then they should proceed, and a rights issue of ordinary shares is the best option. Exam practice questions Multiple-choice questions 1 A 2 C 3 D 4 C 5 C 6 A Structured question 1 a Winston plc Budgeted statement of financial position at 31 October 2017 Cost Accumulated depreciation Net book value $000 $000 $000 Assets Tangible non-current assets Freehold premises 1 000 – 1 000 Plant and machinery 1 380 (580) 800 2 380 (580) 1 800 Current assets Inventory (191 − 76) 115 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 23 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

142 142 Cost Accumulated depreciation Net book value $000 $000 $000 Trade receivables (82 + 15) 97 Cash and cash equivalents 251 463 Total assets 2 263 Equity and liabilities Share capital and reserves Share capital (950 + 150) 1 100 Share premium (150 + 60) 210 Revaluation reserve 240 General reserve (100 + 80) 180 Retained earnings 226 1 956 Non-current liabilities Debentures 2021/2023 (300 − 100) 200 Current liabilities Trade payables (73 − 26) 47 Other payable: taxation (40 − 40 + 60) 60 107 Total equity and liabilities 2 263 Notes: In most cases it is simply a question of adjusting the figure in the statement of financial position with the increase or decrease in the statement of cash flow. Where this has been done, the workings are shown in brackets. However, there are some items where it is easier to show the individual ‘T’ accounts: Asset disposal $000 $000 Plant and machinery at cost 110 Bank 41 Profit on disposal 20 Plant and machinery accumulated depreciation 89 130 130 1 As this account (and the others below) are workings, there is no need to bring down any balances. 2 The debit of $110 000 is from additional information note 1. 3 The profit on disposal ($20 000) is from the statement of cash flows under cash flow from operating activity. 4 The credit of $41 000 is also from the statement of cash flow under cash flow from investing activities. 5 This means that the figure to balance the account must be the depreciation written off from the machinery which was sold ($89 000). Cambridge International AS and A Level Accounting Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

143 143 Plant and machinery at cost account $000 $000 Opening balance 1197 Disposal 110 Additions 293 Balance c/d 1380 1490 1490 1 The credit of $110 000 is the double entry from the disposal account. 2 The debit of $293 000 is from the statement of cash flow under cash flow from investing activities. 3 The balance on the account must, therefore, be the closing balance to take to the statement of financial position. Plant and machinery accumulated depreciation account $000 $000 Disposal account 89 Opening balance 469 Balance c/d 580 Charge for year 200 669 669 1 The credit of $200 000 is from the statement of cash flow under cash from operating activities. 2 The debit of $89 000 is the double entry from the disposal account. 3 So the closing balance must be $580 000 which then is entered in the budgeted statement of financial position. Revaluation account $000 $000 Balance c/d 240 Freehold premises at cost 150 Freehold premises depreciation 90 240 240 1 The credit of $150 000 is the amount required to take the cost of the premises from its present book figure of $850 000 to the revalued amount of $1 000 000. 2 The credit of $90 000 is the depreciation already charged on the freehold premises in the past. This must also be written back as it no longer exists. 3 This means that the balance on the revaluation account is $240 000, which then is entered in the equity section of the statement of financial position. Retained earnings account $000 $000 Dividends paid 30 Balance b/f 173 Transfer to general reserve 80 Profit for the year afier tax 163 Balance c/d 226 336 336 Answers to activities, practice exercises and exam practice questions: Chapter 23 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

144 144 1 The credit of $173 000 comes from the retained earnings figure in the statement of financial position at 31 October 2016. 2 The credit of $163 000 is from the additional information. 3 The debit of $30 000 comes from the statement of cash flow under cash flow from financing activities. 4 The debit of $80 000 is per note 2 from the additional information. 5 The closing balance is then taken to the budgeted statement of financial position. b Having done a lot of the workings for part a, this will help in answering part b, which is to show the budgeted statement of changes in equity: Note: Notice that the figure at the bottom right hand corner ($1 956 000) is the one which appears as the total equity in the answer to part a. Winston plc Budgeted statement of changes in equity for the year ended 31 October 2017 Details Share capital Share premium General reserve Retained earnings Revaluation reserve Total $000 $000 $000 $000 $000 $000 At start of year 950 150 100 173 – 1 373 Profit for year attributable to equity holders 163 163 Dividends paid – final (30) (30) Dividends paid – interim – – Share issue 150 60 210 Revaluation of assets 240 240 Transfer to reserves 80 (80) – Balance at year end 1 100 210 180 226 240 1 956 Cambridge International AS and A Level Accounting Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

