F3 Mock Exam Answers:

Mock Exam:1
MCQ’S:
Question#1:
1 and 3 only
The profits of a company belong to its owners, the shareholders.
The directors of the company, who are appointed to run the company on behalf of the shareholders,
must decide whether to distribute the profits as dividends or to retain the profits so that they can be
reinvested in the business.
A limited liability company has a separate legal identity from its owners.
Question#2:
The International Financial Reporting Standards Interpretations Committee
The two main roles of the International Financial Reporting Standards (IFRS) Interpretations Commitee
are to:
(1)Review, on a timely basis, newly identified financial reporting issues not specifically addressed in
IFRSs
(2)Clarify issues where unsatisfactory or conflicting interpretations have developed, or seem likely to
develop in the absence of authoritative guidance, with a view to reaching consensus on the appropriate
treatment
Question#3:
Substance over form
Consolidated financial statements are an application of substance over form.
Question#4:
Dr Decrease in a liability Cr Increase in capital

A debit entry will:

(1) increase an asset

(2) decrease a liability
(3) decrease capital
(4) increase an expense

A credit entry will:

(1) decrease an asset

(2) increase a liability
(3) increase capital
(4) increase income
Question#5:
$124,256

Payables control account

Debit Credit
$ $
Cash paid to credit suppliers 172,506 Balance b/f 141,588

Contra with receivables ledger 8,102 Credit purchases 165,487

Purchase returns 1,094

Early settlement discounts received 1,117

Balance c/f 124,256 307,075

307,075

Cash purchases are recorded in the cash book, not the payables control account.

Question#6:

Share capital $66,000

Share premium $29,000

In the rights issue the number of shares issued is 100,000 / 5 = 20,000. Therefore, after
the rights issue the balances are:

Share capital (100,000 x 0.5) + (20,000 x 0.5) = $60,000

Share premium (25,000 + 20,000 x 0.5) = $35,000

Total number of shares in issue = 100,000 + 20,000 = 120,000

The rights issue is followed by a bonus issue on 1 September 20X9. In a bonus issue
the company reclassifies some of its reserves (in this case share premium) as share
capital. No new funds are raised in a bonus issue.

In the bonus issue the number of shares issued is 120,000 / 10 = 12,000.

Therefore after the bonus issue the balances are:

Share capital (60,000 + 12,000 x 0.5) = $66,000

Share premium (35,000 - 12,000 x 0.5) = $29,000
Total number of shares in issue = 120,000 + 12,000 = 132,000
Question#7:
Control accounts can be used to check that the underlying accounts are correct
Control accounts are part of the double entry system within the general ledger. For example, the
receivables control account records all transactions with credit customers and its balance represents the
total amount due from these customers. A business will also keep individual accounts for each of these
customers within the receivables ledger. Comparing the total of the individual customer balances with
the control account balance can identify whether errors have been made in the underlying customer
accounts.
Question#8:
A possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non occurrence of one or more uncertain future events not wholly within the control of
the entity
In IAS 37 (10) the definition of a contingent liability is a possible obligation that rises from past events
and whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain
future events.
Question#9:
Non-current assets Overstated
Profit Overstated

Lux Co has made a loss on disposal of $1,600 (15,800 - 14,200). So the correct
accounting entries required to record the disposal are:

$
Dr Cash 14,200
Dr Loss on disposal 1,600
Cr Non-current assets 15,800

Therefore if the error is not corrected non-current assets will be overstated by $15,800
and profit will be overstated by $15,800 (profit recorded in error of 14,200 + loss not
recorded of 1,600).
Question#10:
$106,250

Cost of sales $
Opening inventory 15,000
plus: Purchase 82,000
less: Closing inventory (12,000)
85,000
Therefore using the mark-up on cost of sales:
Sales revenue = 125% / 100% x 85,000 = $106,250
Question#11:
$80,000 should be accrued in the financial statements
Per IAS 10 (9a) the settlement after the reporting period of the court case confirms the entity had a
present obligation at the end of the reporting period and so is an adjusting event. The settlement of the
claim provides evidence of the amount of the provision and therefore the $80,000 that was awarded is
the correct amount to provide for in the accounts at the year end.
Question#12:
$23,080
Interest received in cash is $23,080.

Interest receivable:
Debit Credit
$ $
Balance b/f 11,120 Cash 23,080
Statement of profit 28,140 Balance c/f 16,180
or loss
39,260 39,260
Question#13:
$15,000
Added to retained earnings = profit for the year $36,000 - dividends $21,000 = $15,000
The surplus on revaluation will be added to the revaluation surplus, not to retained earnings.
Question#14:
$121,620
IAS 2 requires inventories to be carried at the lower of cost and net realisable value.

Cost per unit Number of Total cost NRV Lower of cost

units and NRV
14.2 4,100 58,220 48,960 48,960
11.1 2,600 28,860 35,500 28,860
8.5 5,200 44,200 43,800 43,800
Carrying value 121,620
Question#15:
A rights issue of shares offers new shares to existing shareholders in proportion to their shareholding
A rights issue is an issue of new shares for cash. The 'rights' are offered to existing shareholders in
proportion to their existing shareholdings. This is beneficial for existing shareholders in that the shares
are usually issued at a discount to the current market price.
No cash is paid in a bonus issue of shares.
Question#16:
$2,000
Carrying value of old vehicle = 20,000 - (20,000 x 3 years / 4 years) = $5,000
Part-exchange value = 25,000 sales price - 18,000 cash paid = $7,000
Therefore profit on disposal = 7,000 part-exchange value - 5,000 carrying value = $2,000
Question#17:
$11,200
1 June 20X8 Purchase of asset $40,000
30 November 20X8 Depreciation 40,000 x 6 / 12 x 20% = $4,000
Depreciation calculation on a reducing balance basis 20% pro rated for year of acquisition so six months
depreciation charged in year of acquisition: June to November.
1 December 20X8 Carrying value of asset 40,000 - 4,000 = $36,000
30 November 20X9 Depreciation 36,000 x 20% = $7,200
On a reducing balance basis depreciation is charged on the carrying value of the asset, not the cost.
Therefore total accumulated depreciation at 30 November 20X9 is $11,200 (4,000 + 7,200).
Question#18:
$64,400 Credit
Trade discounts are recorded as a deduction to revenue.
$70,000 x 92% = $64,400 Credit
Question#19:
Dr Irrecoverable $14,250 Cr Receivables $14,250
debts

Kitty has permanently written off all of Mr Fable's debt of $8,000 and half of Mrs Storey's
debt of $12,500 ($6,250), a total of $14,250, because she expects that neither of these
will be paid. The double entry to permanently write off these debts is:

