3.1. Preparation of financial statements
A subsection of Accounting, 9706, through 3. Financial accounting (A Level)
Listing 10 of 678 questions
Rahman, Silva and Thierry have been in partnership for a number of years sharing profits and losses in the ratio 3 : 2 : 1 respectively. The following draft statement of financial position was drawn up at 30 June 2017: $ $ Non-current assets at net book value Freehold property 120 000 Plant and machinery 56 000 Motor vehicles 38 000 214 000 Current assets Inventory 42 000 Trade receivables 19 400 Cash and cash equivalents 2 300 63 700 Total assets 277 700 Capital and liabilities Capital accounts Rahman 90 000 Silva 60 000 Thierry 30 000 180 000 Current accounts Rahman 42 300 Silva 18 600 Thierry (4 400) 56 500 Non-current liabilities Loan account - Thierry 30 000 Current liabilities Trade payables 11 200 Total capital and liabilities 277 700 Thierry decided to retire from the partnership on 30 June 2017 and the following information was available: Rahman and Silva were to continue in partnership sharing profits and losses in the ratio 3 : 2 respectively. Goodwill was to be valued at $48 000. No goodwill account was to be maintained in the books of account. Thierry was to take over one of the motor vehicles at an agreed value of $12 000. The remaining motor vehicles were to be valued at $22 000. The value of inventory was to be written down by $3000. An irrecoverable debt of $200 was to be written off. Thierry agreed not to ask for repayment of his loan to the partnership when he retired. REQUIRED Prepare the revaluation account at 30 June 2017. Prepare the journal entry to account for goodwill at 30 June 2017. A narrative is not required. Prepare a statement to show the total amount due to Thierry on his retirement from the partnership. State three items that may appear in a partnership agreement. Explain the difference between a realisation account and a revaluation account.
9706_w17_qp_23
THEORY
2017
Paper 2, Variant 3
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Aisha, Bilal and Cao have been in partnership for many years sharing profits and losses in the ratio 2 : 2 : 1. Bilal decided to retire from the partnership at 31 January 2018. Their statement of financial position at 31 January 2018 before any adjustments was as follows: Aisha, Bilal and Cao Statement of financial position at 31 January 2018 $ $ Assets Non-current assets Premises 85 000 Motor vehicles 32 000 Fixtures and fittings 7 500 124 500 Current assets Inventory 16 200 Trade and other receivables 4 800 21 000 Total assets 145 500 Capital and liabilities Capital accounts Aisha 48 000 Bilal 48 000 Cao 24 000 120 000 Current accounts Aisha 8 400 Bilal (1 200) Cao 6 400 13 600 Current liabilities Trade and other payables 5 600 Bank overdraft 6 300 11 900 Total capital and liabilities 145 500 The following information is available. The partners agreed that the value of goodwill at that date was $85 000. It was also agreed that certain assets should be revalued to the following amounts. $ Premises 114 000 Inventory 15 000 As part of the final settlement, Bilal was entitled to retain one of the motor vehicles at its net book value of $11 400. It was agreed that of the final settlement due to Bilal, $20 000 would be paid immediately by cheque and the balance would remain in the business as a loan. REQUIRED Prepare a statement to calculate the profit or loss on revaluation at 31 January 2018. Prepare Bilal’s capital account on his retirement from the partnership. Identify three ways, other than using bank finance, in which a partnership could raise funds to purchase a non-current asset. State three items that may be included in the appropriation account before the division of residual profit.
9706_w18_qp_21
THEORY
2018
Paper 2, Variant 1
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Jack and Kelly are in partnership. They share profits and losses in the ratio of 2 : 5 respectively. The partners decided to admit Liam as a partner with effect from 1 July 2018. The partnership’s statement of financial position immediately prior to Liam’s admission was as follows. Jack and Kelly Summarised statement of financial position at 30 June 2018 $ Assets Non-current assets 91 400 Current assets 21 700 Total assets 113 100 Capital and liabilities Capital accounts Jack 33 000 Kelly 71 000 Current liabilities 9 100 Total capital and liabilities 113 100 The partners do not maintain separate current accounts. The following was agreed. Assets were revalued upwards by $21 000. Goodwill was valued at $52 500. No goodwill account was to be maintained in the partnership’s books of account. In the future profits and losses would be shared in the ratio Jack : Kelly : Liam, 2 : 5 : 3 respectively. The balances of the partners’ capital accounts immediately after Liam’s admission should total $120 000 and be in the same ratio as the profit sharing ratio. Each partner would either pay funds into, or withdraw funds from, the business bank account in order to achieve this requirement. REQUIRED Prepare the partners’ capital accounts to record Liam’s admission as a partner on the next page. State what is meant by the term ‘goodwill’. Explain why a partnership may make an adjustment for goodwill when they admit a new partner. Explain why partners may agree not to maintain a goodwill account in the books of the partnership on the admission of a new partner. Additional information The partners forecast that profit for the year ending 30 June 2019 will be $60 000. This is an increase of 25% on the current year’s profit. The partners believe that Liam’s admission will result in an improved return on capital employed. REQUIRED Advise the partners whether or not they are correct in believing that Liam’s admission will result in an improved return on capital employed in the year ending 30 June 2019. Support your answer with calculations.