24 Business purchase and merger Activities Activity 1 a and b Capital accounts Nitin Maria Sam Nitin Maria Sam $000 $000 $000 $000 $000 $000 Goodwill 15 15 15 Opening balance b/d 120 120 Balances c/d 151 128 95 Profit on revaluation 16 8 Goodwill 30 15 Non-current assets 98 Inventory 12 166 143 110 166 143 110 Balances b/d 151 128 95 c Nitin, Maria and Sam Statement of financial position at 1 June 2016 afier the admission of Sam to the partnership $000 Assets Non-current assets (220 + 98 + 24) 342 Current assets (80 + 12) 92 Total assets 434 Capital accounts Nitin 151 Maria 128 Sam 95 374 Current accounts Nitin 16 Maria (4) Sam – 12 Current liabilities 48 Total capital and liabilities 434 Activity 2 a Hamil Limited Journal $ $ Goodwill 29 000 Freehold property 70 000 Plant and machinery 12 000 Ofiice furniture 4 000 Inventory 2 500 Trade receivables 5 500 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 24 145 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

146 146 Cambridge International AS and A Level Accounting $ $ Trade payables 3 000 Cash and cash equivalents 20 000 Ordinary share capital 80 000 Share premium account 20 000 123 000 123 000 Purchase of Abdul’s business for $120 000 and settlement by $20 000 in cash and 80 000 ordinary shares of $1 in Hamil Ltd at $1.25. b Hamil Limited Statement of financial position at 30 June 2016 afier the acquisition of Abdul’s business $ Assets Non-current assets Intangible Goodwill 29 000 Tangible Freehold property (100 000 + 70 000) 170 000 Plant and machinery (60 000 + 12 000) 72 000 Ofiice equipment 14 000 Ofiice furniture 4 000 289 000 Current assets Inventory (10 000 + 2 500) 12 500 Trade receivables (7 000 + 5 500) 12 500 Cash and cash equivalents (25 000 − 20 000) 5 000 30 000 Total assets 319 000 Capital and liabilities Equity and reserves Ordinary shares (150 000 + 80 000) 230 000 Share premium (20 000 + 20 000) 40 000 Retained earnings 40 000 310 000 Current liabilities Trade payables (6000 + 3000) 9 000 Total equity and liabilities 319 000 Activity 3 a $60 000 × 5 8 = $37 500 b $60 000 × 5 4 = $75 000 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

147 147 Answers to activities, practice exercises and exam practice questions: Chapter 24 Activity 4 Digger Limited Statement of financial position at 31 December 2016 immediately afier the acquisition of Christofere and Sarah $ Assets Non-current assets Land and buildings (90 000 + 60 000) 150 000 Fixtures and fittings (30 000 + 14 000) 44 000 Ofiice machinery (15 000 + 10 000) 25 000 Goodwill (working) 25 000 244 000 Current assets Inventory (20 000 + 15 000) 35 000 Trade receivables (5 000 + 6 000) 11 000 Cash and cash equivalents (60 000 − 28 000) 32 000 78 000 Total assets 322 000 Capital and liabilities Equity and reserves Ordinary shares (200 000 + 60 000 [1]) 260 000 Share premium 15 000 [2] Retained earnings 4 000 279 000 Non-current liability 8% debenture ( 12 000 × 8 10 ) 15 000 Current liabilities Trade payables (16 000 + 12 000) 28 000 Total equity and liabilities 322 000 $ $ Shares issued: Purchase consideration 118 000 Less: cash 28 000 Debenture 15 000 43 000 Value of shares 75 000 Share premium 60 000 × $0.25 = $15 000 [1] No of shares at $1.25 per share = 60 000 [2] Share premium 60 000 × $0.25 = $15 000 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