Dr Irrecoverable debts $14,250

Cr Receivables $14,250
Question#20:
$167,000

The debit balance on the tax account is the result of an under provision of tax in the
previous year of $22,000. Therefore income tax expense for current year is:

$
Under provision from previous year 22,000
Provision for current year 145,000
Tax expense in statement of profit or loss 167,000
Question#21:
An item of plant and machinery that is currently not in use
A new office building that has been acquired but is not yet occupied
Non-current assets are assets bought by the business for use in the long-term as opposed to current
assets which are assets that will be realised, consumed or sold in the normal operating cycle of the
business or are assets held primarily for trading.
The new office building is a non-current asset as the fact that it is not yet occupied suggests it will be
occupied in the future. It is therefore retained for use in the long-term as opposed to being held for
trading. Similarly with the item of plant and equipment.
Short-term investments are current assets as they are expected to be realised in the short term.
A motor vehicle for sale in a car showroom is part of the inventory of the car dealer business and is
therefore a current asset.
Question#22:
Teri has received a total of $1,995 in cash.
$580 of this was from cash customers and related to cash sales so this amount should be credited to
revenue.
The $65 is settlement discounts that customers were not expected to take and therefore revenue must
be adjusted accordingly (580-65=515). The remaining $1,480 in cash relates to receivables balances.
Question#23:
$1,290
Sales of 100 units on 8 November are taken from the 400 units of opening inventory, leaving 300 units in
inventory.
Sales on 24 November of 400 units are taken from the remaining opening inventory (300 units) plus
100 units from the purchase made on 19 November, which leaves 200 of that purchase in inventory.
The closing balance of inventory is therefore 200 x 6.45 = $1,290.
Question#24:
Purchases from the purchases daybook have been credited to sales and dealt with correctly in the
payables control account
The correct double entry for recording purchases from the purchases daybook is Dr Purchases, Cr
Payables control account.
If purchases have instead been credited to sales then two credit entries have been made (Cr Sales, Cr
Payables control account).
Therefore the total debits will not equal the total credits in the accounts and a suspense account will
need to be opened for the difference.
Question#25:
$65,000
In accordance with IAS 38 research expenditure should be written off immediately to the statement of
profit or loss. Development costs, if they meet the capitalisation criteria, should be capitalised. Once the
asset is available for use the capitalised developments costs should be amortised over the useful life. In
this case project B is not complete so the associated development costs should not be amortised.
$
Research expenditure 40,000
Amortisation of capitalised development costs (100 / 4) 25,000
Total charge to statement of profit or loss 65,000
Question#26:
$1,023 Cr
Bank reconciliation:

$
Balance per bank statement (653) (overdrawn)
Less error (25)
Add uncleared lodgements 268
Less unpresented cheques (613)
Cash book balance (1,023) (credit)
An overdrawn balance is shown as a debit in the books of the bank and as a credit
(liability) in the books of the business.
Question#27:
To record non-routine transactions
To record the depreciation charge for the year
A journal entry is used to record non-routine transactions and double entries that do not arise from the
other books of prime entry such as the depreciation charge for the year. Journal entries are also made
when errors are discovered and need to be corrected.
Question#28:
Reduction of $295
An accrual of $750 is required for the electricity cost: Dr Expenses, Cr Accruals $750
A prepayment of $455 (780 x 7 / 12) is required for the rent paid in July: Dr Prepayments, Cr Expenses
$455
Total impact on net profit is therefore (750) + 455 = $(295) reduction.
Question#29:
$1,944 Cr
The opening balance on the suspense account is $1,944 (76,159 - 74,215).
Neither error affects the suspense account so the balance on the suspense account
remains at $1,944 after correcting the errors:

(1) The double entry has been recorded the wrong way round. This will result in an
overstatement of purchases and of payables, however, the total debits and credits in the
accounts will still be equal.
(2) The sales ledger is a memorandum ledger and has no effect on the double entry accounts.
Therefore the correction of this error has no effect on the suspense account.
Question#30:
A memorandum record that lists the ledger account balances
A trial balance is a list of ledger balances shown in debit and credit columns. It is a memorandum record
that has no impact on the double entry accounts. The trial balance helps to identify if errors have been
made in the ledger accounts, but not all errors will be identified by the use of a trial balance.
Question#31:
Statement of cash flows
Statement of financial position
The statement of financial position can be used to examine the liquidity of an entity through calculating
ratios such as the current ratio and the quick ratio.
Further appreciation of the entity's liquidity position and the entity's ability to adapt to changing
circumstances by adjusting the amount and timing of cash flows can be seen in the statement of cash
flows.
Question#32:
24%
Gross profit = 28,000 - 21,280 = $6,720
Gross profit margin = 6,720 / 28,000 x 100% = 24%
Question#33:
Mint is suffering a worsening liquidity position in 20X2
Mint is suffering a worsening liquidity position in 20X2. The fall in the current ratio shows that Mint has
less current assets with which to pay its current liabilities compared to 20X1. This could lead to cash flow
(liquidity) problems.
Question#34:
1 and 2 only
A liability is defined in IAS 37(10). A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefits
A provision is defined in IAS 37 (10) as a liability of uncertain timing or amount.
Contingent liabilities are not recognised in the financial statements. They are instead disclosed in the
notes.
Question#35:
$10,546

Cash at Bank:
$ $
Balance b/f 882
Cash from credit customers 28,112 Cash paid to credit suppliers 38,622

