TOPICAL

A U N S OSolutions
Worked LVED

Article: 113

9708

ACCOUNTING
PAPER-3

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 1

A
ACCOUNTING
Paper 3 (TOPICAL & YEARLY)
All Variants (2018-19 edition)
Article: 113

Muhammad Nauman Malik

FCMA, MS Accounting (Gold Medalist), MBA (Finance), PIPFA, DCMA, [Link] (Gold Medalist)
KIMS, Roots FWS, LACAS, GACS

3-C, Gulberg II , Lahore. 042-35714038

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 2

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in
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permission of the Author.
Cambridge International has not provided these questions or answers and can take no responsibility whatsoever for
their accuracy or suitability for the examinations.

Title A2-Level Accounting (Topical & Yearly)

Author Muhammad Nauman Malik

Cell: 0321-8414262, 0300-8414262
E-mail: [Link]@[Link]

Published by Read & Write Publications

Composed by Rashid Mehmood

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Edition: 2018-19

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 3

PREFACE
The current edition has been completely updated to comply with revised CIE – 9706 (A level Accounting
syllabus) 2016-18. From May 2016, there will be only one paper (Paper 3) for A2 qualification and it
replaces both P3 and P4 of the old syllabus followed up to November 2014. Topics like ‘Manufacturing
Accounts’ and ‘Non Profit Organisations’ have been moved to Paper 3 (A 2 level). On the other hand, topics
of ‘Partnership changes’ and ‘Dissolution of partnerships’ have been shifted to AS Level. Moreover, topics
of ‘Redemption and reduction of capitals’ and ‘process costing’ have been removed from the new syllabus.

The other book available in the market is based on Singaporean exams and does not include exams taken
in Pakistan for November session. Moreover, the available book categorises Questions only on yearly basis
whereas the book under review categorises them on topical as well as on yearly basis.

In the book under review, the varying topics of last ten years Cambridge International Examination (CIE)
papers have been categorised in such a way that one can attain optimum skills in each of these.

It is, however, advised that students must supplement their studies with the textbooks recommended by
their teachers, since it is by no means a replacement for a good book.

I am indeed grateful to the students and the teachers who motivated me to undertake this task. In
particular I would like to thank Sajid Munir, Sheraz Sidiq and Waseem Zia for making many helpful
suggestions. Any further suggestions for improvement and intimation of errors will be much appreciated
and acknowledged.

Muhammad Nauman Malik,

Email: [Link]@[Link]
Mob: 0300-8414262
0321-8414262
 4

Table of Contents (Topical)

CHAPTER 1 ACCOUNTS OF NON PROFIT ORGANISATIONS 14
QUESTION 1 MAY 2011 P21 Q2 .......................................................................................................................... 14
QUESTION 2 MAY 2011 P42 Q2 (A TO C) ............................................................................................................... 14
QUESTION 3 NOVEMBER 2011 P23 Q2 (B) ......................................................................................................... 15
QUESTION 4 NOVEMBER 2012 P21 Q2............................................................................................................... 16
QUESTION 5 MAY 2013 P21 Q1 .......................................................................................................................... 16
QUESTION 6 MAY 2014 P23 Q1 .......................................................................................................................... 17
QUESTION 7 MAY 2016 P31 Q1 .......................................................................................................................... 18
QUESTION 8 MAY 2016 P32 Q1 (A TO D) .............................................................................................................. 19
QUESTION 9 NOVEMBER 2016 P31 Q1............................................................................................................... 20
QUESTION 10 NOVEMBER 2016 P32 Q1............................................................................................................... 21
QUESTION 11 NOVEMBER 2016 P33 Q2............................................................................................................... 22
QUESTION 12 NOVEMBER 2017 P31 Q2............................................................................................................... 23
QUESTION 13 NOVEMBER 2017 P32 Q1............................................................................................................... 24
QUESTION 14 NOVEMBER 2017 P33 Q1............................................................................................................... 25
QUESTION 15 MAY 2018 P31 & P33 Q4 ................................................................................................................ 26
SOLUTION CHAPTER 1 27
QUESTION 1 MAY 2011 P21 Q2 .......................................................................................................................... 27
QUESTION 2 MAY 2011 P42 Q2 (A TO C) ............................................................................................................... 28
QUESTION 3 NOVEMBER 2011 P23 Q2 (B) ......................................................................................................... 29
QUESTION 4 NOVEMBER 2012 P21 Q2............................................................................................................... 29
QUESTION 5 MAY 2013 P21 Q1 .......................................................................................................................... 30
QUESTION 6 MAY 2014 P23 Q1 .......................................................................................................................... 31
QUESTION 7 MAY 2016 P31 Q1 .......................................................................................................................... 33
QUESTION 8 MAY 2016 P32 Q1 (A TO D) .............................................................................................................. 34
QUESTION 9 NOVEMBER 2016 P31 Q1............................................................................................................... 34
QUESTION 10 NOVEMBER 2016 P32 Q1............................................................................................................... 36
QUESTION 11 NOVEMBER 2016 P33 Q2............................................................................................................... 36
QUESTION 12 NOVEMBER 2017 P31 Q2............................................................................................................... 37
QUESTION 13 NOVEMBER 2017 P32 Q1............................................................................................................... 38
QUESTION 14 NOVEMBER 2017 P33 Q1............................................................................................................... 39
QUESTION 15 MAY 2018 P31 & P33 Q4 ................................................................................................................ 40
CHAPTER 2 ACCOUNTING FOR CONSIGNMENT 42
QUESTION 1 SPECIMEN 2016 P3 Q2 ................................................................................................................... 42
QUESTION 2 NOVEMBER 2016 P33 Q4............................................................................................................... 42
QUESTION 3 NOVEMBER 2017 P33 Q3............................................................................................................... 43
QUESTION 4 MAY 2018 P32 Q3 .......................................................................................................................... 43
SOLUTION CHAPTER 2 45
QUESTION 1 SPECIMEN 2016 P3 Q2 ................................................................................................................... 45
QUESTION 2 NOVEMBER 2016 P33 Q4............................................................................................................... 45
QUESTION 3 NOVEMBER 2017 P33 Q3............................................................................................................... 46
QUESTION 4 MAY 2018 P32 Q3 .......................................................................................................................... 47
CHAPTER 3 ACCOUNTING FOR JOINT VENTURES 49
QUESTION 1 MAY 2016 P31 Q2 .......................................................................................................................... 49
QUESTION 2 MAY 2017 P31 & P33 Q3 ................................................................................................................ 49
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SOLUTION CHAPTER 3 51
QUESTION 1 MAY 2016 P31 Q2 .......................................................................................................................... 51
QUESTION 2 MAY 2017 P31 & P33 Q3 ................................................................................................................ 52
CHAPTER 4 DISSOLUTION & SALE OF BUSINESS 53
QUESTION 1 NOVEMBER 2013 P41 Q2 (A TO D)................................................................................................... 53
QUESTION 2 NOVEMBER 2013 P42 Q1............................................................................................................... 53
QUESTION 3 NOVEMBER 2014 P41 Q1 (A TO C) ................................................................................................... 54
QUESTION 4 SPECIMEN 2016 P3 Q1 ................................................................................................................... 55
QUESTION 5 MAY 2016 P32 Q3 .......................................................................................................................... 56
QUESTION 6 NOVEMBER 2017 P33 Q2............................................................................................................... 57
QUESTION 7 NOVEMBER 2017 P31 Q4 (A TO D)................................................................................................... 58
SOLUTION CHAPTER 4 60
QUESTION 1 NOVEMBER 2013 P41 Q2 (A TO D)................................................................................................... 60
QUESTION 2 NOVEMBER 2013 P42 Q1............................................................................................................... 60
QUESTION 3 NOVEMBER 2014 P41 Q1 (A TO C) ................................................................................................... 61
QUESTION 4 SPECIMEN 2016 P3 Q1 ................................................................................................................... 62
QUESTION 5 MAY 2016 P32 Q3 .......................................................................................................................... 63
QUESTION 6 NOVEMBER 2017 P33 Q2............................................................................................................... 64
QUESTION 7 NOVEMBER 2017 P31 Q4 (A TO D)................................................................................................... 65
CHAPTER 5 PURCHASE OF BUSINESS 67
QUESTION 1 NOVEMBER 2011 P43 Q1(A) .......................................................................................................... 67
QUESTION 2 MAY 2012 P43 Q2 (A & B) ............................................................................................................... 68
QUESTION 3 MAY 2014 P43 Q1 .......................................................................................................................... 69
QUESTION 4 MAY 2014 P43 Q1 (D TO F) .............................................................................................................. 71
QUESTION 5 NOVEMBER 2016 P32 Q3............................................................................................................... 71
QUESTION 6 MAY 2017 P32 Q4 .......................................................................................................................... 72
QUESTION 7 NOVEMBER 2017 P31 Q4 (E & F) .................................................................................................... 74
QUESTION 8 MAY 2018 P32 Q4 .......................................................................................................................... 74
SOLUTION CHAPTER 5 75
QUESTION 1 NOVEMBER 2011 P43 Q1(A) .......................................................................................................... 75
QUESTION 2 MAY 2012 P43 Q2 (A & B) ............................................................................................................... 75
QUESTION 3 MAY 2014 P43 Q1 .......................................................................................................................... 76
QUESTION 4 MAY 2014 P43 Q1 (D TO F) .............................................................................................................. 78
QUESTION 5 NOVEMBER 2016 P32 Q3............................................................................................................... 78
QUESTION 6 MAY 2017 P32 Q4 .......................................................................................................................... 79
QUESTION 7 NOVEMBER 2017 P31 Q4 (E & F) .................................................................................................... 80
QUESTION 8 MAY 2018 P32 Q4 .......................................................................................................................... 81
CHAPTER 6 FINANCIAL STATEMENTS OF COMPANIES 83
QUESTION 1 MAY 2011 P42 Q2 (D) ..................................................................................................................... 83
QUESTION 2 MAY 2011 P43 Q1 .......................................................................................................................... 83
QUESTION 3 NOVEMBER 2011 P42 Q2 ............................................................................................................... 83
QUESTION 4 MAY 2012 P41 Q1 (C & D) ............................................................................................................... 84
QUESTION 5 MAY 2013 P41 Q2.......................................................................................................................... 84
QUESTION 6 NOVEMBER 2013 P41 Q1 (C) .......................................................................................................... 85
QUESTION 7 NOVEMBER 2013 P42 Q3 (E) .......................................................................................................... 86
QUESTION 8 MAY 2014 P41 Q2 (A TO C) .............................................................................................................. 86
QUESTION 9 NOVEMBER 2014 P43 Q1(A &B) ..................................................................................................... 87
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QUESTION 10 MAY 2015 P41 & P42 Q3(E & F) ...................................................................................................... 87

QUESTION 11 MAY 2015 P43 Q1 (A TO C) .............................................................................................................. 88
QUESTION 12 NOVEMBER 2015 P41 Q1 (A & B) ....................................................................................................... 89
QUESTION 13 NOVEMBER 2015 P43 Q1(A & B) .................................................................................................... 90
QUESTION 14 MAY 2016 P31 Q3 (A TO C) .............................................................................................................. 91
QUESTION 15 NOVEMBER 2016 P31 Q4 (A TO C) ................................................................................................... 91
QUESTION 16 MAY 2017 P31 & P33 Q1 ................................................................................................................ 92
QUESTION 17 MAY 2018 P31 & P33 Q2 ................................................................................................................ 93
QUESTION 18 MAY 2018 P32 Q2 (A & B) ............................................................................................................... 94
SOLUTION CHAPTER 6 96
QUESTION 1 MAY 2011 P42 Q2 (D) ..................................................................................................................... 96
QUESTION 2 MAY 2011 P43 Q1 .......................................................................................................................... 96
QUESTION 3 NOVEMBER 2011 P42 Q2............................................................................................................... 97
QUESTION 4 MAY 2012 P41 Q1 (C & D) ............................................................................................................... 98
QUESTION 5 MAY 2013 P41 Q2.......................................................................................................................... 98
QUESTION 6 NOVEMBER 2013 P41 Q1 (C) ........................................................................................................ 100
QUESTION 7 NOVEMBER 2013 P42 Q3(E) ......................................................................................................... 100
QUESTION 8 MAY 2014 P41 Q2 (A TO C) ............................................................................................................ 101
QUESTION 9 NOVEMBER 2014 P43 Q1(A &B) ................................................................................................... 102
QUESTION 10 MAY 2015 P41 & P42 Q3(E & F) .................................................................................................... 102
QUESTION 11 MAY 2015 P43 Q1 (A TO C) ............................................................................................................ 102
QUESTION 12 NOVEMBER 2015 P41 Q1 (A & B) .................................................................................................. 103
QUESTION 13 NOVEMBER 2015 P43 Q1 (A & B) .................................................................................................. 105
QUESTION 14 MAY 2016 P31 Q3(A TO C) ............................................................................................................. 106
QUESTION 15 NOVEMBER 2016 P31 Q4 (A TO C) ................................................................................................. 107
QUESTION 16 MAY 2017 P31 & P33 Q1 .............................................................................................................. 108
QUESTION 17 MAY 2018 P31 & P33 Q2 .............................................................................................................. 109
QUESTION 18 MAY 2018 P32 Q2 (A & B) ............................................................................................................. 110
CHAPTER 7 ISSUE OF SHARES & DEBENTURES 111
QUESTION 1 MAY 2011 P42 Q1 (C) ................................................................................................................... 111
QUESTION 2 MAY 2012 P43 Q2 (C) ................................................................................................................... 111
QUESTION 3 NOVEMBER 2012 P43 Q2 (D)........................................................................................................ 111
QUESTION 4 MAY 2013 P43 1(D) ....................................................................................................................... 111
QUESTION 5 MAY 2013 P43 1 (A & F) ................................................................................................................ 111
QUESTION 6 MAY 2014 P41 Q2(D)/MAY 2014 P42 Q2(D) ................................................................................. 111
QUESTION 7 NOVEMBER 2014 P42 Q1 (A TO D)................................................................................................. 112
QUESTION 8 MAY 2015 P43 Q2 (C) ................................................................................................................... 112
QUESTION 9 SPECIMEN 2016 P3 Q3 (A TO C) ..................................................................................................... 112
QUESTION 10 NOVEMBER 2017 P32 Q2............................................................................................................. 113
QUESTION 11 NOVEMBER 2017 P33 Q4............................................................................................................. 114
SOLUTION CHAPTER 7 115
QUESTION 1 MAY 2011 P42 Q1 (C) ................................................................................................................... 115
QUESTION 2 MAY 2012 P43 Q2 (C) ................................................................................................................... 115
QUESTION 3 NOVEMBER 2012 P43 Q2 (D)........................................................................................................ 115
QUESTION 4 MAY 2013 P43 1(D) ....................................................................................................................... 115
QUESTION 5 MAY 2013 P43 1 (A & F) ................................................................................................................ 115
QUESTION 6 MAY 2014 P41 Q2(D)/MAY 2014 P42 Q2(D) ................................................................................. 116
QUESTION 7 NOVEMBER 2014 P42 Q1 (A TO D)................................................................................................. 116
QUESTION 8 MAY 2015 P43 Q2 (C) ................................................................................................................... 117
QUESTION 9 SPECIMEN 2016 P3 Q3 (A TO C) ..................................................................................................... 117
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QUESTION 10 NOVEMBER 2017 P32 Q2............................................................................................................. 118

QUESTION 11 NOVEMBER 2017 P33 Q4............................................................................................................. 118
CHAPTER 8 INTERNATIONAL ACCOUNTING STANDARDS 120
QUESTION 1 MAY 2012 P42 Q1 (C & D) ............................................................................................................. 120
QUESTION 2 NOVEMBER 2012 P41 Q1 (C TO G) ................................................................................................. 120
QUESTION 3 MAY 2013 P43 Q3(E) .................................................................................................................... 121
QUESTION 4 NOVEMBER 2013 P42 Q2(C) ........................................................................................................ 121
QUESTION 5 MAY 2014 P43 Q1 (F) ................................................................................................................... 121
QUESTION 6 NOVEMBER 2014 P41 Q1(D & E)................................................................................................... 121
QUESTION 7 NOVEMBER 2014 P42 Q1 (E) ........................................................................................................ 121
QUESTION 8 NOVEMBER 2014 P42 Q2 (G) ....................................................................................................... 122
QUESTION 9 NOVEMBER 2014 P43 Q3 (E) ........................................................................................................ 122
QUESTION 10 MAY 2015 P43 Q1 (D) ................................................................................................................... 122
QUESTION 11 NOVEMBER 2015 P41 Q1 (C) ........................................................................................................ 122
QUESTION 12 NOVEMBER 2015 P42 Q2 (B & C) .................................................................................................. 122
QUESTION 13 NOVEMBER 2015 P43 Q1(C TO E) .................................................................................................. 123
QUESTION 14 NOVEMBER 2016 P31 Q2 (E) ........................................................................................................ 123
QUESTION 15 NOVEMBER 2016 P31 Q4 (D & E) .................................................................................................. 123
QUESTION 16 NOVEMBER 2016 P33 Q3 (D)........................................................................................................ 123
QUESTION 17 MAY 2017 P31 & P33 Q2 (A, B & E) ................................................................................................ 124
QUESTION 18 MAY 2017 P32 Q3 (A, C & D).......................................................................................................... 125
QUESTION 19 MAY 2018 P31 & P33 Q3 (B TO D) .................................................................................................. 125
QUESTION 20 MAY 2018 P32 Q2 (C & D) ............................................................................................................. 126
SOLUTION CHAPTER 8 127
QUESTION 1 MAY 2012 P42 Q1 (C & D) ............................................................................................................. 127
QUESTION 2 NOVEMBER 2012 P41 Q1 (C TO G) ................................................................................................. 127
QUESTION 3 MAY 2013 P43 Q3(E) .................................................................................................................... 128
QUESTION 4 NOVEMBER 2013 P42 Q2(C) ........................................................................................................ 128
QUESTION 5 MAY 2014 P43 Q1 (F) .................................................................................................................... 128
QUESTION 6 NOVEMBER 2014 P41 Q1(D & E)................................................................................................... 128
QUESTION 7 NOVEMBER 2014 P42 Q1 (E) ........................................................................................................ 128
QUESTION 8 NOVEMBER 2014 P42 Q2 (G) ....................................................................................................... 129
QUESTION 9 NOVEMBER 2014 P43 Q3 (E) ........................................................................................................ 129
QUESTION 10 MAY 2015 P43 Q1 (D) ................................................................................................................... 129
QUESTION 11 NOVEMBER 2015 P41 Q1 (C) ........................................................................................................ 129
QUESTION 12 NOVEMBER 2015 P42 Q2 (B & C) .................................................................................................. 129
QUESTION 13 NOVEMBER 2015 P43 Q1(C TO E) .................................................................................................. 129
QUESTION 14 NOVEMBER 2016 P31 Q2 (E) ........................................................................................................ 130
QUESTION 15 NOVEMBER 2016 P31 Q4 (D & E) .................................................................................................. 130
QUESTION 16 NOVEMBER 2016 P33 Q3 (D)........................................................................................................ 130
QUESTION 17 MAY 2017 P31 & P33 Q2 (A, B & E) ................................................................................................ 131
QUESTION 18 MAY 2017 P32 Q3 (A, C & D).......................................................................................................... 131
QUESTION 19 MAY 2018 P31 & P33 Q3 (B TO D) .................................................................................................. 133
QUESTION 20 MAY 2018 P32 Q2 (C & D) ............................................................................................................. 133
CHAPTER 9 AUDITING & STEWARDSHIP 134
QUESTION 1 SPECIMEN 2016 P3 Q3 (D & E) ...................................................................................................... 134
QUESTION 2 NOVEMBER 2016 P32 Q4............................................................................................................. 134
QUESTION 3 NOVEMBER 2016 P33 Q3 (A TO C & E) ........................................................................................... 134
QUESTION 4 MAY 2017 P31 & P33 Q2 (C & D) ................................................................................................... 135
QUESTION 5 MAY 2017 P32 Q3 (B & E) ............................................................................................................. 135
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QUESTION 6 NOVEMBER 2017 P32 Q3............................................................................................................. 135

QUESTION 7 MAY 2018 P31 & P33 Q3 (A) ......................................................................................................... 136
SOLUTION CHAPTER 9 137
QUESTION 1 SPECIMEN 2016 P3 Q3 (D & E) ...................................................................................................... 137
QUESTION 2 NOVEMBER 2016 P32 Q4............................................................................................................. 137
QUESTION 3 NOVEMBER 2016 P33 Q3 (A TO C & E) ........................................................................................... 138
QUESTION 4 MAY 2017 P31 & P33 Q2 (C & D) ................................................................................................... 138
QUESTION 5 MAY 2017 P32 Q3 (B & E) ............................................................................................................. 139
QUESTION 6 NOVEMBER 2017 P32 Q3............................................................................................................. 139
QUESTION 7 MAY 2018 P31 & P33 Q3 (A) ......................................................................................................... 140
CHAPTER 10 COMPUTERISED ACCOUNTING 141
QUESTION 1 MAY 2016 P32 Q1 (E) ................................................................................................................... 141
QUESTION 2 NOVEMBER 2017 P32 Q6 (D)........................................................................................................ 141
QUESTION 3 MAY 2018 P31 & P33 Q3 (E) ......................................................................................................... 141
SOLUTION CHAPTER 10 142
QUESTION 1 MAY 2016 P32 Q1 (E) ................................................................................................................... 142
QUESTION 2 NOVEMBER 2017 P32 Q6 (D)........................................................................................................ 142
QUESTION 3 MAY 2018 P31 & P33 Q3 (E) ......................................................................................................... 142
CHAPTER 11 RATIO ANALYSIS 143
QUESTION 1 NOVEMBER 2011 P41 Q2 ............................................................................................................. 143
QUESTION 2 NOVEMBER 2011 P43 Q1(B & C) ................................................................................................... 144
QUESTION 3 NOVEMBER 2011 P43 Q2 (C & D) .................................................................................................. 144
QUESTION 4 NOVEMBER 2012 P41 Q2 ............................................................................................................. 145
QUESTION 5 NOVEMBER 2012 P42 Q1 ............................................................................................................. 146
QUESTION 6 NOVEMBER 2012 P43 Q2 (C) ........................................................................................................ 147
QUESTION 7 MAY 2013 P43 Q2 (D & E).............................................................................................................. 148
QUESTION 8 NOVEMBER 2013 P43 Q3 (C & D) .................................................................................................. 148
QUESTION 9 NOVEMBER 2014 P41 Q2 ............................................................................................................. 149
QUESTION 10 MAY 2015 P43 Q2 (D & E) ............................................................................................................. 149
QUESTION 11 SPECIMEN 2016 P3 Q4 ................................................................................................................. 150
QUESTION 12 MAY 2016 P31 Q3(D) .................................................................................................................... 151
QUESTION 13 MAY 2016 P31 Q4 ........................................................................................................................ 152
QUESTION 14 MAY 2016 P32 Q4 ........................................................................................................................ 153
QUESTION 15 NOVEMBER 2016 P31 Q3............................................................................................................. 154
QUESTION 16 MAY 2017 P31 & P33 Q4 .............................................................................................................. 155
QUESTION 17 MAY 2017 P32 Q2 ........................................................................................................................ 156
QUESTION 18 NOVEMBER 2017 P31 Q3............................................................................................................. 156
QUESTION 19 NOVEMBER 2017 P32 Q4............................................................................................................. 157
QUESTION 20 MAY 2018 P32 Q1 ........................................................................................................................ 158
SOLUTION CHAPTER 11 159
QUESTION 1 NOVEMBER 2011 P41 Q2 ............................................................................................................. 159
QUESTION 2 NOVEMBER 2011 P43 Q1(B & C) ................................................................................................... 160
QUESTION 3 NOVEMBER 2011 P43 Q2 (C & D) .................................................................................................. 161
QUESTION 4 NOVEMBER 2012 P41 Q2 ............................................................................................................. 161
QUESTION 5 NOVEMBER 2012 P42 Q1 ............................................................................................................. 162
QUESTION 6 NOVEMBER 2012 P43 Q2 (C) ........................................................................................................ 164
QUESTION 7 MAY 2013 P43 Q2 (D & E) ............................................................................................................. 164
QUESTION 8 NOVEMBER 2013 P43 Q3 (C & D) .................................................................................................. 165
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QUESTION 9 NOVEMBER 2014 P41 Q2 ............................................................................................................. 165

QUESTION 10 MAY 2015 P43 Q2 (D & E) ............................................................................................................. 166
QUESTION 11 SPECIMEN 2016 P3 Q4 ................................................................................................................. 167
QUESTION 12 MAY 2016 P31 Q3(D) .................................................................................................................... 168
QUESTION 13 MAY 2016 P31 Q4 ........................................................................................................................ 168
QUESTION 14 MAY 2016 P32 Q4 ........................................................................................................................ 169
QUESTION 15 NOVEMBER 2016 P31 Q3............................................................................................................. 170
QUESTION 16 MAY 2017 P31 & P33 Q4 .............................................................................................................. 171
QUESTION 17 MAY 2017 P32 Q2 ........................................................................................................................ 172
QUESTION 18 NOVEMBER 2017 P31 Q3............................................................................................................. 173
QUESTION 19 NOVEMBER 2017 P32 Q4............................................................................................................. 174
QUESTION 20 MAY 2018 P32 Q1 ........................................................................................................................ 176
CHAPTER 12 STATEMENTS OF CASH FLOWS 177
QUESTION 1 MAY 2011 P42 Q1 (A, B & D) .......................................................................................................... 177
QUESTION 2 NOVEMBER 2011 P43 Q2 (A & B) .................................................................................................. 177
QUESTION 3 MAY 2012 P41 Q1 (A & B) ............................................................................................................. 179
QUESTION 4 MAY 2012 P43 Q1 (A & B) ............................................................................................................. 180
QUESTION 5 NOVEMBER 2012 P43 Q2 (A & B) .................................................................................................. 180
QUESTION 6 MAY 2013 P43 Q2 (A TO C) ............................................................................................................ 181
QUESTION 7 NOVEMBER 2013 P41 Q1 (A & B) .................................................................................................. 182
QUESTION 8 NOVEMBER 2013 P42 Q2 (A & B) .................................................................................................. 184
QUESTION 9 NOVEMBER 2014 P43 Q3 (C & D) .................................................................................................. 185
QUESTION 10 NOVEMBER 2016 P31 Q2 (A TO D)................................................................................................. 186
SOLUTION CHAPTER 12 188
QUESTION 1 MAY 2011 P42 Q1 (A & B) ............................................................................................................. 188
QUESTION 2 NOVEMBER 2011 P43 Q2 (A & B) .................................................................................................. 189
QUESTION 3 MAY 2012 P41 Q1 (A & B) ............................................................................................................. 189
QUESTION 4 MAY 2012 P43 Q1 (A & B) ............................................................................................................. 190
QUESTION 5 NOVEMBER 2012 P43 Q2 (A & B) .................................................................................................. 190
QUESTION 6 MAY 2013 P43 Q2 (A TO C) ............................................................................................................ 191
QUESTION 7 NOVEMBER 2013 P41 Q1 (A & B) .................................................................................................. 192
QUESTION 8 NOVEMBER 2013 P42 Q2 (A & B) .................................................................................................. 192
QUESTION 9 NOVEMBER 2014 P43 Q3 (C & D) .................................................................................................. 193
QUESTION 10 NOVEMBER 2016 P31 Q2 (A TO D)................................................................................................. 194
CHAPTER 13 MANUFACTURING ACCOUNTS 196
QUESTION 1 MAY 2012 P22 Q1 ........................................................................................................................ 196
QUESTION 2 MAY 2012 P42 Q1 ........................................................................................................................ 197
QUESTION 3 NOVEMBER 2012 P23 Q1............................................................................................................. 197
QUESTION 4 NOVEMBER 2012 P43 Q1 ............................................................................................................. 198
QUESTION 5 MAY 2013 P23 Q1 ........................................................................................................................ 199
QUESTION 6 MAY 2014 P21 Q1 (B & C) ............................................................................................................. 200
QUESTION 7 NOVEMBER 2014 P22 Q1 ............................................................................................................. 201
QUESTION 8 MAY 2015 P23 Q1 ........................................................................................................................ 202
QUESTION 9 NOVEMBER 2015 P42 Q1............................................................................................................. 203
QUESTION 10 MAY 2016 P32 Q2 ........................................................................................................................ 204
QUESTION 11 NOVEMBER 2016 P32 Q2............................................................................................................. 205
QUESTION 12 NOVEMBER 2016 P33 Q1............................................................................................................. 206
QUESTION 13 MAY 2017 P32 Q1 ........................................................................................................................ 207
QUESTION 14 NOVEMBER 2017 P31 Q1............................................................................................................. 208
QUESTION 15 MAY 2018 P31 & P33 Q1 .............................................................................................................. 209
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SOLUTION CHAPTER 13 211

QUESTION 1 MAY 2012 P22 Q1 ........................................................................................................................ 211
QUESTION 2 MAY 2012 P42 Q1 ........................................................................................................................ 211
QUESTION 3 NOVEMBER 2012 P23 Q1............................................................................................................. 212
QUESTION 4 NOVEMBER 2012 P43 Q1 ............................................................................................................. 213
QUESTION 5 MAY 2013 P23 Q1 ........................................................................................................................ 215
QUESTION 6 MAY 2014 P21 Q1 (B & C) ............................................................................................................. 216
QUESTION 7 NOVEMBER 2014 P22 Q1 ............................................................................................................. 216
QUESTION 8 MAY 2015 P23 Q1 ........................................................................................................................ 217
QUESTION 9 NOVEMBER 2015 P42 Q1............................................................................................................. 218
QUESTION 10 MAY 2016 P32 Q2 ........................................................................................................................ 220
QUESTION 11 NOVEMBER 2016 P32 Q2............................................................................................................. 221
QUESTION 12 NOVEMBER 2016 P33 Q1............................................................................................................. 222
QUESTION 13 MAY 2017 P32 Q1 ....................................................................................................................... 223
QUESTION 14 NOVEMBER 2017 P31 Q1............................................................................................................. 224
QUESTION 15 MAY 2018 P31 & P33 Q1 .............................................................................................................. 225
CHAPTER 14 ABSORPTION COSTING 227
QUESTION 1 NOVEMBER 2012 P43 Q3............................................................................................................. 227
SOLUTION CHAPTER 14 228
QUESTION 1 NOVEMBER 2012 P43 Q3............................................................................................................. 228
CHAPTER 15 BUDGETING 230
QUESTION 1 MAY 2011 P41 Q3 ........................................................................................................................ 230
QUESTION 2 MAY 2011 P43 Q3 ........................................................................................................................ 231
QUESTION 3 NOVEMBER 2011 P42 Q3............................................................................................................. 231
QUESTION 4 MAY 2012 P42 Q3 (A, B, C, E & F).................................................................................................... 232
QUESTION 5 MAY 2013 P41 Q3 ........................................................................................................................ 233
QUESTION 6 MAY 2013 P42 Q3 ........................................................................................................................ 233
QUESTION 7 NOVEMBER 2013 P43 Q3 (A & B) .................................................................................................. 234
QUESTION 8 MAY 2014 P43 Q3 ........................................................................................................................ 235
QUESTION 9 NOVEMBER 2014 P42 Q3............................................................................................................. 236
QUESTION 10 NOVEMBER 2014 P43 Q2............................................................................................................. 237
QUESTION 11 MAY 2015 P41 & P42 Q1 .............................................................................................................. 238
QUESTION 12 NOVEMBER 2015 P42 Q2(A) ........................................................................................................ 240
QUESTION 13 NOVEMBER 2016 P32 Q6............................................................................................................. 240
QUESTION 14 NOVEMBER 2016 P33 Q6............................................................................................................. 241
QUESTION 15 NOVEMBER 2017 P32 Q6 (A TO C) ................................................................................................. 242
QUESTION 16 NOVEMBER 2017 P33 Q6............................................................................................................. 242
QUESTION 17 MAY 2018 P31 & P33 Q5 .............................................................................................................. 243
SOLUTION CHAPTER 15 245
QUESTION 1 MAY 2011 P41 Q3 ........................................................................................................................ 245
QUESTION 2 MAY 2011 P43 Q3 ........................................................................................................................ 245
QUESTION 3 NOVEMBER 2011 P42 Q3............................................................................................................. 246
QUESTION 4 MAY 2012 P42 Q3 (A, B, C , E & F) ................................................................................................... 247
QUESTION 5 MAY 2013 P41 Q3 ........................................................................................................................ 248
QUESTION 6 MAY 2013 P42 Q3 ........................................................................................................................ 249
QUESTION 7 NOVEMBER 2013 P43 Q3 (A & B) .................................................................................................. 250
QUESTION 8 MAY 2014 P43 Q3 ........................................................................................................................ 252
QUESTION 9 NOVEMBER 2014 P42 Q3............................................................................................................. 253
 11

QUESTION 10 NOVEMBER 2014 P43 Q2............................................................................................................. 254

QUESTION 11 MAY 2015 P41 & P42 Q1 .............................................................................................................. 256
QUESTION 12 NOVEMBER 2015 P42 Q2 (A) ........................................................................................................ 258
QUESTION 13 NOVEMBER 2016 P32 Q6............................................................................................................. 258
QUESTION 14 NOVEMBER 2016 P33 Q6............................................................................................................. 259
QUESTION 15 NOVEMBER 2017 P32 Q6 (A TO C) ................................................................................................. 260
QUESTION 16 NOVEMBER 2017 P33 Q6............................................................................................................. 261
QUESTION 17 MAY 2018 P31 & P33 Q5 .............................................................................................................. 263
CHAPTER 16 STANDARD COSTING 265
QUESTION 1 MAY 2012 P41 Q3 (A TO D) ............................................................................................................ 265
QUESTION 2 NOVEMBER 2012 P42 Q3............................................................................................................. 265
QUESTION 3 MAY 2013 P42 Q1 ........................................................................................................................ 266
QUESTION 4 MAY 2013 P43 Q3(A TO D) ............................................................................................................. 267
QUESTION 5 NOVEMBER 2015 P41 Q3 ............................................................................................................. 267
QUESTION 6 NOVEMBER 2015 P42 Q3............................................................................................................. 268
QUESTION 7 NOVEMBER 2015 P43 Q3............................................................................................................. 269
QUESTION 8 SPECIMEN 2016 P3 Q6 ................................................................................................................. 269
QUESTION 9 MAY 2016 P32 Q6 ........................................................................................................................ 270
QUESTION 10 NOVEMBER 2016 P31 Q5............................................................................................................. 270
QUESTION 11 MAY 2017 P31 & P33 Q5 .............................................................................................................. 271
QUESTION 12 MAY 2017 P32 Q5 ........................................................................................................................ 272
QUESTION 13 NOVEMBER 2017 P31 Q5............................................................................................................. 273
QUESTION 14 NOVEMBER 2017 P33 Q5 (A TO D)................................................................................................. 273
QUESTION 15 MAY 2018 P32 Q6 ........................................................................................................................ 274
SOLUTION CHAPTER 16 275
QUESTION 1 MAY 2012 P41 Q3 (A TO D) ............................................................................................................ 275
QUESTION 2 NOVEMBER 2012 P42 Q3) ........................................................................................................... 276
QUESTION 3 MAY 2013 P42 Q1 ........................................................................................................................ 277
QUESTION 4 MAY 2013 P43 Q3 (A TO D) ............................................................................................................ 278
QUESTION 5 NOVEMBER 2015 P41 Q3 ............................................................................................................. 280
QUESTION 6 NOVEMBER 2015 P42 Q3 ................................................................................................................ 281
QUESTION 7 NOVEMBER 2015 P43 Q3............................................................................................................. 283
QUESTION 8 SPECIMEN 2016 P3 Q6 ................................................................................................................. 284
QUESTION 9 MAY 2016 P32 Q6 ........................................................................................................................ 285
QUESTION 10 NOVEMBER 2016 P31 Q5............................................................................................................. 286
QUESTION 11 MAY 2017 P31 & P33 Q5 .............................................................................................................. 287
QUESTION 12 MAY 2017 P32 Q5 ........................................................................................................................ 288
QUESTION 13 NOVEMBER 2017 P31 Q5............................................................................................................. 290
QUESTION 14 NOVEMBER 2017 P33 Q5 (A TO D)................................................................................................. 291
QUESTION 15 MAY 2018 P32 Q6 ........................................................................................................................ 292
CHAPTER 17 CAPITAL INVESTMENT APPRAISAL 295
QUESTION 1 NOVEMBER 2011 P43 Q3............................................................................................................. 295
QUESTION 2 MAY 2012 P43 Q3 ........................................................................................................................ 295
QUESTION 3 MAY 2014 P41 Q3, MAY 2014 P42 Q3 .......................................................................................... 295
QUESTION 4 NOVEMBER 2014 P42 Q2(A TO F) .................................................................................................. 296
QUESTION 5 NOVEMBER 2014 P43 Q3(C TO F) .................................................................................................. 297
QUESTION 6 MAY 2015 P41 & P42 Q3(A TO D)................................................................................................... 298
QUESTION 7 SPECIMEN 2016 P3 Q5 ................................................................................................................. 299
QUESTION 8 MAY 2016 P31 Q6 ........................................................................................................................ 299
QUESTION 9 NOVEMBER 2016 P31 Q6............................................................................................................. 300
 12

QUESTION 10 NOVEMBER 2016 P33 Q5............................................................................................................. 301

QUESTION 11 MAY 2017 P32 Q6 ........................................................................................................................ 301
QUESTION 12 NOVEMBER 2017 P32 Q5............................................................................................................. 302
QUESTION 13 MAY 2018 P32 Q5 ........................................................................................................................ 303
SOLUTION CHAPTER 17 304
QUESTION 1 NOVEMBER 2011 P43 Q3............................................................................................................. 304
QUESTION 2 MAY 2012 P43 Q3 ........................................................................................................................ 305
QUESTION 3 MAY 2014 P41 Q3, MAY 2014 P42 Q3 .......................................................................................... 305
QUESTION 4 NOVEMBER 2014 P42 Q2(A TO F) .................................................................................................. 306
QUESTION 5 NOVEMBER 2014 P43 Q3(C TO F) .................................................................................................. 307
QUESTION 6 MAY 2015 P41 & P42 Q3 (A TO D) .................................................................................................. 308
QUESTION 7 SPECIMEN 2016 P3 Q5 ................................................................................................................. 309
QUESTION 8 MAY 2016 P31 Q6 ........................................................................................................................ 310
QUESTION 9 NOVEMBER 2016 P31 Q6............................................................................................................. 311
QUESTION 10 NOVEMBER 2016 P33 Q5............................................................................................................. 312
QUESTION 11 MAY 2017 P32 Q6 ........................................................................................................................ 312
QUESTION 12 NOVEMBER 2017 P32 Q5............................................................................................................. 313
QUESTION 13 MAY 2018 P32 Q5 ........................................................................................................................ 314
CHAPTER 18 ACTIVITY BASED COSTING 316
QUESTION 1 MAY 2016 P31 Q5 ........................................................................................................................ 316
QUESTION 2 MAY 2016 P32 Q5 ........................................................................................................................ 316
QUESTION 3 NOVEMBER 2016 P32 Q5............................................................................................................. 317
QUESTION 4 MAY 2017 P31 & P33 Q6 .............................................................................................................. 318
QUESTION 5 NOVEMBER 2017 P31 Q6............................................................................................................. 319
QUESTION 6 NOVEMBER 2017 P33 Q5 (E) ........................................................................................................ 319
QUESTION 7 MAY 2018 P31 & P33 Q6 .............................................................................................................. 319
SOLUTION CHAPTER 18 321
QUESTION 1 MAY 2016 P31 Q5 ........................................................................................................................ 321
QUESTION 2 MAY 2016 P32 Q5 ........................................................................................................................ 322
QUESTION 3 NOVEMBER 2016 P32 Q5............................................................................................................. 323
QUESTION 4 MAY 2017 P31 & P33 Q6 .............................................................................................................. 324
QUESTION 5 NOVEMBER 2017 P31 Q6............................................................................................................. 325
QUESTION 6 NOVEMBER 2017 P33 Q5 (E) ........................................................................................................ 326
QUESTION 7 MAY 2018 P31 & P33 Q6 .............................................................................................................. 326
SPECIMEN 2016 PAPER 03 329
2016 MAY PAPER 31 & 33 334
2016 MAY PAPER 32 340
NOVEMBER 2016 - PAPER 31 346
NOVEMBER 2016 - PAPER 32 351
NOVEMBER 2016 - PAPER 33 357
MAY 2017 - PAPER 31 & 33 362
MAY 2017 - PAPER 32 367
NOVEMBER 2017 - PAPER 31 373
NOVEMBER 2017 - PAPER 32 378
 13

NOVEMBER 2017 - PAPER 33 383

MAY 2018 - PAPER 31 & 33 388
MAY 2018 - PAPER 32 393
INDEX (YEARLY) 398
Chapter 1 14 Accounts of Non Profit Organisations

CHAPTER 1 ACCOUNTS OF NON PROFIT ORGANISATIONS

QUESTION 1 MAY 2011 P21 Q2
The Welcome Cricket Club has the following assets and liabilities.
30 April 2011 1 May 2010
$ $
Equipment (at cost) 104 000 40 000
Equipment – depreciation provision 14 400 4 000
Café inventory 4 800 6 500
Cash at bank ? 12 800
Subscriptions outstanding 3 600 2 200
Subscriptions paid in advance 3 500 5 000
Café staff wages accrued 4 000 500
Loan from cricket association 20 000 –
Loan interest ? –
The receipts and payments for the year ended 30 April 2011 are:

Receipts $
Café revenue (sales) 90 000
Subscriptions 34 000
Loan from cricket association 20 000
Donations 450
Ticket sales 14 560

Payments $
Equipment 64 000
Rent 21 000
Heating and lighting 18 000
Wages of café staff 28 800
Café purchases for resale 36 000
Additional information:
1 Wages are a direct cost of the café and are charged to the trading account.
2 The rent and heating and lighting are apportioned 40% to the café and 60% to the rest of the club.
3 The loan from the cricket association was received on 1 November 2010. Interest is payable at 10% per year.
4 Depreciation is charged to the income and expenditure account.
REQUIRED
(a) Prepare the café income statement to show the gross profit and the profit for the year (net profit) made by
the café during the year ended 30 April 2011. [8]
(b) Prepare the income and expenditure account of Welcome Cricket Club for the year ended 30 April 2011.[14]
(c) Prepare the balance sheet of the Welcome Cricket Club at 30 April 2011. [8]

QUESTION 2 MAY 2011 P42 Q2 (a to c)

The Top Hat Sports Club is a not-for-profit organisation which runs a gym and operates a café.
The treasurer is experienced and for many years has prepared a receipts and payments account.
The club president read a book about the importance of accruals and prepayments. He decided to take the receipts
and payments account prepared by the treasurer and to adjust the figures. He produced the following:
Income and expenditure account at 31 December 2010
$ $ $
Opening bank balance 4 320
Café takings 12 260
Depreciation 4 610
Chapter 1 15 Accounts of Non Profit Organisations

Annual subscriptions $ $
received during the year 39 300
arrears at 1 January 2010 450
prepaid at 1 January 2010 300
arrears at 31 December 2010 750
prepaid at 31 December 2010 150 40 950
62 140
Rent 12 000
General expenses 4 620
Heat, light and power 8 240
Wages 18 600
Purchase of equipment 5 300
Cost of refreshments
payments during the year 8 140
owing at 1 January 2010 700
owing at 31 December 2010 760 9 600 58 360
Closing bank balance 3 780
Further information is as follows:
1 The club president made depreciation the balancing figure. The treasurer was surprised to see it appear
with income.
2 The club president was unaware that there was an unpaid invoice for $910 for heat, light and power at the
year end.
3 Asset valuations were:
1 January 2010 ($) 31 December 2010 ($)
Café inventory 420 800
Equipment 17 200 19 500
4 The club has two members of staff. One was paid $10 600 for the year and worked in the gym and
the other earned $8000 and worked in the café.
5 The club has 265 members who each pay an annual subscription of $150.
On 1 January 2010 the managing committee decided to allow the admission of life members, each paying $1 600.
This would be transferred to income over 20 years. Three people took up life membership during 2010. The club
president omitted life subscriptions from his statement.
REQUIRED
(a) Prepare the corrected income and expenditure account. [9]
(b) Prepare a balance sheet at 31 December 2010. [15]
(c) Explain three differences between the financial statements of a not-for-profit organisation and the financial
statements of a public limited company. [6]

QUESTION 3 NOVEMBER 2011 P23 Q2 (B)

The treasurer of Hamilton Social Club has provided the following information for the year ended 31 March 2011.
31 March 2010 31 March 2011
$ $
Café inventory at cost 3 400 3 950
Café trade payables 1 570 880
Subscriptions in arrears 240 120
Equipment (net book value) 5 400 9 360
Stock of stationery at cost 110 85
Cash at bank 1 800 340
5% loan (repayable 2015) – 5 000
Equipment costing $5000 was purchased on 1 April 2010. It was financed by the 5% loan. At the year-end 31 March
2011, no payment of interest had been made.
Chapter 1 16 Accounts of Non Profit Organisations

Included in the café inventory at 31 March 2011 were items costing $120 that were out of date. They had a net
realisable value of $30.

