1. Financial accounting (AS Level)
A section of Accounting, 9706
Listing 10 of 1775 questions
Francesco is a sole trader who runs a small bicycle distribution business. He does not keep full accounting records. REQUIRED State two benefits to a sole trader of keeping full accounting records. Explain the accounting treatment at the year-end in the income statement and statement of financial position of: Prepayments Accruals Additional information Francesco provided the following information for the year ended 30 April 2017. $ Opening inventory 16 250 Total sales 82 500 Total purchases 62 750 Mark-up is 25%. The normal rate of inventory turnover is 5 times. However, it was discovered at the year-end that some inventory had been stolen. No insurance claim has yet been made for this loss. REQUIRED Prepare an extract from the income statement to show gross profit for the year ended 30 April 2017. Show clearly the value of inventory stolen. Workings: REQUIRED Prepare the bank account for the year ended 30 April 2017. Clearly show the opening balance. Bank account $ $ Workings: Calculate the charge for total expenses which appeared in the income statement for the year ended 30 April 2017. Additional information Francesco’s brother, Marco, runs a similar business. He has calculated the following ratios for his own business: 30 April 30 April Current ratio 2.6 : 1 1.2 : 1 Liquid (acid test) ratio 1.4 : 1 0.8 : 1 REQUIRED Discuss the liquidity position of Marco’s business using only the current and liquid (acid test) ratios. Advise a potential new supplier whether or not to sell goods to Marco on a credit basis. Justify your answer.
9706_w18_qp_21
THEORY
2018
Paper 2, Variant 1
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S Limited is a private limited company. The directors have extracted the following information at 30 September 2019. $ $ 6% debentures (2021 – 2022) 68 000 Accrued expenses 2 480 Administrative expenses 63 810 Bank overdraft 12 770 Carriage inwards 3 600 Distribution costs 49 330 Interest paid 8 160 Inventory at 1 October 2018 62 500 Freehold property 220 000 Motor vehicles Cost 84 600 Provision for depreciation at 1 October 2018 38 760 Office equipment Cost 68 700 Provision for depreciation at 1 October 2018 32 300 Prepaid expenses 4 400 Purchases 392 340 Retained earnings 69 700 Returns inwards 3 470 Revenue 764 570 Share capital (ordinary shares of $1 each) 50 000 Share premium 15 000 Trade payables 48 730 Trade receivables 86 500 Wages and salaries 54 900 The following information is also available: The value of inventory at 30 September 2019 was $73 100 at cost. The directors now wish to write off $2000 in respect of damaged items. Purchase of new office equipment of $6000 had been posted to distribution costs in error. Motor vehicles are to be depreciated at 20% per annum using the straight-line method. The estimated residual value of the motor vehicles is $20 000. Depreciation is to be charged to distribution costs. Office equipment is to be depreciated at 15% per annum using the reducing balance method. Depreciation is to be charged to administrative expenses. At 30 September 2019 there was an additional accrual for wages and salaries of $1700. Wages and salaries are to be charged as 70% to administrative expenses and 30% to distribution costs. Interest paid included debenture interest paid to 30 June 2019. At 30 September 2019 there was an additional prepayment of $4800 for administrative expenses. The directors wish to create a provision for doubtful debts equal to 2% of trade receivables at 30 September 2019 and include it in administrative expenses. REQUIRED Prepare the income statement for the year ended 30 September 2019. Use the space on the next page to show your workings. S Limited Income statement for the year ended 30 September 2019 $ $ Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Prepare the statement of financial position at 30 September 2019. Use the space provided on the next page for your workings. Workings: Explain the term ‘6% debentures (2021 – 2022)’, which appears in S Limited’s financial statements. Additional information Despite having made substantial profit for the year, the directors are concerned that the shareholders have not received any dividends. They are considering two options: option 1: paying the shareholders a dividend of $0.50 per share option 2: making a bonus issue of 1 ordinary share for every 2 shares held. REQUIRED Advise the directors on which option they should choose. Justify your answer.
