3.1. Preparation of financial statements
A subsection of Accounting, 9706, through 3. Financial accounting (A Level)
Listing 10 of 678 questions
Ahmed and Raji are in partnership as retailers but have not maintained full accounting records. They have been advised to use a double entry system of book-keeping. REQUIRED State three advantages to business owners of using the double entry system of book-keeping. Additional information The following information is available for the partnership: Assets and liabilities 30 April 2019 $ 1 May 2018 $ Equipment at net book value 17 600 20 500 Motor vehicles at net book value (Cost $25 000 at 1 May 2018) ? 16 500 Inventory 5 470 6 750 Trade receivables 3 790 3 260 Trade payables 4 560 4 390 Wages owing 2 300 1 500 Rent paid in advance 1 600 Cash and bank balances 6 470 credit 5 430 debit The summary of the partnership bank receipts and payments for the year ended 30 April 2019 was as follows. $ Receipts From credit customers 57 900 Payments To credit suppliers 25 800 New motor vehicle 6 800 Partners’ drawings 16 700 Wages 10 700 Rent 7 500 General expenses 2 300 All purchases and sales were made on credit. The partners wish to create a provision for doubtful debts of 5% of trade receivables. Depreciation on the motor vehicles is charged at 20% using the straight-line method. Depreciation is charged on a monthly basis. On 1 November 2018 a motor vehicle which had cost $7000 on 1 May 2016 was part-exchanged for a new motor vehicle. The amount of the part-exchange was $3300. The balance of the purchase cost of the new vehicle, $6800, was paid by cheque. There were no additions or disposals of equipment during the year. REQUIRED Calculate: the profit or loss on the disposal of the motor vehicle the total depreciation charge for motor vehicles for the year ended 30 April 2019. Prepare the income statement for the partnership for the year ended 30 April 2019. Explain why a business may create a provision for doubtful debts. Additional information When the partners started the business they each invested $25 000 and agreed to share profits and losses equally. The partners are concerned that the business has low profit and a high bank overdraft. Ahmed’s brother is prepared to invest $25 000 into the business. He has suggested two options to Ahmed and Raji. Option 1: To loan this amount to the partnership and receive an annual interest of 10%. Option 2: To invest the full amount and become an equal partner. Through his business contacts he feels that he will be able to improve the total revenue. REQUIRED Advise the partners which option, if either, they should accept. Justify your answer.
9706_s19_qp_21
THEORY
2019
Paper 2, Variant 1
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D Limited is a retailer of sports equipment. The following balances have been extracted from the books of account at 31 December 2018. Debit $000 Credit $000 8% Debentures (2021–23) 10% Bank loan Administrative expenses Bank overdraft Carriage inwards Carriage outwards Distribution costs Dividends paid Land and buildings at 1 January 2018 Cost 2 100 Provision for depreciation Fixtures and fittings at 1 January 2018 Cost Provision for depreciation Motor vehicles at 1 January 2018 Cost Provision for depreciation Interest paid Inventory at 1 January 2018 Property costs Purchases 2 502 Retained earnings Returns outwards Revenue 5 120 Share capital – ordinary shares of $0.50 each 1 200 Share premium Trade payables Trade receivables The following information is also available. Revenue included goods that had been sold to a customer on a sale or return basis on 28 December 2018. The selling price of the goods was $40 000 and they were sold at a mark-up of 25%. The directors were unsure whether or not the goods would be returned. Inventory on D Limited’s premises at 31 December 2018 had been counted and valued at a cost of $585 000. Included in distribution costs is $24 000 in respect of delivery van licenses for the year ended 31 March 2019. REQUIRED Prepare the income statement for the year ended 31 December 2018. Use the space on the next page for your workings. D Limited Income statement for the year ended 31 December 2018 $000 Revenue Cost of sales Gross profit Administrative expenses Distribution costs Property costs Profit from operations Finance costs Profit for the year Prepare an extract showing the current assets section only of the statement of financial position at 31 December 2018. D Limited Extract from the statement of financial position at 31 December 2018 Current assets Prepare a statement for the directors to show the total value of equity at 31 December 2018. Additional information The directors wish to raise additional finance for expansion. They are considering two options. Issue 5% preference shares of $1 each to raise $300 000. Obtain an 8% bank loan to raise $300 000. REQUIRED Advise the directors which option they should choose. Justify your answer. Explain two differences between a bonus issue of shares and a rights issue of shares.
9706_s19_qp_23
THEORY
2019
Paper 2, Variant 3
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John, Kathy and Liz have been in partnership sharing profits and losses in the ratio 4 : 3 : 3. They have agreed to dissolve the partnership. REQUIRED State three reasons why a partnership may be dissolved. Additional information At the time of the dissolution the partnership’s statement of financial position was as follows: Statement of financial position at 31 March 2018 $ $ Assets Non-current assets at net book value Motor vehicles 29 400 Furniture and equipment 15 600 45 000 Current assets Inventory 14 920 Trade receivables 11 540 26 460 Total assets 71 460 Capital and liabilities Capital accounts John 28 000 Kathy 21 000 Liz 19 000 68 000 Current accounts John (2 200) Kathy 1 400 Liz (1 800) (2 600) Current liabilities Bank overdraft 6 060 Total capital and liabilities 71 460 The following information is also available. At dissolution John took over the furniture and equipment at an agreed valuation of $9500 and the inventory at a valuation of $11 000. Liz took over a motor vehicle at an agreed valuation of $16 600; the other motor vehicle was sold for $8450. The balance of one credit customer who owed $740 was written off as irrecoverable. The remaining trade receivables settled their accounts in full less a cash discount of 5%. Cost of dissolution, $2350, was paid from the bank account. REQUIRED Prepare the partnership realisation account. Calculate the amount to be paid to, or to be received from, John on dissolution.