REQUIRED
Prepare a statement of financial position for Hamilton Social Club at 31 March 2011. Show clearly the surplus or
deficit for the year. An income and expenditure account is not required. [10]

QUESTION 4 NOVEMBER 2012 P21 Q2

The PPE Rowing Club prepares its accounts annually on 31 March.
The summary of the Receipts and Payments Account for the year ended 31 March 2012 is shown below.
Receipts $ Payments $
Balance b/d 3 000 Competition prizes 3 100
Subscriptions received 84 400 Dinner dance – hire of band 2 400
Competition receipts 12 200 Dinner dance – catering 5 200
Dinner dance ticket sales 14 000 Insurance 9 800
Donations 1 500 Clubhouse maintenance 10 300
Sale of equipment 24 000 Equipment 46 000
General expenses 30 200
Electricity 1 600
Transfer to deposit account 20 000

Additional information
1 The remaining assets and liabilities of the club at the beginning and end of the year were:
1 April 2011 31 March 2012
$ $
Clubhouse 150 000 150 000
Equipment 160 000 140 000
General expenses owing 800 400
Subscriptions due and unpaid 2 600 3 100
Subscriptions paid in advance 6 300 4 500
Inventory of competition prizes 800 300
Deposit account - 20 000
2 During the year equipment with a book value of $26 000 was sold for $24 000.
3 Of the subscriptions due on 1 April 2011, $280 remains unpaid. This is to be treated as a bad debt.
4 On 1 October 2011, $20 000 was transferred from the Receipts and Payments Account to a short-term
deposit account. This transfer is shown in the summarised Receipts and Payments Account above. Interest
of 5% per annum is earned on the deposit account. This interest has not yet been recorded.
REQUIRED
(a) Prepare the subscriptions account for PPE Rowing Club for the year ended 31 March 2012. [7]
(b) Prepare the income and expenditure account for PPE Rowing Club for the year ended 31 March 2012. Clearly
identify the profit or loss on the dinner dance and competitions. [13]
(c) Prepare the statement of financial position for PPE Rowing Club at 31 March 2012. [10]

QUESTION 5 MAY 2013 P21 Q1

The Klassik Music Society produced the following receipts and payments summary for the year ended 31 March 2013.

Receipts $
Subscriptions 30 000
Sales of food and drink 50 000
Bank loan 30 000
Income from concerts 116 800
Sale of surplus equipment 30 000
Chapter 1 17 Accounts of Non Profit Organisations

Payments $
Balance, 1 April 2012 12 000
Purchase of new equipment 10 000
Hire of hall for concerts 27 000
Printing 14 000
Equipment maintenance and repairs 8 000
Purchases of food and drink 23 000
Salaries 45 000
Cost of concerts 83 500
Sundry expenses 760
Sponsorship 1 000
Balance, 31 March 2013 ?

Additional information:
31 March 2012 31 March 2013
1 Salaries in arrears 2 800 1 600
Subscriptions owing 1 600 2 600
Subscriptions prepaid 1 000 400
Printing accrued 2 600 2 800
Equipment (cost $200 000), at NBV 160 000 ?
Food and drink inventory 15 400 13 200
2 The bank loan was received on 1 July 2012. Interest is charged at 12% per annum. No interest had
been paid by the year end.
3 The equipment sold was purchased on 1 June 2011 and had a NBV of $32 000.
4 Depreciation is provided at 20% on cost for equipment in use at the year end.

REQUIRED
(a) Prepare the trading section of the income statement for the year ended 31 March 2013. [2]
(b) Calculate the gross profit percentage, to one decimal place, made on sales of food and drink. [2]
(c) The prices of food and drink sold had been planned to obtain a gross margin of 70%. Compare this figure
with the figure calculated in (b) and state two reasons why these figures may differ. [4]
(d) Prepare the income and expenditure account of the Klassik Music Society for the year ended 31 March 2013.
[12]
(e) Prepare the statement of financial position of the Klassik Music Society at 31 March 2013. [10]

QUESTION 6 MAY 2014 P23 Q1

The treasurer of the Ocean Fishing Club has prepared the following receipts and payments account for the year
ended 31 March 2014.

Receipts $ Payments $
Balance at 1 April 2013 6 570 Payments to trade payables 2 974
Subscriptions received 7 400 Shop wages 3 670
Donations 1 450 Administration expenses 2 790
Receipts from annual family day 2 300 New equipment 5 600
Shop takings 7 690 Repairs to equipment 2 500
Transfer to deposit account 7 000
_____ Balance c/d 876
25 410 25 410
Chapter 1 18 Accounts of Non Profit Organisations

1 April 2013 31 March 2014

$ $
Shop inventory 975 859
Trade payables for shop 560 784
Deposit account 6 000 13 000
Equipment at cost 9 800 ?
Provision for depreciation 2 940 ?
Repairs to equipment owing 420 370
Shop wages due 250 195
Shop fittings at net book value 750 640

Additional information
1 The donations are to be capitalised.
2 There are 350 members who pay an annual subscription of $20.
At 1 April 2013, 30 members had paid in advance for the coming year but 24 members had not yet paid for
the year ended 31 March 2013.
At 31 March 2014, 10 members had yet to pay and some members had paid in advance but the treasurer
has not yet calculated how many.
3 Interest of 5% per annum is credited to the deposit account by the bank on 31 March each year. This has
not yet been entered in the books.
The transfer of $7 000 to the deposit account was made on the 31 March 2014.
4 Equipment is depreciated at 15% per annum using the reducing (diminishing) balance method. A full year’s
depreciation is charged in the year of purchase.

REQUIRED
(a) Prepare the shop trading account for the year ended 31 March 2014. [4]
(b) Prepare the income and expenditure account for the year ended 31 March 2014. [6]
(c) Prepare the statement of financial position at 31 March 2014. [11]

Additional information
The club wishes to buy a new boat for use by members. It will cost $12 500.

REQUIRED
(d) Suggest three ways the club could raise the finance to purchase the new boat. [3]
(e) State one advantage and one disadvantage of each method you have suggested. [6]

QUESTION 7 MAY 2016 P31 Q1

The Pavey Sports and Social Club is a not for profit organisation. Accounts are prepared annually to 31 March. The
membership has been constant for some years at 350 members paying an annual subscription of $100.

A life membership scheme was introduced to try to boost membership. On 1 April 2015, there were 25 new members
who joined under this scheme, each paying $750. It was agreed that the life membership fund would be transferred
to the income and expenditure account over 15 years.
The following receipts and payments account was prepared for the year ended 31 March 2016.

Receipts $ Payments $
Balance b/d 12 120 Purchase of fixtures and fittings 34 500
Annual subscriptions 34 000 Payments to restaurant suppliers 6 950
Life membership 18 750 Restaurant wages 5 450
Donations 8 500 Administrative expenses 4 750
Restaurant takings 17 450 Balance c/d 39 170
Balance b/d 90 820 90 820
Chapter 1 19 Accounts of Non Profit Organisations

The following information is available for the year ended 31 March 2016.
1 1 April 2015 31 March 2016
Number of members Number of members
Subscriptions in advance 4 3
Subscriptions in arrears 10 ?
2 Restaurant suppliers owing 845 955
Restaurant wages owing – 280
Administrative expenses owing – 350
Administrative expenses prepaid – 200
3 No inventories of restaurant supplies were held.
4 Fixtures and fittings acquired on 1 April 2013 had cost $20 000. Depreciation is charged at 20% per annum
using the reducing balance method. A full year’s depreciation is charged in the year of acquisition.
5 All donations are capitalised.
6 The opening balance on the accumulated fund at 1 April 2016 was $24 675.

REQUIRED
(a) Distinguish between the terms ‘capital’ and ‘accumulated fund’. [2]
(b) Prepare the income and expenditure account for the year ended 31 March 2016, clearly identifying the
profit or loss from the restaurant within the account. [14]
(c) Explain why a club may capitalise donations received from its members. [2]

Additional information
The club is considering modernising the pavilion which will cost $75 000.
REQUIRED
(d) (i) Compare and contrast two sources of finance which the club could use. [4]
(ii) Advise the club members which source of finance would be most appropriate. Justify your answer.
[3]
QUESTION 8 MAY 2016 P32 Q1 (a to d)
The Seagulls Boating Club is a small not for profit organisation which generates income from members’ subscriptions
and a café.

REQUIRED
(a) State two differences between the financial statements of a not for profit organisation and those of a limited
company. [2]
Additional information
The following information is available for the café for the year ended 31 March 2016.
1 The café takings were $25 750 and $8 850 was paid to suppliers.
2 An assistant received monthly wages of $600. On 31 March 2016, the assistant also received a bonus of 10%
of the annual café takings.
3 The following balances were available:

1 April 2015 31 March 2016

$ $
Café inventory 3 875 3 423
Café trade payables 2 831 2 952
REQUIRED
(b) Prepare the café trading account for the year ended 31 March 2016. [5]

Additional information
The club has 310 members who pay an annual subscription of $80.
Chapter 1 20 Accounts of Non Profit Organisations

The following information was available for members’ subscriptions.

1 April 2015 31 March 2016
Number of members Number of members
Subscriptions in advance 4 3
Subscriptions in arrears 9 12

REQUIRED
(c) Prepare the subscriptions account for the year ended 31 March 2016. [4]
Additional information
The following information is also available for the year ended 31 March 2016.
1 General expenses of $2 500 were incurred which included a paid insurance invoice for the period from 1
March 2016 to 31 May 2016 for $180.
2 Fixtures and fittings were acquired on 1 April 2013 at a cost of $16 000 and are depreciated at 25% using
the reducing balance method.
REQUIRED
(d) Prepare the income and expenditure account for the year ended 31 March 2016. [5]
QUESTION 9 NOVEMBER 2016 P31 Q1
International Dancing is a dance club charging an annual subscription of $500 per member.
A summary of its subscriptions account for the year ended 31 December 2015 was as follows:
Subscriptions account
2015 $ 2015 $
Jan 1 Balance b/d 2 000 Jan 1 Balance b/d 1 500
Dec 31 Income and expenditure a/c 106 500 Dec 31 Bank 105 500
Balance c/d 2 500 Balance c/d 4 000
111 000 111 000
Additional information
1 The club’s only other receipts came from the sale of music CDs to members. These receipts amounted to
$5 800 for the year.
2 Payments for the year were as follows:
$
Rent 15 000
Staff costs 61 000
Insurance and administration 4 200
Purchase of music CDs for resale 2 600
Purchase of equipment 11 700
Purchase of CDs for club use 4 000
3 The bank balance at 1 January 2015 was $13 500 debit. All receipts and payments are made through the
bank.
4 CDs purchased for club use are not considered to have a useful life of more than 12 months.
5 The club maintains an inventory of CDs for resale. This amounted to $180 at 1 January 2015 and $280 at 31
December 2015.
6 Equipment was valued at $17 200 at 1 January 2015 and $21 300 at the end of the year.
7 At 31 December 2015 prepaid insurance was $300 and accrued administration costs were $50.
REQUIRED
(a) Prepare the club’s income and expenditure account for the year ended 31 December 2015. [9]
Additional information
In 2016 the club is given the opportunity to buy its premises for $142 000. If it is agreed that this purchase should go
ahead, three sources of finance would be used.
1 Half the balance at bank on 31 December 2015 would be used.
Chapter 1 21 Accounts of Non Profit Organisations

2 Life membership of the club would be introduced. The life membership fee would be $5 000 per person
and this would be credited to the income and expenditure account in equal instalments over a 10-year
period. It is expected that 10 existing members of the club would take up life membership, and the funds
raised would be used in the purchase.
3 A 5-year bank loan, at 10% interest per annum, would finance the balance of the purchase price.
REQUIRED
(b) (i) Calculate the bank balance at 31 December 2015. [2]
(ii) Calculate the amount of the loan which would be taken out. [3]
(c) Assess the effect the purchase of the premises would have on annual cash flows in future years. [4]
(d) Recommend to the managing committee of the club whether or not they should proceed with the purchase
of the premises. Justify your answer by discussing both advantages and disadvantages of the purchase. [7]

QUESTION 10 NOVEMBER 2016 P32 Q1

Sunshine Social Club runs a gift shop. Goods are sold only to members at a discount. Selected balances relating to
the gift shop at 31 December are as follows:
2015 2014
$ $
Net book value of shop equipment ? 55 000
Shop inventory 18 600 24 000
Shop trade payables 64 300 54 500
Insurance prepaid 1 660 1 400
Shopkeeper wages prepaid 3 200 –
Accrued expenses – water and electricity 2 000 2 700
– shopkeeper wages – 3 450
Summarised receipts and payments account of the club for the year ended 31 December 2015 is as follows:
$ $
Balance b/d 124 000 Shop suppliers 74 500
Annual subscriptions 345 000 Purchases of shop equipment 4 000
Life membership subscriptions 60 000 Shopkeeper wages 30 400
Annual ball tickets 68 000 Insurance 9 460
Shop takings 124 200 Water and electricity 14 800
Club administration 361 400
Hire of ballroom & band for annual ball 48 000
Food for annual ball 36 000
_______ Balance c/d 142 640
721 200 721 200
Additional information
1 Expenses are allocated to the shop as follows:
Water and electricity 40%
Insurance 25%
2 Shop equipment is depreciated at 20% per annum using the reducing balance method. Equipment is
depreciated in the year of purchase but not in the year of sale.
REQUIRED
(a) State three differences between a donation and a member subscription received by a not-for-profit
organisation. [3]
(b) Prepare the club’s shop trading account for the year ended 31 December 2015. [15]
Additional information
After reviewing the trading account of the gift shop, the chairman is not satisfied with the performance.
Chapter 1 22 Accounts of Non Profit Organisations

REQUIRED
(c) Discuss two ways to improve the performance of the gift shop. [4]
Additional information
The chairman of the club undertook to cover 50% of the deficit arising from the 2015 annual ball.
The demand for payment was issued to the chairman on 31 December 2015.
REQUIRED
(d) Calculate the amount the chairman had to contribute to the club to cover the deficit. [3]

QUESTION 11 NOVEMBER 2016 P33 Q2

AB Cricket Club is a not-for-profit organisation.
REQUIRED
(a) State two reasons why the members of a not profit organisation do not receive a dividend. [2]
Additional information
The treasurer of AB Cricket Club provided the following financial information:
1 At 1 September 2015 the assets and liabilities were:
$
Equipment at net book value 7 800
Subscriptions in advance 490
Subscriptions in arrears 270
Life membership fund 1 500
Trade payables for refreshments 265
Inventory of refreshments 420
Accumulated fund 7 825

2 The receipts and payments account for the year ended 31 August 2016 was as follows:
Receipts and payments account
$ $
Bank balance b/d 1 590 Groundsman’s wages 7 500
Subscriptions 11 200 Repairs to clubhouse 700
Sale of equipment 4 000 Purchase of equipment 2 500
Match ticket sales 6 400 Cost of refreshments 1 700
Refreshments 2 500 Awards to players 1 450
Life membership 800 Administration expenses 760
Donation 3 500 Bank balance c/d 11 880
_____ Savings account c/d 3 500
29 990 29 990
3 At 31 August 2016, the balances were:
$
Subscriptions in advance 295
Subscriptions in arrears 165
Trade payables for refreshments 315
Inventory of refreshments 390
4 The donation of $3 500 is to be used for the purchase of a new clubhouse. It had been invested in a new
savings account and is to be capitalised.
5 The club depreciates its equipment at 10% on the net book value. A full year’s depreciation is charged in
the year of purchase. No depreciation is charged in the year of sale.
6 Equipment sold had a net book value of $3 640.
7 The life membership fund is transferred to the income and expenditure account over 10 years in equal
instalments.
8 For the year ended 31 August 2016 the club made a profit of $720 on the sale of refreshments.
Chapter 1 23 Accounts of Non Profit Organisations

REQUIRED
(b) Prepare the income and expenditure account for the year ended 31 August 2016. [11]
(c) Prepare the statement of financial position at 31 August 2016. [8]
(d) Explain why the club transfers life membership fund to the income and expenditure accounts over 10 years.
[4]
QUESTION 12 NOVEMBER 2017 P31 Q2
The EF Tennis Club generates revenue from member subscriptions by selling tickets for matches and operating a
club shop. It also receives income from renting out their catering facility.
The treasurer has provided the following figures for the year ended 31 December 2016:
Receipts and Payments Account
2016 $ 2016 $
Jan 01 Balance b/d 1 546 Dec 31 New equipment 1 400
Dec 31 Shop sales 8 960 Dec 31 Shop purchases 5 720
Match tickets 2 740 Dec 31 Printing & advertising for matches 3 765
Sale of old equipment 1 760 Dec 31 Ground staff wages 4 210
Rent of catering facilities 2 600 Dec 31 Shop staff wages 2 200
Subscriptions 3 600 Dec 31 Balance c/d 8 911
Donation 5 000 _____
26 206 26 206
2017
Jan 1 Balance b/d 8 911

Other balances are:

1 January 2016 31 December 2016
$ $
Shop inventory 975 826
Equipment at net book value 14 760 ?
Shop trade payables 1 210 1 450

REQUIRED
(a) Distinguish between the capital of a sole trader and the accumulated fund of a non-profit-making club or
society. [2]
(b) Prepare the shop income statement for the year ended 31 December 2016. [4]

Additional information
1 Equipment is depreciated at 10% of net book value at the year end. Equipment which was sold had a net
book value of $1 900.
2 The rent received for the catering facility is $200 per month and commenced on 1 January 2016.
3 The annual subscription for the year ended 31 December 2016 was $9 per member. On 1 January 2017 it
was increased to $10 per member.
At 1 January 2016:
20 members had paid their subscription in advance for 2016.
There were 6 members in arrears for 2015. Their membership has been withdrawn and the amount
they owed is to be written off as a bad debt.
At 31 December 2016:
26 members paid their subscription in advance for 2017.
10 members were in arrears for 2016 and they had until 30 June 2017 to pay.
4 The donation of $5 000 was received specifically to start a new fund for a club-house. The treasurer would
like to invest this in a separate long-term savings account.
REQUIRED
(c) Prepare the income and expenditure account for the year ended 31 December 2016. [10]
Chapter 1 24 Accounts of Non Profit Organisations

(d) Prepare an extract from statement of financial position at 31 December 2016 to show the current assets
and current liabilities of the club. [4]
(e) Discuss whether or not the treasurer should invest the fund for the club-house in a separate long-term
savings account. Justify your answer. [5]

QUESTION 13 NOVEMBER 2017 P32 Q1

The GT Boating Club is a not-for-profit organisation which collects funds by subscriptions paid annually.
At 1 January 2016 the following assets and liabilities were held by the club:
$
Boathouse 240 000
Fixtures and fittings
Cost 15 000
Accumulated depreciation 10 000
Trade payables 1 750
Total inventory 1 100
Bank 6 150 debit
Insurance paid in advance 1 100
Electricity owing 450
Subscriptions in arrears 600
Subscriptions in advance 400

Additional information
1 The club runs a restaurant for the exclusive use of members and their guests. During the year ended 31
December 2016 the revenue of the restaurant was $45 000.
2 The opening restaurant inventory was 75% of the total club inventory. The closing restaurant inventory had
doubled at 31 December 2016.
3 During the year ended 31 December 2016 the club paid $28 350 for restaurant purchases.
All the club’s trade payables at 1 January 2016 related to the restaurant suppliers. This had risen by 20% at
31 December 2016.
4 The club paid insurance for the year of $4 800 and electricity of $2 000. Half of these costs are charged to
the restaurant.
At 31 December 2016 the club still owed $950 for insurance.
REQUIRED
(a) Prepare a statement to calculate the restaurant profit for the year ended 31 December 2016.
The statement should also clearly show the gross profit. [10]
Additional information
Another local boating club runs a similar restaurant. Its latest accounts showed that the restaurant had achieved a
gross margin of 45%.
REQUIRED
(b) (i) Calculate the difference between the gross margins of both restaurants. [2]
(ii) Discuss three actions which the club could take to improve the gross margin. [6]

Additional information
The club is now considering the introduction of a life membership subscription.
The annual subscription is $100 and the proposed life subscription would be $1 000.
Gurmukh, a retired gentleman, is considering joining the club and seeks your advice on whether or not he should
pay an annual subscription or the life membership.

REQUIRED
(c) Explain the accounting treatment of the life subscriptions. [2]
(d) Advise Gurmukh whether or not he should become a life member. Justify your advice. [5]
Chapter 1 25 Accounts of Non Profit Organisations

QUESTION 14 NOVEMBER 2017 P33 Q1

The RS Rowing Club is a not-for-profit organisation.
A summary of the club’s receipts and payments account for the year ended 31 March 2017 is as follows:
Receipts and payments account
$ $
Balance b/d 4 370 Purchases of sports equipment 1 624
Members’ subscriptions 10 300 Rent of boathouse 2 800
Sales of sports equipment 1 850 General expenses 1 379
Entry fees for annual boat race 4 200 Wages 3 500
Prizes for annual boat race 325
Expenses of annual boat race 2 456
_____ Balance c/d 8 636
20 720 20 720

Additional information
1 The club owns boats which had originally cost $24 000. Accumulated depreciation at 1 April 2016 was $11
200. The depreciation policy is to charge 10% per annum using the reducing balance method.
2 The club also sells sports equipment to its members. Inventory of sports equipment was as follows:
$
1 April 2016 364
31 March 2017 429
3 Members’ subscriptions in arrears and paid in advance were as follows:
1 April 2016 31 March 2017
$ $
Members’ subscriptions in arrears 700 650
Members’ subscriptions in advance 350 450
4 The balance on the accumulated fund on 1 April 2016 was $40 614.

REQUIRED
(a) Identify four terms used only in the financial statements of a not-for-profit organisation with the
corresponding terms used in the financial statements of a profit-making business. [4]
(b) Prepare the income and expenditure account for the year ended 31 March 2017. [8]
(c) Prepare an extract from the statement of financial position at 31 March 2017 showing the accumulated
fund of the club at that date. [2]
Additional information
The club has decided to introduce a scheme offering life membership for payment of $400. Annual subscription fees
are currently $50. The club members think that the life membership fees should be credited in full to the income
and expenditure account when received. The treasurer has suggested that the life membership payments should be
credited to income and expenditure account over a number of years.

REQUIRED
(d) Discuss the correct accounting treatment for the life membership. [4]
Additional information
A former member has donated $35 000 to the club. The funds are to be invested and the investment income used
to encourage young people to train for national competitions. The club is considering two investment options.
1 Invest for 3 years at an annual fixed interest rate of 7.5%.
2 Use the funds to build its own boathouse. Part of the new boathouse could be rented to another local group
at an annual rent of $1250.
REQUIRED
(e) Recommend which option the club should select. Support your answer with reasons and relevant
calculations. [7]
Chapter 1 26 Accounts of Non Profit Organisations

QUESTION 15 MAY 2018 P31 & P33 Q4

A Social Club provides activities for the elderly. It also provides them with meals and organises coach trips.
The ledger accounts of the club for the year ended 31 December 2017 included the following:
Subscription account
Details $ Details $
Balance b/d 400 Balance b/d 100
Income and expenditure account 26 300 Bank 25 800
Balance c/d 50 Irrecoverable debts 250
_____ Balance c/d 600
26 750 26 750

Fixtures and fittings account

Details $ Details $
Balance b/d 12 000 Balance c/d 15 300
Bank 3 300 _____
15 300 15 300

Provision for depreciation of fixtures and fittings account

Details $ Details $
Balance c/d 3 930 Balance b/d 2 400
____ Income and expenditure 1 530
3 930 3 930

The following information was also available.

1 The club owned its own premises which had an original cost of $100 000. These were not depreciated.
2 On 1 January 2017 the bank account had a debit balance of $4 700 and the accumulated fund amounted to
$114 850.
3 The sale of meals to members during the year amounted to $21 500 and made a profit of $2 600. Inventory
of food remained constant at $250. No purchases of food were made on a credit basis. All receipts and
payments for meals were made through the bank account.
4 The club organised two coach trips every month. For each trip it hired a 50-seater coach (with driver) at a
cost of $1 000. During 2017 the club sold 620 coach trip tickets for $25 each.
All receipts and payments for trips were made through the bank account.
5 Other running costs paid during the year totalled $18 100. These included staff costs.
6 Staff costs of $200 were accrued at the end of the year.

REQUIRED
(a) State two differences between a club and a limited company. [4]
(b) Prepare the income and expenditure account for the year ended 31 December 2017. [7]
(c) Prepare the statement of financial position at 31 December 2017. [10]

Additional information
The management committee of the club is considering increasing the price of the coach trip tickets to members.
(d) Advise the management committee whether or not it should increase the price of the coach trip tickets.
Justify your answer. [4]
Chapter 1 27 Accounts of Non Profit Organisations

SOLUTION CHAPTER 1
QUESTION 1 MAY 2011 P21 Q2
(a) Café income statement for the year ended 30 April 2011
$ $
Revenue (sales) 90 000
Cost of sales
Inventory at 1 May 2010 6 500
Purchases 36 000
Inventory at 30 April 2011 4 800
37 700
Add Direct wages ($28 800 + $4 000 – $500) 32 300 70 000
Gross profit 20 000
Overheads
Heating and lighting ($18 000 × 40%) 7 200
Rent ($21 000 × 40%) 8 400 15 600
Profit for the year (net profit) 4 400

(b) Income and Expenditure account for the year ended 30 April 2011
Incomes $ $
Profit on café 4 400
Subscriptions ($34 000 – $2 200 + $3 600 + $5 000 – $3 500) 36 900
Donations 450
Ticket sales 14 560 56 310
Expenses
Rent ($21 000 × 60%) 12 600
Heating and lighting ($18 000 × 60%) 10 800
Depreciation of equipment ($14 400 – $4 000) 10 400
Interest on loan ($20 000 × 10% × 6/12) 1 000 (34 800)
Surplus of incomes over expenditures 21 510

(c) Balance Sheet at 30 April 2011

$ $ $
Non-current assets Cost Depreciation NBV
Equipment 104 000 14 400 89 600
Current Assets
Inventory 4 800
Subscriptions in arrears 3 600
Bank (balancing figure) 4 010
12 410
Current liabilities
Subscriptions prepaid 3 500
Loan interest 1 000
Wages accrued 4 000 (8 500) 3 910
93 510
Non-current liabilities
Loan 20 000
73 510
Represented By
Accumulated fund 52 000
Add Surplus 21 510 73 510
Chapter 1 28 Accounts of Non Profit Organisations

WORKINGS
Calculation of Accumulated Fund
Assets $ $
Equipment ($40 000 – $4 000) 36 000
Inventory 6 500
Bank 12 800
Subscriptions due 2 200 57 500
Less liabilities
Subscriptions paid in advance 5 000
Accrued wages 500 (5 500)
Accumulated fund 52 000

QUESTION 2 MAY 2011 P42 Q2 (a to c)

(a) Top Hat Sports Club
Income and expenditure account for the year ended 31 December 2010
INCOMES $ $
Annual subscriptions (265 × $150) 39 750
Life subscriptions ($1 600 × 3 /20) 240 39 990
EXPENSES
Café loss (See Workings) 3 560
Wages 10 600
Rent 12 000
General expenses 4 620
Heat, light and power ($8 240 + $910) 9 150
Depreciation ($17 200 + $5 300 – $19 500) 3 000 42 930
Deficit 2 940
(b) Balance sheet as at 31 December 2010
NON-CURRENT ASSETS $ $ $
Equipment 19 500
CURRENT ASSETS
Inventory 800
Subscriptions in arrears 750
Bank 3 780 5 330
CURRENT LIABILITIES
Café payables 760
Accrued heat, light and power 910
Subscriptions in advance 150 1 820 3 510
23 010
Accumulated Fund ($4 320 + $420 + $450 + $17 200 – $700 – $300) 21 390
Less Deficit (2 940) 18 450
Life members' fund [(3 × $1 600) – $240] 4 560
23 010

WORKINGS Café Trading Account for the year ended 31 December 2010
$ $
Café takings (Sales) 12 260
Cost of Sales
Opening inventory 420
Purchases ($8 140 + $760  $700) 8 200
Closing inventory (800) (7 820)
Gross Profit 4 440
Café wages (8 000)
Net Profit on Café 3 560
Chapter 1 29 Accounts of Non Profit Organisations

(c) Public limited company Not-for-profit organisation

(i) Prepares income statement Prepares income and expenditure account
(ii) Excess of total incomes over total expenses is Excess of total incomes over total expenses is
called profit called surplus
Excess of total expenses over total incomes is Excess of total expenses over total incomes is
called loss called deficit
(iii) Shows share capital and reserves Shows accumulated fund
(iv) Financial statements are published and Financial statements are not published
available for general view
(v) Prepares statement of cash flows Prepares receipts and payments account

QUESTION 3 NOVEMBER 2011 P23 Q2 (B)

Hamilton Social Club
Balance Sheet
As at 31 March 2011
Non-Current Assets $ $ $
Equipment 9 360
Current Assets
Café inventory [$3 950 – ($120 − $30)] 3 860
Inventory of stationery 85
Subscriptions in arrears 120
Bank 340
4 405
Current Liabilities
Trade Payables 880
Loan interest due ($5 000 × 5%) 250 1 130 3 275
12 635
Non-Current Liabilities
5% loan (repayable 2015) 5 000
7 635
Financed by
Accumulated fund[$3 400+$240+$5 400+$110+$1 800–$1 570] 9 380
Deficit for the year (balancing figure) (1 745) 7 635

QUESTION 4 NOVEMBER 2012 P21 Q2

(a) Subscription Account
$ $
Balance (due) b/f 2 600 Balance (advance) b/d 6 300
Income and expenditure (balancing figure) 86 980 Bank (subscriptions received) 84 400
Balance (advance) c/d 4 500 Bad debts 280
_____ Balance (due) c/d 3 100
94 080 94 080
Balance (due) b/d 3 100 Balance (advance) b/d 4 500

(b) PPE Rowing Club

Income and Expenditure Account
For the year ended 31 March 2012
Income $ $
Subscriptions (“a” part) 86 980
Profit from competitions [$12 200 – ($800 + $3 100 – $300)] 8 600
Profit from dinner dance [$14 000 – ($2 400 + $5 200)] 6 400
Donations 1 500
Interest ($20 000 × 5%) 500 103 980
Chapter 1 30 Accounts of Non Profit Organisations

Expenditure $ $
Insurance 9 800
Clubhouse maintenance 10 300
General expenses ($30 200 + $400 – $800) 29 800
Electricity 1 600
Bad debts 280
Depreciation on equipment ($160 000 + $46 000  $26 000  $140 000) 40 000
Loss on Sale of fixed asset ($26 000  $24 000) 2 000 93 780
Surplus of income 10 200

(c) Statement of Financial Position

As at 31 March 2012
Non-current assets $ $
Clubhouse 150 000
Equipment 140 000 290 000
Current Assets
Stock of prizes 300
Subscriptions due and unpaid 3 100
Interest owing ($20 000 × 5%) 500
Deposit account 20 000
Bank (through bank account) 10 500
34 400
Current Liabilities
Subscriptions in advance 4 500
General expenses owing 400 4 900 29 500
319 500
Represented By
Accumulated Fund ($150 000 + $160 000  $800 + $2 600 
$6 300 + $800 +$3 000) 309 300
Surplus 10 200 319 500
QUESTION 5 MAY 2013 P21 Q1
(a) Income statement (trading section) for the year ended 31 March 2013
$ $
Revenue 50 000
Cost of sales
Inventory at 1 August 2012 15 400
Purchases 23 000
38 400
Inventory at 31 March 2013 (13 200) (25 200)
Gross profit 24 800
Gross Profit
(b) Gross Profit (%) = × 100
Sales revenue
$24 800
= × 100
$50 000
= 49.6%

(c) The obtained gross profit margin is worse than planned margin. This could be due to the following reasons.
 There may have been increase in the cost of purchases without corresponding increase in sales price.
 Loss of inventory by theft or fire not accounted for
 Undervaluation of closing inventory or overvaluation of opening inventory
 Reduction in selling price
Chapter 1 31 Accounts of Non Profit Organisations

(d) Income and Expenditure account

For the year ended 31 March 2013
INCOMES $ $
Profit on food and drink (“a” part) 24 800
Subscriptions ($30 000  $1 600  $400 + $1 000 + $2 600) 31 600
Profit on concert ($116 800  $83 500  $27 000) 6 300 62 700
EXPENSES
Printing ($14 000  $2 600 + $2 800) 14 200
Repairs 8 000
Salaries ($45 000  $2 800 + $1 600) 43 800
Sundry expenses 760
Sponsorship 1 000
Loan interest ($30 000 × 12% × 9/12) 2 700
Depreciation [($200 000 – $40 000 + $10 000) x 20%] 34 000
Loss on sale of equipment ($32 000  $30 000) 2 000 106 460
Deficit of expenditure/income 43 760

(e) Statement of Financial Position at 31 March 2013

Cost Depn NBV
Non-Current Assets $ $ $
Equipment[($200 – $40 + $10)000 ; ($40 –$8 + $34) 000 170 000 66 000 104 000
Current Assets
Inventory 13 200
Subscriptions in arrears 2 600
Bank 32 540 48 340
Current Liabilities
Subscriptions prepaid 400
Salaries accrued 1 600
Accrued Interest 2 700
Printing accrued 2 800 7 500 40 840
144 840
Non-Current Liabilities - Bank loan 30 000
Net assets 114 840
Accumulated fund (See Workings) 158 600
Less Deficit 43 760 114 840
WORKINGS Calculation of Accumulated Fund
$
Assets ($160 000 + $15 400 + $1 600) 177 000
Less Liabilities ($2 800 + $1 000 + $2 600 + $12 000) (18 400)
Accumulated Fund 158 600
QUESTION 6 MAY 2014 P23 Q1
(a) Ocean Fishing Club Shop
Trading Account for the year ended 31 March 2014
$ $
Sales 7 690
cost of sales
Opening Inventory 975
Purchases ($2 974 + $784  $560) 3 198
4 173
Closing Inventory (859) (3 314)
Gross profit 4 376
Chapter 1 32 Accounts of Non Profit Organisations

Expenses $ $
Wages ($3 670 + $195  $250) 3 615
Depreciation – Shop fittings ( $750  $640) 110 (3 725)
Shop profit for the year 651

(b) Income and Expenditure Account for the year ended 31 March 2014
Incomes $ $
Shop profits (‘a’ part) 651
Subscriptions (350 × $20) 7 000
Receipts from annual family day 2 300
Interest on deposit account ($6 000 × 5%) 300 10 251
Expenses
Administration expenses 2 790
Repairs to equipment ($2 500 + $370  $420) 2 450
Depreciation on equipment [($9 800 + $5 600)  $2 940] × 15% 1 869 (7 109)
Surplus 3 142

(c) Ocean Fishing Club

Statement of Financial Position at 31 March 2014
Non-Current Assets Cost Dep’n NBV
$ $ $
Equipment ($9 800 + $5 600); ($2 940 + $1 869) 15 400 4 809 10 591
Shop fittings 750 110 640
16 150 4 919 11 231
Current Assets
Inventory 859
Subscription in arrears(10 × $20) 200
Bank – current account 876
Bank – deposit account [$13 000 + ($6 000 × 5%)] 13 300 15 235
Current Liabilities
Trade payables 784
Other payables ($370+ $195) 565
Subscriptions in advance (W 1) 720 (2 069) 13 166
24 397
Accumulated Fund at 1 April 2013 19 805
Add Surplus 3 142
22 947
Donations fund 1 450 24 397

WORKINGS
(W 1) Subscription Account
$ $
Balance b/f - arrears (24 × $20) 480 Balance b/f - advances (30 × $20) 600
Income & Expenditures A/c (350 × $20) 7 000 Bank - subscriptions received 7 400
Balance c/d - advances (Balancing fig ) 720 Balance c/d - arrears (10 × $20) 200
8 200 8 200
(W 2) Calculation of Accumulated Fund
Assets at 1 April 2013 $
[$975 + $6 000 + ($9 800  $2 940) + $750 + $6 570 (bank) + $480 (W 1)] 21 635
Liabilities at 1 April 2013 [$560 + $420 + $250 + $600 (W 1)] (1 830)
Accumulated Fund at 1 April 2013 19 805
Chapter 1 33 Accounts of Non Profit Organisations

(d) 1 Use of funds from the deposit account

2 Bank loan
3 Ask members for donations
4 Fund raising events

(e) 1 Use of funds from the deposit account

Advantage: Immediate availability of funds.
Disadvantage: No cash reserves will be left. Interest income on deposit will be lost
2 Bank loan
Advantage: Funds available from bank for full amount.
Disadvantage: Bank loans usually require security. Interest will have to be paid.
3 Ask members for donations
Advantage: No fixed interest charges.
Disadvantage: May not generate required funds so some other source may be required.
4 Fund raising events
Advantage: No fixed interest charges.
Disadvantage: May not generate required funds so some other source may be required.

QUESTION 7 MAY 2016 P31 Q1

(a) In a trading organization, term capital is used to represent the amount invested by owner within the
business. As there are no owner(s) in non-profit organisations so accumulated fund replaces capital in this
case and represents the accumulation of surpluses over a number of years.

(b) Income and expenditure accountfor the year ended 31 March 2016
Incomes $ $
Subscriptions (350 members @ $100) 35 000
Life membership [(25 × $750)/15 years] 1 250
Restaurant profit (W 1) 4 660 40 910
Expenses
Administrative expenses ($4 750 + $350 – $200) 4 900
Depreciation on fixtures [($20 000× 80%×80%)+$34 500]×20% 9 460 (14 360)
Surplus 26 550

(W 1) Restaurant Trading Account (to calculate restaurant profit or loss)

$ $
Restaurant takings 17 450
Restaurant purchases ($6 950 + $955 – $845) 7 060
Restaurant wages ($5 450 + $280) 5 730 12 790
Restaurant profit 4 660

(c) As donations are not received on regular basis and their amounts vary from year to year so clubs capitalise
the donations amounts. In addition, donations may be received for some specific purpose or to complete a
specific future project so should not be treated as income in the year of receipt only.
(d) (i) 1 Fund raising events
Advantage: No fixed interest charges.
Disadvantage: May not generate required funds so some other source may be required.
2 Bank deposit and bank loan
Advantage: Funds available from bank for full amount.
Disadvantage: Bank loans usually require security. Interest will have to be paid.
3 Sponsorship
Chapter 1 34 Accounts of Non Profit Organisations

Advantage: No fixed interest charges.

