1.5. Preparation of financial statements
A subsection of Accounting, 9706, through 1. Financial accounting (AS Level)
Listing 10 of 637 questions
The trial balance of Seema Limited for the year ended 30 June 2015 shows these figures: Debit Credit $ $ Revenue 526 000 Purchases 342 000 Inventory at 1 July 2014 37 500 Selling and distribution expenses 37 510 Administrative expenses 36 130 Provision for doubtful debts Interest paid Non-current assets at cost Warehouse buildings 300 000 Motor vehicles 70 000 Office equipment 25 000 Provision for depreciation Warehouse buildings 12 000 Motor vehicles 12 500 Office equipment 1 500 Trade receivables 5 020 Trade payables 6 270 Cash and cash equivalents 27 200 140 000 Ordinary shares of $1 each 140 000 5% Debentures (2021 – 2025) 25 000 General reserve 25 000 Retained earnings 140 990 Interim ordinary dividends paid 8 400 889 385 889 385 Additional information Inventory on 30 June 2015 was valued at $29 400. Depreciation is to be charged as follows: Warehouse buildings 4% using straight line method Motor vehicles 25% using straight line method Office equipment 10% using reducing balance method. The provision for doubtful debts is to be maintained at 5% of the trade receivables. An irrecoverable debt of $200 should be written off. The directors have decided to transfer $25 000 to the general reserve. The directors have proposed a final dividend of $0.07 per share. The debentures were issued in 2011. The motor vehicles were used by the sales team. REQUIRED Prepare the income statement for the year ended 30 June 2015. Prepare the statement of financial position at 30 June 2015. Explain the importance to a business of the current ratio. Additional information The directors of Seema Limited have calculated the current ratio to be 8.87 : 1. They regard the ratio calculated to be too high and are considering repaying the debentures. REQUIRED Discuss the effect of this course of action on: working capital the return on capital employed Advise the directors on whether they should repay the debentures early. Justify your answer.
9706_m16_qp_22
THEORY
2016
Paper 2, Variant 2
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Sturgess has provided the following information: The provision for doubtful debts at 1 August 2015 was $1940. Trade receivables at 31 July 2016 were $48 500. A customer owing $2100 has been declared bankrupt. This amount is to be written off. A customer owing $900 did not pay within the agreed credit terms. There are concerns about the recovery of this debt. The business policy is to make a 5% provision for doubtful debts on remaining trade receivables. REQUIRED State one reason why a business may make a provision for doubtful debts. State one accounting concept applied while making the provision for doubtful debts. Prepare the provision for doubtful debts account for the year ended 31 July 2016. Explain how a provision for doubtful debts is treated in: the statement of financial position the income statement Additional information Accrued telephone expenses at 1 August 2015 were $275. Prepaid telephone expenses at 1 August 2015 were $380. The total amounts paid for telephone expenses during the year were $4750. This included a rental charge of $2980 covering the period from 1 November 2015 to 31 October 2016. Telephone call charges of $840 were paid on 12 September 2016 covering the period from 1 June 2016 to 31 August 2016. REQUIRED Prepare the telephone expenses account for the year ended 31 July 2016.
9706_m17_qp_22
THEORY
2017
Paper 2, Variant 2
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The following balances were extracted from the books of K Limited at 30 September 2018. Debit Credit $000 $000 8% Debentures (2022-2024) Administrative expenses Cash and cash equivalents Cost of sales Debenture interest Distribution costs Dividends paid Equipment cost provision for depreciation at 1 October 2017 Land and buildings cost provision for depreciation at 1 October 2017 Inventory at 30 September 2018 Issued share capital: ordinary shares of $0.50 each Retained earnings at 1 October 2017 Revenue Share premium Trade payables Trade receivables The following information is also available. Administrative expenses includes a payment, $9000, for insurance for the three months ended 30 November 2018. Carriage inwards of $3000 had been included in distribution costs. Land and buildings includes land at a cost of $260 000. The company’s depreciation policy is as follows: Equipment 20% per annum using the reducing balance method Charged to distribution costs Buildings 2½% per annum using the straight-line method Charged to administrative expenses Land No depreciation REQUIRED Prepare the income statement for the year ended 30 September 2018. K Limited Income statement for the year ended 30 September 2018 $000 Workings: Additional information During the year ended 30 September 2018 the directors had made a rights issue of 1 ordinary share for every 2 shares held at a price of $0.70 per share. The issue was fully subscribed and had been recorded in the books of account. REQUIRED Prepare the statement of changes in equity for the year ended 30 September 2018. Share capital $000 Share premium $000 Retained earnings $000 Total $000 Workings: Additional information The directors wish to raise additional finance. They are considering making either a further rights issue of ordinary shares or issue another debenture. REQUIRED Advise the directors which option they should choose. Justify your answer. Additional information The directors have provided the following information: Year ended 30 September Year ended 30 September Industry average for both years Trade payables turnover 29 days 35 days 34 days Trade receivables turnover 39 days 31 days 32 days REQUIRED Analyse the effect that the changes in each of these ratios had on the company’s liquidity using all the available information. State three ways in which a business could reduce trade receivables turnover. State three drawbacks of increasing trade payables turnover.