Cash sales 10,546 Balance c/f 918

39,540 39,540
‘’Section B”
Question#36:
Consolidated statement of profit or loss for the year ended 31 December 20X6
Note
Revenue $420,000 + ($280,000 x 6/12) - $88,000 (1) (2)
Cost of sales $273,000 + ($194,000 x 6/12) - $88,000 + (1) (2) (3)
$12,320
Operating expenses $74,750 (4)
Investment income $8,000 (5)
Taxation $31,375 (6)
Non controlling interest 20% x ($43,750 x 6/12) (7)
Notes:
(1) The acquisition of Lock Co on 1 July 20X6 is treated as a mid-year acquisition. Only
the post-acquisition (6 months) element of the results of Lock Co is consolidated.
(2) The intra-group transaction is eliminated as the group is treated as a single entity.
(3) Unrealised profit of $12,320 ((88,000 – 57,200) x 40%) is eliminated by
increasing group cost of sales by this amount.
(4) 63,000 + (23,500 x 6/12) = 74,750
(5) This is the investment income of Hinge Co.
(6) 22,000 + (18,750 x 6/12) = 31,375
(7) This is the non-controlling interest share of the profits for the year which have been
consolidated. Since Hinge (the parent company) sold the goods to Lock, there is no
impact on the non-controlling interest.
Task 2:
Hinge Co Lock Co
Gross profit % 147,000/420,000 x 100 = 35% 86,000/280,000 x 100
= 31% (Note)
Note: 30% would also be acceptable due to rounding.
If the gross profit percentage in Lock Co was lower than the gross profit percentage in
Hinge Co the conclusion would be that there seems to be more theft of inventories in
Lock Co than Hinge Co.
Theft of inventories reduces the gross profit percentage as it increases cost of sales but
does not generate any revenue.
Task 3:
Consolidated investment income will include no dividends received from Bolt Co (Note
1).
Consolidated profit before tax will include 25% of Bolt’s profit after tax (Note 2).
Notes:
(1) Dividends received are replaced by the group share of the profit after tax of the
associate.
(2) The equity method includes the group share of the associate’s profit for the
year only.
Question#37:
Statement of cash flows for the year ended 31 March 20X8
Cash flows from operating activities
$'000 Notes
Profit before tax 19,944 (1)
Adjustments:
Depreciation 4,700+ (2)
Loss on disposal of non-current assets (2,000 – 1,500) 500+ (3)
Inventory (6,103 – 5,747) 356- (4)
Receivables (2,777 – 3,104) 327+ (5)
Payables (4,100 – 4,999) 899- (6)
Cash generated from operations 24,216 (7)

Tax paid (9,680 + 8,900 – 7,520) 11,060- (8)

Net cash from operating activities 13,156 (7)

Cash flows from investing activities

Payments to acquire non-current assets 9,275- (9)
Proceeds from sale of non-current assets 1,500+ (10)

Net cash from investing activities 7,775- (7)

Cash flows from financing activities

Dividends paid ( 5,191 + 11,044 – 10,348) 5,887- (11)
Net cash from financing activities 5,887- (7)

Net movement in cash and cash equivalents (1,588 – 2,094) 506- (12)
Cash and cash equivalents at beginning of the period 2,094 (13)
Cash and cash equivalents at end of the period 1,588 (14)

Notes:
(1) This statement of cash flows calculates cash flows from operating activities using the
indirect method. In accordance with IAS 7 Statement of cash flows this makes
adjustments to profit before tax to determine cash from operations.
(2) Some figures required will need to be calculated, whilst others are provided in the
information in the question. The depreciation expense is given in the additional
information point 1. Depreciation is added back to profit before tax as it has reduced
profit but does not have a cash flow effect.
(3) The loss on disposal is added back to profit before tax as it has reduced profit but
does not have a cash flow effect. The cash flow effect of the transaction is the receipt of
sale proceeds which is treated as a cash flow from investing activities.
(4) An increase in inventories reduces cash as cash has been spent buying more
inventory.
(5) A reduction in receivables means that more debtors have settled their debts which
increases cash.
(6) A reduction in payables means that the company has settled more of its liabilities
which reduces cash.
(7) This sub-total was not required but has been included for completeness.
(8) The payment of tax is a cash outflow.
(9) Non-current assets
 $'000 $'000
B/f 15,725 Disposals 2,000
Additions 9,275 Depreciation 4,700
C/f 18,300
25,000 25,000

Cash payments made to acquire new assets represent a cash outflow.

(10) Figure provided in additional information point 2. Sale proceeds received represent
a cash inflow.
(11) Dividends paid to the shareholders represent a cash outflow. The profit for the year
is added to the opening balance on retained earnings. The closing balance on retained
earnings is deducted to calculate how much has been paid out as dividends.
(12) In total terms at 31 March 20X8 the cash balance of the company has decreased
as compared to the balance at 31 March 20X7.
(13) As per statement of financial position at 31 March 20X7.
(14) As per statement of financial position at 31 March 20X8.
Mock 2:
MCQ’S:
Question#1:
Drawings + Closing net assets = Profit + Capital introduced + Opening net assets
The business equation is:
Closing net assets = Opening net assets + Capital introduced + Profit - Drawings
Rearranging this equation gives:
Drawings + Closing net assets = Profit + Capital introduced + Opening net assets
Question#2:
$121,250
Per IAS 38 amortisation of intangible assets should commence when the asset is available for use.
Production has commenced for project A. Therefore it is available for use and amortisation should
begin.
Total amortisation expense is calculated as follows:

$
B/f capitalised development costs (420,000/4) 105,000
Project A (65,000/4) 16,250
Total amortisation 121,250
Question#3:
$7,200
The corrected cash book balance is calculated as follows:

$
Balance per cash book 8,210
add: Bank interest 95
less: Direct debits (1,045)
less: Dishonoured cheque (60)
Corrected cash book balance 7,200
Question#4:
Credit Sales
Debit Purchases
The correct entry that should have been made to record the credit sale is:
Dr Receivables, Cr Sales
The entry that was made was:
Dr Receivables, Cr Purchases
Therefore the journal required to correct the error is:
Dr Purchases, Cr Sales
Question#5:
$4,200
Depreciation before the revaluation for six months 1 January 20X6 - 30 June 20X6:
180,000 / 50 years = $3,600 x 6 / 12 = $1,800
After the revaluation the depreciation charge is calculated as:

Revalued amount
Remaining useful life
Therefore depreciation after the revaluation for six months 1 July 20X6 - 31 December 20X6:
223,200 / 46.5 years = $4,800 x 6 / 12 = $2,400
Total depreciation charge for the year = $4,200
Question#6:
2, 3 and 4 only
The statement of changes in equity simply takes the equity section of the statement of financial position
and shows the movements during the year. Therefore total comprehensive income for the year, equity
dividends paid and prior period adjustments are all shown in the statement of changes in equity as they
all have an effect on retained earnings which is part of equity. Tax expense for the year is shown in the
statement of profit or loss.
Question#7:
1 and 3 only
Errors that can be detected by extracting a trial balance are:
(1) Errors of transposition
(2) Errors of omission (if the omission is one-sided)
(3) Errors of commission (if the error is one-sided, or if two debit entries are
made, for example)
1 is a transposition error and 3 is an error of commission as two debit entries have been made
(Dr Statement of profit or loss, Dr Cash). Therefore they will be highlighted when the trial
balance is extracted.
2 will not be highlighted by extracting the trial balance, but would be picked up when a bank
reconciliation is performed.
Question#8:
$70,210
Cash spent on additions is calculated as follows:

