Professional Documents
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(IAS)
Level 3
Model Answers
Series 2 2008 (Code 3902)
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Accounting (IAS) Level 3
Series 2 2008
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Page 1 of 15
Page 2 of 15
Accounting (IAS) Level 3
Series 2 2008
QUESTION 1
The Purchases Ledger Control Account of Granta, a private company, for the month of January 2008
was prepared as shown below:
Purchases Ledger Control Account
Debit Credit
$ $
Cash paid to suppliers 1,253,270 Balance b/f 105,000
Discount received 12,500 Credit purchases 1,600,000
Purchases returns 4,000
Interest charged 12,500
Balance c/f 455,730
1,721,500 1,721,500
The list of balances extracted from the Purchases Ledger at 31 January 2008 totalled $436,735.
In addition to the error in the Purchases Ledger Control Account shown above, the company’s auditors
discovered the following errors:
(1) An invoice for $3,000 recorded in the Purchases Daybook was not posted to the Supplier's
Account in the Purchases Ledger
(2) The discount received column in the Cash Book was over-added by $2,000
(3) The list of payables' balances includes a credit balance of $1,000, which was incorrectly listed as
a debit balance
(4) The debit side of one Supplier's Account had been under-added by $250
(5) A credit balance of $3,295 has been omitted from the list of balances
(6) Purchases Ledger contras of $4,000, representing a balance in the Purchases Ledger set off
against a balance in the Sales Ledger, have been recorded in the Account of the supplier but not
in the Control Account
(7) A cheque for $14,500 paid to a supplier has been wrongly posted to the Supplier's Account as
$10,450
(8) A purchases invoice of $30,000 was omitted from the Purchases Daybook
REQUIRED
(a) (i) Prepare a statement correcting the balance at 31 January 2008 on the Purchases Ledger
Control Account. An amended Purchases Ledger Control Account is not required.
(10 marks)
(ii) Prepare a statement correcting the original total of the list of balances extracted from the
Purchases Ledger.
(12 marks)
(Total 25 marks)
3902/2/08/MA Page 3 of 15
MODEL ANSWER TO QUESTION 1
(a) (i)
Correction of Purchases Ledger Control Balance
$ $
Balance per question 455,730
Add:
Discount received adjustment 2,000
Purchases omitted 30,000
32,000
487,730
Deduct:
Contras 4,000
Purchases over - added 5,000
Purchases returns (4,000 x 2) 8,000
17,000
Corrected balance 470,730
(ii)
Correction of total of Purchases Ledger Balances
$ $
Balance per question 436,735
Add:
Invoice not posted 3,000
Credit balance listed as a debit (1,000 x 2) 2,000
Omitted balance 3,295
Purchases omitted 30,000
38,295
475,030
Deduct:
Debit side under-added 250
Incorrect recording of cheque (14,500 – 10,450) 4,050
4,300
Corrected balance 470,730
3902/2/08/MA Page 4 of 15
QUESTION 2
Chow and Patel are in partnership sharing profits and losses in the ratio 3:2 respectively. The
partners do not maintain double entry records but have produced the following Balance Sheet at 31
December 2006:
Current Assets
Inventory 125,000
Trade receivables 400,000
Prepayments:
Advertising 10,000
Insurance 20,000
Bank 50,000
605,000
Current Liabilities
Trade payables 75,000
Accruals:
Electricity 15,000
Rent 5,000
95,000
Net Current Assets 510,000
870,000
Financed by
$ $
Capital Accounts: Chow 400,000
Patel 250,000
650,000
Current Accounts: Chow 115,000
Patel 105,000
220,000
870,000
Their summarised Bank Account for the year ended 31 December 2007 was as follows:
$ $
Balance b/d 50,000
Trade receivables 2,000,000 Trade payables 1,000,000
Carriage inwards 22,500
Insurance 25,000
Electricity 35,000
Telephone 17,500
Advertising 11,250
Rent 75,000
Office supplies 6,250
New equipment 300,000
Drawings:
Chow 300,000
Patel 150,000
Balance c/d 107,500
2,050,000 2,050,000
3902/2/08/MA Page 5 of 15
QUESTION 2 CONTINUED
Additional information:
Settlement discounts of $25,000 were given to receivables, settlement discounts of $7,500 were
received from payables and bad debts of $75,000 were written off.