Disadvantage: May not generate required funds so some other source may be required.
(d) (ii) A combination of the above sources may be more beneficial for the club. For instance, Fund raising
events or sponsorships may be arranged. In case these sources do not generate required funds
then bank balance may be used. In case, there is still some deficiency then a loan may be arranged.
QUESTION 8 MAY 2016 P32 Q1 (a to d)
(a) Limited companies prepare income statement whereas a not for profit organization prepares income and
expenditure account.
Non- profit organisations use the term ‘surplus’ or ‘deficit’ for the terms profit or loss as used by companies.
Non- profit organisations use the term Accumulated fund for capital as used by companies.
(b) The Seagulls Boating Club
Trading account for the year ended 31 March 2016
$ $
Revenues 25 750
Less cost of sales
Opening inventory 3 875
Purchases ($8 850 + $2 952  $2 831) 8 971
Closing inventory (3 423) (9 423)
Gross profit 16 327
Wages [($600 × 12) + ($25 750 × 10%)] (9 775)
Profit for the year 6 552
(c) Subscriptions account
$ $
Balance b/f (9 × $80) 720 Balance b/f (4 × $80) 320
Income & expenditure a/c (310 × $80) 24 800 Bank (Balancing figure) 24 480
Balance c/d (3 × $80) 240 Balance c/d (12 × $80) 960
25 760 25 760

(d) The Seagulls Boating Club

Income and expenditure account for the year ended 31 March 2016
Incomes $ $
Subscriptions (‘c’ part) 24 800
Cafe profit (‘b’ part) 6 552 31 352
Expenses
General expenses [$2 500  ($180 × 2/3)] 2 380
Depreciation on fixtures [($16 000 × 75% × 75%) × 25%] 2 250 (4 630)
Surplus of incomes over expenditures 26 722

QUESTION 9 NOVEMBER 2016 P31 Q1

(a) International Dancing
Income and Expenditure Account for the year ended 31 December 2015
Incomes $
Annual subscriptions 106 500
Profit on sale of CDs (W 1) 3 300 109 800
Expenses
Rent 15 000
Staff costs 61 000
Insurance and administration ($4 200 – $300 + $50) 3 950
CDs for club use 4 000
Depreciation ($17 200 + $11 700 – $21 300) 7 600 (91 550)
Surplus of income over expenditure 18 250
Chapter 1 35 Accounts of Non Profit Organisations

(W 1) CD’s Trading Account

For the year ended 31 December 2015
$ $
Sales 5 800
Cost of Sales
Opening Inventory 180
Purchases 2 600
2 780
Closing Inventory (280) (2 500)
Profit on sale of CD’s 3 300

(b) (i) Bank Account

$ $
Balance b/f 13 500 Rent 15 000
Subscription 105 500 Staff costs 61 000
Sale of Cd’s 5 800 Insurance and administration 4 200
Purchase of music CDs for resale 2 600
Purchase of equipment 11 700
Purchase of CDs for club use 4 000
______ Balance c/d (balancing figure) 26 300
124 800 124 800
Balance b/d (balancing figure) 26 300

(ii) Statement to calculate the amount of the loan

$
Purchase price of premises 142 000
Amount arranged from existing bank balance [$26 300 (b(i)) × 1/2] (13 150)
Life membership fees ($5 000 × 10%) (50 000)
Bank loan needed to finance the project 78 850

(c) Statement to show the effects of purchase of the premises on future annual cash flows
$
Rent saved 15 000
Loan interest payable ($78 850 × 10%) (7 885)
Annual membership fees foregone of 10 members joined as life members (5 000)
Annual net cash flow saving 2 115

(d) Advantages
 Certainty of securing a long term business location
 An investment that will potentially increase in value
 Helps to avoid any sudden, large rent increases
 Ability to customise the premises without the landlord’s consent
 Increase the value of the business and the net wealth of the business owner
 The unused area of the building space may be sublet to generate some additional revenue
Disadvantages
 High initial cost -- which might be used for more important business purposes.
 Owning a property also comes with responsibilities like responsibility for maintenance, fixtures and
fittings, decoration and security.
 Any fall in the value of the property will decrease your capital.
 It is usually harder to relocate the business, because selling business premises is a complex and
sometimes lengthy process.
 Payment of loan interest and repayment of loan are also important factors.
Chapter 1 36 Accounts of Non Profit Organisations

QUESTION 10 NOVEMBER 2016 P32 Q1

(a) Donation Member subscription
Voluntary basis (not of binding on donors) Members’ obligation
May be from both members and non-members From members only
Irregular payment Regular payment, i.e. monthly or annually
May be for a specific purpose or for general purpose For daily running of the organization

(b) Sunshine Social Club

Shop Trading Account for year ended 31 December 2015
$ $
Gift shop takings 124 200
Cost of sales
Inventory at 1 Jan 2015 24 000
Purchases ($74 500 + $64 300 – $54 500) 84 300
Inventory at 31 December 2015 (18 600) (89 700)
Gross profit 34 500
Expenses
Shopkeeper wages ($30 400 – $3 450 – $3 200) 23 750
Depreciation of shop equipment [($55 000 + $4 000) × 20%] 11 800
Insurance [($9 460 + $1 400 – $1 660) × 25%] 2 300
Water and electricity [($14 800 – $2 700 + $2 000) × 40%] 5 640 (43 490)
Shop loss transferred to Income and Expenditure account (8 990)

(c)  start selling goods to non-members as well

 reduce or stop discount offers to members
 better control of overheads
 review the proportion of expenses allocated to gift shop

(d) Statement to calculate the chairman’s contribution to cover the deficit

$ $
Annual ball tickets 68 000
Less Hire of ballroom & band for annual ball 48 000
Food for annual ball 36 000 (84 000)
Loss on annual ball (16 000)
Chairman’s share ($16 000 × 1/2) 8 000

QUESTION 11 NOVEMBER 2016 P33 Q2

(a) A non-profit organisation is a legal entity which nobody owns. It has trustees or members, who run the
organization but cannot sell their "trusteeship or membership". It is not allowed to distribute profits to
anyone, no matter how much money it makes. In these organisations 100% of the money (surplus) earned
is re-invested in the organisation to finance its main cause.

(b) AB Cricket Club

Income and expenditure account for the year ended 31 August 2016
Incomes $ $
Subscriptions ($11 200 + $165  $295 + $490 – $270) 11 290
Profit on the sale of equipment ($4 000  $3 640) 360
Match ticket sales 6 400
Profit from refreshments (W 1) – already given in question 720
$1 500 + $800
Life membership ( ) 230 19 000
10
Chapter 1 37 Accounts of Non Profit Organisations

Expenses $ $
Groundsman’s wages 7 500
Repairs to clubhouse 700
Awards to players 1 450
Administration expenses 760
Depreciation on equipment [($7 800 + $2 500 – $3 640) × 10%] 666 11 076
Surplus of income over expenditure 7 924
(c) AB Cricket Club
Statement of financial position as at 31 August 2016
Non-current assets $ $
Equipment at net book value [($7 800 + $2 500 – $3 640)  $666] 5 994
Current assets
Inventory 390
Subscriptions in arrears 165
Bank 11 880
Savings account 3 500 15 935
Total assets 21 929
Accumulated fund at 1 September 2015 7 825
Add Surplus for the year 7 924 15 749
Life membership fund ($1 500 + $800  $230) 2 070
Clubhouse fund (donation) 3 500
21 319
Current liabilities
Subscriptions in advance 295
Trade payables for refreshments 315 610
Total funds and liabilities 21 929
(d) In case of life membership, the members are generally required to make the payment in a lump sum only
once which enables them to become the members for whole of the life. Life members are not required to
pay the annual membership fees. As 'life membership fees' is a substitute for 'annual membership fees',
therefore, it is desirable that life membership fees should be credited to a separate fund and fair proportion
be credited to income in subsequent years as the organisation is supposed to provide membership facilities
for the rest of their lives.
QUESTION 12 NOVEMBER 2017 P31 Q2
(a) In a trading organization, term capital is used to represent the amount invested by owner within the
business. As there are no owner(s) in non-profit organisations so accumulated fund replaces capital in this
case and represents the accumulation of surpluses over a number of years. Drawings by a sole trader reduce
his capital but as there is no owner in a non-profit organisation so accumulated fund is not affected by
drawings. Capital increases through profits and reduces by losses & drawings whereas surpluses are added
in accumulated funds and deficits are subtracted.
(b) EF Tennis Club shop trading account
For the year ended 31 December 2016
$ $
Sales 8 960
Cost of Sales
Opening inventory 975
Purchases ($5 720 + $1 450 – $1 210) 5 960
Closing inventory (826) (6 109)
2 851
Shop staff wages (2 200)
Shop profit 651
Chapter 1 38 Accounts of Non Profit Organisations

(c) EF Tennis Club

Income and expenditure account for the year ended 31 December 2016
Incomes $ $
Subscriptions [$3 600 + (20 × $9) + (10 × $9) – (26 × $10)] 3 610
Shop profit 651
Caterer’s rent ($200 × 12) 2 400
Match ticket sales 2 740 9 401
Expenses
Depreciation on equipment [($14 760 + $1 400 – $1 900) × 10%] 1 426
Printing and advertising for matches 3 765
Ground staff wages 4 210
Bad debts (6 × $9) 54
Loss on sale of equipment ($1 900 – $1 760) 140 9 595
Deficit for the year (194)

(d) Statement of Financial Position (Extract) at 31 December 2016

Current assets $ $
Shop inventory 826
Subscriptions in arrears (10 × $9) 90
Bank and cash 8 911 9 827
Current liabilities
Trade payables 1 450
Subscriptions in advance (26 × $10) 260
Rent in advance [$2 600 – ($200 × 12)] 200 1 910
7 917

(e)  As donation is received for a specific long term purpose so should be invested in long term saving
account.
 This investment will create a source of income for the organization.
 It would diversify the incomes of the organization and reduces its dependency on conventional
earning sources.
 The interest on long term saving account may help to “smooth out” the overall income stream.

QUESTION 13 NOVEMBER 2017 P32 Q1

(a) Statement to calculate the restaurant profit for the year ended 31 December 2016
$ $
Revenue 45 000
Cost of sales
Opening inventory ($1 100 × 75%) 825
Purchases [$28 350 + ($1 750 × 120%) – $1 750] 28 700
29 525
Closing inventory ($825 × 2) (1 650) (27 875)
Gross profit 17 125
Expenses
Insurance [($4 800 + $950 + $1 100) × 50%] 3 425
Electricity ($2 000  $450) × 1/2) 775 (4 200)
Restaurant profit 12 925

$17 125 ×100

(b) (i) Difference in gross margins = 45%  38.06% (
$45 000
)
= 6.94%
Chapter 1 39 Accounts of Non Profit Organisations

(ii) Bulk buying with higher trade discounts.

Increase in selling prices
Change of suppliers with cheaper rates
More sales of higher margin items

(c) In case of life membership, the members are generally required to make only one payment in a lump sum
which enables them to become the members for whole of their lives. As 'life membership fees' is a
substitute for 'annual membership fees', therefore, it is debited to bank account and credited to a separate
fund and fair proportion be credited to income in subsequent years as the organisation is supposed to
provide membership facilities for the rest of their lives.

(d) If Gurmukh has $1 000 to pay life fee he would not be required to pay membership fee again in his life
irrespective of changes in annual membership rates. As Gurmukh is a retired personnel so it can only benefit
him on financial grounds if he lives for a period more than one year. Clubs usually offers special benefits for
life members which could also be there. However, life fee, once paid is not recoverable or refundable.
On the basis of above discussion, Gurmukh may become life member if he has ample funds like $1 000and
his health conditions are good.

QUESTION 14 NOVEMBER 2017 P33 Q1

(a)
Not-for-profit organisations Profit-making organisations
Accumulated fund Capital / Equity
Income and Expenditure account Income Statement
Receipts and payments account Bank account/Cash book
Surplus of income over expenditure Profit
Excess of expenditure over income (deficit) Loss

(b) RS Rowing Club

Income and Expenditure Account for the year ended 31 March 2017
Incomes $ $
Members’ subscriptions ($10 300 + $650 – $700 – $450 + $350) 10 150
Profit on sale of equipment [$1850 (sales)  {($364+$1624$429) cost of sales}] 291
Profit from annual boat race [$4 200  $325  $2 456) 1 419 11 860

Expenses
Rent of boathouse 2 800
General expenses 1 379
Wages of boatman 3 500
Depreciation of boats and equipment [($24 000  $11 200) × 10%] 1 280 (8 959)
Surplus of income over expenditure 2 901

(c) RS Rowing Club

Extract from statement of financial position at 31 March 2017
$
Accumulated fund at 1 April 2016 40 614
Surplus of income over expenditure 2 901
Accumulated fund at 31 March 2017 43 515

(d) In case of life membership, the members are generally required to make only one payment in a lump sum
which enables them to become the members for whole of their lives.
Chapter 1 40 Accounts of Non Profit Organisations

As 'life membership fees' is a substitute for 'annual membership fees', therefore, it is debited to bank
account and credited to a separate life fee fund and fair proportion be credited to income in subsequent
years as the organisation is supposed to provide membership facilities for the rest of their lives.
This treatment is also in compliance with the matching concept. The life fee should be spread over a suitable
time period for which club is expecting to provide services to the life members. The suitable time period
may be determined through dividing the life fee by the annual membership fee. This time period is 8 years
($400/$50) in this case.

(e) If amount is invested at interest rate of 7.5% then it will generate annual income $2 625 ($35 000 × 7.5%).
On the other hand if club builds its own boat house, then club would save annual rent of boathouse
amounting to $2 800 and in addition it will also generate an annual rental income of $1 250. Total extra
income would be $4 050.
As investment is for three years only so the funds would be available to the club afterwards for other
investment opportunities, this flexibility would not be available in case of building a boathouse. Boathouse
may involve higher maintenance with passing years but as rents usually increase on yearly basis so increase
in rental income and saving also justifies the building of a new boat house.
On purely financial grounds, the club should use the funds to build the new boat-house.
QUESTION 15 MAY 2018 P31 & P33 Q4
(a)
Public limited company Not-for-profit organisation
(i) Prepares income statement Prepares income and expenditure account
(ii) Excess of total incomes over total expenses is Excess of total incomes over total expenses is called
called profit surplus
Excess of total expenses over total incomes is Excess of total expenses over total incomes is called
called loss deficit
(iii) Shows share capital and reserves Shows accumulated fund
(iv) Financial statements are published and available Financial statements are not published
for general view
(v) Prepares statement of cash flows Prepares receipts and payments account

(b) Income and Expenditure Account for the year ended 31 December 2017
Incomes $ $
Subscriptions 26 300
Profit on sale of meals 2 600 28 900
Less expenditure
Loss on trips [($1000 × 2 × 12)  (620 × $25)} 8 500
Irrecoverable debts (subscriptions written off) 250
Depreciation on fixtures and fittings 1 530
Other running costs ($18 100 + $200) 18 300 (28 580)
Surplus 320

(c) Statement of Financial Position at 31 December 2017

$ $ $
Non-current assets Cost Acc dep NBV
Premises 100 000 100 000
Fixtures and fittings 15 300 3 930 11 370
115 300 3 930 111 370
Current assets
Inventory of meals 250
Subscriptions in arrears 600
Bank (W1) 3 200 4 050
Total assets 115 420
Chapter 1 41 Accounts of Non Profit Organisations

Accumulated fund at 1 January 2017 114 850

Surplus for the year 320
Accumulated fund at 31 December 2017 115 170
Current liabilities
Other payables (accrued staff costs) 200
Subscriptions in advance 50 250
115 420

(W 1) Bank account (to calculate bank balance)

$ $
Balance b/f 4 700 Purchase of meals ($21 500  $2 600) 18 900
Subscriptions received 25 800 Purchase of Fixtures 3 300
Sale of meals 21 500 Cost of trips ($1 000 × 2 × 12) 24 000
Sale of trip tickets (620 × 25) 15 500 Other running costs 18 100
____ Balance c/d 3 200
67 500 67 500

(d) Increase in the price of the coach trip tickets does not seem to be a good option as coaches for trips are
620 bookings
operated at just little more than 50%( ). Increase in ticket price could further depress
1 200 seats
demand.
Company should rather consider reduction in prices of tickets to attract more customers or some
promotions such as a discount for booking on re trips or more could be offered.
Prices of ticket could be adjusted after analysing trip which are most popular in terms of timing or
destinations. Number of trips could be adjusted accordingly.
Chapter 2 42 Accounting For Consignments

CHAPTER 2 ACCOUNTING FOR CONSIGNMENT

QUESTION 1 SPECIMEN 2016 P3 Q2
Lee started a business in Indonesia on 1 January 2013 selling lawn mowers.
During the first year of trading Lee bought 1000 lawn mowers at $50 each. He shipped 400 of these to Albert, his
agent in Jamaica. Lee also sold 550 lawn mowers in Indonesia.
The following additional information is available.
Freight charges paid by Lee $3 600
Landing duties paid by Albert $400
Rate of commission paid to Albert 10%
Cash remitted by Albert to Lee $19 000
Lee’s income statement for the year ended 31 December 2013 included the following.
$
Gross profit 22 000
Consignment profit 6 720
Selling, distribution and administration costs (arising in Indonesia) 17 600
Lee’s statement of financial position at 31 December 2013 included the following inventory.
$
Jamaica 4 800
Indonesia 2 500
Total inventory 7 300
REQUIRED
(a) Prepare the consignment account in the books of Lee for the year ended 31 December 2013. [8]
(b) Prepare Albert’s account in the books of Lee for the year ended 31 December 2013. [6]
(c) Calculate the number of unsold lawn mowers Albert was holding on 31 December 2013. [5]

Additional information
Lee is considering whether to concentrate his efforts on sales in Indonesia or in Jamaica.
REQUIRED
(d) Advise Lee where to concentrate his sales effort. Support your answer with calculations. [6]

QUESTION 2 NOVEMBER 2016 P33 Q4

Hamid and Patel trade regularly with each other. Patel is based in India and Hamid is based in Scotland.
On 15 November 2014 Hamid sent 100 cases of goods to Patel costing $12 000. The commission on sales was agreed
at 5% of the gross sales.
On the same day Hamid paid delivery charges of $610 and insurance of $110.
Hamid’s financial year ended on 31 March 2015.
At that date Patel provided the following information:
1 70% of the goods had been sold for $10 600.
2 $7 475 had been sent to Hamid.
3 There was an irrecoverable debt of $120.
4 Storage charges of $350 and selling expenses of $245 had been paid by Patel.
Patel paid the balance due on 31 March 2015.
Hamid incurred bank charges of $12 for processing this payment.
REQUIRED
(a) Prepare in the books of Hamid the following accounts at 31 March 2015:
(i) the goods sent on consignment account [1]
(ii) the consignment to Patel account [11]
(iii) Patel account [7]
Chapter 2 43 Accounting For Consignments

(b) Analyse the effect on profit of the irrecoverable debt incurred during the year. [2]

Additional information
Hamid and Patel are now considering forming a partnership rather than continuing to trade on a consignment basis.

REQUIRED
(c) Advise whether or not Hamid and Patel should enter into a partnership with each other. Justify your answer.
[4]

QUESTION 3 NOVEMBER 2017 P33 Q3

Aleksander is a trader with a financial year end of 30 June. He buys containers of sunflower seeds for $100 each.
Some of these he ships to his agent Benji in northern Europe. He pays Benji a commission of 10% of sales value.
The following information is available:
1 On 2 April 2017 Aleksander sent 200 containers to Benji. Aleksander paid packing costs of $120 and freight
costs of $6 080.
2 Benji paid additional freight costs of $1 600 for transport from the port to his warehouse.
3 In the period to 30 June 2017 Benji sold 160 containers for $170 each. He remitted $21 000 to Aleksander
on 14 June.

REQUIRED
(a) Prepare the following ledger accounts in the books of Aleksander for the 3 months ended 30 June 2017.
(i) goods on consignment account [2]
(ii) consignment account [12]
(iii) Benji account [5]

Additional information
The government in Benji’s country decided to introduce import duties from 1 July 2017 which amount to $20 per
container.

REQUIRED
(b) Explain how Aleksander might have dealt with this increase in cost. Support your answer by considering the
effect on the profit per container. [4]
(c) State why an advertising campaign paid for by an agent would not be included in the valuation of inventory.
[2]

QUESTION 4 MAY 2018 P32 Q3

Y Limited is based in Mauritius and has recently sent a consignment of goods to Mahood who lives in Egypt. They
agreed the following terms:
1 Mahood has to make an advance payment before the goods are delivered to him.
2 Mahood is entitled to a commission of 5% on all sales made by him. The commission is calculated on the
sales value after the deductions of the commission.
The following transactions took place during the year ended 31 December 2017.

Y Limited:
sent 1000 units to Mahood and invoiced him at $175 each
paid freight of $15 400 and insurance of $3 200.

Mahood:
made an advance payment of $55 000 to Y Limited
made cash sales of 480 units at $257.50 each
made credit sales of 320 units at $270 each
paid the following:
Chapter 2 44 Accounting For Consignments

$
import duty 1 600
Advertising 9 700
carriage inwards 2 800
carriage outwards 3 300
All customers who bought on credit from Mahood settled their accounts in full at 31 December 2017 except a
customer who bought 16 units. It was confirmed that nothing will be recovered from this customer.
At the year-end 60 units with minor faults were discovered by Mahood. Their net realisable value was $150 each.
Mahood paid the balance owing to Y Limited by cheque.

Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the cost per unit to be used when valuing inventory. [2]
(b) Prepare the consignment account in the books of Y Limited for the year ended 31 December 2017. [13]
(c) Prepare Mahood’s account in the books of Y Limited for the year ended 31 December 2017. [5]

Additional information
The directors of Y Limited are thinking of opening a branch overseas to sell its goods rather than having a
consignment agreement with Mahood.
(d) Suggest whether Y Limited should continue consigning goods to Mahood or open a branch overseas. Justify
your answer. [5]
Chapter 2 45 Accounting For Consignments

SOLUTION CHAPTER 2
QUESTION 1 SPECIMEN 2016 P3 Q2
(a) In the books of Lee
Consignment Account
$ $
Goods on consignment 20 000 (1) Albert (sales) 28 800 (1of)
Bank (freight) 3 600 (1) (25 920 ÷ 0.9)
Albert (landing duties) 400 (1) Balance c/d 4 800 (1)
Albert (commission) 2 880 (1of)
Consignment profit 6 720 (1) ____ __
33 600 33 600
Balance b/d 4 800
Note – Mark for word ‘balance’. ‘Inventory’ not awarded.
(b) In the books of Lee
Albert Account
$ $
Consignment account (sales) 28 800 (1of) Consignment A/c (landing duties) 400 (1)
Consignment A/c (commission) 2 880 (1of)
Bank 19 000 (1)
________ Balance c/d 6 520 (1of)
28 800 28 800
Balance b/d 6 520 (1of)
(c) Calculate the number of unsold lawn mowers Albert was holding on 31 December 2013. [5]
Unit cost = 20 000 + (3600 + 400) (1) ÷ 400 (1) = $60 (1of)
Number of units = 4800 (1) ÷ 60 = 80 units (1of)
(d) • Sales in Jamaica – profit per unit is 6720/320 = $21
• Assuming freight costs etc. are fully variable this would be replicated. Would Lee need a second
agent? Would another agent work for the same rate of commission?
• Could there be problems with exchange rates, import quotas etc?
• Sales in Indonesia – profit per unit is (22 000 – 17 600)/550 = $8. Clearly this is much less. But
expenses may have a substantial fixed component. It would be more useful to compare
contribution.
(1 mark) × 6 valid points
QUESTION 2 NOVEMBER 2016 P33 Q4
(a) (i) Goods sent on consignment account
$ $
Consignment to Patel 12 000
(ii) Consignment to Patel account
$ $
Goods sent on consignment (100 cases) 12 000 Sales ([(100 × 70%) cases] 10 600
Bank - Delivery charges 610 Balance c/d ($12 000 + $610 + $110 +
Bank - Insurance 110 $350) × 30%] 3 921
Patel - Irrecoverable debt 120
Patel - Storage charges 350
Patel - Selling expenses 245
Patel - Commission ($10 600 × 5%) 530
Bank - Bank charges 12
Profit to income statement 544 _____
14 521 14 521
Chapter 2 46 Accounting For Consignments

(iii) Patel account

$ $
Consignment 10 600 Cash (advance) 7 475
Consignment - Irrecoverable debts 120
Consignment - storage expenses 350
Consignment - Selling expenses 245
Consignment - Commission 530
_____ Bank (final settlement) 1 880
10 600 10 600
(b) The irrecoverable debt as an expenses will reduce profit for the year by $120
(c) Hamid and Patel should enter into partnership due to
 availability of additional capital
 sharing of managerial responsibilities resulting in shared workload and less stress
 spread of risk as losses will be shared
Hamid and Patel should not enter into partnership due to
 liability of the partners for debts of their firm is unlimited.
 limited life as death or insolvency of partner(s) dissolves the partnership.
 possible disputes between partners
 practical issues such as speed of communication for decision making between countries e.g. time
differences
QUESTION 3 NOVEMBER 2017 P33 Q3
(a) (i) Goods on consignment account
2017 $ 2017 $
Jun 30 Income statement 20 000 Apr 2 Consignment account 20 000
(ii) Consignment account
2017 $ 2017 $
Apr 2 Goods on consignment (200 × $100) 20 000 Jun 30 Benji – sales (160 units × $170) 27 200
Bank – packing 120 Jun 30 Balance c/d
Bank - freight 6 080 [20000 + (120 + 6080 + 1600)] × 40 5 560
Benji - additional freight charges 1 600 200 units
Jun 30 Benji - commission ($27 200 × 10%) 2 720
Income statement (profit) 2 240
32 760 32 760
Jul 1 Balance b/d 5 560
(iii) Benji
2017 $ 2017 $
Jun 30 Consignment a/c (sales) 27 200 Apr 02 Consignment a/c - freight 1 600
Jun 14 Bank - remittance 21 000
Jun 30 Consignment a/c - commission 2 720
Balance c/d 1 880
27 200 27 200
Jul 1 Balance b/d 1 880
$2 240
(b) Existing profit per container is $14 ( ). The introduction of import duty of $20 per container will result
$160
in a per container loss of $6 ($20  $14). With increase in import duty it is not viable for Aleksander to
consign goods at the same terms.
If Aleksander still wants to export to Benji’s country then import duty is an unavoidable cost. To make the
consignment profitable again, Aleksander could either increase the selling price or reduce Benji’s
commission by $6. Aleksander should also look for some other sale opportunities.
Chapter 2 47 Accounting For Consignments

(c) Under IAS 2 advertising cost should not be included in the inventory valuation as it is not incurred on
purchasing or producing inventory items. As per IAS 2 only those costs may be included in inventory
valuation which are incurred on preparing the inventory to its present location or condition.

QUESTION 4 MAY 2018 P32 Q3

Total Costs
(a) Cost per unit =
Total Units
15 400+3 200+ 1 600+2 800
= $175 +
1 000 𝑢𝑛𝑖𝑡𝑠
= $198

(b) Consignment account

$ $
Goods on consignment (1 000 units @ $175) 175 000 Cash sales (480 units @ $257.5) 123 600
Bank : Freight 15 400 Credit sales (320 units × $270) 86 400
Insurance 3 200 Balance c/d [(1 000 – 480 –320–60)×$198]
Mahood: Import duty 1 600 + (60 × $150) 36 720
Advertising 9 700
Carriage inwards 2 800
Carriage outwards 3 300
Bad debt (16 units × $270) 4 320
Commission (W 2) 10 000
Income statement (profit on consignment) 21 400 ______
246 720 246 720
Balance b/d (inventory) 36 720

WORKINGS
(W 1) Commission = Sales after Commission (W 2) × 5%
= $200 000  x
= $10 000

(W 2) Sales after Commission = Sales before commission  Commission

x = ($123 600 + $86 400)  0.05x
Sales after Commission = $210 000
1.05
= $200 000

(c) Books of Y Limited Mahood Account

$ $
Cash sales 123 600 Bank - Advance payment 55 000
Credit sales 86 400 Import duty 1 600
Advertising 9 700
Carriage inwards 2 800
Carriage outwards 3 300
Bad debt (16 units × $270) 4 320
Commission (W 2) 10 000
______ Bank (balancing figure) 123 280
210 000 210 000

(d) If Y Limited consigns goods to Mahood then it would not need to incur heavy initial cost to set up an
overseas branch. It would also allow to have a trial run in the overseas market before investing heavily. This
will involve low risk in terms of overseas economic, political, cultural and social environment conditions.
Chapter 2 48 Accounting For Consignments

Opening a branch overseas allows overseas expansion of the business if local market is saturated or highly
competitive. Overseas markets usually offer low tax rates. Though opening a new branch involves high costs
but would offer Y Limited complete control of the business activities and would also offer flexibility in
business operations.
Chapter 3 49 Accounting For Joint Ventures

CHAPTER 3 ACCOUNTING FOR JOINT VENTURES

QUESTION 1 MAY 2016 P31 Q2
Ahmed and Bashmir have separate garage businesses and have agreed to form a joint venture to buy and sell second
hand cars.

They have agreed to share the profits and losses as two thirds to Ahmed and one third to Bashmir.

They record purchases and sales of cars in their own books of account.
The following financial information is available for the period of the joint venture.

Ahmed Bashmir
$ $
Credit purchases 24 500 17 600
Expenses 3 200 2 300
Commissions received 1 000
Discount received 500 100
Cash sales 6 000 4 800
Credit sales 32 000 50 700
Returns inwards 4 500
Irrecoverable debts 300

It was agreed that Bashmir would take over the inventory of unsold cars at the end of the venture. Bashmir has
advised that he has an inventory of unsold cars at the end of the venture valued at $6 500.

REQUIRED
(a) Prepare the memorandum joint venture account. [9]
(b) Prepare the joint venture account in the books of Ahmed and show the balance due to or from Bashmir.
[8]
(c) State the heading under which the balance due will be shown in Ahmed’s statement of financial
position. [1]
Additional information
Ahmed has discovered that Bashmir did not hold any inventory but had sold the closing inventory of cars for $12 500.
REQUIRED
(d) Calculate:
(i) the correct total profit for the joint venture. Start your calculation with your answer from (a). [3]
(ii) the extra profit due to Ahmed from the joint venture. [1]
(e) Evaluate whether or not Ahmed should have entered into the joint venture with Bashmir. Justify your
answer. [3]

QUESTION 2 MAY 2017 P31 & P33 Q3

Greaves and Hurst participated in a joint venture sharing profits and losses in the ratio 2 : 1.
Greaves provided goods valued at $15 000 and incurred costs of $900.
Hurst provided goods valued at $10 000 and incurred costs of $800.
Greaves sold all of the goods for $35 000.
It was agreed that a commission of 10% of the sales value would be paid to the person making the sale.
The joint venture was then dissolved.
REQUIRED
(a) Explain two benefits to Greaves and Hurst of forming a joint venture. [4]
(b) Calculate the share of profit made by Greaves and Hurst from the joint venture. [6]
Chapter 3 50 Accounting For Joint Ventures

Additional information
A separate set of books of account are maintained to record the transactions of the joint venture.
Greaves and Hurst kept their own transactions with the joint venture in their own books.
REQUIRED
(c) Prepare the following ledger accounts:
(i) Greaves account with the joint venture
(ii) Hurst account with the joint venture [9]
Additional information
Following the closure of the joint venture, Greaves and Hurst have received more orders and are considering forming
a partnership.

REQUIRED
(d) Advise Greaves and Hurst whether or not they should form a partnership. Justify your answer by discussing
advantages and disadvantages of forming the partnership. [6]
Chapter 3 51 Accounting For Joint Ventures

SOLUTION CHAPTER 3
QUESTION 1 MAY 2016 P31 Q2
(a) Ahmed and Bashmir
Memorandum Joint Venture account
$ $
Trade receivables - Returns inwards 4 500 Bank- Cash Revenue ($6 000 + $4 800) 10 800
Trade payables-Purchases(24500+17600) 42 100 Trade receivables-Cr Sales(32000+50700) 82 700
Bank - Expenses ($3 200 + $2 300) 5 500 Drawings - Closing inventory 6 500
Trade receivables -Irrecoverable debts 300 Bank - Commissions received 1 000
Profit Share: Ahmed (2/3) $32 800 Trade payables – Dis. received (500+100) 600
Bashmir (1/3) $16 400 49 200 _______
101 600 101 600

Alternatively
Memorandum Joint Venture account
$ $
Revenue [($6 000 + $4 800) + ($32 000 + $50 700)] 93 500
Returns inwards (4 500) 89 000
Cost of Sales
Purchases ($24 500 + $17 600) 42 100
Closing inventory (6 500) (35 600)
Gross profit 53 400
Other incomes
Commissions received 1 000
Discount received 600 1 600
Expenses 55 000
Expenses ($3 200 + $2 300) 5 500
Irrecoverable debts 300 (5 800)
Profit for the year 49 200
Profit Share
Ahmed ($49 200 × 2/3) 32 800
Bashmir ($49 200 × 1/3) 16 400 49 200

(b) Books of Ahmed

Joint venture with Bashmir account
$ $
Trade payables - Credit Purchases 24 500 Bank – cash sales 6 000
Trade receivables - Returns inwards 4 500 Trade receivables – credit sales 32 000
Bank - Expenses 3 200 Bank - Commissions received 1 000
Profit share 32 800 Trade payables – Discount received 500
Balance c/d 25 500
65 000 65 000
Balance b/d 25 500
(c) The balance due from Bashmir would be shown as other receivables in current assets section.
(d) Calculation of Correct Net Profit
(i) $
Profit as per memorandum joint venture account 49 200
Profit on sales of inventory [$12 500 (sales proceeds)  $6 500 (cost)] 6 000
Correct Net Profit on joint venture 55 200
Chapter 3 52 Accounting For Joint Ventures

(ii) Extra profit share of Ahmed = Total extra Profit × 2/3

= ($55 200  $49 200) × 2/3
= $4 000

(e) The points favouring forming the joint venture may include having a pool of diversified skill, reduced
investments because of pooling of funds, to enter into new markets and sharing of risk as each party
diversifies risk
The points against forming the joint venture may include loss of reputation due to poor choice of business
associate and no enactment is directly applicable on joint ventures.

QUESTION 2 MAY 2017 P31 & P33 Q3

(a) The points favouring forming the joint venture may include having a pool of diversified skill, reduced
investments because of pooling of funds; to enter into new markets and sharing of risk as each party
diversifies risk.

(b) Statement to calculate the share of profit made by Greaves and Hurst from the joint venture
$ $
Sales revenue 35 000
Cost of goods ($15 000 + $10 000) 25 000
Commission ($35 000 × 10%) 3 500
Other expenses ($900 + $800) 1 700 (30 200)
Profit share 4 800
Greaves ($4 800 × 2/3) 3 200
Hurst ($4 800 × 1/3) 1 600 4 800

(c) (i) Greaves account

$ $
Joint venture – Purchases 15 000 Joint venture – Sales 35 000
Joint venture – Expenses 900
Joint venture – Commission 3 500
Joint venture – Profit 3 200
Hurst – Cash (balancing figure) 12 400 ______
35 000 35 000

(ii) Hurst account

$ $
Joint venture – Purchases 10 000 Greaves– Cash (balancing figure) 12 400
Joint venture – Expenses 800
Joint venture – Profit 1 600 _____
12 400 12 400
(d) Advantages:
 availability of additional capital
 sharing of managerial responsibilities resulting in shared workload and less stress
 spread of risk as losses will be shared
Disadvantages:
 liability of the partners for debts of their firm is unlimited.
 limited life as death or insolvency of partner(s) dissolves the partnership.
 possible disputes between partners
Keeping in mind the above points Greaves and Hurst whether or not they should form a partnership.
Chapter 4 53 Dissolution & Sale of Business

CHAPTER 4 DISSOLUTION & SALE OF BUSINESS

QUESTION 1 NOVEMBER 2013 P41 Q2 (a to d)
Dilip, Ephraim and Fonzie have been in partnership for many years preparing accounts to 30 June and sharing profits
and losses in the ratio [Link]. Due to declining profits they decided to dissolve the partnership on 30 June 2013.
Statement of Financial Position at 30 June 2013
Non-Current Assets $ $
Land and buildings 195 000
Motor vehicles 43 750
Fixtures and fittings 32 645 271 395
Current Assets
Inventories 29 875
Trade receivables 19 765
Cash and cash equivalents 6 850 56 490
Total assets 327 885
Equity
Capital Account Dilip 60 000
Ephraim 50 000
Fonzie 40 000 150 000
Current Account Dilip 33 865
Ephraim 24 910
Fonzie (1 875) 56 900
206 900
Non-Current Liabilities
Bank loan 100 000
Current Liabilities
Trade payables 14 650
Bank interest accrual 6 335 20 985
327 885
The terms of the dissolution were:
1 The land and buildings were sold for 10% above their net book value. Fixtures and fittings realised 80% of
their net book value.
2 Ephraim took over a motor vehicle at an agreed valuation of $10 000. Fonzie took over a motor vehicle at a
valuation of $7500. The other vehicles realised $18 500.
3 The inventories realised $21 000.
4 The trade receivables raised $15 750 whilst the partners were able to settle the trade payables in full for
$12 500.
5 The dissolution costs totalled $3 450.
6 The partners closed the business bank account by drawing the balances due to them after the above took
place.
REQUIRED
(a) Prepare the partnership realisation account for the dissolution. [14]
(b) Prepare the partnership bank account. [10]
(c) Prepare the partners’ capital accounts. [10]
(d) State three other reasons why a partnership may be dissolved apart from a decline in Profit. [6]
QUESTION 2 NOVEMBER 2013 P42 Q1
Alvin, Bertram and Chana are in partnership preparing accounts to 30 June. They share profits and losses in the ratio
[Link]. On 30 June 2013, the partners decided to convert the business to a new limited company, Albech Ltd.
Statement of Financial Position at 30 June 2013
$ $
Non-current assets (NBV) 250 000
Chapter 4 54 Dissolution & Sale of Business

Current assets
Inventories 89 345
Trade receivable 53 485
Cash and cash equivalents 9 250 152 080
Total assets 402 080
Equity
Capital account Alvin 75 000
Bertram 90 000
Chana 60 000 225 000
Current account Alvin 24 840
Bertram 44 950
Chana 18 555 88 345
Total equity 313 345
Liabilities
Non-current liabilities
Alvin 8% loan account 40 000
Current liabilities
Trade payables 48 735 88 735
Total equity and liabilities 402 080

The terms of the transfer were as follows:

1 The agreed valuation of the business was $475 000.
2 Consideration was to be satisfied as follows.
200 000 ordinary shares of $1 each.
200 000 8% non-redeemable preference shares of $0.50 each.
Sufficient 10% long term debentures to enable Alvin to receive the same amount of annual interest
he currently receives on his loan.
The balance to be cash in the form of a long term bank loan.
3 The ordinary shares and cash were allocated in the profit sharing ratio whilst the preference shares were
allocated in the ratio of the capital account balances at 30 June 2013.
4 All assets and liabilities were transferred to the new company with the exception of trade receivables, trade
payables and the cash and cash equivalents.
5 A bad debt of $720 was written off.
6 Discounts of $3 060 were agreed with the suppliers.
7 All other assets were transferred at their book value.
8 The loan from Alvin was repaid to him.

REQUIRED
(a) Prepare the partnership realisation account. [8]
(b) Prepare the bank account. [8]
(c) Prepare the partners’ capital accounts to close the partnership. [8]
(d) Prepare the opening statement of financial position of Albech Ltd at 1 July 2013. [10]

QUESTION 3 NOVEMBER 2014 P41 Q1 (a to c)

Aston, Brutus and Cesar have been in partnership for many years sharing profits and losses in the ratio [Link]. They
provided the following information.
Aston, Brutus and Cesar
Statement of financial position at 30 September 2014
Non-Current Assets $ $
Land and buildings 210 000
Plant and machinery 27 950
Motor vehicles 11 352 249 302
Current Assets
Chapter 4 55 Dissolution & Sale of Business

Inventory 17 632
Trade receivables 9 340
Cash and cash equivalents 2 546 29 518
Total assets 278 820
Capital and Liabilities
Capital accounts Aston 80 000
Brutus 60 000
Cesar 20 000 160 000
Current accounts Aston 12 735
Brutus 10 873
Cesar (2 628) 20 980
Non-current Liabilities
Loan from Aston 75 000
Current liabilities
Trade payables 22 840
Total capital and liabilities 278 820
On 30 September 2014 they decided to dissolve the partnership. The terms of the dissolution were:
1. Land and buildings were sold for $217 000.
2. Plant and machinery was sold for $25 000.
3. Motor vehicles were disposed of as follows: one to Aston and one to Brutus at an agreed value of $4 000
each, with the remaining motor vehicles being sold for $5 000.
4. The inventory was sold for $18 478.
5. Two customers who owed the partnership $590 and $450 were unable to settle their debts. The remaining
credit customers paid in full after receiving a 2% discount.
6. All of the trade payables were paid after they allowed a 5% discount.
7. The total costs of dissolution amounted to $2 250.

REQUIRED
(a) Prepare the partnership realisation account. [13]
(b) Prepare the partners’ capital accounts. [10]
(c) Prepare the partnership bank account. [9]

QUESTION 4 SPECIMEN 2016 P3 Q1

Ayanda and Bola have been in partnership for many years, sharing profits in the ratio of 3 : 2 respectively. The annual
profit has been $60 000 for some years.
On 1 June 2013 the partnership books of account showed the following balances.
$
Capital account Ayanda 40 000
Bola 25 000
Current account Ayanda 17 000 Cr
Bola 2 500 Dr
Bank 3 500 Dr
Trade payables 4 000
On that date the business was sold to Hetl Limited for a purchase consideration of $140 000.
This consisted of 50 000 $1 ordinary shares in Hetl Limited with a market value of $1.80, to be shared equally, and
the balance in cash. Hetl Limited took over all the assets and liabilities of the business with the exception of the bank
account and the trade payables.
REQUIRED
(a) Calculate the gain on realisation arising from the sale of the partnership. [5]
(b) Calculate the amount in cash due to each partner on the sale of the partnership. [5]
(c) Prepare the partnership bank account showing the entries to close the account. [5]
Chapter 4 56 Dissolution & Sale of Business

Additional information
Bola thinks it is unfair that Ayanda received more cash than she did.
REQUIRED
(d) Give four reasons why it is fair that Ayanda received more cash than Bola. [4]
Additional information
Hetl Limited pays a dividend of $0.25 per share each year. Surplus funds can be put on deposit in a bank and earn
6% interest a year.
Ayanda has accepted a job with Hetl Limited at a salary of $20 000 a year.
REQUIRED
(e) Compare Ayanda’s current income with his earnings as a partner. [5]
(f) Suggest one non-financial reason why Ayanda might prefer to be an employee rather than a partner. [1]
QUESTION 5 MAY 2016 P32 Q3
Anjali and Bailey trade as partners. They share profits and losses in the ratio 3 : 2.
At 30 April 2016 the statement of financial position of the partnership was as follows:
Assets $
Non-current assets
Premises 115 000
Machinery 40 000
Vehicles 78 000
233 000
Current assets
Inventory 15 000
Trade receivables 4 000
19 000
Total assets 252 000
Capital and liabilities
Capital
Anjali 130 000
Bailey 110 000
240 000
Current liabilities
Trade payables 7 500
Cash and cash equivalents 4 500
12 000
Total capital and liabilities 252 000
The partners agreed to form a limited company, XY Limited, to take over their business.
Additional information
The following information relates to the partnership.
1 Two vehicles were taken over by the partners at the following valuations.
$
Anjali 15 000
Bailey 12 500
2 The remaining assets were transferred to XY Limited at the following agreed values.
$
Premises 170 000
Machinery 30 000
The remaining vehicles 35 000
Inventory 9 000
Chapter 4 57 Dissolution & Sale of Business

3 Cash collected from trade receivables was $3 900.

4 Trade payables accepted $7 100 in full settlement of amounts due to them.
5 Costs involved in dissolving the partnership were $3 800.
6 The purchase consideration for the partnership of Anjali and Bailey was $255 000. This was made as
follows:
60 000 7% preference shares of $1 each distributed in profit-sharing ratios.
The balance as ordinary shares of $1 at a premium of $0.25 per share distributed to the partners in
proportion to their capital account balances at 30 April 2016.
7 Anjali and Bailey agreed to pay into the business bank account sufficient money to cover any deficit
on their capital accounts after the shares had been issued.