Revalued amount
Dr ($) Cr ($)
Balance b/f 697,680 Disposal 40,000
Revaluation 75,000 Depreciation 82,400
Additions 70,210 Balance c/f 720,490
842,890 842,890
Question#9:
3 only
Events which do not affect the situation at the reporting date should not be adjusted for, but should be
disclosed in the financial statements.
In 3 the restructuring plan was not announced until after the reporting date. Therefore it does not
provide any more information about the situation at the reporting date and should not be adjusted for.
1 and 2 are adjusting events as they provide further evidence of conditions which already existed at the
reporting date. They should be adjusted for in the financial statements.
Question#10:
$1,295,000
Redeemable preference shares are treated like loans and are included as liabilities in the
statement of financial position. This is because they have the characteristics of debt and not of
equity. Irredeemable preference shares are classified as equity. The total equity and reserves is
therefore:

$
$1 ordinary share capital 600,000
Revaluation surplus 225,000
Retained earnings 420,000
Irredeemable preference shares 50,000
1,295,000
Question#11:
$263,125
Cost of buildings = 250,000 - 75,000 = $175,000
Carrying value of buildings at 1 Nov 20X9 = 175,000 - (175,000 x 3 / 40 years) = $161,875
The land is not depreciated.
Carrying value of land and buildings at 1 Nov 20X9 = 75,000 + 161,875 = $236,875
Revaluation surplus = 500,000 current value - 236,875 carrying value = $263,125
This amount is recorded in the accounts as:
Dr Land and buildings, Cr Revaluation surplus
Question#12:
$263,237

Receivables control account

Dr ($) Cr ($)
Balance b/f 221,588 Cash rec'd from credit customers 114,568
Credit sales 166,100 Contra with payables ledger 10,051

Dishonoured cheques from 168

credit customers

Balance c/f 263,237

387,856 387,856
Cash sales are not included in the receivables control account. Dishonoured cheques from credit
customers are written back to the receivables control account as the balances owed by those customers
are now unpaid.
Question#13:
A contingent liability should be disclosed
IAS 37 defines a contingent liability as:
(1)A possible obligation that arises from past events and whose existence will be confirmed only by the
occurence or non-occurence of one or more uncertain future events not wholly within the entity's
control
(2)A present obligation that arises from past events but is not recognised because:
- It is not probable that a transfer of economic benefits will be required to settle the obligation; or
- The amount of the obligation cannot be measured with sufficient reliability
In this case Viva Co has a possible obligation. At the moment the amount of the obligation is not known.
The obligation is unlikely to be confirmed until legal proceedings have officially begun which is an event
outside of Viva Co's control. Viva Co should therefore disclose a contingent liability in its financial
statements.
Question#14:

$4,925 Cr

Sales tax account

Dr ($) Cr ($)
Input sales tax (71,940 x 10 / 6,540 Balance b/f 5,250
110)
Output sales tax (62,150 x 10%) 6,215
Balance c/f 4,925
11,465 11,465
Question#15:
Dr Non-current assets - Cost $685,000
Cr Cash $685,000
Shipping costs, installation costs and site preparation costs can all be capitalised as part of the cost of a
non-current asset in accordance with IAS 16.
The total cost of the asset is therefore:
600,000 + 50,000 + 25,000 + 10,000 = $685,000
The double entry to record the purchase is therefore:
Dr Non-current assets $685,000, Cr Cash $685,000
Question#16:
First-in first-out
Kyla is using the first-in first-out method of inventory valuation because the sales of 600 units are first
taken from the opening inventory (400 units) and the remaining 200 units are taken from more recent
purchases.
This shows that the items purchased first in inventory are the first to be taken out in sales. Hence the
use of the first-in first-out method.
Question#17:
2 only
Petty cash is the name for the small cash float most businesses hold on their premises to make
occasional small payments in cash, for example, staff refreshments, postage stamps, to pay the office
cleaner, taxi fares, etc. Petty cash is therefore part of a company's cash balance and will appear in the
final accounts as part of the overall 'cash at bank and in hand' balance.
Although the amounts involved are small petty cash transactions still need to be recorded. Otherwise
the cash float could be abused for personal expenses or even stolen.
Under the imprest system the petty cash is kept at an agreed sum so that each topping up is equal to
the amount paid out in the period, and is therefore not a fixed amount.
Question#18:
Control accounts show a summary of transactions from the daybooks
A control account is a means of checking the underlying accounting records are correct
Control accounts show a summary of transactions from the daybooks. For example invoices sent to
credit customers are recorded individually in the sales daybook as each invoice is sent. Periodically the
sales daybook is totalled and the total amount posted to the accounts:
Dr Receivables ledger control account, Cr Sales
Control accounts provide a check on the accuracy of entries made in the personal accounts of customers
and suppliers in the receivables ledger and payables ledger. By comparing the total of the personal
accounts and the control account it is possible to identify if errors have been made.
Question#19:
$129,055

Cost of sales: $
Materials 62,025
Shipping inwards 9,823
Import duty 2,615
Labour 38,092
Factory rent 16,500
129,055
IAS 2 allows import duties and shipping inwards costs to be included in the cost of inventories. The
labour and factory rent can also be included in the cost of inventories as they are costs of conversion
directly attributable to the repair of the clocks.
IAS 2 specifically excludes selling expenses, including postage and packing to customers, from the cost of
inventories. These costs should be included as expenses of the period and presented below gross profit
in the statement of profit or loss.
Question#20:
Relevance
The qualitative characteristics identified by the IASB's Conceptual Framework are relevance, faithful
representation, comparability, verifiability, timeliness and understandability.
Question#21:
1 and 3 only
A limited liability company is legally a separate entity from its owners, the shareholders. Limited liability
status means that the business's debts and the personal debts of the business's owners (shareholders)
are legally separate.
The shareholders are not liable for the debts of the business unless they have given some personal
guarantee.
Limited liability companies generate profits for their owners, the shareholders. The directors of the
company determine how much of the profits to distribute to shareholders as dividends and how much
to retain in the business for future growth.
Question#22:
$ 3,123

$
Balance per statement 3,213
Less trade discount (25% x 360) (90)
Balance owing to Ross 3,123
The contra in the payables control account and the omitted invoice are errors made by Rachel. Ross's
statement is correct except for the trade discount.
Question#23:
$505.00

Charge for year to 30 November 20X7 $

December 20X6 450 x 1 / 12 = 37.50
January - November 20X7 510 x 11 / 12 = 467.50
505.00
Question#24:
$43,500

$
Our provision from previous year (1,500)
Provision for current year 45,000
Tax response in statement of profit or loss 43,500
Question#25:
$1,478 Dr