Inventory was $185,000, receivables were $275,000, payables were $50,000, accrued
electricity was $12,500, prepaid insurance was $5,000, vehicles had a book value of $90,000 and
equipment had a book value of $490,000.
Interest on drawings to be charged at 5% of total drawings for the year, interest on capital
accounts to be allowed at 8% per year and Patel to be entitled to an annual salary of $100,000.
REQUIRED
(a) The Income Statement and Appropriation Account for the year ended 31 December 2007.
(18 marks)
(b) The Partners’ Current Accounts, in columnar form, for the year ended 31 December 2007.
(7 marks)
(Total 25 marks)
3902/2/08/MA Page 6 of 15
MODEL ANSWER TO QUESTION 2
(a)
Chow and Patel
Income Statement and Appropriation Account
for the year ended 31 December 2007
$ $
Sales (275,000 + 25,000 + 75,000 + 2,000,000 - 400,000) 1,975,000
Cost of sales
Opening inventory 125,000
Purchases (1,000,000 + 50,000 + 7,500 - 75,000) 982,500
Carriage in 22,500
1,130,000
Closing inventory 185,000
945,000
Gross profit 1,030,000
Discounts received 7,500
1,037,500
3902/2/08/MA Page 7 of 15
MODEL ANSWER TO QUESTION 2 CONTINUED
3902/2/08/MA Page 8 of 15
QUESTION 3
Alpha, a private company, was formed on 1 January 2007. During the year ended 31 December
2007, the following transactions took place:
(1) Issued 500,000 Ordinary Shares of $1 each at par. All proceeds were received by 31 December
2007. No dividends were paid on these shares during the year ended 31 December 2007
(3) Purchased office equipment costing $300,000 from Gamma and paid $275,000. The
remaining amount was paid in March 2008
(4) Bought goods on credit for $1,000,000 and sold them on credit at a margin of 25% of selling
price
(5) Received $1,100,000 from customers and paid $900,000 to suppliers of goods
(8) Purchased $250,000 9% Debentures in Zeta, a public company, at 95. No interest was received
during the year ended 31 December 2007
(9) Borrowed $450,000 from Gnat Bank to finance the purchase of a new building, which cost
$800,000. At 31 December 2007, Alpha owed $50,000 to the vendor of the building
(12) Issued 250,000 $1 9% Preferred Shares at a premium of $0.10 per share and received all
cash by 31 December 2007. No dividends were paid on these shares during the year ended 31
December 2007
(13) Issued $500,000 5% Debentures in exchange for new plant and machinery. No interest was
paid on the debentures during the year ended 31 December 2007
(14) Bought 250,000 Ordinary Shares of $1 in Beta, a public company, at a premium of $0.05 per
share and paid cash in full settlement by 31 December 2007. No dividends were received on
these shares during the year ended 31 December 2007
(15) Wrote off $150,000 of the cost of the new building because of a permanent diminution in value
REQUIRED
(a) Prepare the Cash Flow Statement of Alpha for the year ended 31 December 2007 in accordance
with IAS 7.
(21 marks)
(b) Give two reasons why a company, in its first year of operation, might have a net cash outflow
from operations, despite having a satisfactory gross profit margin.