REQUIRED
(a) (i) Prepare the realisation account for Anjali and Bailey. [7]
(ii) Prepare the capital accounts of Anjali and Bailey on the realisation of the partnership. [7]
(iii) Calculate the total amount of share premium payable to Anjali and Bailey. [2]
(b) Assess the effect for Anjali and Bailey if the ordinary shares have been distributed in the profit sharing ratio
rather than in proportion to their capital balances. [4]
(c) Explain whether or not Anjali and Bailey made the correct decision to form a limited company. Justify your
answer. [5]

QUESTION 6 NOVEMBER 2017 P33 Q2

Wembo and Bob are in partnership. They share profits and losses in the ratio 3 : 2.
Another business, C Limited, has been trading for many years.
At 31 March 2017 the summarised statements of financial position of both businesses were as follows:
Wembo C Limited
and Bob
$ $
Premises 80 000 282 000
Machinery 45 000 112 000
Vehicles 28 000 –
Inventory 15 000 49 000
Trade receivables 6 000 36 000
174 000 479 000
Capital accounts
Wembo 100 000
Bob 60 000
Equity and reserves
Ordinary shares of $1 each 300 000
Share premium 75 000
Revaluation reserve 25 000
Retained earnings 40 000
440 000
Trade payables 9 000 26 000
Bank overdraft 5 000 13 000
174 000 479 000
REQUIRED
(a) State what is meant by the term ‘revaluation reserve’. [1]
Additional information
The directors of C Limited have decided to purchase Wembo and Bob’s partnership on 31 March 2017.
The following information relates to the purchase of Wembo and Bob’s partnership.
Chapter 4 58 Dissolution & Sale of Business

1 Two vehicles were taken over by the partners at the following agreed values:
$
Wembo 11 000
Bob 12 500
2 The following partnership assets, excluding the partnership overdraft, were transferred to C Limited at the
following agreed values:
$
Premises 90 000
Machinery 36 000
Other vehicles 3 500
Inventory 13 000
3 Cash collected from trade receivables was $4 900.
4 Trade payables accepted $8 100 in full settlement of amounts due to them.
5 Costs involved in dissolving the partnership were $3 800.
6 The purchase consideration for the partnership was $155 000. This was made up as follows:
$60 000 was from the issue of 7% cumulative preference shares of $1 each distributed in profit-sharing
ratio.
The balance was by the issue of ordinary shares of $1 at a premium of $0.25 per share. These shares were
distributed to the partners in proportion to their capital account balances at 31 March 2017.

REQUIRED
(b) Prepare the partners’ capital accounts at 31 March 2017 to show the closing entries for the
partnership. [16]
(c) Prepare the equity and reserves section of the statement of financial position for C Limited at 31 March
2017 immediately after the purchase of the partnership. [4]
(d) Explain one benefit to Wembo and Bob of receiving:
(i) ordinary shares
(ii) cumulative preference shares. [4]

QUESTION 7 NOVEMBER 2017 P31 Q4 (a to d)

Armfield and Bonetti are sole traders. Their statements of financial position at 31 December 2016 are shown below:
Assets Armfield ($) Bonetti ($)
Non-current assets 85 000 135 000
Current assets
Inventories 8 000 12 000
Trade receivables 6 000 9 000
Cash and cash equivalents 4 000 5 000
18 000 26 000
Total assets 103 000 161 000
Capital and liabilities
Capital accounts 100 000 150 000
Current liabilities
Trade payables 3 000 11 000
103 000 161 000
They have decided to merge their two businesses into a partnership on 1 January 2017. All assets and liabilities, with
the exception of cash and cash equivalents, were transferred to the new partnership at the following agreed values:
Armfield ($) Bonetti ($)
Non-current assets 80 000 145 000
Inventories 7 000 11 000
Trade receivables 5 000 8 000
Trade payables 3 000 11 000
Chapter 4 59 Dissolution & Sale of Business

REQUIRED
(a) State the meaning of the term ‘capital account’. [2]
(b) Prepare the capital accounts of Armfield and Bonetti to close their existing businesses.
Transfer the balances on their capital accounts to new partnership capital accounts. [6]
Additional information
Each partner will either invest or withdraw cash to achieve a balance of $125 000 to carry forward on their
partnership capital account.
REQUIRED
(c) Prepare the partnership capital accounts clearly showing each partner’s adjustment for cash. [3]
(d) Prepare the opening statement of financial position for the partnership at 1 January 2017. [5]
Chapter 4 60 Dissolution & Sale of Business

SOLUTION CHAPTER 4
QUESTION 1 NOVEMBER 2013 P41 Q2 (a to d)
(a) Realisation account
$ $
Land and buildings 195 000 Trade payables ($14 650  $12 500) 2 150
Motor vehicles 43 750 E’s Capital– Motor vehicle 10 000
Fixtures and fittings 32 645 F’s Capital – Motor vehicle 7 500
Inventories 29 875 Bank: Land & buildings ($195 000 × 110%) 214 500
Trade receivables ($19 765  $15 750) 4 015 Fixtures & fittings ($32 645 × 80%) 26 116
Bank (Dissolution costs) 3 450 Motor vehicles 18 500
Inventories 21 000
Capital a/c D ($8 969 × 3/6) $4 484
E ($8 969 × 2/6) $2 990
______ F ($8 969 × 1/6) $1 495 8 969
308 735 308 735

(b) Bank account

$ $
Balance b/f 6 850 Trade payables 12 500
Trade receivables 15 750 Dissolution costs 3 450
Realisation a/c: Land & buildings 214 500 Bank Loan 100 000
Realisation a/c: Fixtures & fittings 26 116 Bank interest accrual 6 335
Realisation a/c: Motor vehicles 18 500 Capital a/c D $89 381
Realisation a/c: Inventories 21 000 E $61 920
______ F $29 130 180 431
302 716 302 716

(c) Partners’ capital accounts

D ($) E ($) F ($) D ($) E ($) F ($)
Current a/c 1 875 Balance b/f 60 000 50 000 40 000
Realisation 4 484 2 990 1 495 Current a/c 33 865 24 910
Realisation. – Vehicle 10 000 7 500
Bank (balancing figure) 89 381 61 920 29 130 _____ _____ _____
93 865 74 910 40 000 93 865 74 910 40 000

(d) Death or insolvency of one of the partners.

Mutual agreement of the partners to dissolve the business
Disagreement between the partners
Conversion into a company

QUESTION 2 NOVEMBER 2013 P42 Q1

(a) Realisation account
$ $
Non-current assets 250 000 Trade payables (discounts received) 3 060
Inventories 89 345 Albech Ltd (Purchase consideration) 475 000
Trade receivables (Bad debts) 720
Capital a/c:A($137995×4/8) 68 998
B ($137995×3/8) 51 748
C ($137995×1/8) 17 249 137 995 ______
478 060 478 060
Chapter 4 61 Dissolution & Sale of Business

(b) Bank Account

$ $ $
Balance b/f 9 250 Trade payables ($48 735$3060) 45 675
Trade receivables ($53 485  $720) 52 765 Capital a/c B 18 073
Capital a/c A 27 995 C 26 262 44 335
90 010 90 010
(c) Partner’s capital accounts
A ($) B ($) C ($) A ($) B ($) C ($)
Ordinary shares (4/8: 3/8: 1/8) 100 000 75 000 25 000 Balance b/f 75 000 90 000 60 000
Pref. shares (5/15:6/15:4/15) 33 333 40 000 26 667 Current a/c 24 840 44 950 18 555
Debentures (W 1) 32 000 Realisation (profit) 68 998 51 748 17 249
Cash [475 000200 000  Loan 40 000
10000032000]×4/8;3/8;1/8 71 500 53 625 17 875 Bank (Balancing fig) 27 995
Bank (Balancing figure) ______ 18 073 26 262 ______ ______ _____
236 833 186 698 95 804 236 833 186 698 95 804

(d) Statement of Financial Position as at 1 July 2013

Non-Current Assets $ $
Intangible - Goodwill (W 2) 135 655
Tangibles 250 000 385 655
Current Assets
Inventories _89 345
Total assets 475 000
Equity $ $
200 000 ordinary shares of $1 200 000
200 000 8% pref. shares of $0.50 100 000 300 000
Non-Current Liabilities
10% debentures (W 1) 32 000
Bank loan [$475 000  $200 000  $100 000  $32000] 143 000 175 000
475 000
WORKINGS
(W.1) Face value of debentures × 8 % = Interest on Alvin’s loan of partnership
X × 10 % = ($40 000 × 8%)
X = $32 000
(W.2) Calculation of Goodwill $
Purchase consideration of the partnership 475 000
Net worth of partnership purchased [250 000 + 89 345] 339 345
Goodwill 135 655
QUESTION 3 NOVEMBER 2014 P41 Q1 (a to c)
(a) Realisation Account
$ $
Land and buildings 210 000 Bank: Land and buildings 217 000
Plant and machinery 27 950 Bank: Plant and machinery 25 000
Motor vehicles 11 352 Bank: Motor vehicles 5 000
Inventories 17 632 Bank: Inventories 18 478
Trade receivables (W 1) 1 206 A’s capital – Motor vehicle 4 000
Bank - dissolution costs 2 250 B’s capital – Motor vehicle 4 000
Capital a/c A $1 692 Trade payables ($22 840 × 5%) 1 142
B 1 692
C 846 4 230 ______
274 620 274 620
Chapter 4 62 Dissolution & Sale of Business

WORKING
(W 1) Trade receivables: = $9 340 – [($9 340 – $590  $450) × 98%] = 1206

(b) Partners’ Capital Accounts

A B C A B C
$ $ $ $ $ $
Current a/c 2 628 Balance b/f 80 000 60 000 20 000
Realisation - Vehicle 4 000 4 000 Current a/c 12 735 10 873
Bank (Balancing figure) 165 427 68 565 18 218 Loan – Aston 75 000
______ _____ _____ Realisation (profit) 1 692 1 692 846
169 427 72 565 20 846 169 427 72 565 20 846

(c) Bank Account

$ $
Balance b/f 2 546 Trade payables ($22 840 × 95%) 21 698
Trade receivables [9340590450)×98%] 8 134 Realisation - dissolution costs 2 250
Realisation: Land and buildings 217 000 Capital a/c A (b part) $165427
Realisation: Plant and machinery 25 000 B (b part) 68 565
Realisation: Motor vehicles 5 000 C (b part) 18 218 252 210
Realisation: Inventories 18 478 ______
276 158 276 158

QUESTION 4 SPECIMEN 2016 P3 Q1

(a) Calculation of the gain on realisation arising from the sale of the partnership
$
Capital account A 40 000
B 25 000
Current account A 17 000
B (2 500) (1)
Net assets 79 500
Bank (3 500)
Trade payables 4 000 (1)
Net assets taken over 80 000 (1of)
Consideration 140 000 (1)
Gain on realisation 60 000 (1of)
(b) Calculation of the amount in cash due to each partner on the sale of the partnership
Ayanda Bola
$ $
Capital account 40 000 25 000
Current account 17 000 (2 500) (1) both
Gain on realisation 36 000 (1of) 24 000 (1of)
Value of shares (45 000) (45 000) (1) both
Amount due 48 000 1 500 (1of) both

(a) Bank account

$ Trade payables $
Bal b/d 3 500 (1) Capital A 4 000 (1)
Hetl Limited 50 000 (1) Capital B 48 000 (1of)
______ 1 500 (1of)
53 500 53 500
(d) Responses could include:
Chapter 4 63 Dissolution & Sale of Business

• Ayanda’s initial investment was greater

• Bola received more than just the cash and the shares were distributed equally
• Bola had a debit balance on her current account
• excessive drawings in the past meant she had received her benefit earlier
• the profit sharing ratio meant that Ayanda was entitled to greater benefits.
Accept any reasonable alternative (1 mark) × four valid reasons
(e)
Annual share of profit as a partner $36 000 (1)
Current annual income
Dividend income 6 250 (1)
Interest 2 880 (1of)
Salary 20 000 (1)
Total 29 130 (1of)
Ayanda is worse off (1of)
(f) Example:
Less risk/less responsibility/entitlement to holidays or sick pay.
(1 mark) × one reason
QUESTION 5 MAY 2016 P32 Q3
(a) (i) Realisation account
$ $
Premises 115 000 Trade payables 7 500
Machinery 40 000 Vehicles- Anjali 15 000
Vehicles 78 000 Vehicles-Bailey 12 500
Inventory 15 000 Bank – Trade receivables 3 900
Trade receivables 4 000 XY Limited - Purchase consideration 255 000
Bank - Trade payables 7 100
Bank - Dissolution cost 3 800
Profit share A ($31 000 × 3/5) 18 600
B ($31 000 × 2/5) 12 400 31 000 ______
293 900 293 900

(ii) Capital Accounts

A B A B
$ $ $ $
Vehicles 15 000 12 500 Balance b/d 130 000 110 000
Pref. shares ($60 000 × 3/5; 2/5) 36 000 24 000 Profit on realisation 18 600 12 400
Ordinary shares (W 1) 105 625 89 375 Bank (balancing figure) 8 025 3 475
156 625 125 875 156 625 125 875

(W.1) Purchase consideration $255 000

Payment in preference shares $60 000
Payment in ordinary shares $195 000
A’s shares ($195 000  130/(130 + 110)) $105 625
B’s shares ($195 000  110/(130 + 110)) $89 375 $195 000

(W 2) Bank Account
$ $
Realisation – Trade receivables 3 900 Balance b/f 4 500
A’s Capital 8 025 Realisation – Trade payables 7 100
B’s capital 3 475 Realisation – Dissolution costs 3 800
15 400 15 400
Chapter 4 64 Dissolution & Sale of Business

(iii) Calculation of total amount of share premium payable to Anjali and Bailey
$
Purchase consideration 255 000
Payment in preference shares (60 000)
Payment in ordinary shares 195 000
$195 000 × $1.00
Face value of ordinary shares ( ) (156 000)
$1.25
$195 000 × $0.25
Total amount of share premium ( ) or ($195 000  $156 000) 39 000
$1.25

(b) Statement to assess the effect of change in method of profit distribution for Anjali and Bailey
Anjali Bailey
$195 000
Distribution of shares in the profit sharing ratio ( ) shares × 3/5; 2/5 93 600 62 400
$1.25
$105 625 $89 375
Distribution of shares in proportion to capital balances ( );( ) 84 500 71 500
$1.25 $1.25
Difference in shareholdings 9 100 (9 100)

If profit sharing ratio used Anjali would be 9100 shares better off and Bailey would be 9100 shares worse off.

(c) Anjali and Bailey’s partnerships have low working capital. The partnership had overdrafts and its trade
payables were more than trade receivables. In the absence of inventory or in case of its sales then
partnership had a negative working capital.
As partnerships have unlimited liability and limited companies have limited liability, it seems to be a prudent
action to form a limited company, in order to protect the personal assets of partners.

QUESTION 6 NOVEMBER 2017 P33 Q2

(a) A revaluation reserve arises when a company revalues its non-current assets at a value which is higher than
their current book value.

(b) Capital Accounts

Wembo Bob Wembo Bob
$ $ $ $
Vehicles (withdrawals) 11 000 12 500 Balance b/d 100 000 60 000
Prefer. shares ($60 000 × 3/5 ; 2/5) 36 000 24 000 Realisation profit (W1) 3 900 2 600
Ordinary shares Bank (balancing figure) 2 475 9 525
($155 000  $60 000) × 10/16 ; 6/16 59 375 35 625
106 375 72 125 106 375 72 125

(W 1) Realisation Account
$ $
Premises 80 000 Trade payables 9 000
Machinery 45 000 C Ltd (purchase consideration) 155 000
Vehicles 28 000 Bank – Trade receivables 4 900
Inventory 15 000 Capital – Wembo 11 000
Trade receivables 6 000 Bob 12 500
Bank – Trade payables 8 100
Bank – Dissolution costs 3 800
Realisation profit
Capital – W ($6 500 × 3/5) 3 900
B ($6 500 × 2/5) 2 600 6 500 ______
192 400 192 400
Chapter 4 65 Dissolution & Sale of Business

(c) Extract from the statement of financial position for Chantelle Limited at 31 March 2018
Equity and reserves $
$1.00
Ordinary shares [$300 000 + ($155 000  $60 000) × ] 376 000
$1.00 + $0.25
Preference shares 60 000
$0.25
Share premium [$75 000 + ($155 000  $60 000) × ] 94 000
$1.00 + $0.25
Revaluation reserve 25 000
Retained earnings 40 000
Total equity 595 000

(d) Ordinary shares

Wembo and Bob will be entitled to vote at the annual general meeting and may also earn a higher dividend
in periods of high profits

Cumulative preference shares receive dividends at fixed rate and amount of $4 200. They also have low risk
as are entitled to be paid any arrears of their dividend before ordinary shares receive any dividends

QUESTION 7 NOVEMBER 2017 P31 Q4 (a to d)

(a) Capital account records the injection of funds within the business or withdrawal of funds out of the business
by the owner. It may also incorporate changes within the owner’s capital through business operations like
profits etc.

(b) Capital accounts

Armfield Bonetti Armfield Bonetti
$ $ $ $
Revaluation loss (W 1) 7 000 Balance b/d 100 000 150 000
Cash and cash equivalents 4 000 5 000 Revaluation profit (W 1) 8 000
Balance c/d 89 000 153 000
100 000 158 000 100 000 158 000
Balance b/d 89 000 153 000

(W 1) Revaluation accounts
A ($) B ($) A ($) B ($)
Non-current assets (85 00080 000) 5 000 Non-current assets(145000135000) 10 000
Inventories 1 000 1 000 A’s Capital (Revaluation loss) 7 000
Trade receivables 1 000 1 000
B’s Capital (Revaluation profit) ____ 8 000 _____ _____
7 000 10 000 7 000 10 000

(c) Partnership Capital accounts

Armfield Bonetti Armfield Bonetti
$ $ $ $
Cash ($153 000  $125 000) 28 000 Balance b/d 89 000 153 000
Bal. c/d (as per agreement) 125 000 125 000 Cash ($125 000  $89 000) 36 000
125 000 153 000 125 000 153 000
Balance b/d 125 000 125 000

(d) Armfield and Bonetti

Statement of Financial Position at 1 January 2017
$ $
Non-current assets ($80 000 +$145 000) 225 000
Chapter 4 66 Dissolution & Sale of Business

Current assets $ $
Inventories ($7 000 + $11 000) 18 000
Trade receivables ($5 000 + $8 000) 13 000
Cash & cash equivalents ($36 000  $28 000) 8 000 39 000
Total assets 264 000

Capital accounts:
Armfield 125 000
Bonetti 125 000 250 000
Current liabilities
Trade payables ($3 000 + $11 000) 14 000
264 000
Chapter 5 67 Purchase of Business

CHAPTER 5 PURCHASE OF BUSINESS

QUESTION 1 NOVEMBER 2011 P43 Q1(a)
Prescott, Rohini and Singh have been in partnership for many years with a profit sharing ratio of 2: 2: 1. Their
statement of financial position (balance sheet) at 30 June 2011 was as follows:
Prescott, Rohini and Singh
Statement of Financial Position (Balance Sheet) at 30 June 2011
Non-current assets $ $
Land and buildings 100 000
Fixtures and fittings 34 500
Motor vehicles 16 750 151 250
Current assets
Inventories 23 500
Trade receivables 14 850
Bank 7 595
45 945
Current liabilities
Trade payables (9 450) 36 495
187 745
Non-current liabilities
Loan from Prescott at 12% (25 000)
162 745
Financed by:
Capital Accounts: Prescott 70 345
Rohini 54 250
Singh 38 150 162 745

The partners sold their business to Ashburton Ltd on 1 July 2011 for $215 000. Ashburton Ltd took over all of the
assets and liabilities except the bank account.

The purchase consideration was satisfied by:

1 The issue of 100 000 ordinary shares of $1 at a premium of $0.50.
2 The issue of 8% debentures redeemable at par in 2020 to Prescott to ensure that he receives the same
amount of annual interest that he received from the loan.
3 The balance was paid by cash.

On 1 July 2011 the partnership assets were revalued as follows:

$
Land and buildings 115 000
Fixtures and fittings 32 000
Motor vehicles 15 000
Inventories 22 000
Trade receivables 13 500
Ashburton Ltd’s statement of financial position at 30 June 2011 was as follows:

Ashburton Ltd
Statement of Financial Position at 30 June 2011
Non-current assets $ $
Land and buildings 125 000
Fixtures and fittings 67 750
Motor vehicles 24 975 217 725
Chapter 5 68 Purchase of Business

Current assets
Inventories 22 875
Trade receivables 14 363
Bank 28 462
65 700
Current liabilities
Trade payables 14 630 51 070
268 795
Financed by:
Ordinary shares of $1 200 000
Share premium 20 000
Retained profit 48 795 268 795
REQUIRED
Prepare Ashburton Ltd’s statement of financial position immediately after the acquisition of partnership. [22]
QUESTION 2 MAY 2012 P43 Q2 (a & b)
Brian Mills and Beryl Smart had been in partnership for many years. Accounts were prepared to 30 April. It was
decided that the partners would retire on 30 April 2012 and the business was sold to Chipperfield Ltd.
The partnership's statement of financial position at 30 April 2012 was as follows:
Non-Current Assets $ $
Property 85 000
Fixtures and fittings 27 500
Plant and machinery 14 750 127 250
Current Assets
Inventories 28 800
Trade receivables 10 950
Bank 5 450 45 200
Total assets 172 450
Current Liabilities
Trade payables 13 950
158 500
Non-Current Liabilities
Loan from Brian Mills at 8% per annum 15 000
Loan from Beryl Smart at 6% per annum 10 000 25 000
Net assets 133 500
Capital accounts
Brian Mills 76 000
Beryl Smart 57 500 133 500
Chipperfield Ltd’s statement of financial position at 30 April 2012 was as follows:
Non-Current Assets $ $
Property 145 000
Fixtures and fittings 57 750
Plant and machinery 18 750
221 500
Current Assets
Inventories 39 450
Trade receivables 12 380
Bank 69 675 121 505
Total assets 343 005
Current Liabilities
Trade payables 18 675
Net assets 324 330
Chapter 5 69 Purchase of Business

Equity $ $
300 000 Ordinary shares of $0.50 150 000
Share premium 75 000
Retained earnings 99 330 324 330
Chipperfield Ltd purchased the business on 1 May 2012 for $160 000. The company took over all of the assets (except
the bank account) together with the current liabilities.
The purchase consideration was:
1 120 000 ordinary shares of $0.50 nominal value issued at a premium of $0.10.
2 30 000 6% non-redeemable preference shares of $0.50.
3 10% debentures redeemable in 2020 issued so that Brian and Beryl receive the same interest
payments as in the partnership.
4 The balance paid from the bank account. The partnership assets were re-valued as follows:
$
Property 95 000
Fixtures and fittings 24 500
Plant and machinery 12 500
Inventories 27 500
Trade receivables 10 250
REQUIRED
(a) Prepare Chipperfield Ltd’s statement of financial position at 1 May 2012, after the partnership had been
acquired. [22]
Chipperfield Ltd’s profit for the year ended 30 April 2012 was $82 350. The budgeted profit for the year ended 30
April 2013 is $116 000.
REQUIRED
(b) Calculate the return on capital employed for the two years. State whether Chipperfield Ltd has benefited
from the purchase of the partnership. [7]

QUESTION 3 MAY 2014 P43 Q1

On 1 October 2013, Rezwan Limited agreed to purchase the net assets, excluding cash and cash equivalents, of
Nimra, a sole trader.
Nimra provided the following information at 30 September.
Assets 2013 2012
Non-Current Assets $ $
Land and buildings 110 000 110 000
Plant and equipment 76 500 85 000
186 500 195 000
Current Assets
Inventory 21 000 17 000
Trade receivables 34 000 28 000
Cash and cash equivalents 11 000 3 500
66 000 48 500
Total assets 252 500 243 500
Equity
Capital Balance 207 500 201 500
Profit for the year 58 000 54 000
Drawings (54 000) (48 000)
Total equity 211 500 207 500
Liabilities
Current Liabilities
Trade payables 41 000 36 000
Total equity and liabilities 252 500 243 500
Chapter 5 70 Purchase of Business

Additional information
On 1 October 2013:
1 The land and buildings are revalued at $170 000.
2 Additional depreciation of $8 500 is provided on the plant and equipment.
3 Inventory valued at 15% of the total is written off.
4 Bad debts equal to 10% of the trade receivables are written off.

REQUIRED
(a) Calculate the value of the net assets acquired by Rezwan Limited. [6]

Additional information
The directors of Rezwan Limited agreed to pay Nimra five times the average profit for the year for the last two years.
They made a payment in cash of $100 000 and issued new $1 ordinary shares to Nimra at a premium of $0.50 for
the balance of the purchase price.

REQUIRED
(b) Calculate the amount the directors of Rezwan Limited paid for Nimra’s business. [2]
(c) Calculate the number of new $1 shares issued by Rezwan Limited. [4]
Additional information
Rezwan Limited’s statement of financial position at 30 September 2013 before it acquired Nimra’s business and
assets is as follows:

Statement of financial position at 30 September 2013

Assets $
Non-Current Assets
Land and buildings 120 000
Plant and equipment 60 000
180 000
Current Assets
Inventory 45 000
Trade receivables 24 000
Cash and cash equivalents 132 000
201 000
Total assets 381 000
Equity $
Ordinary shares of $1 each 200 000
Share premium 20 000
Retained earnings 110 000
Total equity 330 000
Liabilities
Current liabilities
Trade payables 51 000
Total equity and liabilities 381 000
REQUIRED
(d) Prepare Rezwan’s statement of financial position at 1 October 2013 immediately after acquiring Nimra’s
business. [14]
(e) Explain why the directors of Rezwan Limited are prepared to pay more for the assets acquired than their
book value. [6]
Additional information
The directors of Rezwan Limited expect that the value of goodwill acquired from Nimra may reduce over a period of
years.
Chapter 5 71 Purchase of Business

REQUIRED
(f) Explain, making reference to IAS 36 and 38, how any reduction will be calculated and state the accounting
adjustments which will be made in future financial statements. [8]
QUESTION 4 MAY 2014 P43 Q1 (d to f)
On 1 July 2013 Clemens, August and Bleeker converted their partnership into a limited company.
The company issued ordinary shares of $1 each to Clemens and August at a premium of 10% to settle the capital
account balances.
$1 non-redeemable 5% preference shares will be issued to Bleeker at par to settle his capital balance.
The balances in each partner’s capital at 30 June 2013 were as follows.
Clemens August Bleeker
$ $ $
Balances at 30 June 2013 88 000 132 000 60 000
REQUIRED
(d) Calculate the number of shares issued to each partner. [5]
(e) Show the equity section of the statement of financial position at 1 July 2013. [3]
(f) Explain how each partner will receive a return on their investment in the new company. [6]

QUESTION 5 NOVEMBER 2016 P32 Q3

Husna had been a sole trader for many years and has decided to retire. Her statement of financial position at 30
June 2016 was as follows:
Statement of Financial Position at 30 June 2016
Assets $
Non-current assets
Premises 120 000
Equipment 14 600
134 600
Current assets
Inventory 29 500
Trade receivables 17 200
Cash & Cash equivalents 46 700
Total assets 181 300
Capital and liabilities
Opening capital 162 100
Profit for the year 41 600
203 700
Drawings 36 000
Closing capital 167 700
Current liabilities
Bank 2 000
Trade payables 11 600
13 600
Total capital and liabilities 181 300
On 30 June 2016 Husna sold her business to FLF Limited.
The statement of financial position of FLF Limited at 30 June 2016 before the sale was as follows:

Statement of Financial Position at 30 June 2016

Assets $
Non-current assets
Premises 815 100
Equipment 190 900
Vehicles 81 500
1 087 500
Chapter 5 72 Purchase of Business

Current assets
Inventory 103 600
Trade and other receivables 99 400
Cash and cash equivalents 7 100
210 100
Total assets 1 297 600
Equity and liabilities
Equity
800 000 ordinary shares of $1 each 800 000
Retained earnings 322 500
General reserve 80 000
Total equity 1 202 500
Current liabilities
Trade and other payables 95 100
Total equity and liabilities 1 297 600

For the sale of the business, Husna’s premises were revalued at $280 000 and trade receivables balances of $1 200
were written off.
FLF Limited took over all the assets and liabilities of Husna’s business except the bank account.
The total purchase consideration was $440 000. This was made up as follows:

Cash $70 000

8% debentures (2025) $120 000
$1 ordinary shares issued at a premium 100 000 shares
At the same time as the business purchase, the directors of FLF Limited decided to have their own premises revalued.
The premises were revalued at $1 000 000.
REQUIRED
(a) Prepare the statement of financial position of FLF Limited on 1 July 2016 immediately after the purchase of
Husna’s business. [16]

Additional information
FLF Limited’s dividend yield is 3%. A bank deposit account pays interest of 4%.
Husna’s young nephew is disappointed with his aunt’s decision to sell the business. He says that if she wanted to
retire she could have appointed him to manage the business at an annual salary of $20 000.
REQUIRED
(b) Assess whether Husna made the right decision in selling the business. Support your answer with
calculations. [9]

QUESTION 6 MAY 2017 P32 Q4

Alex and Brown were in partnership sharing profits and losses in the ratio of 3 : 2 respectively.
They provided the following information at 31 October 2016:

$ $ $
Land and buildings 320 000
Plant and machinery 135 000
Motor vehicles 110 000
Inventory 38 000
Trade receivables 54 000
Cash and cash equivalents 19 000
Trade payables (39 000)
637 000
Chapter 5 73 Purchase of Business

Alex Brown
Capital accounts 300 000 200 000 500 000
Current accounts
Balance at 1 November 2015 72 000 57 000
Partners’ salaries 30 000 45 000
Interest on capital 15 000 10 000
Share of residual profit 36 000 24 000
Drawings (77 000) (75 000)
Balance at 31 October 2016 76 000 61 000 137 000
637 000

C Limited purchased this partnership business on 1 November 2016. They took over all the assets and liabilities with
the exception of:
Cash and cash equivalents
One motor vehicle which was taken over by Alex at an agreed value of $28 000.
The remaining assets taken over by C Limited had the following values:

$
Land and buildings 450 000
Plant and machinery 120 000
Motor vehicles 60 000
Inventory 49 000
Trade receivables 52 000
The purchase consideration was five times the partnership profit for the year ended 31 October 2016.
This purchase consideration was settled by C Limited as follows:
1 $127 500 cash was paid into the partnership bank account.
2 Alex and Brown were issued an amount of 8% debentures. Both will continue to receive the same amount
of interest as they had received from the interest on capital.
3 The balance of the purchase consideration was settled by an issue of $1 ordinary shares at a price of $1.80
each. The shares were distributed between the partners in their profit and loss sharing ratios.

REQUIRED
(a) State what is meant by ‘goodwill’. [1]
(b) Calculate the value of goodwill paid for by C Limited. [4]
(c) Calculate the total profit on realisation due to the partners. [4]
(d) Prepare the partners’ capital accounts to close their business. [11]

Additional information
The capital employed of C Limited at 31 October 2016 before purchasing the partnership business was as follows:

$
Ordinary shares of $1 each 3 400 000
Share premium 300 000
Retained earnings 816 000
4 516 000

The company made a profit for the year ended 31 October 2016 of $352 000.
The directors of C Limited estimate that the profit for the coming year after purchasing the partnership business will
be increased to $540 000.
REQUIRED
(e) Discuss the advantages to C Limited, other than increase in the profit, of purchasing Alex and Brown’s
business. [5]
Chapter 5 74 Purchase of Business

QUESTION 7 NOVEMBER 2017 P31 Q4 (e & f)

Armfield and Bonetti are sole traders. Profit for the year ended 31 December 2016 of Armfield was $80 000 and
Bonetti was $120 000.
They have decided to merge their two businesses into a partnership on 1 January 2017.
The profit for the year of the partnership for the year ending 31 December 2017 is expected to be $200 000. The
partners agreed to share the profits and losses equally.
REQUIRED
(e) Discuss whether or not the merger of the two businesses has been beneficial to each partner. [5]
Additional information
After the first year’s successful trading as a partnership the partners were advised to consider incorporating their
business. Both partners are close to retirement age and have family.
(f) Discuss two advantages to the partners of incorporating their business. [4]

QUESTION 8 MAY 2018 P32 Q4

Ephraim and Fikriyah are sole traders. They agreed to merge their two businesses into a partnership on 1 October
2017 sharing profits and losses equally.
Ephraim and Fikriyah’s statements of financial position at 30 September 2017 were as follows:
Ephraim Fikriyah
$ $
Non-current assets 45 000 110 000
Current assets
Inventories 7 500 11 500
Trade receivables 9 000 15 500
Cash and cash equivalents 6 500 1 000
23 000 28 000
Total assets 68 000 138 000

Capital 60 000 120 000

Current liabilities
Trade payables 8 000 18 000
68 000 138 000
The agreed valuations for the merger were:
Ephraim Fikriyah
$ $
Non-current assets 55 000 115 000
Inventories 8 000 10 500
Goodwill 10 000 6 000

All other assets and liabilities were transferred at their book value.
Goodwill was not to be retained in the books of account.
REQUIRED
(a) Prepare the opening statement of financial position for the partnership at 1 October 2017. [13]
Additional information
The average annual profit earned by Ephraim for the past three years was $60 000.
The average annual profit earned by Fikriyah for the past three years was $40 000.
The budgeted profit for the partnership for its first year’s trading is expected to be $100 000. In each of the following
three years it is expected to be 10% less than the previous year. This is as a result of the increasing competition.
(b) Discuss the benefits and limitations of the merger to each partner. Justify your answer using both financial
and non-financial factors. [12]
Chapter 5 75 Purchase of Business

SOLUTION CHAPTER 5
QUESTION 1 NOVEMBER 2011 P43 Q1(a)
(a) Ashburton Ltd
Statement of financial position after acquisition of the partnership
Non-current assets $ $
Goodwill (W 1) 26 950
Land & buildings ($125 000 + $115 000) 240 000
Fixtures & fittings ($67 750 + $32 000) 99 750
Motor vehicles ($24 975 + $15 000) 39 975 406 675
Current assets
Inventories ($22 875 + $22 000) 44 875
Trade receivables ($14 363 + $13 500) 27 863
Bank [$28 462 – $27 500 (W 2)] 962 73 700
Total assets 480 375
Shareholders’ Equity
Ordinary shares of $1 [$200 000 + (100 000 × $1)] 300 000
Share premium [$20 000 + ($100 000 × 0.5)] 70 000
Retained profit 48 795 418 795
Non-current liabilities
8% debentures 2020 (W 2) 37 500
Current liabilities
Trade payables ($14 630 + $9 450) 24 080
Total liabilities and equity 480 375
WORKINGS
(W 1) Calculation of Goodwill $
Purchase consideration of the business 215 000
Fair value of net assets purchased ($115 000+$32 000+$15 000+$22 000+$13 500 – $9 450) (188 050)
Goodwill 26 950
(W 2) Calculation of Cash Payment $
Purchase consideration of the business 215 000
Payment in ordinary shares [100 000 × ($1.0 + $0.5)] (150 000)
$25 000 ×12%
Payment in debentures ( ) (37 500)
8%
Payment in cash (balancing figure) 27 500
QUESTION 2 MAY 2012 P43 Q2 (a & b)
(a) Chipperfields Ltd
Statement of Financial Position as at 1 May 2012
Non-Current assets $ $ $
Intangible
Goodwill (W 1) 4 200
Tangible
Property ($145 000 + $95 000) 240 000
Fixtures and fittings ($57 750 + $24 500) 82 250
Plant and machinery ($18 750 + $12 500) 31 250 353 500
357 700
Current assets
Inventories ($39 450 + $27 500) 66 950
Trade receivables ($12 380 + $10 250) 22 630
Bank $[69675–(160000–18000)+(120000@$0.6)+(30000 @$0.5)] 14 675
104 255
Chapter 5 76 Purchase of Business

Current liabilities
Trade payables ($18 675 + $13 950) (32 625) 71 630
429 330
Non-current liabilities
10% Debenture 2020 ($12 000 + $6 000) (18 000)
411 330
Equity
420 000 Ordinary shares of $0.50 [$150 000) + (120 000@$0.5)] 210 000
30 000 6% non-redeemable preference shares of $0.50 15 000
Share premium [$75 000 + (120 000@$0.1)] 87 000
Retained earnings 99 300 411 330
Operating Profit ×100
(b) Return on Capital Employed =
Capital Employed
$82 350 ×100
2012 =
$324 330
= 25.39%

$116 000 ×100

2013 =
$429 330
= 27.02%
The ROCE has increased so Chipperfield Ltd has benefited from the acquisition.
WORKINGS
(W 1) Calculation of Goodwill
$ $
Purchase price of Business 160 000
Agreed value of tangible net assets
Property 95 000
Fixtures and fittings 24 500
Plant and machinery 12 500
Inventories 27 500
Trade receivables 10 250
169 750
Less Trade payables (13 950) 155 800
Goodwill 4 200
(W 2) Value of Debentures to be issued on purchase of Business $
$15 000 ×8%
Debentures to be issued to Brian ( ) 12 000
10%
$10 000 ×6%
Debentures to be issued to Beryl ( ) 6 000
10%
Total value of debentures to be issued 18 000

QUESTION 3 MAY 2014 P43 Q1

(a) Rezwan Limited
Calculation of net assets acquired on 1 October 2013
Fair value of assets taken over $ $
Land and buildings 170 000
Plant and equipment ($76 500  $8 500) 68 000
Inventory [$21 000  ($21 000 × 15%)] 17 850
Trade receivables [$34 000  ($34 000 × 10%)] 30 600 286 450
Fair value of liabilities taken over
Trade payables (41 000)
Fair value of the net assets acquired by Rezwan Limited 245 450
Chapter 5 77 Purchase of Business

(b) Purchase consideration = Average profit x5

($58 000+$54 000)
= x5
2
= $280 000

(c) Consideration in shares = $280 000 – $100 000

= $180 000
$180 000
Number of shares issued at $1.50 =
$1.50
= 120 000 shares

(d) Rezwan Limited

Statement of financial position at 1 October 2013
Non-Current Assets $ $ $
Tangible Assets
Land and buildings ($120 000 + $170 000) 290 000
Plant and equipment ($60 000 + $68 000) 128 000 418 000
Intangible asset
Goodwill($280 000 – $245 450) 34 550
452 550
Current Assets
Inventory ($45 000 + $17 850) 62 850
Trade receivables ($24 000 + $30 600) 54 600
Cash and cash equivalents ($132 000 – $100 000) 32 000 149 450
Total assets 602 000
Equity
Ordinary shares of $1 each [$200 000 + (120 000 × $1)] 320 000
Share premium [$20 000 + (120 000 × $0.50)] 80 000
Retained earnings 110 000 510 000
Current Liabilities
Trade payables ($51 000 + $41 000) 92 000
602 000

$34 55𝑜
(e) Goodwill paid by Rezwan Limited is $34 550 ($280 000 – $245 450) which is almost 14% ( )in excess
$245 450
of the agreed value of the net assets acquired.
Rezwan Limited, as the acquiring business pays, goodwill for the reputation, advantageous location,
customers’ loyalty, quality products etc.
As this Goodwill is included in Rezwan’s statement of financial position after acquisition.

(f) As this goodwill arises on purchase of business so under IAS 38 (Intangible assets), Rezwan Ltd can show it
as an intangible non-current asset in the Statement of Financial Position. Rezwan must then amortise the
goodwill on the straight line basis over the estimated useful life of goodwill. This is done by transferring an
equal charge from goodwill to its Income Statement. The amortisation period should be reviewed annually
and changes made in the amortisation in line with this review.