9706_w19_qp_23
THEORY
2019
Paper 2, Variant 3
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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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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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The directors of Y Limited have provided the following balances at 30 June 2022. $ 6% debentures (2025–2026) 60 000 Administrative expenses 89 540 Bank overdraft 1 440 Carriage inwards 4 310 Delivery vehicles – valuation 74 000 Distribution costs 72 910 Dividends paid 6 400 Finance costs 1 800 Inventory at 1 July 2021 105 600 Office equipment – cost 54 600 Office equipment – provision for depreciation 22 300 Provision for doubtful debts 3 540 Purchases 338 200 Retained earnings 16 920 Returns inwards 7 550 Revenue 615 300 Share capital (ordinary shares of $1 each) 80 000 Trade payables 48 650 Trade receivables 93 240 The following information is also available. Inventory at 30 June 2022 was valued at $126 800. Inventory at 30 June 2022 included damaged goods costing $3200 that could be sold for $3950 after repairs costing $910. The delivery vehicles have an estimated value at 30 June 2022 of $62 000. Office equipment is to be depreciated at 10% per annum using the reducing balance method. Administrative expenses included $1800 office rent for the three months ending 31 August 2022. Distribution costs of $850 were owing at 30 June 2022. The 6% debentures (2025–2026) were issued in 2017. An irrecoverable debt of $490 is to be written off to administrative expenses. The provision for doubtful debts is to be maintained at 4% of trade receivables. 10 There is no interest charged on the bank overdraft. REQUIRED Prepare the income statement for the year ended 30 June 2022. Y Limited Income Statement for the year ended 30 June 2022 $ Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings: Cost of sales Administrative expenses Distribution costs Prepare the statement of financial position at 30 June 2022. Y Limited Statement of Financial Position at 30 June 2022 Additional information The directors of Y Limited wish to repay the 6% debentures (2025–2026) early. They are considering making a rights issue of one ordinary share for every two shares held at a premium of 50%. REQUIRED Advise the directors whether or not they should make a rights issue of ordinary shares to repay the debentures. Justify your answer.
9706_w22_qp_21
THEORY
2022
Paper 2, Variant 1
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The following balances have been extracted from the draft financial statements of H Limited at 30 September 2022. $ 8% bank loan (2028–2029) 28 000 Cash and cash equivalents 2 590 Inventory 48 900 Plant and machinery at net book value 52 000 Property at valuation 65 000 Retained earnings 27 350 Revaluation reserve 23 000 Share capital (ordinary shares of $1 each) 80 000 Share premium 19 400 Trade payables 17 140 Trade receivables 26 400 The directors discovered that the following had not been accounted for. Plant and machinery had been purchased for $16 500. This was settled by the part‑exchange of machinery with a net book value of $11 800 and a bank payment of $4700. No depreciation for the year had been charged. Plant and machinery is depreciated at 10% per annum using the reducing balance method. A full year’s depreciation is charged in the year of purchase and none in the year of disposal. A bonus issue of one ordinary share for every four shares held had been made on 1 June 2022. The directors had decided to keep the reserves in the most flexible form. An interim dividend of $0.03 per share had been paid on 1 September 2022 on all shares in issue at that date. Property had been revalued downwards by $4000. One half of the 8% bank loan (2028–2029) had been repaid on 30 September 2022. A provision for doubtful debts of 5% was to be made. REQUIRED Prepare the journal entry to record the bonus issue of shares. Dates and narrative are not required. Calculate the net book value of plant and machinery at 30 September 2022. Calculate the adjusted balance of cash and cash equivalents at 30 September 2022. Calculate the adjusted balance of retained earnings at 30 September 2022. Prepare the statement of financial position at 30 September 2022. H Limited Statement of Financial Position at 30 September 2022 Explain two differences between capital reserves and revenue reserves. Explain one accounting concept applied when making a provision for doubtful debts.
9706_w22_qp_22
THEORY
2022
Paper 2, Variant 2
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Questions Discovered
1775