Suspense account
Dr ($) Cr ($)
Opening balance 650
Discounts received 118
Sales 710 Closing balance 1,478
1,478 1,478
1 $178 Dr - the opening balance is on the wrong side.
2 $1,242 Dr - discounts is on the wrong side.
3 $58 Dr - sales is on the wrong side.
Question#26:
Share capital $425,000 Share premium $275,000
Number of shares in issue at 1 December 20X7 = 600,000
Number of shares issued in bonus issue = 600,000 / 4 = 150,000
 Share Share
capital ($) premium ($)
Opening balance 300,000 150,000
Bonus issue 150,000 x $0.50 75,000 (75,000)
Share issue 100,000 x $0.50 50,000 200,000
425,000 275,000
Question#27:
$4,677 Cr

Dr ($) Cr ($)
Sales 78,612
Trade payables 36,701
Purchases 55,692
Non-current assets 69,175
Returns inward 2,461
Capital 60,414
Drawings 22,188
Inventory 14,022
Cash at bank 16,866
180,404 175,727
Suspense account 4,677
180,404 180,404
Balance required on the suspense account is $4,677 credit.
Question#28:
$23,000

Cost of sales $
Opening inventory 0
Purchases 150,000
less: Closing inventory (35,000)
115,000
Sales (115,000 x 120 / 100) 138,000
Cost of sales (115,000)
Gross profit 23,000
Question#29:
None of the statements
A trial balance is a list of ledger account balances shown in debit and credit columns. The balance on
each ledger account is extracted and recorded under the relevant column. For example a closing debit
balance on the cash account would be recorded under the debit column of the trial balance.
The purpose of a trial balance is to highlight certain errors that may have occured in the double entry
accounting system. However not all errors will be detected by extracting a trial balance: errors of
complete omission, errors of principle, compensating errors and errors of original entry will not be
highlighted.
The trial balance and control account reconciliations are both checks on the accuracy of the accounts
and should both be performed.
Question#30:
$240,000
Cost of sales can be calculated from the figures given:

Opening inventories + purchases - closing inventories

= $34,000 + $182,000 - $48,000
= $168,000
Sales can then be calculated:

%
Sales 100
Cost of sales 70
Gross profit 30
Sales = $168,000 x 100% / 70% = $240,000
Question#31:
0.9
Quick ratio = (Current assets - Inventory)/Current liabilities
= (325 + 75) / (330 + 50 + 70)
= 400 / 450
= 0.9
Question#32:
Expenditure that improves an asset's earning capacity can be capitalised
Capital expenditure is expenditure which results in the acquisition of non-current assets or an
improvement in their earning capacity. Repairs and maintenance costs, and administrative and general
overhead costs incurred in the construction of an asset cannot be capitalised.
Question#33:
Inventory held at the reporting date was sold for less than cost
The settlement of a claim for compensation for $10,000 more than the provision included in the
statement of financial position
Adjusting events are events that provide further evidence of conditions which already existed at the
reporting date and they should be adjusted for in the financial statements.
The sale of inventory after the reporting date gives evidence as to their net realisable value at the end of
the reporting period - IAS 10 (9 b). The settlement of a claim for compensation is an adjusting event
according to IAS 10 (9a) as it confirms an obligation at the end of the reporting period.
Events which do not provide more information about conditions that already existed at the reporting
date should not be adjusted for, but should be disclosed in the financial statements if material.
Issuing shares after the reporting date does not affect the situation at the reporting date. Therefore it
should not be adjusted for.
Similarly a reorganisation after the reporting date does not provide any more information about the
conditions at the reporting date. Therefore it should not be adjusted for.
Question#34:
1 and 3 only
Users of financial statements can gain a better understanding of the significance of the information in
financial statements by comparing it with other relevant information. Comparisons, usually in ratios,
may be made with previous financial periods, with other similar businesses or with averages for the
particular industry. The choice will depend on the purpose for which the comparison is being made and
the information that is available.
One of the problems of making comparisons with other companies is that of identifying companies that
are comparable. Comparability between companies may be impaired due to different degrees of
diversification, different financing policies, different accounting policies and different effects of
government incentives.
Question#35:
1 and 2 only
Gross profit ratio = Gross profit / Revenue
(1)A bigger proportion of the sales are now made up of items with a lower gross profit margin, then the
average gross profit per sale will decrease and hence the overall gross profit ratio will decrease.
(2)If costs are increasing and these costs are not passed on to customers with higher sales prices, then
the gross profit made on each sale will decrease and therefore the overall gross profit ratio will
decrease.
(3)An increase in the amount of closing inventory held will increase the gross profit of the company as it
will reduce cost of sales and increase gross profit.
MTQ’S:
Question#36:
Task 1:
Answer Notes
Ordinary shares of Wallace Included in (1)
Ordinary shares of Bruce Excluded from (2)
Investment in Bruce Excluded from (3)
Pre-acquisition retained earnings of Bruce Excluded from (4)
Current assets of Wallace Included in (1)
Current assets of Bruce Included in (3)
Notes:
(1) The consolidated statement of financial position includes all of the balances of the parent company.
(2) The ordinary shares of Bruce form part of the net assets at acquisition which are included in the
goodwill calculation.
(3) On consolidation the investment in Bruce is replaced by the individual assets and liabilities of the
subsidiary.
(4) Pre-acquisition retained earnings are excluded as they were generated before Wallace obtained
control of Bruce. They form part of the net assets at acquisition which are included in the goodwill
calculation.
Task 2:
'000 Notes
Total consolidated profit for the year (12,706 + (8,200 x 9/12) 18,856 (1)

Consolidated tangible non-current assets (29,860 + 14,895) 44,755

Goodwill at acquisition
Cost of investment (10 million x 60% x $1.50) 9,000 (2)
Add: Fair value of non-controlling interest (4 million x $1.50) 6,000 (2)
Less fair value of Bruce's net assets:
Ordinary shares 5,000 (3)
Retained earnings 9,060 (3)