Under IAS 36 (Impairment of assets) each year Rezwan should also compare the carrying value of the
goodwill (i.e. its net book value after amortisation) with its recoverable amount (its value in use). If the
recoverable amount is less than the carrying value then an impairment loss is shown as an additional
expense in its income statement.
Chapter 5 78 Purchase of Business

QUESTION 4 MAY 2014 P43 Q1 (d to f)

(d)
Clemens August Bleeker
Value of total capital in partnership 88 000 132 000 60 000
÷ Issue price per share ÷ $1.10 ÷ $1.10 ÷ $1.00
Number of shares issued 80 000 120 000 60 000
(e) Statement of financial position at 1 July 2013 (Equity section)
$
Ordinary shares of $1 each (80 000 + 120 000) shares @$1 each 200 000
Share premium account (80 000 + 120 000) shares @$0.10 each 20 000
Preference shares of $1 each 60 000 shares @$1 each 60 000
280 000
(f) All partners will become shareholders in the new company. As a result, all of them will receive their return
in the form of dividends.
As Bleeker owns preference shares in the new company so he will receive preference dividends at a fixed
rate. In addition this dividend payment will take priority in preference to the ordinary dividend.
Clemens and August will own ordinary shares. The ordinary dividend amount may vary from year to year
and is declared by the directors out of distributable profits. In the absence of any distributable profits the
shareholders may not receive any dividend. In addition, directors usually do not distribute all the profits as
dividend.
QUESTION 5 NOVEMBER 2016 P32 Q3
(a) FLF Limited
Statement of Financial Position at 1 July 2016
Assets $ $
Non-current assets
Intangible
Goodwill (W 1) 111 500
Tangible
Premises ($1 000 000 + $280 000 ) 1 280 000
Equipment ($190 900 + $14 600) 205 500
Vehicles 81 500 1 567 000
1 678 500
Current Assets
Inventory ($103 600 + $29 500) 133 100
Trade and other receivables [$99 400 + ($17 200 – $1 200)] 115 400 248 500
Total assets 1 927 000
Equity and liabilities
Equity
900 000 ordinary shares of $1 each ($800 000 + $100 000 ) 900 000
Share premium (W 2) 150 000
Retained earnings 322 500
General reserve 80 000
Revaluation reserve ($1 000 000 – $815 100) 184 900 1 637 400
Non-current liabilities
8% debentures (2025) 120 000
Current liabilities
Trade and other payables ($95 100 + $11 600) 106 700
Cash and cash equivalents ($70 000 – $7 100) 62 900 169 600
Total equity and liabilities 1 927 000
Chapter 5 79 Purchase of Business

WORKINGS
(W 1) Calculation of Goodwill $
Purchase price of business 440 000
Fair value of the business’ net assets [280 000+14 600 + $29 500 + ($17 200 – $1 200) –11 600] (328 500)
Goodwill 111 500
(W 2) Calculation of Premium on issue of shares $
Total purchase consideration 440 000
Payment in cash (70 000)
Payment in debentures (120 000)
Face value of ordinary shares issued (100 000)
Total premium on issue of shares 150 000
(b) Statement to calculate Total income for Husna if she sells the business
$
Debenture interest ($120 000 × 8%) 9 600
Dividends on ordinary shares ($250 000 × 3%) 7 500
Bank interest ($70 000 – $2 000) × 4% 2 720
Total income for Husna after sale of business 19 820
Statement to calculate total income for Husna if she continues her business
$
Profit for the year as per balance sheet of partnership 41 600
Nephew’s annual salary as manager (20 000)
Total net income for Husna after sale of business 21 600
Husna is likely to earn more profits if she accept the offer from her nephew as the profit with him as a manager
appears to be higher. Though the nephew is ready to take the initiative but his skills and experience may not be
sufficient to have smooth functioning of business operations. In the absence of Husna there might be a reduction in
profits.
Husna would be relatively safe if she makes her investment in a larger business. Husna has gained an opportunity
for capital gains on the value of her shares. Both options give a return lower than the previous level of drawings.
Husna’s shares might fall in value.
QUESTION 6 MAY 2017 P32 Q4
(a) Goodwill is an intangible non-current asset. It arises from the factors like advantageous location, good
reputation, quality products & customer loyalty of the concerned business. Mathematically, it represents
the value of the business in excess of the book value of its net assets.
(b) Statement to calculate Goodwill
$
Purchase consideration (W 1) 800 000
Fair value of net assets taken over $(450 000 + 120 000 + 60 000 + 49 000 + 52 000  39 000) 692 000
Goodwill 108 000
(c) Realisation account
$ $
Land and buildings 320 000 Trade payables 39 000
Plant and machinery 135 000 C Ltd - Purchase consideration (W 1) 800 000
Motor vehicles 110 000 Alex Capital - Vehicle 28 000
Inventory 38 000
Trade receivables 54 000
Profit share
Capital – A ($210 000 × 3/5) 126 000
B ($210 000 × 2/5) 84 000 210 000 ______
867 000 867 000
Chapter 5 80 Purchase of Business

(d) Capital Accounts

Alex Brown Alex Brown
$ $ $ $
Realisation - vehicle taken over 28 000 Balance b/f 300 000 200 000
8%Debentures (W 2) 187 500 125 000 Current account 76 000 61 000
Ordinary shares (W 2) 216 000 144 000 Realisation profit (b part) 126 000 84 000
Bank (balancing figure) 70 500 76 000
502 000 345 000 502 000 345 000

(W 1)
Purchase consideration = Profit before appropriation: × 5
= [Residue profit + Partners' salaries + Interest on capital] × 5
= (36 000 + 24 000) + (30 000 + 45 000) + (15 000 + 10 000)] × 5
= $800 000
(W 2) $ $
Purchase consideration 800 000
Payment through cash (127 500)
8% Debentures: Alex ($15 000 ÷ 8%) 187 500
Brown ($10 000 ÷ 8%) 125 000 (312 500)
Settled by ordinary shares 360 000
Alex ($360 000  60%) 216 000
Brown ($360 000  40%) 144 000 (360 000)
(e) The ‘return on capital employed’ before the acquisition is 7.79% ($352 000 /$4 516 000) whereas the
additional return from this acquisition is expected to be 23.5% [($540 000 – $352 000) / $800 000]. This will
improve overall profitability of the business to 10.16% [($540 000 / ($4 516 000 + $800 000]] from 7.79%.
The improvement in profit could have been due to economies of scale or due to synergy effect. The goodwill
of partnership may also bring additional revenue or customers for the business. As a result the shareholders
may receive higher dividend.

QUESTION 7 NOVEMBER 2017 P31 Q4 (e & f)

(e) As only one year’s data is available so is difficult to make a safe decision. Based on available data Armfield
would be better off in terms of increased profits by $20 000 whereas Bonetti will be worse off by $20 000
in the form of reduction in his profits.
The advantages are:
 availability of additional capital
 sharing of managerial responsibilities resulting in shared workload and less stress
 spread of risk as losses will be shared
 different skills may be beneficial to the business
 Holiday / sickness cover
The disadvantages are:
 Sharing of profits
 Delayed decision making
 Possible disputes
 sharing of managerial responsibilities

(f)  The liability that each shareholder has for company debts is only limited to the amount paid for his or
her shares.
 Company may find it easier to raise finance through loans, issue of shares and debentures
 Continuity of the business
 Partners have to work in the business where shareholders may only invest
 Shares can easily be transferred by shareholders to other individuals or entities.
Chapter 5 81 Purchase of Business

 On the other side a company has to comply with a number of statutory regulations. It has to audit its
accounts annually and also has to publish audited accounts on annual basis.
 A company’s affairs are less private than those of a sole trader or partnership, since company accounts
are made available for publication.
 Separation of ownership and control makes it difficult for ordinary shareholders to take concerted
action to oust bad management group.
 Compliance with the Companies Act imposes an increased administrative burden on the company. This
also involves occurrence of higher overheads on accounting and secretarial services.

QUESTION 8 MAY 2018 P32 Q4

(a) Ephrain and Fikriyah
Statement of financial position at 1 October 2017
$ $
Non-current assets ($55 000 + $115 000) 170 000
Current assets
Inventories ($8 000 + $10 500) 18 500
Trade receivables ($9 000 + $15 500) 24 500
Cash & cash equivalents ($6 500 + $1 000) 7 500 50 500
Total assets 220 500
Capital and liabilities
Capital accounts:
Ephraim (W 1) 72 500
Fikriyah (W 1) 122 000 194 500
Current liabilities
Trade payables ($8 000 + $18 000) 26 000
220 500

(W 1) Capital accounts
Ephraim Fikriyah Ephraim Fikriyah
$ $ $ $
1
Goodwill[($10 000 + $6 000) × /2) 8 000 8 000 Balance b/f 60 000 120 000
Inventories  ($11 500 10 500) 1 000 Goodwill 10 000 6 000
Balance c/d 72 500 122 000 Non-current assets  ($55 000 
$45 000) ; ($115 000 110 000) 10 000 5 000
_____ _____ Inventories  ($8 000  $7 500) 500 ______
80 500 131 000 80 500 131 000

(b) Profits are subject to consistent annual reduction of 10% per annum. Profits in the first year of merger will
be $100 000. Second year profits will be $90 000 ($100 000 × 90%), third year $81 000 ($90 000 × 90%), and
fourth year $72 900 ($81 000 × 90%).
As profits are shared equally between Ephraim and Fikriyah so Ephraim who has been earning profits of
$60 000 for the last three years is worse off throughout the period as his maximum profit share in a year is
just $50 000 ($100 000 × 1/2).
Fikriyah is better off for first three years as his third year profit share will be $40 500 ($81 000 × 1/2) but is
also worse off in year four.
It can be assumed safely, that the increased competition would affect profit of Ephraim and Fikriyah as sole
traders in the same way as affecting the partnership. The formation of partnership would rather help
partners to compete in a better way.
On financial grounds, it looks that on financial grounds the merger is beneficial for Fikriyah but not for
Ephraim.
Chapter 5 82 Purchase of Business

The benefits of forming the partnership like risk sharing, responsibility sharing etc need to outweigh any
financial loss in earnings for Ephraim.
Both partners have ample time for making plan to combat reduction in profits in coming years
Chapter 6 83 Financial Statements of Companies

CHAPTER 6 FINANCIAL STATEMENTS OF COMPANIES

QUESTION 1 MAY 2011 P42 Q2 (d)
A public limited company is required to publish a Report of the Directors.
List five items which appear in the Report of the Directors. [10]
QUESTION 2 MAY 2011 P43 Q1
On 30 April 2010 Frog Log plc’s statement of financial position (balance sheet) showed the following:
$000
Non-current assets 2012
Net current assets 983
2 995
Non-current liabilities
5% convertible loan stock 250
7% debentures 200
2545
Equity $000
1 000 000 ordinary shares of $1 each 1000
200 000 redeemable ordinary shares of $0.50 each 100
Share premium 750
General reserve 80
Retained earnings 615
2545
The following additional information is available:
1 On 1 May 2010 the premises were revalued at $530 000.
They were included in the statement of financial position on 30 April 2010 at a cost of $270 000 with
accumulated depreciation of $20 000.
2 In August 2010 Frog Log plc redeemed its redeemable ordinary shares at a premium of $0.05 per share.
They had originally been issued at a premium of $0.10 per share.
3 The convertible loan stock is due to be repaid on 31 December 2011.
Loan stock can be converted into ordinary shares at a price of $3 per share in the period between
1 January 2010 and 31 December 2011.
In December 2010 holders of $150 000 of the loan stock decided to convert their loan stock.
4 Profit for the year ended 30 April 2011 was $170 000.
$50 000 was transferred to general reserves.
Dividends paid during the year amounted to $95 000.
5 There were no acquisitions or disposals of non-current assets during the year.
The income statement included depreciation charges of $5 000 on the premises and $112 000 on other
non-current assets.
6 Current assets on 30 April 2011 totalled $1 610 000.
REQUIRED
(a) Prepare, in as much detail as possible, the statement of financial position of Frog Log plc at 30 April
2011. [32]
(b) State whether each reserve in your balance sheet is a revenue reserve or a capital reserve. [5]
(c) In what circumstances would stockholders wish to exercise their right to convert loan stock into ordinary
shares? [3]
QUESTION 3 NOVEMBER 2011 P42 Q2
The trial balance of Ashbourne plc at 30 June 2011 was as follows:
Dr. Cr.
$000 $000
Land and buildings - cost 8 473
Land and buildings - depreciation 2 173
Chapter 6 84 Financial Statements of Companies

Other non-current assets - cost 1 058

Other non-current assets - depreciation 236
Revenue 7 216
Purchases 4 425
Distribution costs 1 485
Administrative expenses 1 098
Finance charges 80
Final dividend paid for year ended 30 June 2010 100
Interim dividend paid for year ended 30 June 2011 125
Inventories at 1 July 2010 1 596
Trade receivables 897
Trade payables 173
Prepaid and accrued expenses 265 146
Bank 74
Ordinary share capital ($0.50 ordinary shares) 5 000
Share premium 2 500
8% debentures 2020 (issued in 2008) 2 000
Retained earnings _____ 232
19 676 19 676
Additional information:
1 The inventories at 30 June 2011 were valued at $1 730 000.
2 Land, included in the trial balance total at $4 million, is to be revalued at $5 million.
3 All of the depreciation on the relevant non-current assets has been accounted for.
4 There was a flood at the company's premises on 29 July 2011 resulting in a material uninsured
loss of $215 000.
5 On 14 August 2011 the company declared its final dividend for the year ended 30 June 2011
of $0.03 per share.
REQUIRED
(a) Prepare the income statement for the year ended 30 June 2011. [12]
(b) Prepare the statement of financial position (balance sheet) at 30 June 2011. [20]
IAS 10 (events after the statement of financial position date) identifies two types of event as adjusting events and
non-adjusting events.

REQUIRED
(c) State the difference between adjusting and non-adjusting events. Explain their treatment in the financial
statements. [4]
(d) State if the items in points 4 and 5 in the additional information are adjusting or non-adjusting events. Justify
your answer. [4]

QUESTION 4 MAY 2012 P41 Q1 (c & d)

(c) Describe the treatment of a proposed final dividend in the financial statements. Give the reason for this
treatment. [4]
(d) Name one item included in a statement of changes in equity which would not appear in a statement of
recognised income and expenses. [2]
QUESTION 5 MAY 2013 P41 Q2
The financial statements of Manik plc showed the following in respect of non-current assets:
$000
Cost at 1 January 2012 2 000
Less: accumulated depreciation 200
Net book value at 1 January 2012 1 800
Chapter 6 85 Financial Statements of Companies

During the year ended 31 December 2012 the following took place.
New machinery costing $100 000 was purchased. This had been entered in the ledger. Machinery which had cost
$200 000 and had been depreciated by $50 000 was sold. The proceeds of the sale were $145 000 and this had been
credited to the suspense account.
No depreciation has been charged on the plant and machinery for the year. Depreciation is charged at 10% on the
net book value of plant and machinery at 31 December 2012. The charge is to be included in the Administrative
expenses for the year.
REQUIRED
(a) Prepare a statement suitable for inclusion in the published accounts to show the cost, accumulated
depreciation and net book value of plant and machinery at 31 December 2012. [8]

The trainee accountant at Manik plc has provided the following financial information at 31 December 2012.

$000
Revenue 4 000
Cost of sales 1 000
Administrative expenses 1 700
Distribution costs 450
Suspense account 145
Dividends paid and proposed 135
Inventory 400
Trade receivables 385
Trade payables 120
Cash and cash equivalents 170
Long term loan 300
Ordinary shares of $1 each 1 250
Retained earnings at 1 January 2012 265

Additional information
1 No adjustments have been made in respect of distribution costs owing of $20 000 and administrative
expenses prepaid of $15 000.
2 Interest on the long-term loan is chargeable at 10% per annum. Only the interest paid during the year of
$20 000 has been included in administrative expenses.
3 The estimated tax charge for the year is $365 000.
4 The figure for dividends paid and proposed is made up as follows:
Final dividend for the year ended 31 December 2011 paid in 2012 $50 000
Interim dividend paid 30 September 2012 $25 000
Proposed final dividend to be paid in March 2013 $60 000
5 On 1 December 2012 the company issued a further 500 000 shares of $1 each at $1.50.
These shares would qualify for the proposed final dividend to be paid in March 2013.

REQUIRED
(b) Prepare the company’s income statement for the year ended 31 December 2012. [11]
(c) Prepare a statement of changes in equity for the year ended 31 December 2012. [10]
(d) Prepare the company’s statement of financial position at 31 December 2012. [8]
(e) Explain how proposed dividends are treated in the published accounts. [3]

QUESTION 6 NOVEMBER 2013 P41 Q1 (c)

Manchi plc are preparing their budgets for the forthcoming year ending 30 September 2014. They provide the
following information.
1 The following note was extracted from the financial statements at 30 September 2013.
Chapter 6 86 Financial Statements of Companies

Non-current assets Cost Depreciation Net book value

Property plant and equipment $000 $000 $000
Land 1500 - 1500
Buildings 800 250 550
Plant and equipment 1500 600 900
Motor vehicles 150 50 100
Total 3 950 900 3 050
2 The land is expected to increase in value by $100 000 during the year.
3 Budgeted capital expenditure for the year on buildings is $80 000; plant and equipment $280 000; motor
vehicles $30 000 and goodwill $50 000.
4 Budgeted depreciation for the year on buildings is $50 000; plant and equipment $255 000 and motor
vehicles $25 000.
5 Plant and equipment with an original cost of $35 000 and depreciation of $15 000 is budgeted to be disposed
of for proceeds of $10 000.
REQUIRED
Prepare the property, plant and equipment section of the non-current assets note to the budgeted statement of
financial position at 30 September 2014. [10]

QUESTION 7 NOVEMBER 2013 P42 Q3 (e)

Sanghera Manufacturing plc produces office desks in two versions, standard and superior. The directors of Sanghera
Manufacturing plc wish to raise additional finance for investment.
REQUIRED
(i) Identify two possible sources of finance the directors could use. [2]
(ii) Explain one advantage and one disadvantage of each method you have chosen. [6]
QUESTION 8 MAY 2014 P41 Q2 (a to c)
Bridlington plc prepares accounts annually to 30 September. The directors provide the following information.
Trial Balance at 30 September 2013
Debit ($) Credit ($)
Revenue 936 011
Purchases 479 352
Distribution costs 108 376
Administrative expenses 236 758
Ordinary share capital 400 000
Share premium 40 000
Retained earnings 57 386
Land and buildings
Cost 380 000
Accumulated depreciation 78 400
Plant and machinery
Cost 105 000
Accumulated depreciation 66 500
Motor vehicles
Cost 65 000
Accumulated depreciation 37 578
Loss on disposal of motor vehicle 850
Inventory at 1 October 2012 177 838
Provision for doubtful receivables 6 834
Trade receivables 138 450
Trade payables 51 243
Cash and cash equivalents _______ 17 672
1 691 624 1 691 624
Chapter 6 87 Financial Statements of Companies

Additional information
1 Land, which cost $100 000, is not to be depreciated.
2 Depreciation is to be provided as follows:
Buildings 4% on cost,
plant and machinery 10% on cost,
motor vehicles 25% reducing balance.
A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.
The charge is split in the ratio 3:1 between administrative expenses and distribution costs.
Plant and machinery costing $10 000 was acquired on 1 April 2013.
A motor vehicle which had been purchased on 1 February 2011 for $16 000 was sold on 1 June 2013 for $8
150.
3 The inventory at 30 September 2013 was valued as follows:
Net realisable value $212 653
Cost $172 927
4 The provision for doubtful receivables is to be provided at 4% of the trade receivables and the movement
is to be treated as an administrative expense.
5 An invoice for an administrative expense of $4 525 remained unpaid at 30 September 2013.
6 There was a prepayment for a distribution cost at 30 September 2013 of $2 760.
7 The tax charge for the year is estimated to be $16730.

REQUIRED
(a) Prepare an income statement for the year ended 30 September 2013. [16]
(b) Prepare a schedule of property, plant and equipment at 30 September 2013 suitable to be used as a note
to the accounts. [10]
(c) Prepare a statement of financial position at 30 September 2013. [8]

QUESTION 9 NOVEMBER 2014 P43 Q1(a &b)

The following extract from the income statement has been prepared for Asteroid plc for the year ended 30 June
2014.
$000
Revenue 11 735
Cost of sales (5 872)
Gross profit 5 863
Dividends received 750
Gain on disposal of non-current asset 395
Distribution costs (2 138)
Administrative expenses (1 574)
Profit from operations 3 296

On 1 May 2014 the directors issued $5 625 000 8% debentures redeemable in 2022.
The estimated tax liability for the year was $782 000.
REQUIRED
(a) Calculate the finance costs which would be entered in the income statement. [3]
(b) Calculate the profit before taxation and profit attributable to equity holders. [2]
QUESTION 10 MAY 2015 P41 & P42 Q3(e & f)
Abdul is considering forming a company by issuing ordinary and preference shares.
REQUIRED
(e) State one advantage and one disadvantage of ordinary shares to:
(i) the company [2]
(ii) a shareholder. [2]
Chapter 6 88 Financial Statements of Companies

(f) State one advantage and one disadvantage of preference shares to:
(i) the company [2]
(ii) a shareholder. [2]
QUESTION 11 MAY 2015 P43 Q1 (a to c)
The directors of Plantin plc have produced the following.
Plantin plc
Statement of Financial Position at 1 April 2014
Non-current assets $ $ $
Tangible Cost Depreciation Book value
Land and buildings 260 000 90 000 170 000
Plant and equipment 152 000 87 000 65 000
412 000 177 000 235 000
Investments 55 000
290 000
Intangible: Goodwill 80 000
370 000
Current assets
Inventories 45 000
Trade and other receivables 56 000 101 000
Total assets 471 000
Equity
Ordinary share capital ($1 shares) 100 000
5% Non-redeemable $1 preference shares 80 000
Retained earnings 110 000 290 000
Non-current liabilities
5% debentures 100 000
Current liabilities
Trade and other payables 24 000
Taxation 40 000
Cash and cash equivalents 17 000 81 000
Total equity and liabilities 471 000
The following information is also available for the following year.
Extract from Income Statement for the year ended 31 March 2015
$
Profit from operations 74 000
Income from investments 5 000
Finance costs (12 000)
Profit before taxation 67 000
Taxation (15 000)
Profit for the year 52 000
Statement of cash flows for the year ended 31 March 2015
Operating activities $ $
Profit from operations 74 000
Depreciation - buildings 28 000
- plant and equipment 33 000
Impairment of goodwill 20 000
Increase in inventories (30 000)
Increase in trade receivables (40 000)
Increase in trade payables 30 000 41 000
Cash from operations 115 000
Interest paid (12 000)
Tax paid (40 000)
Chapter 6 89 Financial Statements of Companies

Net cash flow from operations 63 000

Investing activities
Purchase of non-current assets
- buildings (80 000)
- plant and equipment (80 000)
Income from investments 5 000 (155 000)
Financing activities
Redemption of debentures (50 000)
Proceeds of issue of non-redeemable preference shares 20 000
Proceeds of issue of 50 000 ordinary shares 80 000
Dividends paid (preference) (4 000) 46 000
Net decrease in cash and cash equivalents (46 000)
Cash and cash equivalents at 1 April 2014 (17 000)
Cash and cash equivalents at 31 March 2015 (63 000)
REQUIRED
(a) Prepare an extract from the statement of changes in equity for the year ended 31 March 2015 showing the
retained earnings column. [4]
(b) Prepare the property, plant and equipment section of the non-current assets note to the statement of
financial position at 31 March 2015. [7]
(c) Prepare Plantin plc’s statement of financial position at 31 March 2015. (Comparatives are not
required.) [21]
QUESTION 12 November 2015 P41 Q1 (a & b)
The directors of Corbiere plc have extracted the following balances from the books of account at 30 September 2015.
Dr ($) Cr ($)
6% debentures (2020) 68 000
Accrued expenses 2 480
Administrative expenses 63 810
Cash and cash equivalents 12 770
Carriage inwards 3 600
Distribution costs 49 330
Interest paid 3 060
Inventories at 1 October 2014 62 500
Motor vehicles: Cost 84 600
Provision for depreciation 38 760
Plant and machinery: Cost 68 700
Provision for depreciation 32 300
Prepaid expenses 4 400
Property 220 000
Purchases 392 340
Retained earnings 69 700
Returns inwards 3 470
Returns outwards 2 780
Revenue 756 690
Share capital ($1 ordinary shares) 50 000
Share premium 15 000
Trade payables 48 730
Trade receivables 86 500
Wages and salaries 54 900
Additional information
The directors have discovered the following.
1 Inventories have all been valued at cost at $73 100 on 30 September 2015.
Chapter 6 90 Financial Statements of Companies

Included in this valuation are some items which originally cost $5 000 but have been damaged. They would
normally sell for $10000. The items could be repaired at a cost of $3 000 and then sold for $6 500.
2 On 13 October 2015 a flood resulted in the loss of inventory valued at $17 500.
3 Purchase of new plant and machinery on 1 October 2014 of $6 000 has been posted in error to
administrative expenses.
4 Motor vehicles are to be depreciated at 20% per annum using the straight-line method. The estimated
residual value of motor vehicles is $20000. Depreciation is apportioned 80% to distribution costs and the
remainder to administrative expenses.
5 Plant and machinery is to be depreciated at 15% per annum using the reducing balance method.
Depreciation is apportioned 80% to administrative expenses and the remainder to distribution costs.
6 A payment for administrative expenses of $14400 has been made on 15 January 2015 covering the period
from 1 February 2015 to 31 January 2016.
7 At 30 September 2015 there was an additional accrual for wages and salaries of $1700.
Wages and salaries are apportioned between distribution costs and administrative expenses in the ratio
4:1.
8 The 6% debenture included in the balances was issued on 1 October 2014.
9 The taxation charge for the year is $28200.
10 The directors wish to create a provision for doubtful debts equal to 2% of trade receivables at 30 September
2015. This provision is to be treated as an administrative expense.
11 The directors proposed a final dividend of $0.05 per share. No dividends were paid during the year.

REQUIRED
(a) Prepare the income statement for the year ended 30 September 2015 in accordance with International
Accounting Standards. [21]
(b) Prepare the statement of financial position at 30 September 2015 in accordance with International
Accounting Standards. [13]
(You are not required to prepare notes to financial accounts.)
QUESTION 13 NOVEMBER 2015 P43 Q1(a & b)
Pitman plc has been trading for many years. The following balances have been extracted from the books of account
at 30 June 2015.
Dr Cr
$ $
Administrative expenses 141 970
Cash and cash equivalents 650
Distribution costs 36 120
Land and buildings: Cost 135 000
Provision for depreciation at 1 July 2014 21 840
Fixtures and fittings: Cost 18 110
Provision for depreciation at 1 July 2014 5 310
Motor vehicles: Cost 41 600
Provision for depreciation at 1 July 2014 19 200
Inventories at 1 July 2014 62 400
Purchases 268 200
Retained earnings 30 740
Revenue 563 800
Ordinary share capital ($1 shares) 60 000
Trade payables 80 250
Trade receivables 76 920
Other payables 870
Other receivables 1 040 _______
782 010 782 010
Chapter 6 91 Financial Statements of Companies

Additional information
1 Inventories were valued at cost $70 300 on 30 June 2015.
2 At 30 June 2015 land and buildings were revalued. Land was valued at $90 000 and buildings at $65 000.
3 Depreciation is to be charged to administrative expenses as follows:
Buildings 2% per annum using the straight-line method
Fixtures and fittings 15% per annum using the reducing balance method
Motor vehicles 25% per annum using the reducing balance method
4 Goods with a cost price of $6000 had been sold on credit at a mark-up of 20%. The customer who had
purchased these goods has been declared bankrupt and the debt is to be written off. The bad debt is to be
charged to administrative expenses.
5 A provision for doubtful debts is to be provided at 2.5% of the closing trade receivables balance. This is to
be charged to administrative expenses.
6 On 1 April 2015 the company issued a 5% debenture for $50 000 repayable in 2024. On the same day it also
made a fully subscribed rights issue of 1 ordinary share for every 4 ordinary shares held for $1.50 per share.
No entries have been made in the books of account in respect of either of these items.
7 The taxation charge for the year is $12 650.

REQUIRED
(a) Prepare an income statement for the year ended 30 June 2015 in line with International Accounting
Standards. [12]
(b) Prepare statement of financial position at 30 June 2015 in line with Accounting Standards. [18]
QUESTION 14 MAY 2016 P31 Q3 (a to c)
ACM plc provided the following information about its non-current assets.
Accumulated depn Cost at Cost at
at1 January 2015 1 January 2015 31 December 2015
$ $ $
Property 17 000 200 000 200 000
Plant and machinery 210 000 258 000 310 000
Delivery vans 10 000 23 000 23 000
Additional information
1 Half of the value of property relates to land. Property is depreciated at the rate of 1% per annum using the
straight-line method.
2 Plant and machinery is depreciated at the rate of 10% per annum using the straight-line method. A full year’s
depreciation is provided in the year of purchase and none in the year of disposal.
On 1 June 2015 a machine, bought on 10 July 2007, was sold for $17 800. This resulted in a profit on disposal
of $13 000.
3 The delivery vans are depreciated at the rate of 25% per annum on the reducing balance basis.
REQUIRED
(a) Prepare the disposal of machinery account for the year ended 31 December2015. [6]
(b) Prepare the non-current assets schedule for inclusion in the published financial statements of the company
for the year ended 31 December 2015 in accordance with International Accounting Standards. [8]
(c) Explain why a business depreciates its non-current assets. [3]

QUESTION 15 NOVEMBER 2016 P31 Q4 (a to c)

Scrumpton plc has been trading successfully for many years. The company required additional finance to renew its
plant. The following selected balances are available at 1 October 2015:
$
Property, plant and equipment 400 000
Ordinary share capital 1 200 000
Share premium 300 000
Retained earnings 125 000
Chapter 6 92 Financial Statements of Companies

A draft profit of $167 500 was recorded for the year ended 30 September 2016 before making the following
adjustments:
1 Property, plant and equipment with a net book value of $200 000 was sold for $180 000 and replaced by
new items at a cost of $250 000.
Depreciation is charged at 15% using the reducing balance method. A full year’s depreciation is charged in
the year of acquisition and none in the year of disposal.
2 A trade receivable owing $15 000 was declared bankrupt.
3 Distribution costs of $7 500 were still owing at the year-end.
4 The nominal value of the ordinary share capital is $1 each. The final dividend of $0.02 per share for the year
ended 30 September 2015 was paid on shares held at that date.
5 During the year ended 30 September 2016 there was a rights issue of one share for every four held. The
shares were issued at $1.20 each and were fully taken up.
REQUIRED
(a) Explain what is meant by a ‘rights issue’. [3]
(b) Prepare the statement of changes in equity for the year ended 30 September 2016. [10]
(c) State how a proposed dividend would be treated in the financial statements. [2]
QUESTION 16 MAY 2017 P31 & P33 Q1
The following balances were extracted from the books of XY plc on 31 January 2017.
$
Land and buildings - at cost 700 000
Equipment - at cost 320 000
Motor vehicles - at cost 230 000
Accumulated depreciation
Land and buildings 100 000
Equipment 186 000
Motor vehicles 96 000
Ordinary shares of $5 each 500 000
Share premium 120 000
Retained earnings at 1 February 2016 125 000
Inventory at 1 February 2016 37 100
Trade receivables 102 000
8% Loan 150 000
Provision for doubtful debts 2 100
Revenue 985 000
Purchases 428 000
Administrative expenses 346 000
Distribution costs 144 000
Interim dividend paid 20 000
Additional information
1 Inventories at 31 January 2017 included 100 units of damaged items. These items, with a unit cost of $80,
were all sold on 2 February 2017 for $65 each.
At 31 January 2017 all other inventories were valued at cost, $36 000, and had a net realisable value of $85
400.
2 The administrative expenses include an amount of $30 000 for a machine purchased on 1 February 2016.
The machine has a useful life of three years and will then be scrapped with nil proceeds. Any costs related
to the machine should be charged to the cost of sales.
3 The figure for land and buildings (at cost) includes land which had cost $300 000.
4 During the year, XY plc purchased a motor vehicle which cost $60 000. This was settled by a payment of $40
000 from the bank and the part exchange of an old vehicle. This old vehicle had originally cost $75 000 and
had been depreciated by $27 000. Only the bank payment had been recorded in the books of account.
Chapter 6 93 Financial Statements of Companies

5 Depreciation is to be charged on the following basis:

Land not depreciated
Buildings straight-line method over 25 years, charged to cost of sales
Equipment straight-line method over 5 years, charged to administrative expenses
Motor vehicles reducing balance method at 20% per annum, charged to distribution costs
The company policy is to charge a full year’s depreciation in the year of purchase and none in the year of
sale.
6 Trade receivables included an irrecoverable debt of $8 800. A provision for doubtful debts of 4% is to be
maintained. These items need to be included in administrative expenses.
7 The loan was obtained on 1 September 2016.

REQUIRED
(a) State two objectives of financial statements of a limited company. [2]
(b) Prepare the income statement for the year ended 31 January 2017. [15]

Additional information
In October 2016 XY plc made a bonus issue of 1 ordinary share for every 10 ordinary shares held. No entry had
been made in the books of account.
REQUIRED
(c) Prepare the statement of changes in equity for the year ended 31 January 2017. (A total column is not
required.) [4]

Additional information
The directors are considering making a further issue of bonus shares rather than paying a cash dividend.

REQUIRED
(d) Advise the directors which course of action they should take. Justify your answer. [4]

QUESTION 17 MAY 2018 P31 & P33 Q2

The directors of D plc are preparing the end of year financial statements including the notes to the accounts.
The following information is available at 1 January 2017:
$
Ordinary share capital (shares of $2 each) 2 000 000
Share premium 300 000
Revaluation reserve 400 000
General reserve 100 000
Retained earnings 1 500 000
During the year ended 31 December 2017 the following took place:
1 On 1 June an interim dividend of $0.20 per ordinary share was paid.
2 On 1 October an issue of 500 000 ordinary shares was made at $2.40 per share to raise money to
purchase an additional factory.
3 On 1 November there was a rights issue of 2 shares for every 5 currently held at $2.25.
The rights issue was necessary to fund the unexpected costs on the purchase of the factory. The issue was
fully subscribed.
4 On 1 December there was a bonus issue of 4 shares for every 10 held on that date. The reserves were
maintained in their most flexible form.
On 31 December 2017 the finance director informed the other directors that:
1 The profit from operations for the year was $520 000.
2 Finance charges of $64 000 had been paid during the year.
3 The end of year tax liability on profits had been calculated as $93 000.
4 There had been a transfer to the general reserve of $47 000.
5 A final dividend of $0.10 per ordinary share had been proposed.
Chapter 6 94 Financial Statements of Companies

REQUIRED
(a) State three uses of the notes to the accounts within the financial statements. [3]
(b) Prepare the statement of changes in equity for the year ended 31 December 2017. A total column is not
required. [15]
Additional information
After the share issues there was a decrease in the market price of one ordinary share to $2.10. One of the
shareholders at the Annual General Meeting (AGM) stated that instead of the share issues the directors should have
carried out the following:
1 Financed the purchase of the new factory through a loan of $2 200 000 repayable over 5 years with total
interest payable of $68 000.
2 Paid the shareholders an extra $0.50 per share in their final dividend rather than a bonus issue of shares.

REQUIRED
(c) Advise whether or not the directors acted in the best interests of the shareholders. Justify your answer with
relevant calculations. [7]

QUESTION 18 MAY 2018 P32 Q2 (a & b)

The trial balance of N plc at 31 December 2017 was as follows:
$ $
Land and buildings: cost 600 000
provision for depreciation 1 January 2017 72 000
Equipment: cost 278 000
provision for depreciation 1 January 2017 112 000
Revenue 2 354 000
Purchases 1 322 000
Administrative expenses 674 000
Distribution costs 296 000
Finance charges 9 000
Inventory 1 January 2017 241 000
Trade receivables 456 000
Trade payables 394 000
Cash and cash equivalent 62 000
Ordinary share capital 600 000
Share premium 140 000
6% debentures (2021) 200 000
Retained earnings ________ 66 000
3 938 000 3 938 000
The following information is also available.
1 Revenue included a deposit of $6 000 from a customer for the goods to be delivered in March 2018.
2 Total inventory at 31 December 2017 cost $265 000. Of this the goods costing $24 600 had a net realisable
value of $18 800.
3 Land and buildings were acquired in 2008. On 1 January 2017 they were revalued at $720 000 of which two-
thirds was allocated to land and one-third to buildings. N plc had not recorded this revaluation.
4 During the year, a new photocopier was purchased for $80 000. The purchase consideration was settled by
an exchange for a fully depreciated old photocopier with a trade-in value of $10 000. The old photocopier
had been purchased in 2011 for $40 000. The balance of the purchase had been paid by cheque. N plc had
recorded only the bank payment transaction. There was no other purchase or sale of non-current asset
during the year.
5 Depreciation is to be charged as follows:
Land Nil
Buildings over the useful life of 25 years
Equipment 25% per annum on cost
Chapter 6 95 Financial Statements of Companies

A full year’s depreciation is charged in the year of purchase and none in the year of disposal.
All depreciation charged is to be included in administrative expenses.
6 An interim dividend of $30 000 was paid on 1 October 2017 and included in administrative expenses.
7 Interest for 3 months on the debentures had not been recorded.

REQUIRED
(a) Prepare the income statement for the year ended 31 December 2017. [15]
(b) Calculate the balance on the revaluation reserve account at 1 January 2017 following the revaluation. [5]
Chapter 6 96 Financial Statements of Companies

SOLUTION CHAPTER 6
QUESTION 1 MAY 2011 P42 Q2 (d)
The Directors’ Report should contain the following:
 The state of affair of the company (review of business performance during the year).
 Statement of company’s principal activities with significant changes.
 An indication of research and development activities of the business.
 A statement of political and charitable donations
 Proposed transfers to reserves
 Amounts of recommended dividends
 Details of directors’ remuneration
 Names of directors and their holdings of shares and debentures in the company
 A statement of principal risks and uncertainties which the company is facing
 A statement of details of annual general meeting (AGM)

QUESTION 2 MAY 2011 P43 Q1

(a) Frog Log plc
Statement of Financial Position
As at 30 April 2011
Non-current assets $000 $000 $000
Premises ($530 000 – $5 000) 525
Other assets ($2 012 000 – ($270 000 − $20 000) – $112 000] 1 650
2 175
Current assets 1 610
Current liabilities
Convertible loan stock 2011 [$250 000 − $150 000(W 2)] 100
Trade and other payables (W 1) 545 645 965
3 140
Non-current liabilities
Debentures 200
2 940
Equity
Ordinary shares [$1 000 000 + $50 000 (W 2)] 1 050
Share premium [$750 000+ 100 000(W 2)] 850
Revaluation reserve [$530 000 – ($270 000 − $20 000)] 280
Capital redemption reserve 100
General reserve ($80 000 + $50 000) 130
Retained earnings $[615 000+170000–(100000×110%)–50000–95 000) 530 2 940
WORKINGS
(W 1) $
Profit for the year 170 000
Redemption of shares ($100 000 × 110%) (110 000)
Dividends paid (95 000)
Depreciation: Premises 112 000
Other non-current assets 5 000
Increase in net-current assets($1 610 000 − $983 000) (627 000)
Trade and other payables 545 000
1
(W.2) Number of shares to be issued = $150 000 × = 50 000 shares
3
Convertible loan stock = 50 000 × 3 = $150 000 
Ordinary Shares Capital = 50 000 × 1 = $50 000 ↑
Share premium = 50 000 × 2 = $100 000 ↑
Chapter 6 97 Financial Statements of Companies

(b) Share premium capital reserve

Revaluation reserve capital reserve
Capital redemption reserves capital reserve
General reserve revenue reserve
Retained earnings revenue reserve
(c) If at the time of conversion, the offered price of $3 for conversion is less than the market price of the shares,
it could be advantageous to exercise the option.

QUESTION 3 NOVEMBER 2011 P42 Q2

(a) Income Statement
For the year ended 30 June 2011
$000 $000
Sales Revenue 7 216
Cost of Sales
Inventories at 1 July 2010 1 596
Purchases 4 425
Inventories at 30 June 2011 (1 730) (4 291)
Gross Profit 2 925
Operating Expenses
Distribution costs 1 485
Administrative expenses 1 098 (2 583)
Operating Profit 342
Finance charges ($2 000 000 × 8%) (160)
Profit after interest 182
(b) Statement of Financial Position
As at 30 June 2011
Cost/Value Depn Book value
$000 $000 $000
Land and buildings [8 473 + (5 000  4 000)] 9 473 2 173 7 300
Other non-current assets 1 058 236 822
8 122
Current Assets
Inventories at 30 June 2011 1 730
Trade receivables 897
Prepaid expenses 265
Bank 74
2 966
Current Liabilities $000 $000 $000
Trade payables 173
Accrued finance charges ($200 000 × 8%) 80
Accrued expenses 146 (399) 2 567
10 689
Non-Current Liabilities
8% debentures 2020 (issued in 2008) (2 000)
8 689
Equity
Ordinary share capital ($0.50 ordinary shares) 5 000
Surplus on revaluation of land ($5 000 000  $4 000 000) 1 000
Share premium 2 500
Retained earnings (232 000 + 182 000  100 000  125 000) 189 3 689
8 689
Chapter 6 98 Financial Statements of Companies

WORKINGS Statement of Changes in Equity

Ordinary Revaluation Share Retained Total
capital reserves premium earnings
$000 $000 $000 $000 $000
Balance at 1 July 2011 5 000 Nil 2 500 232 7 732
Current year profit 182 182
Surplus on land revaluation($5m  $4 m) 1 000 1 000
Final dividend paid for year to 30-6-2010 (100) (100)
Interim dividend paid for year to 30-6-2011 _____ _____ ____ (125) (125)
Balances at 30 June 2011 5 000 1 000 2 500 189 8 689
Notes
 There was a flood at the company's premises on 29 July 2011 resulting in a material uninsured loss of $215
000.
 On 14 August 2011 the company declared its final dividend for the year ended 30 June 2011 of $0.03 per
share.