148 148 Cambridge International AS and A Level Accounting Digger Limited Journal – working for goodwill $ $ Goodwill (balancing figure) 25 000 Land and buildings 60 000 Fixtures and fittings 14 000 Ofiice machinery 10 000 Inventory 15 000 Trade receivables 6 000 Trade payables 12 000 Cash and cash equivalents 28 000 Debenture for Christofere 15 000 Ordinary share capital 60 000 Share premium account 15 000 130 000 130 000 Practice exercises 1 a Journal entry to record the acquisition of Eric and Tia in the books of Istaimy plc: Journal Name of account Debit Credit $ $ Freehold land and buildings at cost 878 000 Freehold land and buildings accumulated depreciation 128 000 Plant and machinery at cost 100 000 Inventory 30 000 Trade receivables (76 000 − [5 000 × 0.80]) 72 000 Trade payables 29 000 10% debenture $100 000 × 80 ÷ 100) 80 000 Ordinary share capital 700 000 Share premium 140 000 Cash (balancing figure) 3 000 1 080 000 1 080 000 Notes: 1 The inventory has been valued on a line-by-line basis as identified by IAS 2, as this is the method that Istaimy will have to use. 2 It has been assumed that the cash and cash equivalents in the statement of financial position of the partners will be retained by them. b The advantages to Eric and Tia of selling their business is that they no longer have to spend their time on or worry about managing it in the future. They have been issued with shares in Istaimy plc on which they can expect to receive dividends in the future. Their investment in Istaimy, being in a larger and possibly more diverse business than theirs, may be less risky. It may be practical to sell the shares piecemeal (unlike portions of a partnership!) and the shares may increase (or decrease) in value. Eric has also received a debenture paying an amount equal to that which he received from their old business. They may wish Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

149 149 to retire, or take up employment, or they may be able to start a new business with the cash taken from their old one, although this was not a large sum. There are though, several disadvantages to consider. It may be that they receive less in dividends on the shares in Istaimy plc than the profit their business previously earned. Indeed, they may not receive any dividends at all if Istaimy plc fails to make a profit. They will also have no involvement in the management of Istaimy plc. The journal shows that the purchase price matched the agreed net asset values and that Istaimy made no payment for goodwill. This is unusual (to say the least) in the acquisition of a profitable business and indicates that they may have sold their business to Istaimy plc too cheaply. Overall, however, if they were looking to retire and also have some sort of income in the future, then selling their business to Istaimy plc may have been the correct option if no higher ofiers were available. 2 a Joel Limited Statement of financial position immediately afier the purchase of Kay and Ola's business $000 Assets Non-current assets Intangible Tangible Land and buildings (1 425 + 220) 1 645 Plant and machinery (803 + 170) 973 2 618 Current assets Inventory (381 + 128) 509 Trade receivables (519 + 105) 624 Cash and cash equivalents (420 + 69) 489 1 622 Total assets 4 261 Capital and liabilities Equity and reserves Ordinary share capital (1 350 + 300) 1 650 Share premium 150 Retained earnings 1 248 3 048 Non-current liabilities (Existing) 8% debenture 450 (New) 10% loan (100 × 1.25) 125 575 Current liabilities Trade payables (500 + 138) 638 Total capital and liabilities 4 261 Answers to activities, practice exercises and exam practice questions: Chapter 24 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737

150 150 Cambridge International AS and A Level Accounting Working: 1 We are told that Joel pays out the residual element of the partners’ capital accounts, but it seems that one partner owes the other: Realisation account (K and O partnership) $000 $000 Land and buildings 150 Trade payables 130 Plant and machinery 280 Inventory 150 Purchase consideration: Trade receivables 141 Debenture 125 Cash and cash equivalents 69 Shares 450 Loss on realisation (85) Kay   42.5 Ola   42.5 790 790 2 Capital accounts (K and O partnership) Kay Maria Kay Maria $000 $000 $000 $000 Current a/c Balance b/d 300 260 Debenture 125 Loan account Ordinary shares 225 225 Loss on realisation 42.5 42.5 Bank (from Orla) 7.5 Bank (to Kay) 100   7.5 400 267.5 400 267.5 Note: In preparing the statement of financial position of Joel, it is assumed that Kay and Orla have settled up, whether via Joel or independently. 3 Journal entry to record the acquisition of Kay and Ola in the books of Joel: Journal Name of account Debit Credit $000 $000 Land and buildings 220 Plant and machinery 170 Inventory 128 Trade receivables 105 Cash and cash equivalents 69 Trade payables 138 Loan to Kay (100 × 1.125) 125 Ordinary share capital 300 Share premium 150 Cash* Goodwill (balancing figure)** 21 – 713 713 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737