1.5. Preparation of financial statements
A subsection of Accounting, 9706, through 1. Financial accounting (AS Level)
Listing 10 of 637 questions
Ismail opened a retail business on 1 January 2019 with the following assets and liabilities. $ Bank 7 500 Debit Non-current assets 18 500 Bank loan (repayable 2022) 4 200 Ismail prepared a draft income statement for the year ended 31 December 2019. However, this contained errors. Draft income statement for the year ended 31 December 2019 $ $ Revenue 274 500 Cost of sales (182 360) 92 140 Add discounts received Gross profit 92 960 Add bank loan 4 200 97 160 Less expenses Carriage inwards 1 020 Drawings 18 740 General expenses 22 280 Insurance 1 730 Rent 20 250 Loan interest (64 230) Profit for the year 32 930 The following had not been accounted for. Ismail had taken goods for his own use. These goods cost $420 and had a selling price of $630. Carriage inwards included capital expenditure of $400 on non-current assets which had been paid on 18 January 2019. Depreciation on all non-current assets is to be provided at 20% per annum on cost. A full year’s depreciation is charged in the year of purchase. The amount shown for insurance included $720 for the six-month period ending 30 April 2020. At 31 December 2019 trade receivables totalled $14 800. A customer who owed $600 had been declared bankrupt. Ismail decided to write off this account. He also decided to create a provision for doubtful debts of 5% of trade receivables at the year end. Interest on the bank loan is charged at 10% per annum. REQUIRED Prepare the corrected income statement for the year ended 31 December 2019. Ismail Income statement for the year ended 31 December 2019 Workings: Calculate the balance on Ismail’s capital account at 31 December 2019. Additional information Ismail would like to expand his business. He will need additional finance of $25 000. He is considering two options to raise this amount: option 1: apply for a bank loan option 2: form a partnership with Seema, a friend. Seema would expect profits and losses to be shared equally. REQUIRED Advise Ismail which of these options he should choose. Justify your answer. Additional information Ismail sees benefits in keeping a full set of accounting records. REQUIRED State four benefits to a business of keeping a full set of accounting records.
9706_w20_qp_21
THEORY
2020
Paper 2, Variant 1
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Anjali is a sole trader. She does not maintain a full set of accounting records. At 1 October 2019 the assets and liabilities of Anjali were as follows: Cash at bank 4 600 debit Inventory 14 500 Non-current assets (carrying value) 85 000 Trade payables 9 930 Trade receivables 12 850 During the year ended 30 September 2020 the following transactions were recorded. General expenses paid 11 480 Payments to trade payables 50 250 Receipts from trade receivables 73 850 Rental income received 9 000 Returns inwards 2 070 Returns outwards 1 290 Anjali made drawings of $600 per month throughout the year. All receipts and payments were processed through the bank account. Irrecoverable debts of $2300 were written off. At 30 September 2020 the assets and liabilities were as follows: Inventory 18 000 Non-current assets (carrying value) 72 250 Prepaid general expenses Trade payables 11 470 Trade receivables 14 980 REQUIRED Calculate the bank balance at 30 September 2020. Prepare the income statement for the year ended 30 September 2020. Use the space on the next page for your workings. Anjali Income statement for the year ended 30 September 2020 Workings: Calculate the following, to two decimal places, for the year ended 30 September 2020. Gross margin Mark-up Profit margin Explain how a business may increase its gross margin. Explain how a business may improve its profit margin. State one reason why each of the following may be interested in the financial statements of a business. 1 Employees 2 Suppliers 3 Government
9706_w20_qp_22
THEORY
2020
Paper 2, Variant 2
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The directors of G Limited have provided a trial balance at 30 September 2020. Debit Credit $ $ Administrative expenses 117 528 Bank 10 316 Distribution costs 60 263 Inventory at 1 October 2019 86 228 Ordinary share capital ($1 shares) 200 000 Property plant and equipment Cost 300 000 Provision for depreciation at 1 October 2019 82 500 Provision for doubtful debts at 1 October 2019 1 528 Purchases 237 851 Retained earnings 34 572 Revenue 498 430 Share premium 20 000 Trade payables 26 124 Trade receivables 71 600 873 470 873 470 The following information is also available. Property plant and equipment Cost $ Accumulated depreciation $ Depreciation method Allocation of depreciation Land 120 000 Nil – Nil Other than land 180 000 82 500 15% per annum straight-line 2/3 administrative expenses 1/3 distribution costs Total 300 000 82 500 There were no acquisitions or disposals during the year. Inventory at 30 September 2020 cost $91 368 and had a net realisable value of $126 435. The directors wish to maintain a provision for doubtful debts at 3% of trade receivables. All expenses relating to doubtful debts are charged to administrative expenses. At 30 September 2020 $ Administrative expenses accrued Bank interest accrued Distribution costs prepaid REQUIRED Prepare the income statement for the year ended 30 September 2020. G Limited Income statement for the year ended 30 September 2020 Workings: Prepare the statement of financial position at 30 September 2020. G Limited Statement of financial position at 30 September 2020 Workings: State two differences between ordinary shares and preference shares. Define a ‘capital reserve’. State one use of a capital reserve. Additional information The directors are planning a major expansion. They wish to raise $100 000. The directors are considering three options: Option 1: Issue 6% debentures (2029) of $100 000. Option 2: Make a rights issue of one ordinary share for every two ordinary shares held at $1 each. Option 3: Make a new issue of 100 000 ordinary shares at a premium of $0.10 per share. REQUIRED Advise the directors which option they should take. Justify your answer.