(c) Adjusting event: Adjusting events refer to situations where the events after balance sheet date provide
new evidence of conditions that exist at the balance sheet date, and result in adjustment to the financial
statements.
Non-adjusting event: Non-adjusting events represent events that are indicative of conditions that arose
after the balance sheet date. As a result, they should be reflected in the financial statements of the following
accounting period, but not adjusted for in the financial statements of the current accounting period.
However, if it is considered that these events are relevant and material and that users of the financial
statements need the information for making economic decisions, these events can be disclosed in notes to
the accounts. Otherwise, users of financial statements would be deprived of material information.
(d) Dividends
The accounting standard (IAS 10.2) stipulates that if a company declares dividends after the balance sheet
date, then the declared dividends should not be recognized as a liability in the financial statements. This is
a non-adjusting event and should be disclosed in the notes to the financial statements.
Flood
Natural disasters such as severe flooding are unexpected; sudden; and can have significant impact on an
entity’s operations. That’s why this is a non-adjusting event and should be disclosed in the notes to the
financial statements.
QUESTION 4 MAY 2012 P41 Q1 (c & d)
(c) Only dividends paid during the year are now included in the financial statements. They are shown as
deductions in the Statement of changes in equity. This implies that current year’s interim dividend and last
year’s final dividend paid during the current year (provided the latter has been approved by the
shareholders) will be included in the current year’s financial statements.
The proposed final dividend of current year needs shareholders’ approval at the Annual General Meeting
and accordingly is not provided for in the financial statements and can only be disclosed by way of a note
to the financial statements.
(d) Issue of shares including premium
Dividends.
QUESTION 5 MAY 2013 P41 Q2
(a) Statement of cost, accumulated depreciation and net book value at 31 December 2012
$000
Cost at 1 January 2012 2 000
Additions (purchases) during the year 100
Disposals during the year (200)
Cost at 31 December 2012 1 900
Chapter 6 99 Financial Statements of Companies

Accumulated depreciation at 1 January 2012 200

Accumulated Depreciation on disposals (50)
Charge for the year [{$1 900 000 – ($200 000  $50 000)} × 10%] 175
Accumulated depreciation at 31 December 2012 325
Net book value at 31 December 2012 ($1 900 000  $325 000) 1575

(b) Manik Limited

Income Statement
For the year ended 31 December 2012
$000 $000
Revenue 4 000
Cost of sales 1 000
Gross profit 3 000
Operating Expenses
Administrative expenses $[1 700– 15 – 20 + 175 (depn)+[(20050)145]000 1 845
Distribution costs ($450 000 + $20 000) 470 (2 315)
Operating Profit 685
Financial costs – interest on loan ($300 000 × 10%) (30)
Profit before tax 655
Tax (365)
Profit for the year attributable to equity holders 290
(c) Statement of changes in equity for the year ended 31 December 2012
Ordinary Share Retained Total
Details Shares Premium Earnings
$000 $000 $000 $000
At 31 December 2011 500 – 265 765
Profit attributable to equity holders 290 290
New issue of shares 500 250 750
Dividends paid ($50 000 + $25 000) ____ ___ (75) (75)
At 31 December 2012 1 000 250 480 1 730

(d) Statement of financial position at 31 December 2012

Non-current assets $000 $000 $000
Plant and machinery (a) 1 900 325 1575
Current Assets
Inventory 400
Trade receivables 385
Other receivables (prepayments) 15
Cash and cash equivalents 170 970
Current Liabilities
Trade payables 120
Tax payable 365
Other payables - accruals [$20 000 + ($30 000  $20 000)] 30 515 455
2 030
Non-Current Liabilities
Loan (300)
1 730
Equity
Ordinary shares of $1 each 1 000
Share premium 250
Retained earnings 480 1 730
Chapter 6 100 Financial Statements of Companies

(e) Proposed ordinary dividend is treated as a non-adjusting event so is disclosed by way of a note to the
financial statements. This will not be included anywhere in the financial statements for 2012.

QUESTION 6 NOVEMBER 2013 P41 Q1 (c)

Manchi plc
Note to the budgeted statement of financial position for the year ending 30 September 2014
Plant and Motor
Property, plant and equipment Land Buildings Total
equipment vehicles
Cost / valuation $000 $000 $000 $000 $000
Balance at 1 October 2013 1 500 800 1 500 150 3 950
Add Revaluation 100 100
Add Purchases 80 280 30 390
Less Disposals ____ ___ (35) ___ (35)
Balance at 30 September 2014 (a) 1 600 880 1 745 180 4 405
Depreciation
Balance at 1 October 2013 250 600 50 900
Less Disposals (15) (15)
Add Depreciation charge for the year 50 255 25 330
Balance at 30 September 2014 (b) 300 840 75 1 215

Net book value at 30 September 2014(a-b) 1 600 580 905 105 3 190
QUESTION 7 NOVEMBER 2013 P42 Q3(e)
(i) Public issue of shares, rights issue, debentures issue, bank loan, disposal of surplus non-current assets, debt
factoring.
(ii) Public issue
Advantages
 Reduce gearing level
 no legal obligation to pay dividend in the years of low or no profitability
Disadvantages
 Expensive
 needs underwriting to ensure success
 dilutes control of existing owners
Right issue
Advantages
 no dilution of control of existing owners
 no legal necessity to pay dividend in a bad year
 Enjoy voting rights
Debenture issue/loan
Advantages
 charging of interest against profit which is admissible expense for tax purposes
 trading on equity
Disadvantages
 need to be redeemed (repaid)
 interest is always payable regardless of profitability
 no voting rights in general meeting
Disposal of non-current assets
Advantages
 no loss of control within ownership
 no fixed costs involved
 will generate immediate cash
Chapter 6 101 Financial Statements of Companies

Disadvantages
 may affect business operations
 may become insufficient as business grows

QUESTION 8 MAY 2014 P41 Q2 (a to c)

(a) Bridlington PLC
Income statement for year ended 30 September 2013
$ $
Revenue 936 011
Cost of sales
Opening Inventory 177 838
Purchases 479 352
Closing Inventory (lower of cost or NRV) (172 927) (484 263)
Gross profit 451 748
Distribution costs (W 1) 112 967
Administrative expenses (W 2) 262 042 (375 009)
Operating Profit 76 739
Tax (16 730)
Profit for the year 60 009

(W 1) Distribution costs $
Balance as per Trial balance 108 376
Prepayments (2 760)
Loss on disposal of motor vehicle ($850 × 1/4) 212
Depreciation[$28 556 (W 3) × 1/4] 7 139
Total Distribution costs 112 967
(W 2) Administrative expenses: $
Balance as per Trial balance 236 758
Accrual 4 525
Decrease in provision for doubtful debts [$6 834  ($138 450 × 4%)] (1 296)
Loss on disposal of motor vehicle ($850 × 3/4) 638
Depreciation[$28 556 (W 3) × 3/4] 21 417
Total administrative costs 262 042
(W 3) Calculation of Current year Depreciation $
Buildings ($280 000 × 4%) 11 200
Plant and machinery ($105 000 × 10%) 10 500
Motor vehicles [$65 000  ($44 578  $7 000)] × 25% 6 856
Total Depreciation charge for the year 28 556
(b) Non-Current asset Schedule
Cost Land Buildings Plant & Machine Motor Vehicle
Balance at year start (1/10/2012) 100 000 280 000 95 000 81 000)
Additions during the year 10 000
Disposal during the year ______ ______ ______ (16 000)
Balance at year end (30/9/2013) (a) 100 000 280 000 105 000 65 000)
Depreciation
Balance at year start (1/10/2012) Zero 78 400 66 500 44 578
Disposal [$16 000  ($8 150 + $850)] (7 000)
Current year depreciation charge (W 3) Zero 11 200 10 500 6 856)
Balance at year end (30/9/2013) (b) Zero 89 600 77 000 44 434
Net Book Value at 30.09.13 100 000 190 400 28 000 20 566
Net Book Value at 30.09.12 (a  b) 100 000 201 600 28 500 36 422
Chapter 6 102 Financial Statements of Companies

(c) Statement of Financial Position

Assets $ $ $
Non-current assets
Property, plant and equipment 338 966
Current assets
Closing Inventory 172 927
Trade receivables 138 450)
Provision for doubtful debts ($138 450 × 4%) (5 538) 132 912
Other receivables (prepayments) 2 760 308 599
Total assets 647 565
Equity and liabilities
Equity
Share capital 400 000
Share premium 40 000
Retained earnings ($57 386 + $60 009) 117 395 557 395
Current liabilities
Trade payables 51 243
Other payables (accruals) 4 525
Tax liability 16 730
Cash and cash equivalents (bank overdraft) 17 672 90 170
Total equity and liabilities 647 565
QUESTION 9 NOVEMBER 2014 P43 Q1(a &b)
(a) Finance costs = $5 625 000 × 8% × 2/12
= $75 000

(b) Profit before tax = $3 296 000 – $75 000

= $3 221 000
Profit attributable to equity holders = $3 221 000 – $782 000
= $2 439 000
QUESTION 10 MAY 2015 P41 & P42 Q3(e & f)
(e) (i) Advantage – dividends need not be paid if profits are insufficient
Disadvantage – sharing of management control as ordinary shareholders control have the voting
rights
(ii) Advantage – entitled to vote at the annual general meeting
may earn a higher dividend in periods of high profits
Disadvantage – may not receive any dividend in the periods of low or no profits
ordinary shareholders only receive what residue is left after paying to all lenders
and preference shareholders on winding-up of company.
(f) (i) Advantage – an allowable expense for tax purposes if shares are redeemable
Disadvantage – No control over the amount of dividend as it is fixed.
(ii) Advantage – preference shareholders receive the dividend before ordinary shareholders.
Disadvantage – do not receive higher dividends in the periods of higher profits as preference
dividend is a fixed amount.
QUESTION 11 MAY 2015 P43 Q1 (a to c)
(a) Plantin plc
Statement of changes in equity (an extract to show retained earnings)
$000
Retained earnings at 1 April 2014 110
Profit for the year 52
Preference dividend paid ($80 000 × 5%) (4)
Retained earnings at 31 March 2015 158
Chapter 6 103 Financial Statements of Companies

(b) Plantin plc

Note to the statement of financial position at 31 March 2015.
Property, plant and equipment Land and Plant and Total
buildings equipment
Cost $000 $000 $000
Balance at 1 April 2014 260 152 412
Purchases 80 80 160
Balance at 31 March 2015 340 232 572
Depreciation
Balance at 1 April 2014 90 87 177
Charge for the year 28 33 61
Balance at 31 March 2015 118 120 238
Net book value
Balance at 31 March 2015 222 112 334
Balance at 31 March 2014 170 65 235

(c) Plantin plc

Statement of Financial Position
As at 31 March 2015
Non-current assets Cost Depreciation Book value
Tangible $000 $000 $000
Property, plant and equipment
Land and buildings 340 118 222
Plant and equipment 232 120 112
Investments 55
389
Intangible
Goodwill ($80 000 – $20 000) 60
449
Current assets
Inventories ($45 000 + $30 000) 75
Trade and other receivables ($56 000 + $40 000) 96 171
Total assets 620
Equity
Ordinary share capital[$100 000 + (50 000 shares × $1)] 150
Non-redeemable $1 preference shares ($80 000 + $20 000) 100
Share premium [$80 000  (50 000 shares × $1)] 30
Retained earnings (‘a’ part) 158
438
Non-current liabilities
5% debentures 50

Current liabilities
Trade and other payables ($24 000 + $30 000) 54
Taxation (Income Statement) 15
Cash and cash equivalents (Statement of Cash flows) 63 132
Total equity and liabilities 620

QUESTION 12 NOVEMBER 2015 P41 Q1 (a & b)

(a) Corbiereplc
Income statement for the year ended 30 September 2015
Chapter 6 104 Financial Statements of Companies

$ $
Revenue ($756 690 – $3 470) 753 220
Cost of Sales (W 1) (384 060)
Gross Profit 369 160
Operating Expenses
Administrative Expenses (W 2) 73 732
Distribution Costs (W 3) 106 218 (179 950)
Operating Profit 189 210
Finance Costs ($68 000 × 6%) (4 080)
Profit before tax 185 130
Taxation (28 200)
Profit for the year 156 930
Workings
(W1) Calculation of Cost of Sales
$ $
Opening Inventories 62 500
Purchases 392 340
Returns outwards (2 780)
389 560
Carriage Inwards 3 600 393 160
455 660
Closing inventories [$73 100 – {$5 000  ($6 500  $3 000)] (71 600)
Cost of Sales 384 060

(W2) Calculation of Administrative and Distribution Expenses

Administrative Distribution
Expenses Expenses
Administrative expenses [$63 810 – $6 000  ($14 400 × /12)]
4
53 010
Distribution costs 49 330
Depreciation motor vehicles [($84 600 – $20 000) × 20%] × 20% ; 80% 2 584 10 336
Depreciation Plant [($68 700 + $6 000  $32 300) × 15%) × 80% ; 20%] 5 088 1 272
1 4
Wages and salaries ($54 900 + $1 700) × /5 ; /5 11 320 45 280
Increase in provision for doubtful debts ($86 500 × 2%) 1 730 _____
Total 73 732 106 218

(b) Corbiere plc

Statement of financial position at 30 September 2015
Assets $ $ $
Non-Current Assets
Property 220 000
Plant and Machinery ($68 700 + $6 000) 74 700
Provision for depreciation ($32 300 + $6 360) (38 660) 36 040
Motor Vehicles 84 600
Provision for depreciation ($38 760 + $12 920) (51 680) 32 920 288 960
Current Assets
Inventories [$73 100 – {$5 000  ($6 500  $3 000)] 71 600
Trade receivables 86 500
Provision for doubtful debts ($86 500 × 2%) (1 730) 84 770
Other receivables [$4 400 + ($14 400 × 4/12)] 9 200 165 570
Total Assets 454 530
Chapter 6 105 Financial Statements of Companies

Equity and liabilities

Equity $ $
Ordinary share capital 50 000
Share Premium 15 000
Retained earnings ($69 700 + $156 930) 226 630 291 630
Non-current liabilities
6% debentures (2020) 68 000
Current liabilities
Trade payables 48 730
Other payables [$2 480 + $1 700 + ($4 080  $3 060)] 5 200
Taxation due 28 200
Cash & cash equivalents 12 770 94 900
Total equity and liabilities 454 530

QUESTION 13 NOVEMBER 2015 P43 Q1 (a & b)

(a) Pitman plc
Income statement for the year ended 30 June 2015
$ $
Sales 563 800
Cost of sales:
Opening inventories 62 400
Purchases 268 200
330 600
Closing inventories (70 300) (260 300)
Gross profit 303 500
Administrative expenses (W 2) 158 433
Distribution costs 36 120 (195 853)
Profit from operations 107 647
Finance costs (50 000 × 5% × 3/12) (625)
Profit before taxation 107 022
Taxation (12 650)
Profit for the year 94 372

(b) Pitman plc

Statement of financial position at 30 June 2015
Assets $ $
Non-current assets
Property, plant and equipment
Land & Buildings ($90 000 + $65 000) 155 000
Fixtures & fittings 18 110
Provision for depreciation ($5 310 + $1 920) (7 230) 10 880
Motor vehicles 41 600
Provision for depreciation ($19 200 + $5 600) (24 800) 16 800
182 680
Current assets
Inventories 70 300
Trade and other receivables [$76 920 – ($6 000 × 120%)] 69 720
Provision for doubtful debts [($76 920 – $7 200) × 2.5%] (1 743)
Other receivables 1 040
Cash & cash equivalents ($650 + 50 000 + [(60 000 × 1/4) shares@1.5] 73 150 212 467
Total assets 395 147
Chapter 6 106 Financial Statements of Companies

Equity and liabilities $ $

Equity
Ordinary share capital ($1 shares) [$60 000 + [(60 000 × 1/4)] 75 000
Retained earnings ($30 740 + $94 372) 125 112
Share premium [(60 000 × 1/4) shares × (1.5 – 1.0)] 7 500
Revaluation reserve (W 1) 43 140 250 752
Non-current liabilities
5% debentures (2024) 50 000
Current liabilities
Trade payables 80 250
Other payables [$870 + $625 Finance charge)] 1 495
Taxation due 12 650 94 395
Total equity and liabilities 395 147

(W 1) Land & Buildings [($90 000  $65 000)  $135 000] ↑ $20 000 Dr
Provision for depreciation [$21 840 + ($65 000 × 2%)] ↓ $23 140 Dr
Revaluation reserves ↑ $43 140 Cr

(W 2) Calculation of Administrative expenses

$
Administrative expenses 141 970
Depreciation on fixtures & fittings [($18 110  $5 310) × 15%] 1 920
Depreciation on motor vehicles [($41 600  $19 200) × 25%] 5 600
Bad debts ($6 000 × 120%) 7 200
Increase in provision for doubtful debts [($76 920 – $7200) × 2.5%] 1 743
Total Administrative expenses 158 433

QUESTION 14 MAY 2016 P31 Q3(a to c)

(a) Disposal of machinery account
2015 $ 2015 $
Jun 1 Machinery (W 1) 24 000 Jun 01 Provision for depreciation 19 200
Dec 31 Income statement (profit) 13 000 Jun 01 Bank (selling price) 17 800
37 000 37 000
(W 1) The machine is sold after 8 years so it means that it has been depreciated by 80% (10% × 8 years) of original
cost. It indicates that the book value of machine sold $4 800 [(17 800 – 13 000) is 20% of original cost (100%
– 80%). This relationship can therefore be used to calculate original cost of machine sold.
$4 800
Cost of machine sold =
20%
= $24 000

(W 2) Provision for depreciation = $24 000 × 10% × 8 or $24 000  $4 800

= $19 200
(b)
Property Plant and Delivery Total
machinery vans
Cost $ $ $ $
At 1 January 2015 200 000 258 000 23 000 481 000
Of additions (Balancing figure) 76 000 76 000
Of disposals (24 000) (24 000)
At 31 December 2015 (a) 200 000 310 000 23 000 533 000
Chapter 6 107 Financial Statements of Companies

Depreciation $ $ $ $
At 1 January 2015 17 000 210 000 10 000 237 000
Charge for year ($200 000 × 50% × 1%) ; ($310 000 ×
10%) ; {($23 000  $10 000) × 25%] 1 000 31 000 3 250 35 250
Reduction on disposals (W 2) (19 200) (19 200)
At 31 December 2015 (b) 18 000 221 800 13 250 253 050

Net book value at 31 December 2015 (a – b) 182 000 88 200 9 750 279 950
Net book value at 31 December 2014 183 000 48 000 13 000 244 000

(c) Depreciation is an application of the matching/accruals concept. Depreciation is matched with the benefit
which the asset provides over each accounting period.
The provision for depreciation annually is intended to spread the cost over the useful life of the asset. This
is in accordance with the accruals/prudence concept.

QUESTION 15 NOVEMBER 2016 P31 Q4 (a to c)

(a) Right issue is a right given to existing ordinary shareholders of the company to buy a certain number of
shares as a proportion to the number of shares, which they already have at a price in between the face price
and market price.

(b) Scrumpton plc

Statement of changes in equity for the year ended 30 September 2017
Share Share Retained
Total
Capital Premium Earnings
$ $ $ $
Balance at start 1 200 000 300 000 125 000 1 625 000
Share issue (W 1) 300 000 60 000 360 000
Current year profit (W 2) 57 500 57 500
Dividends (1 200 000 shares@$0.02 per share) _______ ______ (24 000) (24 000)
Balance at year end 1 500 000 360 000 158 500 2 018 500

WORKINGS
(W 1 ) Number of rights issue Existing number of shares × 1/4
1 200 000 × 1/4
300 000
Effects of rights issue Bank ↑ $360 000 (300 000 shares × $1.20)
Share capital ↑ $300 000 (300 000 shares × $1.0)
Share premium ↑ $60 000 (300 000 shares × $0.20)
(W 2) $
Profit as per draft statement 167 500
Loss on asset disposal ($200 000  $180 000) (20 000)
Depreciation [($400 000  $200 000 + $250 000) × 15% (67 500)
Bad debts written off (15 000)
Accrued distribution costs accounted for (7 500)
Correct profit attributable to equity holders 57 500

(c) The proposed final dividend of current year needs shareholders’ approval at the Annual General Meeting
and accordingly is not provided for in the financial statements and can only be disclosed by way of a note
to the financial statements. This implies that current year’s interim dividend and last year’s final dividend
paid during the current year (provided the latter has been approved by the shareholders) will be included
in the current year’s financial statements.
Chapter 6 108 Financial Statements of Companies

QUESTION 16 MAY 2017 P31 & P33 Q1

(a) Financial statements of a limited company provide information about its
1 financial position and solvency through statement of financial position (balance sheet)
2 financial performance is primarily provided in an income statement through comparison of incomes
with expenses
3 movements of cash flows through cash flow statement
4 changes in equity items including shares and reserves through statement of changes in equity
5 overall position and future prospects which may be very helpful for users of financial statements in
making different solutions
(b) XY plc
Income Statement for the year ended 31 January 2017
$ $
Revenue 985 000
Cost of sales (W 1) (448 600)
Gross profit 536 400
Operating expenses
Distribution costs (W 2) 201 200
Administrative expenses (W 3) 390 428 (591 628)
Loss from operations (55 228)
5
Finance cost – Loan interest ($150 000 × 8% × /12) (5 000)
Loss for the year (60 228)
WORKINGS
(W 1) Cost of sales $
Opening inventory 37 100
Purchases 428 000
Closing inventory [(100 units @ $65) + $36 000] (42 500)
422 600
Depreciation on machine ($30 000 ÷ 3 years) 10 000
Depreciation on buildings ($400 000 ÷ 25 years) 16 000
448 600
(W 2) Distribution costs $
Distribution costs as per trial balance 144 000
Depreciation vehicles [($230 000 + $60 000 – $75 000)($96 000 – $27 000)] × 20% 29 200
Loss on disposal of motor vehicle [($60 000  $40 000) – ($75 000  $27 000)] 28 000
Total distribution costs 201 200

(W 3) Administrative expenses $
Administrative expenses as per trial balance 346 000
Less Purchase of machine wrongly included in admin expenses now corrected (30 000)
Depreciation on equipment ($320 000 ÷ 5 years) 64 000
Irrecoverable debt 8 800
Increase in provision for doubtful debts [($102 000 – 8 800)  4%] – $2 100 1 628
Total administrative expenses 390 428
(c) Statement of Changes in Equity for year ended 31 January 2017 980
Share capital Share premium Retained earnings
$ $ $
Balance at start of year 500 000 120 000 125 000
Loss for the year (60 228)
Dividend paid (20 000)
Bonus shares ($500 000 × 10%) 50 000 (50 000) ______
Balance at end of year 550 000 70 000 44 772
Chapter 6 109 Financial Statements of Companies

(d) In the initial growth phase of a company, preserving cash is of utmost importance while satisfying the return
desires of its shareholders takes precedence when the company is mature. A company has various means
at its disposal to satisfy its objectives and one of these is the type of dividend pay-out. A company can either
choose or is forced to (because of cash constraints) to pay a cash or bonus issue to replace cash dividend.
Each carries its own advantages and disadvantages which are discussed below.
Bonus Issue
 Bonus issue allows the company to declare a dividend without using up cash that may be needed to
finance the profitable investment opportunities within the company.
 Sometimes a company may declare the bonus issue to increase the trading activity and reduce the
market price of the share to make it more attractive to investors.
 The bonus issue does not affect the book value of shareholders’ wealth of the company and therefore
it has no value for them.
 Sometimes, bonus issue is the only way to satisfy the shareholders when a company faces stringent
cash difficulty or where certain restrictions to pay dividend in cash are put under loan agreement.
 The cost of issue of bonus shares is the minimum because no underwriting commission, brokerage etc.
 Bonus issue is specifically beneficial for the investors who believe in the long term story of the company
and want to increase their investment in the same.
 The company doesn’t receive any cash upon issuing bonus shares. So, the company’s ability to raise
money by follow-on offerings is reduced.
Cash dividend
 A cash dividend is paid by a company out of its earnings to investors in the form of cash.
 Cash dividends are beneficial, in that they provide shareholders with regular income on their
investment.
 Cash dividend is specifically beneficial for the investors who believe in the short term story of the
company.
 The receivers of cash dividends must pay tax on the dividend value, lowering its final value.
QUESTION 17 MAY 2018 P31 & P33 Q2
(a) Notes to the accounts within the financial statements are required to accompany the information shown
on the face of the financial statements in the following way.
 Notes disclose any information as required by international standards but not shown on the face of the
financial statements
 provide additional information that is not presented elsewhere in the financial statements but is
relevant to an understanding of any of them.
 Notes provide explanation of the basis and accounting policies used in preparing the financial
statements e.g. inventory valuation, depreciation policy etc.
 Notes may also provide information regarding future activities that are anticipated to have a notable
impact on the business or its activities.
(b) Statement of changes in equity for the year ended 31 December 2017
Ordinary Share Revaluation General Retained
shares premium Reserve reserve earnings
$000 $000 $000 $000 $000
Balances as at 1 January 2017 2 000 300 400 100 1 500
Interim dividend (1 000 000 shares @ $0.20) (200)
Share issue (500 000 × $2) ; (500 000 × $0.40) 1 000 200
Rights issue [600 000 (W 1) × 2] ; [600 000 × 0.25] 1 200 150
Bonus issue [840 000 (W 2) × 2] 1 680 (650) (400) (100) (530)
Profit for the year ($520 000 –$64 000 – $93 000) 363
Transfer to general reserve ____ ____ ____ 47 (47)
Balances as at 31 December 2016 5 880 0 0 47 1 086
WORKINGS
$2 000 000+$1 000 000
(W 1) Number of rights shares = = 1 500 000 shares × 2/5 = 600 000 shares issued
2
Chapter 6 110 Financial Statements of Companies

(W 2) Number of bonus shares = (1 500 000 + 600 000) shares × 4/10 = 840 000 shares

(c) The directors’ decision may be supported on the basis of the following points.
No finance charges are involved so would save $68 000 over 5 years which would have adversely affected
both the cash flow and the profitability of the business.
No negative impact on profitability will improve shareholders confidence and they would be better off
through extra dividends as 1 940 000 new shares were issued on which dividend of $194 000 is proposed in
addition to dividend of $100 000 on shares held at year start. The company may not have had enough cash
or profit to pay the extra dividend. However, through bonus issue, company avoided payment of extra
5 880 000
dividends $1 470 000.[ × 0.50] as suggested by a shareholder. Instead of paying extra dividends,
2
the directors saved this money which can be used on other areas within the business
Gearing level was also reduced because of increase in ordinary shares
Through three new issue of shares, there has been a decrease in the market price of each share of $0.30
5 880 000
($2.40  $2.10) and $882 000 in total ( ) × $0.30
2
Potential shareholders may question why a loan or a debenture was not taken out to finance the purchase
of the factory instead of new share issues.
If proposal by shareholder was accepted, the capital repayment would also reduce the cash flow and the
potential for future dividend payments due to lack of cash.
Through borrowing of loans interest on loan would be charged against profit which is admissible expense
for tax purposes

QUESTION 18 MAY 2018 P32 Q2 (a & b)

(a) N plc
Income Statement for the year ended 31 December 2017
$ $
Revenue ($2 354 000 – $6 000) 2 348 000
Cost of sales
Opening inventory 241 000
Purchases 1 322 000
Closing inventory [$265 000 – ($24 600 + $18 800) (259 200) 1 303 800
Gross profit 1 044 200
Distribution costs (296 000)
Administrative expenses (W2) (711 000) (1 007 000)
Profit from operations 37 200
Finance charge ($200 000 × 6%) or [$9 000 + ($200 000 × 6% × 3/12)] (12 000)
Profit for the year 25 200

(W 1) Calculation of Administrative costs

$
Administrative expenses as per trial balance 674 000
Add Depreciation on building ($720 000 × 1/3) / 16 years (remaining life) 15 000
Less Profit on disposal of equipment (10 000)
Add Depreciation on equipment ($278 000 + $10 000 – $40 000) × 25% 62 000
Less Interim dividend paid wrongly included in administrative expenses now corrected (30 000)
711 000

(b) Change in value of Land & Building ($720 000  $600 000) ↑ $120 000 Dr
Provision for depreciation ↓ $72 000 Dr
Revaluation reserve account at 1 January 2017 following the revaluation ↑ $192 000 Cr
Chapter 7 111 Issue of Shares & Debentures

CHAPTER 7 ISSUE OF SHARES & DEBENTURES

QUESTION 1 MAY 2011 P42 Q1 (c)
Explain the difference between a rights issue and a bonus issue. [4]
QUESTION 2 MAY 2012 P43 Q2 (c)
During the next financial year it is anticipated that plant modernisation will be required and that additional capital
will have to be raised. The directors are considering four options:
1 Bonus issue.
2 Issue of 10% debentures.
3 New share issue.
4 Rights issue.
REQUIRED
Explain the advantages and disadvantages of each option and recommend the most appropriate option. [11]
QUESTION 3 NOVEMBER 2012 P43 Q2 (d)
The directors of Hyung Ltd believe they should raise finance to use during 2013.
Their options are:
1. to take out a loan repayable over 5 years with interest at 6% per annum or
2. to make a rights issue of one ordinary share for every 2 shares held, at a 5% discount on the current market
price.
REQUIRED
Explain one disadvantage of each of the possible methods of raising the finance. [6]
QUESTION 4 MAY 2013 P43 1(d)
Explain the terms ‘participating preference shares’ and ‘convertible loan stock’. [6]
QUESTION 5 MAY 2013 P43 1 (a & f)
Kaunus plc was formed on 1 January 2010. On that day the company issued 200 000 ordinary shares of $1.00 each
at a premium of $0.25 and issued 150 000 redeemable preference shares of $1.00 at a premium of $0.10. The
company also issued $100 000 6% debentures redeemable on 1 January 2013.
REQUIRED
(a) Prepare the company’s statement of financial position at 1 January 2010 immediately after issuing the
shares and debentures. [6]
(f) Explain for what purposes the following balances may be used:
(i) the share premium account [2]
(ii) the retained earnings. [2]

QUESTION 6 MAY 2014 P41 Q2(d)/MAY 2014 P42 Q2(d)

Bridlington plc prepares accounts annually to 30 September. During October 2013 the following transactions took
place.
6 October A rights issue of 1 share for each 8 held was made at $1.50 per share.
The rights were fully taken up. Nominal value of each share is $1.00.
15 October A bonus issue of 1 share for every 10 held was made. The company maintains its reserves in
the most flexible manner.
31 October Land which cost $100 000, was revalued at $200 000.
Profit for the month of October was $2 615.
The company had the following balances as at 30 September 2013.
Ordinary share capital 400 000 ordinary shares of $1 each.
Company’s share premium $40 000.
Retained profits $117 395

REQUIRED
Prepare the equity section of the statement of financial position at 31 October 2013. [6]
Chapter 7 112 Issue of Shares & Debentures

QUESTION 7 NOVEMBER 2014 P42 Q1 (a to d)

The directors of Aston plc provided the following financial information at 1 June 2013.

$000
Ordinary share capital ($1 shares) 25 000
Share premium 5 000
Revaluation reserve 1 000
Retained earnings 2 950

Land 6 000
On 1 July 2013 $1 800 000 8% debentures were issued.
For the year ended 31 May 2014 profit from operations was $3 752 000.
The tax charge for the year was 25% of the profit before taxation.
REQUIRED
(a) Prepare the income statement for the year ended 31 May 2014. [6]

Additional information
On 1 September 2013 a final dividend relating to the previous year of $0.04 per ordinary share was paid.
On 1 October 2013, 5 000 000 ordinary shares of $1 each were issued at a premium of $0.10 per share.
On 1 November 2013 a rights issue was made of 1 ordinary share for every 5 ordinary shares owned at $1 per share.
This was fully subscribed.
On 1 February 2014 land was revalued at $7 500 000.
On 1 February 2014 an interim dividend of $0.03 per ordinary share was paid.
On 1 March 2014 a transfer of $500 000 was made from retained earnings to a newly formed general reserve.
On 1 April 2014 the directors proposed a final dividend for the year 50% higher per share than the previous year.
REQUIRED
(b) Prepare a statement of changes in equity for the year ended 31 May 2014. [20]
(c) Explain the treatment of the final dividend proposed on 1 April 2014. [4]
Additional information
The directors are hoping to expand the business. They are planning a bonus issue of 1 new ordinary share for every
5 ordinary shares held on 31 May 2014.
REQUIRED
(d) Explain what is meant by a bonus issue and also explain whether it would help the expansion plans for the
business. [4]

QUESTION 8 MAY 2015 P43 Q2 (c)

Chandra wishes to invest the $60 000 which he received from the partnership. He is considering acquiring a
debenture or convertible loan stock.

REQUIRED
Explain what is meant by a debenture and convertible loan stock highlighting the major difference between
them. [5]
QUESTION 9 SPECIMEN 2016 P3 Q3 (a to c)
The following information is available about Whittlesford plc on 31 December 2011.
$
500 000 ordinary shares of $1 each 500 000
Share premium 200 000
General reserve 70 000
Retained earnings 298 300
Chapter 7 113 Issue of Shares & Debentures

Further information is as follows:

1 The draft profit for the year ended 31 December 2012 was $122 800.
2 On 1 January 2012 property was revalued from $520 000 to $780 000.
3 On 31 January 2012 a rights issue of 1 share for every 5 held was made at a premium of $0.25 each.
4 On 30 June 2012 an interim dividend of $0.08 per share was paid.
5 On 31 October 2012 a bonus issue of shares of 1 for every 4 held was made. The directors decided to keep
the reserves in their most flexible form.
6 On 31 December 2012 $40 000 was transferred to general reserve and a final dividend of $0.12 per share
was proposed.
7 On 5 January 2013 it was discovered that a customer who had owed $4200 at the year end had been
declared bankrupt. It was also discovered that goods in inventory at the year end, with a cost of $3000, had
been water damaged and could now only be sold for $600.
8 On 17 January 2013 a burglary at the business premises resulted in the loss of computer equipment, $15
700.
REQUIRED
(a) Explain what is meant by keeping reserves in their most flexible form. [3]
(b) Prepare the statement of changes in equity for the year ended 31 December 2012. [13]
(c) Explain whether the event on 17 January 2013 was an adjusting or a non-adjusting event. [2]
QUESTION 10 NOVEMBER 2017 P32 Q2
FS plc’s statement of financial position on 1 January 2016 showed the following:
$000
Ordinary share capital (shares of $1 each) 1000
Share premium 300
General reserve 100
Retained earnings 220
During the year ended 31 December 2016 the following took place:
1 On 30 June 2016, an interim dividend of $55 000 was paid.
2 On 1 October 2016, an issue of 700 000 ordinary shares was made at $1.80 per share. All the funds raised
from this share issue were used to buy a second factory on 7 January 2017.
3 On 1 November 2016, a bonus issue of shares was made with 3 new shares being issued for every 10 held.
Reserves were maintained in their most flexible form.
4 For the year ended 31 December 2016, the company made a profit from operations of $288 000. Finance
charges of $52 000 had been paid. The directors provided $41 000 for the tax liability for the year.
5 At 31 December 2016, $40 000 was transferred to general reserve and a final dividend of $75 000 was
proposed.
REQUIRED
(a) Prepare the statement of changes in equity for the year ended 31 December 2016 (a total column is not
required). [12]
(b) Explain how the proposed final dividend should be treated in the financial statements for the year ended
31 December 2016. [2]
(c) Explain the treatment in the financial statements for the year ended 31 December 2016 of the purchase of
the second factory on 7 January 2017. [3]
Additional information
A shareholder at the Annual General Meeting said that the purchase of the new factory would cause non-current
asset turnover to fall, with an adverse effect on shareholder confidence.
REQUIRED
(d) Advise the directors whether or not they should be concerned about the shareholder’s comment. Justify
your answer. [5]
(e) State how an upward revaluation of an existing non-current asset is recorded in the financial statements of
a company. [3]
Chapter 7 114 Issue of Shares & Debentures

QUESTION 11 NOVEMBER 2017 P33 Q4

W Limited has been trading for several years. The company is now in a position to expand operations and trade
abroad. A new warehouse is required for this expansion, which will cost $550 000.
An extract from the statement of financial position at 31 March 2016 showed the following:
$
Ordinary shares of $1 each 400 000
Revaluation reserve 150 000
Share premium 50 000
Retained earnings 350 000
REQUIRED
(a) Explain how share premium arises. [2]
Additional information
The directors believe that the purchase of the new warehouse can be financed by:
A rights issue of ordinary shares on the basis of one share for every share currently held and any remaining balance
by an issue of a 5% debenture.
The directors expect that 60% of the ordinary shareholders will take up the rights issue of ordinary shares at $1.75
per share.
REQUIRED
(b) Calculate the amount of finance that will need to be raised by the issue of the debenture. [3]

Additional information
The following information is available for the year ended 31 March 2017:
On 1 October 2016
An interim dividend of $0.02 was paid on the ordinary shares held at that date.
On 1 January 2017
The company made the planned rights issue on the ordinary shares. These were taken up as expected. A
5% debenture was also issued.
On 31 March 2017
The profit from operations for the year was $245 000.
Finance charges were $70 000 excluding any debenture interest.
A taxation charge of 20% was to be provided.
A final dividend of $0.04 was proposed on all the ordinary shares held at that date.

REQUIRED
(c) (i) Prepare the statement of changes in equity for the year ended 31 March 2017 (total column is not
required) [9]
(ii) Prepare any supporting note to the financial statements in respect of the proposed dividend. [2]
Additional information
Profits have been constant for a number of years.
At the Annual General Meeting, the directors were confident that following the expansion next year the ordinary
shareholders will see an increase in dividends as profits for the year were expected to increase by 20%.
However, one of the ordinary shareholders expressed concerns that the Earnings Per Share would fall following the
rights issue on 1 January 2017. He proposed that a further expansion planned for two years’ time should be financed
by a long-term loan instead.
REQUIRED
(d) Recommend whether the directors should finance the future expansion with loans or rights issues. Justify
your choice using relevant calculations. [9]
Chapter 7 115 Issue of Shares & Debentures

SOLUTION CHAPTER 7
QUESTION 1 MAY 2011 P42 Q1 (c)
A rights issue is made to raise additional finance for the business.
A bonus issue is a free issue of ordinary shares out of reserves
QUESTION 2 MAY 2012 P43 Q2 (c)
Bonus issue:
Issue of bonus shares should not be considered as it does not involve any cash inflow as bonus shares are issued free
of price to existing shareholders.
Issue of 10% debentures:
Debentures issue will raise the finance needed. However fixed annual interest payment has to be made irrespective
of profit or loss but as interest expense is an allowable expense for tax purposes it reduces the tax liability as well.
Moreover when debentures will be repaid cash will be required for their redemption.
New share issue:
The issue of new shares will also raise the finance needed but could affect control of existing shareholders. There is
no compulsion to pay dividend annually to the ordinary shareholders; moreover dividends are not allowable expense
for tax purposes. Issue of such high number of shares may utilise limit of authorised capital or market value of shares
may fall.
Rights issue:
The issue of new shares will raise the finance needed but would not affect control of existing shareholders. There is
no compulsion to pay dividend annually to the ordinary shareholders; moreover dividends are not allowable expense
for tax purposes.
QUESTION 3 NOVEMBER 2012 P43 Q2 (d)
On loans, fixed amount of interest has to be paid irrespective of profit or loss made by the company. In addition, if
the loan is secured on non-current assets then these assets cannot be sold unless loan is being paid off.
Rights issue usually results in reduction in market value of shares. It is possible that all shareholders do not take up
their rights and as a result required funds could not be raised.
QUESTION 4 MAY 2013 P43 1(d)
Participating Preference Shares entitle the bearer to a certain minimum dividend as well as an additional dividend
based on some predetermined condition. The dividend paid may be higher than the fixed minimum dividend
depending upon company performance. In any case, these dividends must be paid before any dividends are paid
on common stock, and if a company is unable to pay dividends on participating preferred stock, stockholders have
the right to force the liquidation of the company.
Through convertible loan stocks, a stockholder (lender) may exchange, at any time after a waiting period, for ordinary
shares in the company issuing the loan stock. This conversion is under specified conditions and with a pre-
determined conversion rate.
The number of shares one receives for each loan stock is determined when the convertible loan stock is issued. A
convertible loan stock usually carries lower interest rate than debentures.
QUESTION 5 MAY 2013 P43 1 (a & f)
(a) Kaunus plc
Statement of financial position at 1 January 2010
Current Assets $000 $000
Cash & cash equivalents [(200 000 × $1.25) + (150 000 × $1.10) + $100 000] 515
Non-Current Liabilities
6% debentures 100
Redeemable preference shares of $1.00 each 150 250
265
Equity
200 000 ordinary shares of $1.00 each 200
Share premium [(200 000 shares @ $0.25) + (150 000 shares @ $0.10)] 65 265
Chapter 7 116 Issue of Shares & Debentures

(f) (i) The share premium account may be used

to pay up new shares issued as fully paid bonus shares
to write off expenses and any commission paid on the issue of share

(ii) The retained earnings may be used

1 to pay cash dividends
2 to issue fully paid bonus shares
3 to fund a reduction or repayment of capital
4 to provide for prior year adjustments

QUESTION 6 MAY 2014 P41 Q2(d)/MAY 2014 P42 Q2(d)

Equity section of the statement of financial position at 31 October 2013
$
Share capital [$400 000 + $50 000 (W 1) + $45 000 (W 2)] 495 000
Share premium [$40 000 + $25 000 (W 1) – $45 000 (W 2)] 20 000
Revaluation reserve (W 3) 100 000
Retained earnings [$117 395 (c part) + $2 615) 120 010
735 010
WORKINGS
(W 1) Number of right shares = (400 000 × 1/8) = 50 000 shares $000
Effects = Ordinary Capital (50 000 shares × 1.0) ↑ 50
Share Premium (105 000 shares × 0.50) ↑ 25
Bank ↑75

(W 2) Number of bonus shares = (400 000 +50 000) shares × 1/5 = 45 000 shares
Effects: Share Premium ↓ 45
Ordinary capital ↑ 45
(W 3) Effects: Land ($200 000  $100 000) ↑ 100
Revaluation Reserves ↑ 100
QUESTION 7 NOVEMBER 2014 P42 Q1 (a to d)
(a) Income statement for the year ended 31 May 2014
$000
Profit from operations 3 752.
Finance costs ($1 800 000 × 8% × 11/12) (132)
Profit before tax 3 620.
Tax ($3 620 000 × 25%) (905)
Profit for the year 2 715.
(b) Statement of changes in equity for the year ended 31 May 2014
Share Share Revaluation General Retained
Total
Capital Premium Reserve Reserve Earnings
$000 $000 $000 $000 $000 $000
Balance at start 25 000 5 000 1 000 Zero 2 950 33 950
Dividend paid (W 1) (1 000) (1 000)
Issue of share (W 2) 5 000 500 5 500
Rights issue (W 3) 6 000 6 000
Revaluation (W 4) 1 500 1 500
Interim dividend (W 5) (1 080) (1 080)
Transfer to Genl reserves (W 6) 500 (500) -------
Profit for the year _____ _____ ____ ____ 2 715 2 715
Balance at end 36 000 5 500 2 500 500 3 085 47 585
Chapter 7 117 Issue of Shares & Debentures

Workings
W1 Retained Profits ↓ $1 000 000 ($25 m × $0.04) Bank ↓ $1 000 000 ($25 m × $0.04)
W2 Bank ↑ $5 500 000( $5 m × 1.10) Share capital ↑ $5 000 000 ($5 m × $1.00)
Premium ↑ $500 000 ($5 m × $0.10)
W3 Bank ↑ $6 000 000 ($6 m × $1) Share capital ↑ $6 000 000 ($6 m × 1.0)
W4 Land ↑ $1 500 000 ($7.5 m  $6 m) Revaluation reserves↑$1 500 000($7.5m$6m)
W5 Ret. Profits ↓ (25m+5m+6m)×0.03=$1 080 000 Bank ↓ (25m+5m+6m)×0.03=$1 080 000
W6 Retained Profits ↓ $500 000 General reserves ↑ $500 000

(c) Under IAS 1, the final dividend is not accounted for in the financial statements unless it is approved by the
ordinary shareholders in the annual general meeting.
It is however disclosed as a note to the accounts as non-adjusting event. This is included in the next year
financial statements.