Goodwill at acquisition:
Cost of investment + fair value of non-controlling interest – 100% fair value of Bruce's
net assets
Notes:
(1) The acquisition takes place mid-year therefore only nine months of the profits of Bruce are
consolidated.
(2) The cost of the investment is calculated at fair value which in this case is based on the market value
of the shares at the date of acquisition. The fair value of the non-controlling interest is added to this.
(3) The fair value of the net assets of Bruce at acquisition is calculated by adding together the equity
share capital and retained earnings at the date of acquisition.
(4) The value of goodwill in this example would be $940,000.
Task 3:
The consolidated statement of profit or loss will include 0% of the sales from Wallace to Bruce.
The profit on the sales to Bruce should be eliminated because Wallace and Bruce are a single economic
entity.
The non-controlling interest of Bruce is not affected by the accounting treatment within the
consolidated statement of profit or loss.
Question#37:
Task 1:
Cost of Sales
Task 2:
Arthur Co's gross profit for the year ended 30 June 20X8 is $3,250,000 (Note 1).
Arthur Co's profit before tax for the year ended 30 June 20X8 is calculated by taking the gross profit for
the year and adjusting by $-450,000 - 2,555,000 (Note 2).
Notes:
(1) 13,800 - 10,350 - 200 = 3,250
(2) Carriage outwards and rent and rates for office building are deducted from gross profit to calculate
profit before tax. Inventory is irrelevant here as this is the asset balance which would appear in the
statement of financial position.
Task 3:
The tax liability will be the estimated tax for the year = $63,000.
The tax expense will be:
$'000
Tax for the year 63
Less: over provision from previous year 30
Tax expense 33
Task 4:
In accordance with IAS 2 Inventories, inventory must be stated at the lower of cost and net realisable
value.
A reduction in the value of year end inventory will result in a decrease (Note) in gross profit for the year.
Note:
Opening inventory is added to purchases in cost of sales. Year end inventory is deducted from purchases
in cost of sales. If cost of sales increases, gross profit decreases.
Task 5:
(1) The discovery that the items are worth $2.40 per item has no effect on inventory valuation as this is
higher than cost of $2.
(2) The items are currently held at cost of $4 per item. Net realisable value is $3.80 ($4.60 - $0.80). As
this is lower than cost the 500 items should be valued at $3.80 each. This will decrease the inventory
valuation.
(3) The fire took place after the year end therefore it has no effect on the value of the inventory at the
year end date. It is a non-adjusting event after the reporting period.
Task 6:

A bonus issue increases capital without diluting current True

shareholders' holdings

A rights issue results in the capitalisation of reserves False

A rights issue raises cash for the company True

A bonus issue is also known as a capitalisation issue True

Bonus shares are issued to shareholders for free on the basis of their existing holding
therefore their holding is not diluted.
A rights issue does not result in a capitalisation of reserves. The double entry is as
follows:
DR Cash
CR Share capital
CR Share premium account
Shares in a rights issue are normally offered at a discount but they do need to be
purchased by shareholders raising cash for the company.
A bonus issue is also known as a capitalisation issue as it results in the capitalisation of
reserves. The double entry is as follows:
DR Share premium account
CR Share capital
Task 7:
$000
Share premium at 1 July 20X7 8,000
Rights issue (Note 1) 1,000
Bonus issue (Note 2) (5,000)
4,000
Note 1
Shares issued in rights issue: 20,000/4 = 5,000
$000 $000
DR Cash (5,000 x 1.2) 6,000
CR Share capital 5,000
CR Share premium 1,000
Note 2
Shares issued in bonus issue: (20,000 + 5,000)/5 = 5,000
$000 $000
DR Share premium 5,000
CR Share capital 5,000
Task 8:
The share premium account is a non-distributable reserve.
This means that it cannot be distributed as dividends.
 Mock Exam 3:
MCQ’S:
Question#1:
Debit Cash
Credit Irrecoverable debts
The double entry to write off an irrecoverable debt is Dr Irrecoverable debts expense, Cr Receivables
control account.
If the cash relating to a debt that has been written off is later received, there is no longer any receivable
balance to credit it against. Therefore the cash received is credited against the irrecoverable debts
expense to reduce the expense for the year: Dr Cash, Cr Irrecoverable debts expense.
Question#2:
$ 11,600
Carrying amount at 1 June 20X8
75,000 - ((75,000 - 5,000) x 2/10) =
$61,000
Depreciation after useful life and residual value are revised
= (Carrying value at date of revision - revised residual value)/revised useful life
= (61,000 - 3,000)/5
= $11,600
Question#3:
Increase of $58
Adjustments required:

(1) Electricity accrual for three months to 31 May 20X0 for $250, double entry required is:
Dr Expenses, Cr Accruals $250
(2) Insurance prepayment for June - Dec 20X0 (7 months) = $528 x 7/12 = $308, double
entry required is: Dr Prepayments, Cr Expenses $308

The net effect of these adjustments is a credit to the statement of profit or loss of (308 - 250) $58, which
means profit will increase by $58.
Question#4:
$ 115,700
Albert Co has under provided for tax in the previous year.
Therefore income tax expense for current year is:
$
Under provision from previous year (102,600 - 99,400)
3,200
Provision for current year
112,500
Tax expense in statement of profit or loss
115,700
Question#5:
Profit Reduce by $5,680
Closing inventory Reduce by $5,680
 Adjustment required to closing inventory $
Faulty inventory to return to supplier (5,130)
Write down to NRV for obsolete items (6,700 - 6,150) (550)
(5,680)
Closing inventory is deducted from the cost of purchases to give cost of sales. So a decrease in closing
inventory gives a higher cost of sales value and so a lower profit figure. The correct adjustments are
therefore to reduce profit and closing inventory by $5,680.
Question#6:
$15,725 Credit
Trade discounts are recorded as reduction to revenue made on the sale, so the sale to Marta is recorded
as:
Dr Sales ledger control account ($18,500 - (15% x $18,500)) $15,725
Cr Sales $15,725
Question#7:
$89,500 inflow

Cash flows from financing activities $

Cash received from share issue (50,000 x $1.25) 62,500
Cash received from additional loans (92,000 - 27,000
65,000)
89,500
No cash is received from a bonus issue of shares. Cash spent on investments and received in interest
income from investments are classified as investment cash flows, not financing cash flows, in the
statement of cash flows.
Question#8:
1 and 2 only
Both 1 and 2 will cause the totals of the debit column and the credit column in the trial balance not to
agree:
In 1 the debit side of the entry has not been recorded, hence the total credits will exceed total debits by
$600.
In 2 the debit side of the entry is larger than the credit side of the entry by $9, therefore the total debits
will exceed total credits by $9.
In 3 no entry has been made in the accounts for this payment, therefore the total debits and the total
credits will both be understated by $440, but the trial balance will still balance.
Question#9:
Assets - liabilities = opening capital - drawings + profit
The accounting equation is assets - liabilities = capital
At the reporting date, closing capital = opening capital - drawings + profit
Therefore:
Assets - liabilities = opening capital - drawings + profit
Question#10:
$87,600
According to IAS 10, adjusting events are those events that happen between the reporting date and the
date the financial statements are authorised for issue that provide more evidence about conditions that
existed at the reporting date.
Both of these events provide more evidence of the recoverability of the receivables balance at the
reporting date and therefore should be adjusted for.
In the case of Flora Bailey, the debt is wholly irrecoverable and should be written off.
In the case of Fred Willis, the debt is partially irrecoverable and the irrecoverable portion should be
written off.
The receivables balance after adjusting for these events is 136,400 - 22,500 - (44,300 - 18,000) = $87,600
Question#11:
$ 22,273