9706_w18_qp_22
THEORY
2018
Paper 2, Variant 2
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From time to time M Limited issues shares. REQUIRED State the double entry required to record a rights issue of shares at a premium. Additional information The directors of M Limited have a policy of not paying interim dividends. The statement of changes in equity of the company for the year ended 31 December 2016 was as follows. M Limited Statement of changes in equity for the year ended 31 December 2016 Ordinary share capital Share premium General reserve Retained earnings Total $ $ $ $ $ Jan 1 Balance 400 000 150 000 – 120 000 670 000 Feb 10 ? 100 000 (100 000) – Jun 25 Dividend (60 000) (60 000) Dec 31 Transfer 50 000 (50 000) – Dec 31 Profit for the year 90 000 90 000 Dec 31 Balance 500 000 50 000 50 000 100 000 700 000 REQUIRED State which event was recorded by the entry on 10 February 2016. Explain why the entry made on 10 February 2016 was made to the share premium account rather than the retained earnings account. State which dividend was recorded by the entry on 25 June 2016. State why the directors decided to create a general reserve. Explain why a long-term bank loan received by the company on 1 July 2016 was not recorded in the statement of changes in equity. Additional information Balances at 1 January 2017 included the following. $ Buildings cost 400 000 provision for depreciation 38 000 Equipment cost 256 000 provision for depreciation 61 000 Motor vehicles cost 188 000 provision for depreciation 81 000 During the year ended 31 December 2017 the following took place: new equipment costing $37 000 was bought a motor vehicle with an original cost of $10 000, bought during 2016, was sold. The company’s depreciation policy is as follows: buildings at a rate of 2% per annum using the straight-line method equipment at a rate of 10% per annum using the straight-line method motor vehicles at a rate of 20% per annum using the reducing balance method. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal. On 31 December 2017 the buildings were revalued at $650 000. REQUIRED Calculate the net book value of non-current assets which will appear in the statement of financial position at 31 December 2017. Additional information The following information is also available. $ At 1 January 2017 10% Bank loan (2025) 100 000 During the year ended 31 December 2017 Dividend paid 66 000 Profit for the year before charging depreciation and loan interest 163 000 There was no change to issued share capital At 31 December 2017 Current assets 290 300 Current liabilities (including accrued loan interest) 96 300 REQUIRED Prepare the statement of financial position at 31 December 2017. Use the space on the next page for your workings. Use this space for your workings. Additional information The directors are considering the rates of depreciation applied to the company’s non-current assets. REQUIRED Advise the directors whether or not they should decrease the depreciation rates. Justify your answer.
9706_w18_qp_23
THEORY
2018
Paper 2, Variant 3
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Angela, Beena and Cai were in partnership sharing profits and losses in the ratio of 4 : 3 : 1. They dissolved their partnership on 30 September 2017. The following information is available. At that date their statement of financial position was as follows: Assets $ $ $ $ Non-current assets Land and buildings 150 000 Motor vehicles 40 000 Machinery 60 000 250 000 Current assets Inventory 35 000 Trade receivables 45 000 Bank 4 500 84 500 Total assets 334 500 Capital and liabilities Angela Beena Cai Capital account 100 000 75 000 25 000 200 000 Current account 5 000 4 000 (1 000) 8 000 Total 105 000 79 000 24 000 208 000 Non-current liabilities 10% loan from Beena 100 000 Current liabilities Trade payables 26 500 Total liabilities 126 500 Total capital and liabilities 334 500 The following assets were sold for cash. $ Land and buildings 200 000 Machinery 55 150 Inventory 33 750 Angela took a motor vehicle at an agreed valuation of $20 000. Beena took the remaining motor vehicle at an agreed valuation of $13 000. An amount of $40 500 was received from trade receivables in full settlement of their accounts. An amount of $25 000 was paid to trade payables in full settlement of their accounts. Dissolution costs of $2300 were paid from the bank. REQUIRED Prepare the realisation account on dissolution of the partnership. Realisation account $ $ Calculate the amount to be paid to Beena on dissolution of the partnership. State two items which may be included in a partnership agreement. Explain why partners may each have a separate capital account and current account.
9706_w18_qp_23
THEORY
2018
Paper 2, Variant 3
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