9706_w20_qp_23
THEORY
2020
Paper 2, Variant 3
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Eleni owns a business selling computers. She does not maintain full accounting records. The following information is available. At 30 June $ At 1 July $ Equipment at valuation Inventory Trade receivables Provision for doubtful debts ? Other receivables: rent prepaid Trade payables Other payables: wages Bank 1420 Credit 860 Credit Cash in hand – Bank loan – A summary of receipts and payments made through the bank for the year ended 30 June 2021 was as follows: Receipts $ Receipts from credit customers 58 960 Cash sales banked 3 980 Sale of equipment Payments $ Payments to credit suppliers 39 750 Purchase of equipment General expenses Rent 6 860 Bank loan repayments 1 390 Bank charges Cash withdrawn 14 080 All cash sales are banked. REQUIRED Calculate total revenue for the year ended 30 June 2021. Additional information Of the cash withdrawn from the bank, Eleni took $450 each month for drawings and paid total wages of $7620 for the year. The remaining cash from the cash till was used to pay for general expenses. REQUIRED Prepare the cash account to calculate the amount paid in cash for general expenses. Cash account $ $ Additional information The following information is also available. Eleni wishes to write off an irrecoverable debt of $50 at 30 June 2021. She wishes to maintain the provision for doubtful debts at the same percentage as the previous year. Equipment sold during the year had a valuation of $140. REQUIRED Prepare the income statement for the year ended 30 June 2021. Eleni Income statement for the year ended 30 June 2021 Workings: Prepare an extract from the statement of financial position at 30 June 2021 to show the capital and liabilities section only. Eleni Statement of financial position at 30 June 2021 Capital and liabilities Additional information Eleni is concerned that she is not earning enough profit. She is considering increasing her prices by 5%. REQUIRED Advise Eleni whether or not she should increase her prices by 5%. Justify your answer. State three factors that a business should consider when making a provision for doubtful debts.
9706_w21_qp_21
THEORY
2021
Paper 2, Variant 1
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The following balances have been extracted from the books of P Limited at 31 August 2021. $ 5% Debentures (2022–2023) 36 000 Administrative expenses 35 180 Bank 4 770 Credit Carriage inwards Delivery vehicles Cost Provision for depreciation at 1 September 2020 89 420 42 200 Distribution costs 44 320 Dividend paid 3 000 Freehold property at valuation at 31 August 2020 66 000 Interest paid 1 590 Inventory at 1 September 2020 22 880 Purchases 88 900 Revenue 216 600 Retained earnings 24 200 Returns outwards Revaluation reserve 6 000 Share capital (ordinary shares of $0.50 each) 60 000 Share premium 8 500 Trade payables 11 730 Trade receivables 32 480 Wages and salaries 26 100 The freehold property was revalued on 1 September 2020 at $58 000. The revaluation has not yet been recorded in the books of account. REQUIRED Prepare the journal entry to record the revaluation of the freehold property on 1 September 2020. A narrative is not required. REQUIRED Prepare the income statement for the year ended 31 August 2021. Use the space on the next page for your workings. P Limited Income statement for the year ended 31 August 2021 $ Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Prepare a statement to show the balance of retained earnings at 31 August 2021 after the preparation of the income statement. Additional information The directors wish to reduce the level of trade receivables. REQUIRED State two ways in which the level of trade receivables of a business could be reduced. Additional information The directors have plans to expand the business and they are considering two options. Option 1: Make a rights issue of 80 000 ordinary shares of $0.50 each at a premium of 25%. Option 2: Issue 8% debentures (2027–2028) to raise $50 000. REQUIRED Advise the directors which option they should choose. Justify your decision.
9706_w21_qp_22
THEORY
2021
Paper 2, Variant 2
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Questions Discovered
637