(d) A bonus issue is a free issue of ordinary shares to the existing ordinary shareholders in proportion to their
present shareholdings. The proposed plan would result in 1 new share for each 5 held being given to the
existing shareholders. This is simply a bookkeeping exercise and a reserve is debited without receiving any
cash on the issue. As a result, it would not help Aston plc in the expansion plans for the business.

QUESTION 8 MAY 2015 P43 Q2 (c)

Debentures are secured long-term loans for the company. They have to be redeemed by the company at a fixed
future date. Interest is paid on debentures at a fixed rate whether the company makes profit or not.
Likewise convertible loan stocks are also a long term loan to the company. They also carry a fixed rate of interest. Its
major difference with debentures is that the holders of convertible loan stocks have the right to exchange their stock
for ordinary shares in the company at a predetermined price at a specified future date.

QUESTION 9 SPECIMEN 2016 P3 Q3 (a to c)

(a) This means using capital reserves before revenue reserves in order to maintain distributable reserves so
that maximum future dividends can be paid.
Developed explanation (2–3 marks)
Basic explanation (1 mark)

(b) Statement of changes in equity for the year ended 31 December 2012
Ordinary Share General Revaluation Retained
Share capital premium reserve reserve Earnings
$000 $000 $000 $000 $000
Balance at 1 January 2012 500 200 70 298.3 (1 all)
Profit attributable to 116.2*
equity shareholders
Revaluation of property 260 (1)
Rights issue 100 (1) 25 (1)
Dividend paid (48) (1)
Transfer to reserves (40) (1)
Bonus issue 150 (1) _____ _____ (150) (1) ___________
Balance at 31 December 2012 750 225 110 110 326.5 (1of) all
* 122.8 (1) – 4.2 (1) – 2.4 (1) = 116.2 (1of)

(c) Example:
Non-adjusting event. It does not affect conditions which existed on the 31 December 2012.
Developed explanation (2 marks)
Basic explanation (1 mark)
Chapter 7 118 Issue of Shares & Debentures

QUESTION 10 NOVEMBER 2017 P32 Q2

(a) Statement of changes in equity for the year ended 31 December 2016
Ordinary Share General Retained
share capital Premium reserve earnings
$000s $000s $000s $000s
Balances at 1 Jan 2016 1 000 300 100 220
Share issue (700 000 shares @$1) ; (700 000 shares @$0.80) 700 560
Bonus issue [(1 000 000 + 700 000) × 1/3] 510 (510)
Profit for the year ($288 000 – $52 000 – $41 000) 195
Transfer to general reserve 40 (40)
Interim dividend paid ____ ___ ___ (55)
Balances at 31 Dec 2016 2 210 350 140 320

(b) Under IAS 1, the final dividend is not accounted for in the financial statements unless it is approved by the
ordinary shareholders in the annual general meeting.
It is however disclosed as a note to the accounts as non-adjusting event. This is included in the next year
financial statements.

(c) This is a non-adjusting event as its condition did not exist at the reporting date (date of statement of
financial position). It will be disclosed by way of note to the financial statement. However it will be recorded
in the financial statements of the following year.

(d) The non-current assets turnover ratio may fall in the short term as new factory will not start working at full
capacity immediately.
Once factory becomes fully operational then there should be an increase in revenues and profits.
Increase in revenues and profits are more relevant for shareholders than non-current assets ratio.
Increase in revenues will also increase the non-current assets turnover ratio in the long term.
Purchase of a new factory should also boost the shareholders’ confidence as it indicates the company is
growing.
Though this does not seem to be big issue but as it is raised in the annual general meeting so should be
addressed seriously by the directors.
The dissatisfaction of shareholders may adversely affect their confidence. The shareholders may elect new
directors. They may sell their shares in the company and due to negative impact in the market new
shareholders may not be inclined to buy the company’s shares.

(e) An upward revaluation of an existing non-current asset is credited to a capital reserve called revaluation
reserve.
It increases the value of the non-current asset to reflect the true and fair view of the financial position of
the business.
It reduces the accumulated depreciation in the statement of financial position.
It increases the shareholders’ equity and is recorded in the statement of changes in equity and also shown
as part of equity in the statement of financial position.

QUESTION 11 NOVEMBER 2017 P33 Q4

(a) A share premium arises when a share is sold for more than its nominal value. The difference between the
selling price and the nominal value is called the share premium.

(b) Statement to calculate the amount of finance to be raised by the issue of the debentures
$
Cost of warehouse expansion 550 000
Amount received through rights issue [(400 000 × 60%) shares @ $1.75] (420 000)
Finance to be raised by the issue of the debenture 130 000
Chapter 7 119 Issue of Shares & Debentures

(c) (i) Statement of Changes in Equity for the year ended 31 March 2017
Ordinary Share Revaluation Retained
share capital premium reserve earnings
$000s $000s $000s $000s
Balances at 1 April 2016 400 50 150 350.0
Interim dividend paid (400 000 × $0.02) (8.0)
Rights issue [(400 000 × 60%) shares × $1.00 ; $0.75] 240 180
Profit for the year [{($245 000 – $70 000– (130 000 ×
5% × 3/12)} × 80%] ___ ___ ___ 138.7
Balances at 31 March 2017 640 230 150 480.7

(ii) Notes to the financial statements:

Ordinary share dividends proposed for the year ending 31 March 2018 amounting to $25 600 (640
000 × 0.04).

$138 700
(d) Earnings per share is $0.22 ( ) per share for the current year and in the absence of rights issue, the
$640 000
$138 700
EPS would have been $0.35 per share( ).
$400 000
Borrowing a long term loan will increase gearing and income gearing. Though cash will be received for the
time being but as loan is repayable after two years so would also affect liquidity. Interest on loan would
have to be paid irrespective of the amounts of profits. Higher income gearing would also result in lower
profits available for ordinary shareholders leading to lower EPS.
Earnings per share has fallen considerably due to increase in the number of shares by 60% without a
corresponding increase in profits. Even if profits increase by 20% in 2017-18 then it would not be able to
generate EPS at the same higher level as it was before the rights issue. Profits need to increase by 60% to
match it with the current EPS as increase in shares is 60%.
Chapter 8 120 International Accounting Standards

CHAPTER 8 INTERNATIONAL ACCOUNTING STANDARDS

QUESTION 1 MAY 2012 P42 Q1 (c & d)
IAS 23 sets out the required accounting treatment for borrowing costs.
REQUIRED
(c) Explain how the directors should deal with the interest on a loan taken out to acquire a ‘qualifying
asset’. [5]
IAS 36 sets out the accounting procedures to ensure that assets are carried on the statement of financial position at
no more than their recoverable amount.
REQUIRED
(d) Explain the accounting treatment to ensure that this is achieved. [3]
QUESTION 2 NOVEMBER 2012 P41 Q1 (c to g)
The following balances were extracted from the draft financial statements of Flott plc on 31 January 2012:
$
Revenue 2 120 600
Purchases 1 180 800
Non-current assets 420 800
Trade receivables 205 400
Trade payables 91 100
The non-current asset figure includes the net book value of an item of equipment which was bought on 1 February
2010 at a cost of $50 000. This equipment had been subject to depreciation at the rate of 20% a year on the reducing
balance basis.
This equipment could now be sold on the open market for $26 000 although the company would incur transport
costs of $200.
If the company continued to use the equipment it could be used for four more years.
The associated revenues and costs (excluding depreciation) would be as follows:
Year Revenue ($) Costs ($)
1 42 292 32 611
2 34 444 25 364
3 30 622 22 500
4 24 810 18 221

The discount factors used by the company are as follows

Year Discount factor
1 0.909
2 0.826
3 0.751
4 0.683

REQUIRED
(c) Calculate at 31 January 2012:
(i) the equipment’s carrying amount; [3]
(ii) its fair value less costs to sell; [2]
(iii) its value in use. [9]
(d) (i) state the equipment’s recoverable amount at 31 January 2012; [2]
(ii) state the value at which the equipment should be included in the statement of financial position
at 31 January 2012. [2]
(e) Calculate:
(i) the impairment loss; [2]
Chapter 8 121 International Accounting Standards

(ii) the correct value for total non-current assets in the statement of financial position at 31 January
2012; [2]
(iii) the cost of capital used by the company. [2]

(f) (i) Suggest two possible reasons for impairment loss. [4]
(ii) Name the IAS which deals with impairment losses. [2]

Additional information:
The equipment operates in a factory which the company recently built. The figure for non-current assets includes
the amounts paid to the seller of the land, the supplier of the building materials, and the building contractor who
supplied the labour.
REQUIRED
(g) Name one (1) additional cost involved in building the factory which is included in non-current assets. [2]

QUESTION 3 MAY 2013 P43 Q3(e)

IAS 2 defines cost as cost of purchase or cost of conversion.
REQUIRED
Give two examples of cost of purchase and two examples of cost of conversion. [4]

QUESTION 4 NOVEMBER 2013 P42 Q2(c)

Explain the term ‘impairment of non-current assets’ with reference to IAS 36. [4]

QUESTION 5 MAY 2014 P43 Q1 (f)

The directors of Rezwan Limited expect that the value of goodwill acquired from Nimra may reduce over a period of
years.

REQUIRED
Explain, making reference to IAS 36 and 38, how any reduction will be calculated and state the accounting
adjustments which will be made in future financial statements. [8]

QUESTION 6 NOVEMBER 2014 P41 Q1(d & e)

Aston is considering investing in a limited company. He does not understand some of the accounting terminology.
REQUIRED
(d) Give an example of a revenue reserve and a capital reserve. [2]
(e) Explain the following terms in accordance with IAS 37:
(i) Provision
(ii) Contingent liability
(iii) Contingent asset [6]
QUESTION 7 NOVEMBER 2014 P42 Q1 (e)
In July 2014, the directors carried out impairment review of their plant and equipment.
The data for this review is shown below:

Asset Carrying value Net selling price Value in use

$ $ $
1 1 870 1 560 1 362
2 2 423 2 514 2 625
3 1 368 1 287 1 313
REQUIRED
(i) Explain what is meant by impairment. [2]
(ii) Calculate the total impairment loss that would be recognised in the income statement for the year ending
31 May 2015 in accordance with IAS 36, Impairment of assets. [4]
Chapter 8 122 International Accounting Standards

QUESTION 8 NOVEMBER 2014 P42 Q2 (g)

State the IAS which deals with property, plant and equipment and identify five items which a company can add to
the cost price of an asset. [6]

QUESTION 9 NOVEMBER 2014 P43 Q3 (e)

The following information relates to Asteroid plc for the year ended 30 June 2014.
On 18 July 2014 a flood damaged a material amount of inventory.
On 29 July 2014 a company which owed Asteroid plc a material amount went into liquidation.
On 11 August 2014 a dividend of $0.03 per ordinary share was declared.

REQUIRED
State which type of event each occurrence is and say how they would be treated in the accounts for the year ended
30 June 2014. Your answer should be in accordance with IAS 10. [7]

QUESTION 10 MAY 2015 P43 Q1 (d)

The directors of Plantin plc have recently discovered a material error in the published financial statements for the
year ended 31 March 2014. It was discovered that sales of $30 000, which had never taken place, had been included
in revenue and in trade receivables.

REQUIRED
(i) State how this error has affected the financial statements for the year ended 31 March 2014. [4]
(ii) Explain how the directors of Plantin plc should deal with this error in its financial statements in accordance
with IAS 8. [4]

QUESTION 11 NOVEMBER 2015 P41 Q1 (c)

The directors of Corbiere plc have discovered the following.
1 Inventories have all been valued at cost at $73 100 on 30 September 2015.
Included in this valuation are some items which originally cost $5 000 but have been damaged. They would
normally sell for $10000. The items could be repaired at a cost of $3 000 and then sold for $6 500.
2 On 13 October 2015 a flood resulted in the loss of inventory valued at $17 500.
3 The directors proposed a final dividend of $0.05 per share. No dividends were paid during the year.
REQUIRED
Explain your treatment of the points listed above. [6]

QUESTION 12 NOVEMBER 2015 P42 Q2 (b & c)

Jamal prepared his own financial statements for the year ended 31 August 2015. After the financial statements were
prepared his accountant made the following discoveries.
1 An impairment review of three delivery vans was as follows:
Van Carrying amount Net selling price Value in use
$ $ $
1 16 000 15 000 17 000
2 18 000 14 000 16 000
3 24 000 20 000 16 750
Jamal entered the carrying amount in his statement of financial position.
2 When preparing his income statement Jamal treated the opening inventory of $6 000 as closing inventory
and closing inventory of $4 000 as opening inventory.
Jamal’s income statement for the year ended 31 August 2015 showed a draft profit for the year of $40
000.
REQUIRED
(a) Calculate the revised profit for the year. [5]
Chapter 8 123 International Accounting Standards

Additional information
Jamal calculated his return on capital employed for the year ended 31 August 2015 as 40%. He did this by dividing
his profit for the year of $40 000 by the closing balance on his capital account.
REQUIRED
(b) Calculate to one decimal place Jamal’s revised return on capital employed after the adjustments. [5]

QUESTION 13 NOVEMBER 2015 P43 Q1(c to e)

After the financial statements had been prepared it was discovered that an item of fixtures and fittings should have
been impaired. The item was bought two years ago for $6 000. It could now be sold for $4 000 and has a value in use
of $3 000.
Depreciation is to be charged on Fixtures and fittings at 15% per annum using the reducing balance method
REQUIRED
(c) Explain the term impairment and the treatment of impairment in the financial statements. [4]
(d) Advise the directors as to whether or not the item of fixture and fittings is impaired. Show your
workings. [4]
(e) Explain how your advice would differ if the value in use had been $5 000. [2]

QUESTION 14 NOVEMBER 2016 P31 Q2 (e)

Advise the directors whether or not they should apply the International Accounting Standards when preparing the
published accounts. Justify your answer. [4]

QUESTION 15 NOVEMBER 2016 P31 Q4 (d & e)

Before the financial statements for 30 September 2016 were approved, the directors were made aware that another
trade receivable owing $10 000 at 30 September 2016 had been made bankrupt.
REQUIRED
(d) (i) Explain the difference between an adjusting event and a non-adjusting event. [4]
(ii) Explain, with reference to IAS 10, how this event should be dealt with in the financial
statements. [2]
Additional information
An impairment review was carried out and revealed that an item of plant with a carrying value of $100 000 could be
sold for $65 000. Its value in use was $70 000. The directors are uncertain how this should be treated in the financial
statements.
REQUIRED
(e) Calculate the effect on the profit for the year of the impairment review. [4]

QUESTION 16 NOVEMBER 2016 P33 Q3 (d)

XY Limited has been trading for many years.
Before the end of year audit, the chairman made the following statement:
‘I am pleased to report that the profit for the year ended 31 March 2016 has increased from $86 000 to $174 000.
These results have been achieved through careful cost control and concentrating on those areas which offer the
greatest return.’

However during the end of year audit the auditors discovered the following:
1 Equipment with a net book value of $180 000 had become obsolete during the year but had not been
written off. The directors believed that the buildings have increased in value by $200 000, which cancelled
out any loss on the obsolete equipment. So no adjustment had been made.
2 The method of inventory valuation had been changed at the end of the year from AVCO to FIFO. The AVCO
valuation had been $142 000 whereas the FIFO valuation was $184 000.
3 At 31 March 2016 the trade receivables amounted to $675 000. During the year a debt for $81000 had been
written off. However, a cheque for 75% of this amount had been discovered during the audit. The cheque
had not been recorded in the books of account but is expected to clear the bank.
Chapter 8 124 International Accounting Standards

REQUIRED
(i) Describe the correct accounting treatment of points 1, 2 and 3 with reference to the relevant accounting
standards. [9]
(ii) Analyse the effects of any correction on the profit for the year ended 31 March 2016. [6]

QUESTION 17 MAY 2017 P31 & P33 Q2 (a, b & e)

The directors of G Limited prepared the following draft statement of financial position at 31 December 2016:
G Limited
Statement of Financial Position at 31 December 2016
$
Non-current assets 642 000
Current assets
Inventory 78 000
Trade receivables 189 000
Other receivables 3 000
Cash and cash equivalents 54 000
324 000
Total assets 966 000
Equity and liabilities
Equity
Ordinary shares of $1 each 550 000
Retained earnings 235 000
785 000
Current liabilities
Trade payables 171 000
Other payables 10 000
181 000
Total equity and liabilities 966 000

The auditor brings the following items to the attention of the directors:
1 G Limited entered into an 18-month rental agreement for a warehouse on 1 May 2016. The following
payments totalling $220 000 were made and charged as an expense in the draft income statement:
$20 000 rental deposit which is refundable at the end of the lease period; and $200 000 total rent covering
the period from 1 May 2016 to 28 February 2017.
2 After an inspection of G Limited’s office premises by the local authority in December 2016, it was found
that the fire exits did not meet the safety specifications. A penalty of $27 000 is probable and G Limited will
incur a cost of $47 000 to rebuild the fire exits. No accounting entries had been made for this.
3 A customer who owed $12 000 at 31 December 2016 was declared bankrupt on 12 January 2017. It is
probable that only 20% of the debt is recoverable. No accounting entries had been made for this.

REQUIRED
(a) Prepare the revised statement of financial position at 31 December 2016. [10]
(b) Explain how each of items 1 and 2 should be treated in the financial statements. [5]

Additional information
G Limited adopted the Weighted Average Cost (AVCO) method to ascertain the value of inventories in 2016. The
purchase price has been increasing over recent years. The directors are now considering changing to First in, First
out (FIFO) method to value inventory in 2017.

REQUIRED
(e) Advise the directors whether or not the method of valuing inventory should be changed.
Justify your answer. [4]
Chapter 8 125 International Accounting Standards

QUESTION 18 MAY 2017 P32 Q3 (a, c & d)

Lushan and Samson are the directors of Z Limited which was newly formed on 1 January 2016. They understand that
they are legally obliged to prepare financial statements in accordance with International Accounting Standards.
REQUIRED
(a) State four reasons why the business should comply with International Accounting Standards when financial
statements are being prepared. [4]
Additional information
The directors prepared the following draft statement of financial position at 31 December 2016:
Z Limited
Statement of financial position at 31 December 2016
Non-current assets $
Property, plant and equipment 478 000
Current assets
Inventories 124 000
Trade receivables 217 000
Cash and cash equivalents 132 000
473 000
Total assets 951 000
Equity and liabilities
Equity
Ordinary shares of $1 each 500 000
Retained earnings 210 000
Total equity 710 000
Current liabilities
Trade payables 188 000
Taxation 53 000
241 000
Total equity and liabilities 951 000
Julia is the auditor of Z Limited. During the course of conducting her audit she was provided with the following
information.
1 On 31 December 2016, Z Limited had been sued for an amount of $29 000. Legal advice indicated that Z
Limited had a 90% chance of losing the case.
2 Included in the trade receivables was a debt of $30 000 owed by P Limited which was in financial difficulty.
The directors of Z Limited had accepted office equipment from P Limited on 31 December 2016 to settle
70% of P Limited’s debt. They were of the opinion that the recovery of the remaining debt was highly
improbable.
3 A piece of machinery had been purchased on 1 January 2016 for $50 000. The machinery had been
depreciated at an annual rate of 20% by using the straight-line method. At 31 December 2016, it had an
estimated fair value of $32 500 and the estimated value in use was $19 500.
REQUIRED
(c) Prepare a revised draft statement of financial position at 31 December 2016 after considering the
information provided to Julia. [8]

(d) Explain the adjustments you have made to the statement of financial position in (c). [6]

QUESTION 19 MAY 2018 P31 & P33 Q3 (b to d)

The directors of K Limited provided information on the following balances at 31 December 2017:
$
Plant and machinery at net book value 654 000
Human asset (see note 1) 116 000
Chapter 8 126 International Accounting Standards

Inventory 146 000

Trade receivables 182 000
Cash and cash equivalents 56 000
$1 Ordinary shares 600 000
Retained earnings at 1 January 2017 215 000
Profit for the year 98 000
Trade payables 166 000
Other payables 75 000
During the course of the year-end audit, the external auditor obtained the following information from the directors
(notes 1 to 3).
1 During the year, K Limited paid a deposit of $70 000 for a 6-month training programme commencing on 1
November 2017. The balance of $50 000 will be paid on completion of the programme. This had been
included in ‘other payables’.
The directors believed that the training would benefit the company for 5 years. The total payments were
regarded as an intangible asset and recorded as a ‘human asset’. Amortisation of $4 000 had been provided.
2 Inventory at 31 December 2017 included some obsolete goods. These had been included in the inventory
at their original cost of $12 000. They could only be sold at half of the normal selling price which was 25%
above cost.
3 On 1 July 2017, K Limited paid $60 000 for acquiring the right to use computer software for three years. The
full amount had been charged as an expense in the income statement.

REQUIRED
(b) Explain the correct accounting treatment of the items in notes 1 and 2. [5]
(c) Calculate the revised profit for the year ended 31 December 2017 after taking into account notes 1, 2 and
3. [8]
(d) State the values at which the following should be included in the statement of financial position at 31
December 2017.
(i) Software licence [2]
(ii) Inventory [1]
(iii) Retained earnings [1]
(iv) Other payables [1]

QUESTION 20 MAY 2018 P32 Q2 (c & d)

There was a water leak in the company’s printing room in January 2018. This destroyed the new photocopier which
was not insured.
(c) State how this should be treated in both 2017 financial statements and 2018 financial statements. [3]
(d) State what is meant by impairment loss in respect of non-current assets. [2]
Chapter 8 127 International Accounting Standards

SOLUTION CHAPTER 8
QUESTION 1 MAY 2012 P42 Q1 (c & d)
(c) A qualifying asset is an asset for which activities to prepare the asset for its intended use or sales are in
progress. The borrowing costs related to its acquisition should be capitalised as soon as such activities start.
Capitalization of borrowing costs ends when all such activities are complete.
(d) When the carrying amount of an asset is more than its recoverable value then it has to be reduced to its
recoverable amount. This reduction in the asset’s value is an impairment loss. The impairment loss is
recorded as an expense in the income statement. Once an impairment loss is recognized, the asset should
be valued in the balance sheet at its recoverable value
QUESTION 2 NOVEMBER 2012 P41 Q1 (c to g)
(c) (i) Calculation of Equipment’s carrying amount $
Cost of equipment at 1 February 2010 50 000
Depreciation for 2010-2011 ($50 000 × 20%) (10 000)
40 000
Depreciation for 2011-2012 ($40 000 × 20%) (8 000)
Equipment’s carrying amount at 31 January 2012 32 000
(ii) Calculation of fair value less costs to sell
Open market (fair) value 26 000
Transport costs to be incurred to sell the inventory (200)
Fair value less costs to sell 25 800

(iii) Calculation of Value in Use

Year Revenue (a) Costs (b) Cash Flow Discount factor Discounted cash flow
$ $ $ (a –b) $
1 42 292 32 611 9 681 0.909 8 800
2 34 444 25 364 9 080 0.826 7 500
3 30 622 22 500 8 122 0.751 6 100
4 24 810 18 221 6 589 0.683 4 500
Value in Use 26 900

(d) (i) Recoverable amount of an asset is the higher of its fair value less costs to sell ($25 800) and its
value in use ($26 900) so it is $26 900 in this case.
(ii) As after an impairment loss, the asset should be shown on the balance sheet at its recoverable
amount so it will be shown at $26 900.

(e) (i) Calculation of Impairment Loss

Impairment loss = Carrying amount  Recoverable amount
= $32 000  $26 900
= $5 100
(ii) Correct Balance sheet value = Original Value  Impairment Loss
= $420 800  $5 100
= $415 700
(iii) As
Future Value × Discount factor = Present Value
Future Value × 0.909 = 1.00
= 1  0.909
= 1.1
So cost of capital is 0.10 (1.10  1.00) or 10%
Chapter 8 128 International Accounting Standards

(f) (i) Decline in market value

Increases in market interest rates
Obsolescence or physical damage
Negative changes in technology, markets, economy, or laws
(ii) IAS36 - Impairment of Assets
(g) Legal costs
Commission of property agent
Architect’s fees
QUESTION 3 MAY 2013 P43 Q3(e)
Cost of purchase – Purchase price, carriage inwards, import duty, handling costs other costs directly
attributable to purchased items.
Cost of conversion – direct labour, other direct expenses, production overheads

QUESTION 4 NOVEMBER 2013 P42 Q2(c)

When the carrying amount of an asset is more than its recoverable value then it has to be reduced to its recoverable
amount. This reduction in the asset’s value is an impairment loss. The impairment loss is recorded as an expense in
the income statement. Once an impairment loss is recognized, the asset should be valued in the balance sheet at its
recoverable value.

QUESTION 5 MAY 2014 P43 Q1 (f)

As this goodwill arises on purchase of business so under IAS 38 (Intangible assets), Rezwan Ltd can show it as an
intangible non-current asset in the Statement of Financial Position. Rezwan must then amortise the goodwill on the
straight line basis over the estimated useful life of goodwill. This is done by transferring an equal charge from
goodwill to its Income Statement. The amortisation period should be reviewed annually and changes made in the
amortisation in line with this review.
Under IAS 36 (Impairment of assets) each year Rezwan should also compare the carrying value of the goodwill (i.e.
its net book value after amortisation) with its recoverable amount (its value in use). If the recoverable amount is less
than the carrying value then an impairment loss is shown as an additional expense in its income statement.
QUESTION 6 NOVEMBER 2014 P41 Q1(d & e)
(d) Revenue reserves – Retained earnings, general reserve, assets replacement reserves.
Capital reserves – Share premium, capital redemption reserve, revaluation reserve.
(e) (i) A provision is a liability of uncertain timing and amount.

(ii) A contingent liability is a possible liability which arises from a past event whose existence will be
confirmed by the occurrence or non-occurrence of an uncertain future event not wholly within the
control of enterprise.
(iii) A contingent asset is a possible asset which arises from a past event whose existence will be
confirmed by the occurrence or non-occurrence of an uncertain future event not wholly within the
control of enterprise.

QUESTION 7 NOVEMBER 2014 P42 Q1 (e)

(i) Impairment loss occurs when the carrying amount of property, plant and equipment exceeds the
recoverable amount. The recoverable amount is the higher of the net realisable value and the value in use.
(ii) Calculation of total impairment loss
Asset Net selling Value in use Recoverable Carrying value Impairment
price ($) ($) amount ($) ($) loss ($)
1 1 560 1 362 1 560 1 870 310
2 2 514 2 625 2 625 2 423 Nil
3 1 287 1 313 1 313 1 368 55
Total impairment loss charged to income statement 365
Chapter 8 129 International Accounting Standards

QUESTION 8 NOVEMBER 2014 P42 Q2 (g)

IAS16 deals with property, plant and equipment
The items which a company can add to the cost price of an asset may include import duties, installation costs,
delivery charges, handling charges, inspection and testing costs, delivery and handling costs.
QUESTION 9 NOVEMBER 2014 P43 Q3 (e)
(i) Non-adjusting event and it should be disclosed as a note to the accounts.
(ii) Adjusting event and it should be written off in the accounts.
(iii) Non-adjusting event and the dividend of $120 000 (4 000 0000 × $0.03) should be disclosed as a note to the
accounts.
QUESTION 10 MAY 2015 P43 Q1 (d)
(i) In this case, revenue, profit for the year , trade receivables and retained earnings have all been overstated
by $30 000.
(ii) IAS 8 states that where an error is discovered a business must correct material errors from prior periods in
the next set of financial statements. Comparative amounts from prior periods must be restated.
QUESTION 11 NOVEMBER 2015 P41 Q1 (c)
1 As per IAS 2, inventory is valued at lower of cost and net realisable value. This is to comply with prudence
and matching concepts. This treatment avoids overstatement of inventory and helps to recognize a loss of
reduction in inventory’s value as soon as it arises.
2 The flood occurred (on 13 October) after the date of the financial statements (30 September) when no
condition existed relating to the fire event. As per IAS 10, this is non-adjusting event and should only be
disclosed as a note without making any adjustment in the financial statements.
3 Proposed dividend (unless approved by the shareholders) is treated as a non- adjusting event under IAS 10.
It is only disclosed as a note to the statement of financial position but not shown within the financial
statements.
QUESTION 12 NOVEMBER 2015 P42 Q2 (b & c)
(b) Calculation of revised profit for the year ended 31 August 2015
$000
Original profit as per financial statements 40
Impairment loss of van 2 ($18 000 – $16 000) (2)
Impairment loss of van 3 ($24 000 – $20 000) (4)
Correction of opening inventory understatement ($6 000 – $4 000) (2)
Correction of closing inventory overstatement ($4 000 – $6 000) (2)
Revised profit for the year 30
Operating Profit
(c) Revised return on capital employed = × 100
Capital Employed
$30 000
= × 100
($40 000÷40%)−$10000(fall in profits)
= 33.33%
QUESTION 13 NOVEMBER 2015 P43 Q1(c to e)
(c) Impairment is the reduction in value if the recoverable amount is less than the carrying amount.
Recoverable amount is the higher of net realizable value and value in use.
It is accounted for by reducing the value of the asset by the impaired amount and is written off in the
income statement.
(d) Carrying amount = $6 000 – ($6 000 × 15%) = $5 100 – ($5 100 × 15%) = $4 335
Recoverable amount = $4000 [higher of net realizable value ($4 000) and value in use ($3 000)]
Since the recoverable amount is below the carrying amount, the fixture should be impaired by $335 and the
directors are correct.
(e) If value in use had been $5 000 then recoverable amount is $3 000. Since in this case the recoverable amount
is greater than the carrying amount the fixture would not be impaired
Chapter 8 130 International Accounting Standards

QUESTION 14 NOVEMBER 2016 P31 Q2 (e)

The international accounting standards should be applied by the directors as they offer the following benefits.
 They reduce the confusing variations in the accounting treatments while preparing financial statements.
 They describe the accounting principles, the valuation techniques and the method of applying accounting
principles so to ensure true and fair view.
 Where important information is not statutorily required, accounting standards calls for its disclosure
 Accounting standards facilitate comparison of financial statements of companies in the same industry
situated in different parts of the world.
 Accounting standards help in resolving conflict of financial interest among various stakeholders.
 Accounting standards help the auditors in case of preparation of financial statements and any deviation can
be disclosed in the reports so that users are aware of such deviations.

QUESTION 15 NOVEMBER 2016 P31 Q4 (d & e)

(d) (i) Adjusting event: Adjusting events refer to situations where the events after balance sheet date
provide new evidence of conditions that exist at the balance sheet date, and result in adjustment
to the financial statements.
Non-adjusting event: Non-adjusting events represent events that are indicative of conditions that
arose after the balance sheet date. As a result, they should be reflected in the financial statements
of the following accounting period, but not adjusted for in the financial statements of the current
accounting period. However, if it is considered that these events are relevant and material and
that users of the financial statements need the information for making economic decisions, these
events can be disclosed in notes to the accounts. Otherwise, users of financial statements would
be deprived of material information.
(ii) The bankruptcy is an adjusting event since it provides further evidence of conditions that existed
at the end of the reporting period.
(e) Under IAS 36, non-current assets should be valued at lower of the carrying amount and recoverable
amount. The carrying amount of the plant is $100 000 whereas the recoverable amount which is the higher
of fair value less costs to sell and value in use ($70 000) is only $70 000. As a result of reduction in asset’s
value ($100 000 - $70 000) the profit therefore reduced by $30000.

QUESTION 16 NOVEMBER 2016 P33 Q3 (d)

(i) 1 IAS 36.
Non-current assets should be valued at lower of carrying value and recoverable amount. Recoverable
amount is higher of the fair value less cost to sell and value in use. Though the asset has carrying value
of $180 0000 but it has nil recoverable value, so the value of asset needs to be reduced by $180 000 in
the balance sheet. This should also be recorded in the income statement as an impairment loss.
2 IAS2 / IAS8
XY Limited should be consistent in applying different accounting methods (consistency concept). This is
also important as if he falsely manipulates the accounts by changing valuation method it will not only
distort true and fair view but comparison of current year results with of the last year will be
meaningless.
As per IAS 2, inventory must be valued at the lower of cost and net realisable value. The value of
inventory should be decreased by $42 000 ($184 000 - $142 000) both in the statement of financial
position and in the income statement which will decrease the amount of profit for the year
3 IAS 10
If a material event exists at the end of the year and the outcome is known before the accounts are
approved, then this is an adjusting event and the financial statements must be amended. As the 75%
of the debt has been recovered so this should be written back in the receivables. This will increase total
current assets in the balance sheet and profit in the income statement as bad debt recovered of $60
750.
Chapter 8 131 International Accounting Standards

(ii) Statement to show the effects of any correction on the profit

$
Original operating profit 174 000
Less Impairment of equipment (180 000)
Overvaluation of inventory due to shift to FIFO ($184 000  $142 000) (42 000)
Add Bad debt recovery accounted for ($81 000 × 75%) 60 750
Adjusted profit for the year 12 750
QUESTION 17 MAY 2017 P31 & P33 Q2 (a, b & e)
(a) G Limited
Revised statement of financial position at 31 December 2016
$ $
Non-current assets 642 000
Current assets
Inventory 78 000
Trade receivables [$189 000 – ($12 000  80%)] 179 400
Other receivables ($3000 + $20 000 (security) + $40 000) 63 000
Cash and cash equivalents 54 000 374 400
Total assets 1 016 400
Equity and liabilities
Equity
Ordinary shares of $1 each 550 000
Retained earnings ($235 000+$20 000 + $40 000–$27 000–$9600) 258 400 808 400
Current liabilities
Trade payables 171 000
Other payables ($10 000 + $27 000) 37 000 208 000
Total equity and liabilities 1 016 400
(b) As $20 000 of the rental deposit is refundable within 12 months’ time so it should be treated as a current
asset.
Prepaid rent of $40 000 ($200 000  2/10) should also be treated as a current assets as its benefits will be
realised within 12 months whereas $160 000 should be recognised as expense in the income statement.
This is in accordance with ‘Matching concept’.
The violation of the safety specifications by the company resulted in a present obligation of $27 000 arising
from past events of breach of law. As this penalty is probable so it should be treated as a liability. IAS 37
specifies that probable obligations like this penalty of $27 000 should be charged to income statement with
the creation of liability in the balance sheet at the same time.
On the other hand, $47 000 expected to be incurred to rebuild the fire exists is not a present obligation so
no provision or disclosure of this amount is required.
(e) IAS 2 allows both FIFO and AVCO to value inventories. The business should, however, select that method
which gives more relevant and reliable information about the state of the transaction.
Consistency concept requires that accounting methods, once chosen, should be used with consistency. The
businesses may, however, are allowed to change the change the accounting method if it is requirement of
an IAS or change is expected to provide reliable and more relevant information about the effects of
transactions.
The directors, therefore, should not change the AVCO method to FIFO to have a higher inventory value and
therefore a higher gross profit.
QUESTION 18 MAY 2017 P32 Q3 (a, c & d)
(a) The international accounting standards should be applied so that the information contained within the
published accounts is useful and aids making economic decisions is comparable, consistent,
understandable, relevant and reliable.
If international standards are not complied with the external auditor will qualify the audit report as the
financial statements do not show a true and fair view
Chapter 8 132 International Accounting Standards

(c) Z Limited
Statement of financial position
As at 31 December 2016
Non-current assets $ $
Property, plant & equipment[$478000 + ($30 000 × 70%)]– ($40 000  $32 500)] 491 500
Current assets $ $
Inventories 124 000
Trade receivables [$217 000 – ($30 000 × 70%)] 196 000
Provision for doubtful debts (9 000)
Cash and cash equivalents 132 000 443 000
Total assets 934 500
Equity
Ordinary shares of $1 each 500 000
Retained earnings($210 000 – $29 000 – $9 000 – ($40 000  $32 500)] 164 500 664 500
Current liabilities
Trade payables 188 000
Provision for compensation 29 000
Taxation 53 000 270 000
Total equity and liabilities 934 500

(d) 1 Under the guidelines of IAS 37 a provision for compensation of $29 000 should be made as a
current liability. This is due to 90% probability of losing the case.
2 Z Limited is only able to recover $21 000 ($30 000 × 70%) in the form of office equipment. As the
recovery of remaining $9 000 ($30 000  $21 000) is highly improbable. Prudence concept of
accounting requires to make a specific provision for this debt of $9 000.
3 According to IAS 36, an asset should be valued at lower of its carrying value [$40 000 ($50 000 ×
80%] and recoverable amount ($32 500). The reduction in the value of asset is $7500 ($40 000 –
$32 500) which should be accounted for as impairment loss in the income statement as an
expense. Recoverable amount is the higher of its fair value ($32 500) and value in use ($19 500).

(b) 1 Cost on training programme should be treated as expense because it is an operating expense of
the business. The expense on training cannot be treated as an asset as it is difficult to establish a
direct relationship between training programme and future benefits from efficiency of employees.
It is sometimes very difficult to measure improvement in efficiency – money measurement
concept. Moreover there could be other contributing factors towards improved efficiency.
As total cost of the 6-month programme is $120 000 ($70 000 + $50 000) so monthly expense
should have been $20 000 ($120 000 ÷ 6). As per matching concept only $40 000 (cost of 2 months)
has been expensed whereas $30 000 ($70 000  $40 000) should be treated as prepayment (other
receivables) but no amount should be included in other payables.

2 Under IAS 2 inventory should be valued at $7 500 which is lower of cost ($12 000) and net realisable
value ($7 500) [($12 000 × 125%) × 1/2)]. This adjustment will reduce the profit for the year and the
value of inventory in current assets. This is in accordance with the prudence concept.

(c) $
Profit for the year ended 31 December 2017 98 000
Add: Amortisation wrongly charged 4 000
Less: Training expenses ($70 000 + $50 000) × 2/6 (40 000)
Less: Inventory valued at lower of cost & NRV [$12 000 – ($12 000 × 125% × 1/2)] (4 500)
Add: Licence fee for the year [$60 000  ($60 000 ÷ 3 years × 6/12) 50 000
Revised profit for the year ended 31 December 2017 107 500
Chapter 8 133 International Accounting Standards

(d) $
(i) Software license [$60 000  {($60 000 ÷ 3 years) × 6/1}2}] 50 000
(ii) Inventory [$146 000 – $4 500 (‘c’ part)] 141 500
(iii) Retained earnings [$215 000 + $107 500 (‘c’ part)] 322 500
(iv) Other payables [$75 000 – $50 000 (training cost)] 25 000

QUESTION 19 MAY 2018 P31 & P33 Q3 (b to d)

(b) 1 Cost on training programme should be treated as expense because it is an operating expense of
the business. The expense on training cannot be treated as an asset as it is difficult to establish a
direct relationship between training programme and future benefits from efficiency of employees.
It is sometimes very difficult to measure improvement in efficiency – money measurement
concept. Moreover there could be other contributing factors towards improved efficiency.
As total cost of the 6-month programme is $120 000 ($70 000 + $50 000) so monthly expense
should have been $20 000 ($120 000 ÷ 6). As per matching concept only $40 000 (cost of 2 months)
has been expensed whereas $30 000 ($70 000  $40 000) should be treated as prepayment (other
receivables) but no amount should be included in other payables.

2 Under IAS 2 inventory should be valued at $7 500 which is lower of cost ($12 000) and net realisable
value ($7 500) [($12 000 × 125%) × 1/2)]. This adjustment will reduce the profit for the year and the
value of inventory in current assets. This is in accordance with the prudence concept.

(c) $
Profit for the year ended 31 December 2017 98 000
Add: Amortisation wrongly charged 4 000
Less: Training expenses ($70 000 + $50 000) × 2/6 (40 000)
Less: Inventory valued at lower of cost & NRV [$12 000 – ($12 000 × 125% × 1/2)] (4 500)
Add: Licence fee for the year [$60 000  ($60 000 ÷ 3 years × 6/12) 50 000
Revised profit for the year ended 31 December 2017 107 500

(d) $
(i) Software license [$60 000  {($60 000 ÷ 3 years) × 6/1}2}] 50 000
(ii) Inventory [$146 000 – $4 500 (‘c’ part)] 141 500
(iii) Retained earnings [$215 000 + $107 500 (‘c’ part)] 322 500
(iv) Other payables [$75 000 – $50 000 (training cost)] 25 000

QUESTION 20 MAY 2018 P32 Q2 (c & d)

(c) It will be treated as a non-adjusting event (IAS 10) in the financial statements of 2017 as the loss was not
expected at the reporting date so only requires disclosure in the notes to the financial statements.
In 2018 financial statements the asset will be written off as an uninsured photocopier was destroyed in
2018.

(d) When the carrying amount of an asset is more than its recoverable value then it has to be reduced to its
recoverable amount. Recoverable amount is the higher of net realizable value and value in use.
This reduction in the asset’s value is an impairment loss. The impairment loss is recorded as an expense in
the income statement. Once an impairment loss is recognized, the asset should be valued in the balance
sheet at its recoverable value.
Chapter 9 134 Auditing & Stewardship

CHAPTER 9 AUDITING & STEWARDSHIP

QUESTION 1 SPECIMEN 2016 P3 Q3 (d & e)
(d) State three characteristics of an auditor’s report. [3]
Additional information
The auditor’s report for Whittlesford plc did not give an unqualified opinion on the financial statements because
$150 000 of investments included in non-current assets have become worthless but have not been written off.
REQUIRED
(e) Assess the effect that this auditor’s report will have on shareholders. [4]

QUESTION 2 NOVEMBER 2016 P32 Q4

The turnover of Soames Limited has been increasing and the directors have been advised that they must now
produce audited accounts. They are therefore required to appoint an auditor to provide the company with an audit
report.
REQUIRED
(a) List five duties which the auditor would carry out during an audit. [5]
Additional information
The first audit report was qualified. Included in current assets was inventory valued at cost of $1 million. This had
become damaged and now could only be sold for $750 000 after repairs costing $200 000.
REQUIRED
(b) Explain what is meant by a qualified audit report. [2]
(c) Explain, with reference to the relevant International Accounting Standard, the necessary adjustment that
must be made to the financial statements. [8]
(d) Analyse the importance to the shareholders of Soames Limited of the auditors providing a true and fair view
of the company’s accounts. [6]
Additional information
The audit report was signed by Aamir, the brother of the finance director of Soames Limited. Aamir was an
unqualified auditor.
(e) Evaluate the validity of this audit report. [4]
QUESTION 3 NOVEMBER 2016 P33 Q3 (a to c & e)
XY Limited has been trading for many years.
Before the end of year audit, the chairman made the following statement:
‘I am pleased to report that the profit for the year ended 31 March 2016 has increased from $86 000 to $174 000.
These results have been achieved through careful cost control and concentrating on those areas which offer the
greatest return.’
However during the end of year audit the auditors discovered the following:
1 Equipment with a net book value of $180 000 had become obsolete during the year but had not been
written off. The directors believed that the buildings have increased in value by $200 000, which cancelled
out any loss on the obsolete equipment. So no adjustment had been made.
2 The method of inventory valuation had been changed at the end of the year from AVCO to FIFO. The AVCO
valuation had been $142 000 whereas the FIFO valuation was $184 000.
3 At 31 March 2016 the trade receivables amounted to $675 000. During the year a debt for $81000 had been
written off. However, a cheque for 75% of this amount had been discovered during the audit. The cheque
had not been recorded in the books of account but is expected to clear the bank.
REQUIRED
(a) Explain the term stewardship. [2]
(b) Explain the purpose of an end of year audit. [2]
Chapter 9 135 Auditing & Stewardship

(c) State whether the published audit report will be qualified or not. [1]
(e) Assess the implications of a qualified audit report. [5]

QUESTION 4 MAY 2017 P31 & P33 Q2 (c & d)

(c) Explain the role of an external auditor. [4]
(d) Explain why the audit report of a limited company is addressed to the company’s shareholders and not its
directors. [2]

QUESTION 5 MAY 2017 P32 Q3 (b & e)

(b) Explain what is meant by stewardship with regard to the role of the directors. [2]
Additional information
Jack, Julia's brother, is the sole trader of a small business. He has asked his sister if his accounts should be audited.