The correct bank balance to be included in the financial statements is the corrected
cash book balance:

$
Balance in cash book 25,050 Dr
Less unrecorded cheques (2,157)
Less receipt recorded twice (620)
22,273
Uncleared deposits and unpresented cheques will feature in the bank reconciliation.
Question#12:
$277,400
The amount to be capitalised is:

$
Improvements to process 265,500
Materials 11,900
277,400
An initial feasibility study is research expenditure and cannot be capitalised.
Question#13:
$24,854

Payables Control Account

$ $
Error in day book (594 - 495) 99 Balance b/f 24,903
Discounts received 150 Undercast in day book 200
Balance c/f 24,854
25,103 25,103
Question#14:
None of the statements are true
If a company uses petty cash, it should maintain a record of petty cash transactions. Petty cash
transactions should always be recorded, no matter how small they are, to help prevent petty cash funds
being stolen or abused for personal use.
Payments made from petty cash are recorded on petty cash receipts and will not appear in the bank
statement. However, payments made from the bank to top up the petty cash will be shown in the bank
statement.
Question#15:
Redeemable preference shares are disclosed as a liability in the statement of financial position
Redeemable preference shares are shares that are redeemable in a certain number of years time, for a
certain amount of cash. Therefore, the company has an obligation to pay cash in the future to the
holders of preference shares. This means they resemble debt and not equity and so are disclosed in the
statement of financial position as a liability.
Question#16:
$77,977

Payables control account

$ $
Balance b/f 64,199
Purchase returns 6,192
Cash paid 100,032
Contra 2,912
Balance c/f 77,977 Purchases 122,914
187,113 187,113
Opening receivables, sales, sales returns and cash received from customers are all features of the
receivables control account, not the payables control account.
Question#17:
$520,000

Buildings ($) Land ($) Total ($)

Cost 250,000 50,000 300,000
Depreciation (250 x 4/50) (20,000) -
230,000 50,000
Revaluation surplus (balancing figure) 460,000 60,000 520,000
Carrying value after revaluation 690,000 110,000 800,000
Question#18:
Share capital $58,500
Share premium $22,000

Share capital ($) Share premium ($)

Opening balance 52,000 21,000
Bonus issue 1,500 (1,500)
Rights issue 5,000 2,500 ($0.5 x 5,000)
58,500 22,000
Question#19:
The costs of purchase of inventory should include any import duties paid, less any trade discounts
received
Inventory should be valued at the lower of cost and net realisable value
IAS 2 permits the use of average cost and first in first out to determine the cost of inventory. LIFO is not
permitted.
The cost of inventory includes:
(1)The cost of purchase (which includes import duties and other taxes paid, plus directly attributable
transport and handling costs, less any trade discounts and other rebates)
(2)The cost of conversion (which includes direct labour and materials, plus an allocation of fixed and
variable production overheads)
(3)Other costs incurred in bringing the inventories to their present location and condition
Inventories should be valued at the lower of cost and net realisable value.
Question#20:
$150,000
No provision has been recognised in the prior financial year, so the provision and corresponding charge
to profit or loss should be for the full likely amount of $150,000.
Question#21:
$95,500
After the revaluation, depreciation will be charged on the property at a new rate of:
Revalued amount/Remaining useful life.
Remaining useful life at date of revaluation:
32 years - 2 years = 30 years
Therefore, carrying value at date of disposal:
= 410,000 - (410,000 x 1.5/30 years)
= 410,000 - 20,500
= $389,500
Profit on disposal:
= 485,000 - 389,500
= $95,500
Question#22:
$155 Dr
Mary's trial balance looks like this:

Dr ($) Cr ($)
Capital 6,260
Cash at bank 890
Discounts received 2,300
Expenses 15,910
Non-current assets (carrying amount) 31,845
Opening inventory 4,820
Purchases 71,470
Payables 6,930
Receivables 15,870
Sales 125,470
140,805 140,960
Suspense account 155
Total 140,960 140,960
The balance required in the suspense account is $155 Dr.
Question#23:
A transposition error
A transposition error is when two digits in a figure are accidentally recorded the wrong way round.
If a transposition error is made when making an entry in the accounts, for example the debit side of a
journal entry is recorded as $345, but the credit side of the journal is recorded as $354, the total debits
and the total credits in the ledger accounts will not agree. If this error is not corrected, the trial balance
will not balance and a suspense account will need to be opened for the difference.
Question#24:
A temporary account used when the business is not sure where an accounting entry should be posted
Suspense accounts, as well as being used to correct some errors, are also opened when it is not known
immediately where to post an amount in the ledger accounts. When the business subsequently works
out where to post the entry, the suspense account is closed and the amount correctly posted using a
journal entry. Suspense accounts are therefore temporary accounts.
Question#25:
$ 115,000

Cost of sales: $
Opening inventory 22,000
Purchases 86,000
Closing inventory (16,000)
Cost of sales 92,000
Therefore sales can be calculated using the gross margin of 20%:
Sales = (92,000 x 100/80) = $115,000
Question#26:
0.69: 1
The company's Quick (Acid Test) Ratio is computed using the following formula:
Total current assets ($323,400) - inventory ($184,100) = $139,300
Total current liabilities ($202,000)
= $139,100 / $202,000
= 0.69
323,400 / 202,000 = 1.60: 1
184,100 / 202,000 = 0.91: 1
Question#27:
The analysis of financial statements using ratios provides useful information when compared with
previous performance or industry averages
The financial statements of a business are designed to provide users with information about its
performance and financial position. The figures on their own, however, are not particularly useful and it
is usually only through analysis of the financial statements using comparisons (usually in ratios) that
their significance can be established.
Comparisons may be made with previous financial periods, with other similar businesses or with
averages for the industry. What comparisons are made will depend on the user's information needs and
what information is available. Ratio analysis is useful to many different users of accounts, not just
potential investors.
Question#28:
Current assets $3,200
Current liabilities $2,500
The cash at bank balance is a credit. Therefore it is actually an overdraft and should be recorded as a
current liability.
The receivables balance should be recorded in current assets net of the allowance for receivables, so at
$3,200 (3,750-550).
The irrecoverable debts balance is an expense which is shown in the statement of profit or loss.
The correct answer is therefore:
$
Current assets 3,200
Current liabilities 2,500
Question#29:
$24,000