9706_m19_qp_22
THEORY
2019
Paper 2, Variant 2
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Noor, a sole trader, was preparing her business’s financial statements for the year ended 31 December 2018. The following information is available. At 1 January 2018 $ General expenses prepaid During the year ended 31 December 2018 $ General expenses paid 12 400 Insurance premiums paid 6 480 Rent received 5 460 At 31 December 2018 General expenses, $1210, were due but unpaid. Insurance premiums paid included $630 covering the six months ended 31 January 2019. Rent receivable of $1200 for the three months ended 28 February 2019 had not yet been received. Inventory had been valued at a cost of $11 400. However, it included several damaged items which had a selling price of $840. All goods are sold with a mark-up of 50%. The damaged items could be sold but would require repairs costing $360. REQUIRED Calculate the amount to be recorded in the income statement for the year ended 31 December 2018 for each of the following items. General expenses Insurance Rent receivable Closing inventory Additional information Noor’s policy is to maintain a provision for doubtful debts at 5% of trade receivables at the end of the financial year. REQUIRED State two accounting concepts which are applied when recording a provision for doubtful debts. Additional information At 31 December 2017 Noor’s trade receivables were $34 200 after deducting the provision for doubtful debts. At 31 December 2018 total trade receivables were $37 200. This total included the accounts of the following two credit customers. $ MN Limited S Wells Noor decided to write off these two accounts. She will maintain her provision for doubtful debts at 5% of trade receivables. REQUIRED Calculate the increase or decrease in the provision for doubtful debts at 31 December 2018.
9706_m19_qp_22
THEORY
2019
Paper 2, Variant 2
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The following information is available for S Limited for the year ended 31 December 2019. Balances at 1 January 2019 $ Inventory 122 000 Administrative expenses accrued 3 875 Amounts paid during the year ended 31 December 2019 Distribution costs 84 475 Administrative expenses 298 875 Purchases 435 000 Amounts received during the year ended 31 December 2019 Revenue 998 400 Balances at 31 December 2019 Inventory 134 200 Administrative expenses prepaid 7 500 6% debenture (2024) 100 000 The following information is also available. Inventory at 31 December 2019 included some damaged goods which had cost $5000. These goods can only be sold for $3000 after repairs costing $700 have been carried out. The 6% debenture (2024) was issued on 1 September 2019. REQUIRED Prepare the income statement for the year ended 31 December 2019. S Limited Income statement for the year ended 31 December 2019 Workings: Additional information The following additional balances were also available at 1 January 2019. $ Ordinary shares of $1 each 100 000 Share premium 20 000 Retained earnings 126 230 An interim dividend of $0.08 per share was paid on 30 June 2019. A bonus issue of one ordinary share for every four shares held was made on 31 October 2019. Reserves were maintained in their most flexible form. A final dividend of $0.09 per ordinary share was proposed on 31 December 2019. REQUIRED Explain what is meant by ‘Reserves were maintained in their most flexible form’. Prepare the ordinary share capital account for the year ended 31 December 2019. Ordinary share capital account $ $ Prepare the statement of changes in equity for the year ended 31 December 2019. S Limited Statement of changes in equity for the year ended 31 December 2019 Share capital $ Share premium $ Retained earnings $ Total $ Additional information The directors are planning to acquire more machinery in the following year and require a further investment of $50 000. They are considering two options: option 1: issue an additional 6% debenture for $50 000 option 2: make a rights issue of one ordinary share for every five shares held at a premium of $1 per share. REQUIRED Advise the directors on which option they should choose. Justify your answer.
9706_m20_qp_22
THEORY
2020
Paper 2, Variant 2
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Questions Discovered
637