9706_s19_qp_23
THEORY
2019
Paper 2, Variant 3
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Hamza and Noor are in partnership. They own a service business. The following information has been extracted from the partnership’s books of account for the year ended 31 December 2019. $ Administrative expenses 18 270 Equipment at 1 January 2019 Cost 11 000 Provision for depreciation 3 300 Loan account (Hamza) 10 000 Motor vehicle at 1 January 2019 Cost 20 000 Provision for depreciation 7 200 Revenue 45 400 Wages of assistant 15 540 The following information is also available. Administrative expenses include $1800 insurance for the three months ended 29 February 2020. The assistant works a 5-day week and is paid a weekly wage of $350. At 31 December 2019 three days’ wages were due but unpaid. Hamza’s loan was provided on 1 April 2019. He is entitled to interest of 8% per annum. Loan interest has not yet been paid to Hamza. The depreciation policy is: Equipment 15% per annum straight-line method Motor vehicle 20% per annum reducing balance method A full year’s depreciation is charged in the year of purchase but none in the year of disposal. An item of equipment was sold for $480 on 3 August 2019. This equipment had been purchased on 1 January 2017 for $2000. REQUIRED State how profits and losses are shared in a partnership where there is no agreement. Explain two reasons why you would recommend partners to have a written agreement, other than stating a ratio for sharing profits and losses. Prepare the income statement for the year ended 31 December 2019. Hamza and Noor Income Statement for the year ended 31 December 2019 Additional information Hamza and Noor have an agreement about sharing profits and losses. Their agreement is as follows. Noor is to be given a salary of $11 000. Partners are allowed to have drawings of $14 000 per annum. Interest of 10% is charged on any drawings in excess of this amount. Remaining profits and losses are to be shared in the ratio Hamza : Noor, 3 : 2. The following balances were available. $ Current account balances at 1 January 2019 Hamza 1 290 Debit Noor 4 350 Credit Drawings for the year ended 31 December 2019 Hamza 16 900 Noor 13 200 REQUIRED Prepare the appropriation account for the year ended 31 December 2019. Hamza and Noor Appropriation account for the year ended 31 December 2019 Calculate the balance of Hamza’s current account at 31 December 2019. Additional information Hamza and Noor have been considering expanding their business which will require additional finance of $90 000. In order to finance the expansion they are considering two options. Option 1: admit a new partner Option 2: apply for a bank loan REQUIRED Advise which option the partners should choose. Justify your advice.
9706_s20_qp_21
THEORY
2020
Paper 2, Variant 1
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Xu and Zoe have been in partnership for a number of years. They decided to dissolve their partnership on 1 October 2019. REQUIRED State three reasons why a partnership might be dissolved. Additional information The partners did not have a formal agreement on sharing of profits and losses. At the date of the dissolution the partnership’s statement of financial position was as follows. Statement of financial position at 1 October 2019 Assets $ $ Non-current assets at net book value Motor vehicle 19 400 Furniture and equipment 11 900 31 300 Current assets Inventory 7 480 Trade receivables 11 200 18 680 Total assets 49 980 Capital and liabilities Capital accounts Xu 18 000 Zoe 22 000 40 000 Current accounts Xu (2 480) Zoe (2 050) Total capital and current accounts 37 950 Loan account: Xu 4 300 Current liabilities Trade payables 5 400 Bank overdraft 2 330 7 730 Total capital and liabilities 49 980 The following information is also available. Xu took the motor vehicle at an agreed value of $15 100. The account of a credit customer, $800, had to be written off as irrecoverable. The accounts of remaining trade receivables were settled in full less a 5% cash discount. Other assets were sold for cash. $ Furniture and equipment Inventory The accounts of trade payables were settled in full less a 5% cash discount. The costs of dissolution, $620,were paid by cheque. REQUIRED Prepare the realisation account. Realisation account $ $ Calculate the amount due to, or from, Xu as a result of the dissolution.
9706_s20_qp_22
THEORY
2020
Paper 2, Variant 2
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L, M and N are in partnership, sharing profits and losses equally. On 31 December 2020 N retired. At that date: N’s capital account balance was $30 000 and his current account had a debit balance of $5400. Profit for the year was $21 000 before paying L’s salary of $6000. The goodwill was valued at $18 000 but is not to remain in the books of account. Other assets are to be revalued upwards by $6000. How much will N be entitled to on his retirement?
9706_s21_qp_11
MCQ
2021
Paper 1, Variant 1
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