Cost of sales: $
Opening inventory -
Purchases 65,000
Less Closing inventory (5,000)
60,000
Mark-up of 40%, therefore gross profit is calculated as:
Gross profit = 60,000 x 40/100 = $24,000
Question#30:
During 20X9, due to a scarcity of supply the company had to pay higher prices when purchasing
components
Gross profit percentage = gross profit/sales x 100%
A decrease in gross profit combined with either an increase in sales or consistent level of sales would
result in a decrease in the gross profit percentage.
Therefore an increase in the cost of sales due to higher prices when purchasing components would be
consistent with the noted decrease in gross profit percentage.
Sales commissions should not be accounted for in the trading account and thus should not affect
reported gross profit. Sales volume changes in isolation will not affect gross profit percentages. An
increase in early settlement discounts would decrease revenue.
Question#31:
The International Financial Reporting Standards Advisory Council
The International Financial Reporting Standards Advisory Council consults with national standard
setters, academics, user groups and a host of other interested parties to advise the International
Accounting Standards Board on a range of issues, including giving practical advice on the implications of
proposed standards for users and preparers of financial statements.
Question#32:
2 and 3
A contingent liability should be disclosed if it is possible that economic benefits associated with it will
flow from the entity. If it is remote, no disclosure is required. If it is probable, then a provision should be
recognised.
IAS 2 requires the disclosure of the amount of inventory carried at net realisable value, as well as the
accounting policies adopted in measuring inventories and the total carrying amount of inventories in
appropriate classifications.
The disclosure requirements in IAS 16 are comprehensive, particularly for revalued assets and include
whether an independent valuer was invloved in the valuation.
Question#33:
Dr Payables $4,100 Cr Returns outwards $4,100
Dr Returns inwards $3,500 Cr Receivables $3,500
A sale to a credit customer is recorded as Dr Receivables, Cr Sales. If the customer returns the goods, the
return is recorded as Dr Returns inwards, Cr Receivables as the customer no longer owes the
receivables.
A purchase on credit is recorded as Dr Purchases, Cr Payables. If the purchase is returned, the return is
recorded as Dr Payables, Cr Returns outwards as the business no longer owes the payable.
Gerry's journal entry is therefore:
Dr Payables $4,100, Cr Returns outwards $4,100
Dr Returns inwards $3,500, Cr Receivables $3,500
Question#34:
1 only
Directors are responsible for the governance of a company. This includes being responsible for the
preparation of the financial statements, even if it is the finance department that does the work to
produce the financial statements, the directors take ultimate responsibility over them.
External auditors are not responsible for the financial statements, instead they give an opinion,
addressed to the shareholders, as to whether the financial statements give a fair presentation of the
affairs of the business and as to whether they are prepared in accordance with relevant legislation and
accounting standards.
Directors need to act in the collective best interests of a wide range of stakeholders including, but not
exclusively, all employees (which does include the other directors), customers and suppliers,
shareholders, the local community and the environment
Question#35:
Understandability means that points that are too complex for non-expert users should be excluded
Understandability means that financial information should be capable of being understood by users with
a reasonable knowledge of business and accounting. This does not mean that useful information should
be excluded.
If this happened the financial statements would be incomplete and misleading.
MTQ’S:
Question#36:
Task 1:
Claus has acquired a controlling interest in Rolph. Therefore Rolph must be accounted for in the
consolidated financial statements as at 31 March 20X2 as a subsidiary.
The cost of the investment in Rolph will appear in the individual statement of financial position of Claus
only. The formula for calculating the cost of the investment is 1m x 75% x $1.50.
Any investment income Claus receives from Rolph will be recorded in the individual accounts of Claus
only.
Task 2:
$'000 Note
Property, plant and equipment (3,270 + 1,565 + 200) 5,035 (1)
Receivables (161 + 262 - 11) 412 (2)
Share capital 3,000 (3)
Retained earnings 1,616 + (75% x (690 - (4)
475))
Payables (192 + 71 - 11) 252 (2)
Revaluation surplus 0 (5)
Notes
(1) A subsidiary's net assets must be consolidated at their fair value at the acquisition date.
Where the fair value is different to the carrying amount an adjustment on consolidation is
required.
(2) Intra-group balances must be cancelled on consolidation as the group is treated as a single
entity.
(3) This is the share capital of the parent company only.
(4) Consolidated retained earnings include those of the parent plus the group share of the post-
acquisition profits of the subsidiary.
(5) There is no revaluation surplus in the parent company statement of financial position and
no post-acquisition change in the value of the subsidiary's non-current assets. The fair
value adjustment to the value of Rolph's property, plant and equipment at acquisition
would be cancelled out in the goodwill calculation.
Task 3:
The journal entry would be as follows:
DR Group retained earnings
CR Inventory
Both group retained earnings and inventory are overstated by the amount of the unrealised profit. On
consolidation this is eliminated by making the adjustments above. As the sale is made by the parent to
the subsidiary the non-controlling interest is not affected by this adjustment.
Task 4:
$'000
Unrealised profit in inventory ((240 x 60/160) x 70%) 63
Note:
Unrealised profit only relates to the 70% of inventory which is still held within the group.
Question#37:
Task 1:
Amortisation for the year:
50,000 x 6/60 = 5,000
Carrying amount:
50,000 - 5,000 = 45,000
The intangible will be classified as a non-current asset as it is to be used in the business for the long
term.
Task 2:
$'000
Proceeds 12
Carrying amount (24 - 9) 15
Loss 3
The carrying amount of the asset exceeds the sale proceeds by $3,000 therefore Desmond has made a
loss.
As Desmond uses the reducing balance method depreciation on the remaining plant is based on net
book value (cost - accumulated depreciation). The balances provided for both cost and accumulated
depreciation at 1 October 20X7 must be adjusted to reflect the disposal.
Task 3:
The total gain on revaluation (revaluation - carrying amount) is recognised in the revaluation surplus.
The buildings at cost account is adjusted to reflect the revised value and any accumulated depreciation
to the date of the revaluation is removed.
DR Buildings - cost
DR Buildings - accumulated depreciation
CR Revaluation surplus
Task 4:
$'000
Depreciation expense (620 x 5%) 31

Transfer of excess depreciation

Depreciation prior to revaluation (580 x 5%) 29
Depreciation after revaluation 31
Excess depreciation 2
Task 5:
The irrecoverable debt will reduce (Note 1) the net profit for the year.
The impact of the movement in the allowance for receivables for the year ended 30 September 20X8
will increase (Note 2) the net profit for the year by $3,000 (Note 3).
Notes:

(1) The receivable is removed from current assets and is recognised as an expense.
(2) The amount of the allowance reduces from $8,000 to $5,000 (see Note 3). This is
recognised as a credit entry in the irrecoverable receivables expense account.
(3) $
Allowance required ((256 - 6) x 2%) 5,000
Allowance previously recognised 8,000
Decrease in allowance 3,000