(4 marks)
(Total 25 marks)
3902/2/08/MA Page 9 of 15
MODEL ANSWER TO QUESTION 3
(a)
Alpha
Cash Flow Statement for the year ended 31 December 2007
$ $
Operating activities
Investing activities
Purchase of tangible assets (275,000 + 750,000) -1,025,000
Sale of tangible assets 27,500
Purchase of investments (237,500 + 262,500) -500,000
Purchase of short term liquid assets -75,000
Net cash from investing activities -1,572,500
-1,612,500
Financing activities
(W1)
3902/2/08/MA Page 10 of 15
QUESTION 4
A company manufactures three types of vacuum cleaner, Alpha, Gamma and Zeta. The following
data applied to the year ended 31 March 2008:
$ $ $
Total sales value 1,800,000 1,400,000 5,000,000
Costs:
Direct material 600,000 500,000 800,000
Direct labour 650,000 400,000 2,050,000
Variable overheads 350,000 300,000 650,000
Fixed overheads 300,000 300,000 300,000
Total costs 1,900,000 1,500,000 3,800,000
$ $ $
Profit/(Loss) (100,000) (100,000) 1,200,000
REQUIRED
(a) Calculate for each type of vacuum cleaner, the contribution per unit. (6 marks)
Both the Alpha and Gamma range of vacuum cleaners are shown as making a loss.
REQUIRED
(c) Explain why the company should not cease production of either the Alpha or the Gamma range of
vacuum cleaners. You are to consider financial reasons only.
(6 marks)
(Total 25 marks)
3902/2/08/MA Page 11 of 15
MODEL ANSWER TO QUESTION 4
(a)
Unit Contribution
Alpha
1,800,000 - (1,900,000 - 300,000) = $ 100
2,000
Gamma
1,400,000 - (1,500,000 - 300,000) = $ 100
2,000
Zeta
5,000,000 - (3,800,000 - 300,000) = $ 300
5,000
(b) (i)
Number of Units
Alpha
300,000 = 3,000
100
Gamma
300,000 = 3,000
100
Zeta
300,000 = 1,000
300
(b) (ii)
Sales Value
Alpha
3,000 x 900* = $ 2,700,000
Gamma
3,000 x 700* = $ 2,100,000
Zeta
1,000 x 1,000* = $ 1,000,000
3902/2/08/MA Page 12 of 15
MODEL ANSWER TO QUESTION 4 CONTINUED
*Alpha Sales (1,800,000) divided by units (2,000) = Unit sales price (900)
Gamma Sales (1,400,000) divided by units (2,000) = Unit sales price (700)
Zeta Sales (5,000,000) divided by units (5,000) = Unit sales price (1,000)
(c) Both the Alpha and Gamma ranges are covering their variable costs and making a contribution
towards the fixed costs.
If the company ceased the manufacture of both Alpha and Gamma ranges of cleaners the
variable costs of each would cease, but the fixed costs would remain, at least for a period of time.
These fixed costs would be transferred to the Zeta range of cleaners, resulting in overall company
profits being reduced from $1,000,000 to $600,000.
3902/2/08/MA Page 13 of 15
QUESTION 5
The following are the summarised Balance Sheets of Malay International, a private company and its
subsidiary Britas, a private company, at 31 December 2007:
$ $
Ordinary shares ($1 each) 250,000 200,000
Accumulated profits 650,000 225,000
900,000 425,000
Malay International acquired 150,000 shares in Britas at 1 January 2007 when the balance on the
accumulated profits of Britas was $150,000. Goodwill is to be written off over five years.
During the year, Britas sold goods to Malay International for $400,000, which included a mark up of
25%. At 31 December 2007 Malay International retained $50,000 of these goods in inventory, valued
at Britas’s selling price.
REQUIRED
(i) Goodwill
(ii) Minority interest
(iii) Consolidated accumulated profits.
(11 marks)
(b) Prepare the summarised Consolidated Balance Sheet of Malay International and its subsidiary at
31 December 2007.
(7 marks)
According to IAS 16 a tangible fixed asset, whether purchased or constructed, should initially be
measured at cost.
REQUIRED
(c) Explain what is meant by the term ‘tangible fixed asset’. (4 marks)
(d) State whether or not each of the following items should be considered part of the original cost of a
tangible fixed asset:
(Total 25 marks)
3902/2/08/MA Page 14 of 15
MODEL ANSWER TO QUESTION 5
(b)
(c) Tangible fixed assets are defined as assets with physical substance that are held for use in the
business, for rental to others or for administrative purposes on a continuing basis.