REQUIRED
(e) Discuss the advantages and disadvantages to Jack of having his accounts audited. [5]

QUESTION 6 NOVEMBER 2017 P32 Q3

LS Limited has completed its first year of trading. The company has four directors, of whom two are not shareholders.
The auditors are currently carrying out the end of year audit.
REQUIRED
(a) (i) Explain the term ‘stewardship’. [2]
(ii) Explain how directors carry out their role of stewardship within a limited company. [2]
(iii) Explain the purpose of an end of year audit. [2]
Additional information
The draft financial statements for the year showed the following:
$
Sales 182 000
Sales returns 8 000
Purchases 154 000
Purchases returns 12 000
All sales were at a mark-up of 150%.
During the audit the auditors discovered that included in the sales records was a sales invoice for $6 000 which had
been prepared for a customer but not yet been sent. The customer had received the inventory on a sale or return
basis, but had yet to decide whether or not to keep the inventory.

REQUIRED
(b) (i) Calculate what should have been the value of the closing inventory. [5]
(ii) Calculate the gross profit for the year. [1]

Additional information
During the year the warehouse manager had been absent from work for a long period of time.
There had been little control over the movement of inventory. Staff had valued the inventory actually in the
warehouse at the end of the year at $24 000.

REQUIRED
(c) Calculate the percentage change in gross profit if the inventory valuation from the warehouse had been
used. [3]
(d) Discuss three possible reasons for the difference between the warehouse inventory valuation and the
calculated value of inventory. [6]
Chapter 9 136 Auditing & Stewardship

(e) Discuss whether the directors should use the warehouse inventory valuation or the amount from the
accounting records as the inventory figure in the financial statements. Justify your answer. [4]

QUESTION 7 MAY 2018 P31 & P33 Q3 (a)

Explain the role of an external auditor. [2]
Chapter 9 137 Auditing & Stewardship

SOLUTION CHAPTER 9
QUESTION 1 SPECIMEN 2016 P3 Q3 (d & e)
(d) • a report to shareholders
• prepared by an independent person
• prepared by a suitably qualified person
• prepared following an inspection of the company’s books
• contains the auditor’s stated opinion as to whether the financial statements give a true and fair
view.
Accept any reasonable alternative.
(1 mark) × three characteristics

(e) • Shareholders will know that they cannot rely on the financial statements as they do not
give a true and fair view.
• They will know that the statement of financial position does not show the true assets and liabilities
of the company.
• They will know that the underlying share value is lower than they previously thought.
• The market value of their shares may fall.
• Potential investors are likely to be deterred from investing.
• Shareholders may not have the required knowledge of auditing and audit reports and they may
not care. They may simply be interested in the dividends the company pays.
• Shareholders may question whether the qualification of the audit report is the result of a
disagreement between the directors and the auditors.
Accept any reasonable alternative.

QUESTION 2 NOVEMBER 2016 P32 Q4

(a) The auditors are appointed to act as an independent check on the reliability of the company’s accounting
records. The auditors are required to carry out their duties objectively.
 They should inquire of management and others to gain an understanding of the organization itself, its
operations, financial reporting, and known fraud or error
 They must ensure that the accounts comply with current accounting standards and the requirements
of Companies Acts.
 They should perform analytical procedures on expected or unexpected variances in account balances
or classes of transactions
 They should test documentation supporting account balances or classes of transactions
 They should observe the physical inventory count
 The overriding requirement is that auditors must ensure the accounts present a true and fair picture
of the company’s financial affairs and that they are free from significant errors.
 The auditors are required to report to shareholders as part of the annual report giving their judgment
as to whether or not the financial statements meet these criteria.
 At the completion of the audit, the auditor may also offer objective advice for improving financial
reporting and internal controls to maximize a company’s performance and efficiency.
(b) A qualified audit report is issued after an audit is done by a professional auditor that suggests that
misstatements (i-e non-compliance with accounting standards/accounting principles, misstatement in
account balances and disclosures), individually or in the aggregate, are material, but not pervasive, to the
financial statements. Auditors who deem audits as qualified opinions are safeguarding the shareholders’
interest by advising them that the information within the audit is not complete or the accounting
methods used by the company do not follow IAS.
(c) As per IAS 2, inventory must be valued at the lower of cost and net realisable value. This treatment avoids
overstatement of inventory and helps to recognize a loss of reduction in inventory’s value as soon as it arises.
Chapter 9 138 Auditing & Stewardship

Net realizable value is the estimated selling price less costs to make the inventory ready for sale. The cost
of inventory is 1 million whereas the net realisable value is only $550 000 ($750 000 – $200 000).
This requires reduction in the value of inventory by $450 000 ($1 000 000 – $550 000). This adjustment will
result in reduction of reported profits by $450 000 in the income statement. Inventory value in the balance
sheet should also be reduced by the same amount to show a true and fair view.
(d) The phrase ‘true and fair view’ in auditing refers to the auditor’s opinion regarding the quality of information
given in financial statements. “Fair” in this context implies that financial statements are free from material
misstatements and “True” entails true representation of the performance and financial position of the
business. They are also important for tax computations, for management decisions and quotations from
lending institutions. Thus, it can clearly be seen why independence and objectivity are important in the
statements. This can be linked back to the four basic concepts on presenting this information: going
concern, accruals (matching), consistency, and prudence. However, a true and fair view is not a guarantee,
but an opinion.
(e) The auditors’ responsibility is to express an independent opinion on financial statements. Independence of
the internal auditor means independence from parties whose interests might be harmed by the results of
an audit. As Aamir is the brother of the finance director of Soames Limited and in addition to that he was
an unqualified auditor so the audit report signed by him will not be valid. Therefore the company must re-
appoint a new qualified and independent auditor.

QUESTION 3 NOVEMBER 2016 P33 Q3 (a to c & e)

(a) Steward is “a person employed to manage another’s property”, which seems straightforward enough.
However, today, stewardship is generally taken to refer to the role of the numerous fund managers
employed by major institutions to invest many trillions of pounds, dollars, yen etc, on behalf of billions of
people via millions of corporations around the world.
(b) A financial statement audit is the examination of an entity's financial statements and accompanying
disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting
to the fairness of presentation of the financial statements and related disclosures. The auditor's report must
accompany the financial statements when they are issued to the intended recipients.
(c) The published audit report would be qualified
A qualified audit report is issued after an audit is done by a professional auditor that suggests that
misstatements (i-e non-compliance with accounting standards or accounting principles, misstatement in
account balances and disclosures), individually or in the aggregate, are material, but not pervasive, to the
financial statements. Auditors who deem audits as qualified opinions are safeguarding the shareholders’
interest by advising them that the information within the audit is not complete or the accounting
methods used by the company do not follow IAS.

QUESTION 4 MAY 2017 P31 & P33 Q2 (c & d)

(c) The auditors are required to carry out their duties objectively.
 They should inquire of management and others to gain an understanding of the organization itself,
its operations, financial reporting, and known fraud or error
 They must ensure that the accounts comply with current accounting standards and the
requirements of Companies Acts.
 They should perform analytical procedures on expected or unexpected variances in account
balances or classes of transactions
 They should test documentation supporting account balances or classes of transactions
 The overriding requirement is that auditors must ensure that the accounts present a true and fair
picture of the company’s financial affairs and that they are free from significant errors.
 The auditors are required to report to shareholders as part of the annual report giving their
judgment as to whether or not the financial statements meet these criteria.
 At the completion of the audit, the auditor may also offer objective advice for improving financial
reporting and internal controls to maximize a company’s performance and efficiency.
Chapter 9 139 Auditing & Stewardship

(d) As auditors are appointed by shareholders in the annual general meeting (AGM) so they are required to
work to serve the requirements of shareholders and not the directors.
QUESTION 5 MAY 2017 P32 Q3 (b & e)
(b) Steward is “a person employed to manage another’s property”, which seems straightforward enough.
However, today, stewardship is generally taken to refer to the role of the numerous fund managers
employed by major institutions to invest many trillions of pounds, dollars, yen etc, on behalf of billions of
people via millions of corporations around the world.
(e) Advantages of Audit
 Audited accounts are readily accepted by Government authorities like Tax authorities.
 By auditing the accounts errors and frauds can be detected and rectified in time.
 Audited accounts are lot more reliable than the accounts which have not been audited.
 For accessing finance from financial institutions like Banks, previous years audited accounts are
evaluated for determining repayment capability.
 Regular audit of account create fear among the employees in the accounts department and
exercise a great moral influence on clients staff thereby restraining them from commit frauds and
errors.
 In the event of loss of property by fire or on happening of the event insured against, Audited
accounts help in the early settlement of claims from the insurance company.
 To determine the value of the business in the event of purchase or sales of the business, audited
account will be the treated as the base for the evaluation.
Disadvantages of Audit
 The payment of audit fees brings extra cost burden to the organization.
 During an audit the auditor requires the attention of several staff and therefore causes disruption.
 An audit does not assure future viability of the organization audited
 An audit does not assure the effectiveness and efficiency of management.
 Auditors express opinion and therefore does not give total assurance of the true fair presentation
of annual reports.
QUESTION 6 NOVEMBER 2017 P32 Q3
(a) (i) Steward is “a person employed to manage another’s property”, which seems straightforward
enough. However, today, stewardship is generally taken to refer to the role of the numerous fund
managers employed by major institutions to invest many trillions of pounds, dollars, yen etc, on
behalf of billions of people via millions of corporations around the world.
(ii) The directors act as stewards on behalf of the shareholders. They are responsible for ensuring that
the resources of the company are managed to best effect on behalf of the shareholders. To this
end directors are responsible for ensuring that proper books of account are prepared, and that an
annual report is published including financial statements which present a true and fair picture of
the company’s affairs. The law also requires directors to include a report on their management of
the company as part of the report.
(iii) A financial statement audit is the examination of an entity's financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a report by
the auditor, attesting to the fairness of presentation of the financial statements and related
disclosures. The auditor's report must accompany the financial statements when they are issued
to the intended recipients.
(b) (i) Statement to calculate the value of closing inventory
$
Purchases 154 000
Purchases returns (12 000)
Sales at cost [($182 000  $6 000) × 100/250)] (70 400)
Sales return at cost ($8 000 × 100/250) 3 200
Closing inventory 74 800
Chapter 9 140 Auditing & Stewardship

(ii) Gross profit = Cost of sales × Mark-up (%)

= ($154 000  $12 000  $74 800) × 150%
= $100 800

(c) Existing Gross profit $100 800

New Gross profit [$100 800  ($74 800  $24 000)] $50 000
Decrease in Gross profit $50 800

$50 800
Decrease in Gross Profit (%) = × 100
$100 800
= 50.4%

(d)  Goods lost by theft/fire

 Goods sent on sale or return or on consignment and are with the customers so not part of physical
count.
 Sales of inventory were omitted from the books
 Mistakes in physical count
 Purchase returns was not accounted for
 Outdated or damaged inventory value was not reduced to its net realisable value.

(e) Inventory should be valued at the lower of cost and net realisable value in line with IAS2. First of all a
statement needs to be made to reconcile book value of inventory with the physical value. Once it is
reconciled then it should be valued as per the guidelines of IAS 2.

QUESTION 7 MAY 2018 P31 & P33 Q3 (a)

The auditors are appointed to act as an independent check on the reliability of the company’s accounting records.
The auditors are required to carry out their duties objectively.
 They should inquire of management and others to gain an understanding of the organization itself, its
operations, financial reporting, and known fraud or error
 They must ensure that the accounts comply with current accounting standards and the requirements of
Companies Acts.
 The auditors are required to report to shareholders as part of the annual report giving their judgment as to
whether or not the financial statements meet these criteria.
 The overriding requirement is that auditors must ensure the accounts present a true and fair picture of the
company’s financial affairs and that they are free from significant errors.
Chapter 10 141 Computerised Accounting

CHAPTER 10 COMPUTERISED ACCOUNTING

QUESTION 1 MAY 2016 P32 Q1 (e)
Recommend to the treasurer whether or not he should introduce a computerised accounting system. Justify your
answer analysing both benefits and limitations to the club. [9]

QUESTION 2 NOVEMBER 2017 P32 Q6 (d)

The directors are considering investing $60 000 in a new computer system to improve inventory control. According
to the payment terms, 50% is payable in March 2018 and the remaining 50% in the following month.

REQUIRED
Advise the directors whether or not they should purchase the new computer. Justify your answer. [5]

QUESTION 3 MAY 2018 P31 & P33 Q3 (e)

K Limited needs additional computer software. The directors are considering whether to buy the computer software
or acquire the right to use the new software for three years.
REQUIRED
Evaluate whether the directors should buy the computer software or acquire the right to use it for three years. Justify
your answer. [5]
Chapter 10 142 Computerised Accounting

SOLUTION CHAPTER 10
QUESTION 1 MAY 2016 P32 Q1 (e)
Computerised accounting has the advantage of automatically posting to both ledger accounts affected by a
transaction, and therefore should eliminate some types of error, including arithmetical ones. It helps to reduce
storage space as uses less paper.

However, there will still be the possibility of errors of omission and errors of original entry due to incorrect
data inputting. Computer system could crash which could lead to loss of information.

QUESTION 2 NOVEMBER 2017 P32 Q6 (d)

Business has a meager net cash balance of $8 500 at 31 March 2018. Half payment of $30 000 will result in cash
deficit in March. As new computer system is needed to improve inventory control so it may allow better
management of cash flows in future. But as in March cash position of the business is not very good so it would be
better to delay the purchase.
Another option could be to seek extended credit from the supplier or to find another supplier with more flexible
credit terms. Borrowing of loan could be an alternative but it would involve additional interest expense which would
affect profits and cash flows.

QUESTION 3 MAY 2018 P31 & P33 Q3 (e)

If company acquires the right to use a computer software for three years then it would be less costly compared to
buying the software so less cash outlay would be required.
Buying a computer software will increase non-current asset subject to amortisation expense over three years life
whereas acquiring the software will directly be charged to income statement as operating expense but with relatively
lower amount.
As technology is subject to rapid advancements so the computer software may get obsolete after three years so it
would be better to go to the cheaper option of acquiring the software licence.
Chapter 11 143 Ratio Analysis

CHAPTER 11 RATIO ANALYSIS

QUESTION 1 NOVEMBER 2011 P41 Q2
The following information is available for Phoenicia Ltd for the year ended 30 June 2011.
Inventories at 1 July 2010 $28 000
Inventories at 30 June 2011 $34 000
Rate of inventory turnover 8 times
Gross profit percentage 35%
Net profit percentage 12%
Income gearing 40%
Administrative expenses were twice as much as distribution costs.
The share capital consists of 250 000 ordinary shares of $0.50 nominal value. Dividends paid during the year were
$0.05 per share.
The directors are not required to implement the IAS regulations because Phoenicia Ltd is a private limited company.

REQUIRED
(a) Prepare an income statement & appropriation account, in as much detail as possible, for the year ended 30
June 2011. [20]
The directors of Phoenicia Ltd have decided to invest in either Algebra plc or Vector plc.
Financial information for these two companies is shown below:
For the year ended 30 June 2011 Algebra plc Vector plc
$000 $000
Profit from operations 100 200
Finance charges (40) (70)
Profit for the year 60 130
Preference dividend (8) (40)
Ordinary dividend (20) (10)
Retained profit for the year 32 80
At 30 June 2011 Algebra plc Vector plc
$000 $000
Non-current assets 850 Non-current assets 1 450
Net current assets 80 Net current assets 130
2020 8% Debentures 500 2016 10% Debentures 700
430 880
Ordinary shares of $1 100 Ordinary shares of $1 100
8% $1 Preference shares 100 8% $1 Preference shares 500
Retained profit 230 Retained profit 280
430 880
The market value of one ordinary share at 30 June 2011 in each company was:
Algebra plc $2.50
Vector plc $3.25
REQUIRED:
(b) For each company calculate the following ratios giving your answer to two decimal places.
(i) Gearing ratio
(ii) Earnings per share
(iii) Price earnings ratio
(iv) Dividend cover
(v) Dividend per share
(vi) Dividend yield [12]
(c) Based on these calculations advise the directors of Phoenicia Ltd whether they should invest in either
Algebra plc or Vector plc. Give reasons for your decision. [8]
Chapter 11 144 Ratio Analysis

QUESTION 2 NOVEMBER 2011 P43 Q1(b & c)

An extract from Ashburton Ltd’s income statement (profit and loss account) for the year ended 30 June 2011 is shown
below:
$
Revenue 385 746
Cost of sales 246 328
Gross profit 139 418
Expenses 101 925
Operating profit 37 493
Taxation 9 276
Profit after taxation 28 217
Dividend paid 10 000
Retained profit for the year 18 217
Ordinary shares (200 000 + 100 000) shares @ 1 (100 000 shares issued in current year) 215 000
8% Debentures 37 500
Following the acquisition of the partnership Ashburton Ltd anticipate that:
1 the revenue will increase by 60%
2 cost of sales will increase by 40%
3 expenses will increase by 35%.
4 There will be no change in ordinary dividend rate from the last year.
The projected taxation liability will be $33 500 and the dividend per share will remain unchanged.

REQUIRED
(b) Prepare a forecast income statement (profit and loss account) for Ashburton Ltd for the year ending 30 June
2012. [12]
(c) Calculate the earnings per share for the year ended 30 June 2011 and the forecast earnings per share for
the year ending 30 June 2012. [6]

QUESTION 3 NOVEMBER 2011 P43 Q2 (c & d)

Sabrina plc has been trading for many years as a worldwide supplier of office equipment. The summarised accounts
prepared for internal purposes for 2011 and 2010 are set out below.
Sabrina plc
Income Statement for the year ended 30 June
2011 2010
$000 $000
Revenue 2 546 1 458
Cost of sales 981 512
Gross profit 1 565 946
Depreciation 786 384
Other expenses 108 84
Profit on disposal of non-current assets 15 8
Operating profit 686 486
Interest 225 80
461 406
Taxation 103 94
Profit after taxation 358 312
Dividends 160 80
Retained profit for year 198 232
Retained profit b/f 821 589
Retained profit c/f 1 019 821
Chapter 11 145 Ratio Analysis

Statement of Financial Position (Balance Sheet) at 30 June

2011 2010
$000 $000
Non-current assets 5 214 2 576
Current assets
Inventories 441 227
Trade receivables 639 361
Bank – 78
1 080 666
Current liabilities
Trade payables 347 287
Dividends 80 40
Taxation 103 94
Bank 195 –
725 421
Working capital 355 245
Non-current liabilities
8% Debentures (2020) 2 500 1 000
3 069 1 821
Capital and reserves $000 $000
Ordinary share capital 2 000 1 000
Share premium 50 –
Retained earnings 1 019 821
3 069 1 821
The directors are concerned about the bank overdraft and are seeking a bank loan. The bank asks for some financial
information.

REQUIRED
(c) Calculate the following ratios for both years, 2011 and 2010.
(i) Return on equity
(ii) Trade receivables collection period (turnover) (in days)
(iii) Trade payables payment period (turnover) (in days)
(iv) Income gearing
(v) Gearing ratio. [10]

(d) Based on these ratios, state whether the bank is likely to give a loan to Sabrina plc. Give three reasons for
your answer. [4]
QUESTION 4 NOVEMBER 2012 P41 Q2
Exa Emsig plc provides the following information
Statements of financial position at 31 March 2012 31 March 2011
Non-current assets $000 $000 $000 $000 $000 $000
Intangible
Goodwill 148 58
Tangible
Property 900 550
Plant 248 250
Equipment 950 2 246 517 1 375
Current assets
Inventory 620 224
Trade receivables 230 186
Cash and cash equivalents 127 58
977 468
Chapter 11 146 Ratio Analysis

Current liabilities $000 $000 $000 $000 $000 $000

Trade payables 298 235
Taxation 46 344 633 36 271 197
2 879 1 572
Non-current liabilities
10% debentures 310 –
2 569 1 572
Equity
Ordinary shares of $0.50 each 1 200 800
6% preference shares of $1 each 300 300
Share premium 400 200
Revaluation reserve 350 –
Profit and loss 319 2 569 272 1 572

Additional information:
For the year ended 31 March 2012 31 March 2011
$000 $000
Finance costs for the year excluding debenture interest 16 20
Taxation provided 46 36
Profit for the year attributable to equity holders ? 99
Total dividends paid 140 98
Ordinary dividends paid 122 80
1 The company had undertaken a major expansion during the year.
2 The debentures were issued on 30 September 2011.
3 No new shares had been issued during the year ended 31 March 2011. However a new share issue took
place on 30 June 2011.
4 Only one ordinary dividend was declared in the year ended 31 March 2012. All the new shares were eligible
for dividend.
5 Property was re-valued on 1 April 2011.
REQUIRED
(a) Calculate for the year ended 31 March 2012:
(i) the profit for the year attributable to equity holders; [2]
(ii) the profit from operations. [3]
(b) Prepare a statement of recognised income and expenses for the year ended31 March 2012, providing
comparative figures for the preceding year. [6]
(c) Explain why the goodwill has increased. [4]
(d) Calculate the following for both years, to two decimal places:
(i) income gearing; [6]
(ii) gearing ratio. [6]
For the year ended 31 March 2011 earnings per share were $0.0506 and the dividend per share was $0.05.
REQUIRED
(e) Calculate for the year ended 31 March 2012:
(i) earnings per share; [4]
(ii) dividend per share. [3]
(f) Comment on the performance of the company over the year from the viewpoint of:
(iii) a debenture holder; [3]
(iv) an ordinary shareholder. [3]
QUESTION 5 NOVEMBER 2012 P42 Q1
The final accounts for Abercrombie plc for the year ended 30 April 2012 had been prepared. Due to a fire it is now
necessary to prepare them again from limited information.
The accountant provides you with the following details:
Chapter 11 147 Ratio Analysis

Rate of inventory turnover 10 times

Gross profit ratio 35%
Net profit ratio 15%
Income gearing 12.5%
The administrative expenses for the year were twice as much as the distribution costs.
The taxation charge for the year was equal to half of the interest charge.
The inventories at 30 April 2012 were valued at $81 250 which was 25% higher than the inventories valuation at 1
May 2011.
REQUIRED
(a) Prepare the income statement for the year ended 30 April 2012. [18]

Additional information
1 The non-current asset turnover was 2.
2 The current ratio was 1.9:1.
3 Current assets also included the bank balance and the only current liability was trade payables.
4 Trade receivables turnover was 34 days. All sales were on credit.
5 Trade payables turnover was 59 days. All purchases were on credit.
6 Interest was paid on a 10% debenture redeemable in 2020.
7 No interim dividends were paid but a final dividend of $0.05 per share was proposed.
8 The total proposed dividend was $10 000, ordinary shares are $1 nominal value and there was no share
premium.
9 The balance on the retained earnings account at 1 May 2011 was $23 756 credit.
10 There was a revaluation reserve which was the balancing figure.

REQUIRED
(b) Prepare the statement of financial position at 30 April 2012. [20]
(c) State how a proposed final dividend should be dealt with in the accounts. [2]

QUESTION 6 NOVEMBER 2012 P43 Q2 (c)

Hyung Ltd has the following statements of financial position
At 31 March 2012 At 31 March 2011
$000 $000 $000 $000
Non-Current Assets (Note 1) 1 700 1 260
Current Assets
Inventories 108 82
Trade receivables 90 72
Cash and cash equivalents – 174
198 328
Current Liabilities
Trade payables 52 108
Cash and cash equivalents 41 –
93 105 108 220
Total assets less current liabilities 1 805 1 480
Non-Current Liabilities
8% Debentures 2010-2020 120 200
1 685 1 280
Equity And Reserves
Ordinary shares of $1 fully paid 1 400 1 000
Share premium 70 50
General reserve 200 200
Retained profits 15 1 685 30 1 280
Chapter 11 148 Ratio Analysis

REQUIRED
Assess the liquidity and profitability of Hyung Ltd at 31 March 2012. [8]

QUESTION 7 MAY 2013 P43 Q2 (d & e)

Winston is a sole trader. He provides the following financial information in respect of his business.

Winston has been given $250 000 in cash by his uncle. He is considering investing the money and has two options:
1 To invest the money in a bank deposit account which currently pays interest at 3% per annum.
2 To purchase shares in either company A or company B.
He has calculated the following ratios for company B:
Gearing 40%
Interest cover 2 times
Dividend yield 5%
He has obtained the following financial information regarding company A:
Share capital 1 million ordinary shares of $1 each
Total equity $2 625 000
10% debenture $500 000
Profit for the year before tax $200 000
Dividends for the year $150 000
Current market price of the share $4.00
REQUIRED
(d) Calculate the same ratios for company A from the information provided. [9]
(e) Advise Winston how he should invest the $250 000. [6]

QUESTION 8 NOVEMBER 2013 P43 Q3 (c & d)

Riffatulah, a retailer provides the following budgeted information for the year ending 31 May 2014.

Budgeted income statement for the year ending 31 May 2014

$ $
Revenue [(4 200 × $3.10) + (4 800 × $3.20)+ (4 600 × $3.40)+ (4 500 × $3.30)] 58 870
Cost of Sales
Opening inventory 4 800
Purchases [(4 700 × $1.20)+(4 600×$1.30)+(4 500×$1.30)+(4 500×1.40)] 23 770
28 570
Closing inventory (5 100) 23 470
Gross profit 35 400
Budgeted statement of financial position at 31 May 2014
Current Assets $ $ $
Inventory 5 100
Trade receivables (W 1) 9 304
Other receivables - insurance ($2 000 × 3/12) 500 14 904
Current liabilities
Trade payables (W 2) 8 932
Other payables - interest ($480  $240) 240
Cash and cash equivalents ($6 600 + payments  receipts) 5 340 14 512
Working Capital 392

REQUIRED
(c) Using only figures from your answers to (a) and (b), calculate Riffatulah’s working capital cycle. [7]
(d) Suggest three ways Riffatulah could improve his working capital cycle and reduce his bank overdraft. [3]
Chapter 11 149 Ratio Analysis

QUESTION 9 NOVEMBER 2014 P41 Q2

The directors of Wotknot Limited provided the following information.
Equity and liabilities (balances) at 1 May 2013
$
Share capital, 200 000 ordinary shares of $0.50 each 100 000
General reserves 40 000
Retained earnings (40 000)
10% debentures 50 000
At 30 April 2014 inventory was valued at $80 000. This was 100% more than the inventory valuation at 30 April 2013.
The following information is available for the year ended 30 April 2014.
Inventory turnover 10 times
Gross profit margin 40%
Operating expenses to sales ratio 21%
Administrative expenses $140 000
Transfer to general reserves $20 000
Dividends paid $0.08 per share
Non-current asset turnover 0.2 times
Trade receivables turnover 40 days
Trade payables turnover 35 days
The only current assets were inventory and trade receivables. All sales and purchases were on a credit basis.
REQUIRED
(a) Prepare, in as much detail as possible, the income statement for the year ended 30 April 2014. [10]
(b) Prepare the statement of changes in equity for the year ended 30 April 2014. [5]
(c) Prepare, in as much detail as possible, the statement of financial position at 30 April 2014. [12]
Additional information
The following information is available for Siri Limited, a similar business, for the year ended 30 April 2014.
Inventory turnover 15 times
Gross profit margin 45%
Operating profit margin 15%
Current ratio 2:1
Trade receivables turnover 35 days
Trade payables turnover 28 days
Dividend yield 12%
Gearing 60%
(The market value of Wotknot Limited’s shares at 30 April 2014 was $1.60)
REQUIRED
(d) Compare the performance of Wotknot Ltd with Siri Limited for the year ended 30 April 2014. [13]
QUESTION 10 MAY 2015 P43 Q2 (d & e)
Chandra is considering investing in ordinary shares. He has obtained the summarised financial statements of two
companies, Richards Limited and Sobers Limited.
The following data is available.
Income Statements Richards Limited ($) Sobers Limited ($)
Gross profit 85 000 65 000
Profit from operations 66 000 48 000
Finance charges (6 000) (8 000)
Profit before tax 60 000 40 000
Tax (30 000) (20 000)
Profit after tax 30 000 20 000
Chapter 11 150 Ratio Analysis

Statements of Financial Position

Total assets 500 000 400 000
Equity
$1 ordinary shares 150 000 100 000
Share premium 15 000 20 000
Retained earnings 105 000 85 000
270 000 205 000
Non-Current Liabilities
8% debentures (2022) 75 000 100 000
Current Liabilities 155 000 95 000
Total equity and liabilities 500 000 400 000

Both companies have non-current assets equal in value to their current assets.
The market value of an ordinary share in Richards Limited is $1.80.
The market value of an ordinary share in Sobers Limited is $2.40.
Neither company has paid any dividends during the year.
Richards Limited proposes a final dividend of $0.06 per ordinary share and Sobers Limited $0.09 per ordinary share.

REQUIRED
(d) Calculate the following ratios for both companies.
(i) Current ratio
(ii) Return on capital employed
(iii) Gearing ratio
(iv) Income gearing
(v) Earnings per share
(vi) Price earnings ratio
(vii) Dividend yield. [14]

(e) Advise Chandra which company he should invest in. Base your answer on your calculations for the return
on capital employed, gearing ratio and income gearing only. [6]

QUESTION 11 SPECIMEN 2016 P3 Q4

Five friends each have $20 000 to invest and are considering whether to invest in ABC plc or
DEF plc. The following information is available from the latest financial statements of ABC plc.
Summarised income statement
$
Revenue 4 700 000
Cost of sales 2 115 000
Gross profit 2 585 000
Expenses 1 645 000
Profit from operations 940 000
Debenture interest 50 000
Profit for the year 890 000
Summarised statement of financial position
$ $
Non-current assets 2 100 000
Current assets
Inventory 880 000
Trade receivables 480 000
Cash and cash equivalents 10 000 1 370 000
Total assets 3 470 000
Chapter 11 151 Ratio Analysis

1 000 000 ordinary shares of $1 each 1 000 000

Share premium 400 000
Revaluation reserve 800 000
Retained earnings 450 000 2 650 000
Non-current liabilities – debentures 500 000
Current liabilities – trade payables 320 000
3 470 000
Other information about ABC plc is as follows:
1 The dividends paid in the year amounted to $440 000.
2 All sales and purchases are made on credit.
3 The value of inventory has remained stable over several years.
4 The market value of one share is $5.60.
The following information is also available about DEF plc.
Earnings per share $0.57
Dividend per share $0.48
Gearing ratio 43.4%
Income gearing 17.7%
Trade payables payment period 97 days
Price earnings ratio 7.18
Dividend cover 1.19 times
Dividend yield 11.7%
Par value of one share $1
The five friends all have different criteria for their investment decision.
Jazgul is an ethical investor and is concerned that suppliers get their money in good time.
Jackson needs a good cash flow and seeks a high return in terms of cash in the short term.
Khan seeks capital growth.
Madge wishes to be confident in a company’s ability to maintain earnings in the future.
Bernard is risk averse and wants to invest in a company which is on a sound financial footing.

REQUIRED
(a) Identify and calculate for each potential investor the ratio for ABC plc which would particularly interest him
or her. [10]
(b) Explain what the ratio you have calculated for each investor shows the investor. [10]
(c) Decide which is the most suitable investment for each investor. [5]

QUESTION 12 MAY 2016 P31 Q3(d)

The Return on Capital Employed (ROCE) of the company was 9.81%. This was lower than the industry average and
the directors wished to find a way to increase it.
Some of the machinery was 10 years old at the start of January 2016 and it had become unreliable and unproductive.
The marketing director suggested that it should be scrapped and replaced at a cost of $120 000, to be financed by
the issue of 8% debentures. This would increase production. Annual sales and costs would be as follows:

$
Revenue 62 000
Prime costs 39 000
Selling and distribution costs 3 000
He calculated that the return from the new machinery would be 62 000 / 120 000 or 51.67%, which, being higher
than the existing 9.81%, would cause the Return on Capital Employed (ROCE) to increase.
REQUIRED
Evaluate the marketing director’s proposal. Support your answer with calculations. [8]
Chapter 11 152 Ratio Analysis

QUESTION 13 MAY 2016 P31 Q4

Winter bottom plc and Ramsey plc are two similar trading companies which have been successfully trading for many
years. Their financial statements prepared for internal purposes are shown below:
Income statements for the year ended 30 June 2015
Winterbottom Ramsey
$000 $000
Revenue 6 279 4 527
Cost of sales (2 075) (1 254)
Gross profit 4 204 3 273
Depreciation (1 285) (720)
Other expenses (1 227) (992)
Profit on disposal of non-current assets 28 15
Profit from operations 1 720 1 576
Finance charges (300) (180)
Profit before taxation 1 420 1 396
Taxation (317) (312)
Retained profit for the year 1 103 1 084
Statements of financial positions at 30 June 2015
Winter bottom Ramsey
Assets $000 $000
Non-current assets 9 864 6 192
Current assets
Inventories 782 451
Trade receivables 1 362 742
Cash and cash equivalents 135 98
2 279 1 291
Total assets 12 143 7 483
Equity and liabilities
Equity
Ordinary share capital ($1 each) 4 500 2 500
Share premium 200 –
Retained earnings 1 447 1 244
6 147 3 744
Current liabilities
Trade payables 679 427
Taxation 317 312
996 739
Non-current liabilities
6% Debentures (2024) 5 000 3 000
Total equity and liabilities 12 143 7 483
Additional information
1 Neither company has paid an interim dividend during the year ended 30 June 2015.
2 The directors of Winterbottom plc propose a dividend of $0.20 per share and those of Ramsey plc $0.35 per
share for the year ended 30 June 2015.
3 At 30 June 2015, the market value of an ordinary share in Winterbottom plc is $3.50 and in Ramsey plc
$2.75.
REQUIRED
(a) Calculate the following ratios for both companies to two decimal places.
(i) Income gearing
(ii) Earnings per share
Chapter 11 153 Ratio Analysis

(iii) Price earnings ratio

(iv) Dividend yield
(v) Dividend cover [10]
Additional information
Alfredo is considering investing in one of the companies but is uncertain which will offer the best return.
Recent industry averages were as follows:
Income gearing 20.25%
Earnings per share $0.33
Price earnings ratio 12.50
Dividend yield 10.45%
Dividend cover 1.20 times
REQUIRED
(b) Analyse the performance of both companies compared to the industry averages. [10]
(c) Advise Alfredo which company he should invest in. Justify your answer. [5]

QUESTION 14 MAY 2016 P32 Q4

The directors of Corim plc are using accounting ratios to analyse the performance of the company.

REQUIRED
(a) Explain two benefits of using accounting ratios. [4]

Additional information
All sales and purchases of Corim plc are on credit.
The following are the income statement and statement of financial position for Corim plc.
Income Statement
For the year ended 31 December 2015
$
Revenue 843 000
Cost of sales (425 800)
Gross profit 417 200
Operating expenses (321 000)
Profit from operations 96 200
Finance costs (66 000)
Profit for the year 30 200
Statement of Financial Position
As at 31 December 2015
Assets $
Non-current assets
Plant and equipment 884 000
Current assets
Inventory 88 800
Trade receivables 132 400
Cash and cash equivalents 14 800
236 000
Total assets 1 120 000
Equity and liabilities
Equity
Ordinary share capital (of $2 each) 400 000
Retained earnings 77 000
Total equity 477 000
Chapter 11 154 Ratio Analysis

Non-current liabilities $
12% loan 550 000
Current liabilities
Trade payables 93 000
Total equity and liabilities 1 120 000
Additional information
1 Inventory at 1 January 2015 was $76 000.
2 The market price of one ordinary share at 31 December 2015 was $2.60.
REQUIRED
(b) Calculate the following ratios for Corim plc:
(i) return on capital employed
(ii) gearing
(iii) income gearing
(iv) working capital cycle (in days)
(v) price earnings.
Calculation should be to two decimal places where appropriate. [14]
Additional information
Takie plc is the major competitor of Corim plc. Takie plc’s capital employed was $1 025 000 at 31 December 2015
including a 8% loan of $100 000.
Some of its comparative ratios are:
Return on capital employed 9.32%
Gearing 9.76%
Income gearing 8.38%
REQUIRED
(c) Compare each company’s gearing and income gearing ratios. [4]

Additional information
Chen has surplus fund and is considering whether or not to invest in the shares of either Takie plc or Corim plc.
REQUIRED
(d) Identify which company Chen should invest in. Justify your answer. [3]

QUESTION 15 NOVEMBER 2016 P31 Q3

Alpha plc and Beta plc both operate in the same industry. Both have the same annual sales revenue. Neither have
any preference shares in issue.
The following additional information is provided:
Alpha plc Beta plc
Profit for the year $160 000 $100 000
Profit margin ? 10%
Finance charges $16 000 ?
Profit from operations ? ?
Income gearing ? 20%
Number of ordinary shares 400 000 ?
Earnings per share ? $0.20
Price earnings ratio ? 4.2
Market value of one share $1.20 $0.84
Dividend per share $0.07 ?
Dividend yield ? 7.14%
Total dividend paid ? ?
Dividend cover ? ?
Chapter 11 155 Ratio Analysis

REQUIRED
(a) Calculate for Alpha plc:
(i) Profit margin
(ii) Income gearing
(iii) Earnings per share
(iv) Price earnings ratio
(v) Dividend yield
(vi) Total dividend paid
(vii) Dividend cover
Clearly label each answer and show your workings. [14]
(b) Suggest one reason for the difference between the two companies for each of the following:
(i) Profit margin
(ii) Income gearing
(iii) Earnings per share
(iv) Price earnings ratio
(v) Dividend yield
(vi) Market value of one share [6]
Additional information
Amit is considering purchasing shares in either Alpha plc or Beta plc.
REQUIRED
(c) Suggest, with reasons, in which company Amit should invest. [5]
QUESTION 16 MAY 2017 P31 & P33 Q4
James has recently retired and received some cash which he wishes to invest in a company.
There are two options. He could invest in either LM plc or AB plc.
The summarised information for the two companies extracted from their financial statements at 31 March 2017 is
as follows:
LM plc AB plc
$ $
Ordinary share capital 300 000 500 000
4% non-redeemable preference shares of $1 each 100 000 150 000
Retained earnings 1 April 2016 50 000 125 000
10% debentures (2025) 150 000 50 000
Profit for the year 125 000 175 000
The nominal value of the ordinary shares of LM plc is $0.50 and of AB plc $1.
The market price of the ordinary shares at 31 March 2016 of both companies was $2.
At 31 March 2017, this had fallen by 10% for LM plc but increased by 10% for AB plc.
Both companies paid a dividend per share of $0.10 for the year ended 31 March 2017.
REQUIRED
(a) Calculate the following ratios for both companies. Give your answers to two decimal places.
(i) Earnings per share
(ii) Price earnings
(iii) Dividend yield
(iv) Dividend cover [4]
(b) Evaluate the performance of each company using each of the ratios calculated in part (a). [8]
Additional information
The industry average gearing ratio is 25%.
REQUIRED
(c) (i) Explain what you understand by gearing. [2]
(ii) Calculate the gearing ratio for both companies to two decimal places. [2]
(iii) Analyse the gearing ratios of LM plc and AB plc. [5]
Chapter 11 156 Ratio Analysis

(d) Advise James which company he should invest in. Give reasons for your answer. [4]

QUESTION 17 MAY 2017 P32 Q2

The summarised statement of financial position of M plc at 31 December 2016 was as follows:
$000
Non-current assets 4 220
Net current assets 2 080
6 300
Share capital and reserves
Ordinary shares of $5 each 5 000
Share premium 500
Retained earnings 800
6 300
Retained earnings for the year ended 31 December 2016 were $160 000, after the payment of dividends which
represented 60% of the profit for the year.
The market price of one ordinary share was $6.40 on 31 December 2016.

REQUIRED
(a) Calculate to two decimal places the following ratios at 31 December 2016:
(i) Return on capital employed
(ii) Earnings per share
(iii) Price earnings ratio
(iv) Dividend cover
(v) Dividend yield [8]
Additional information
It is estimated that the profit for the year ending 31 December 2017 will be same as 2016. The capital employed will
also remain unchanged.
On 1 January 2017, M plc has the opportunity to invest $1 200 000 in a project which will bring an additional annual
profit of $185 000. The directors are considering an issue of ordinary shares at a premium of 20% to finance this
project. The rate of dividend paid is expected to remain at 60% of the profit for the year.
REQUIRED
(b) Prepare a statement to show the forecast share capital and reserves at 31 December 2017. [6]
(c) Calculate to two decimal places the following expected ratios for the year ending 31 December 2017:
(i) Return on capital employed
(ii) Earnings per share [6]
(d) Advise the directors whether or not M plc should invest in the project. Justify your answer. [5]
QUESTION 18 NOVEMBER 2017 P31 Q3
The following information has been extracted from the books of account of M plc at 31 December 2016:
$
Profit for the year 550 000
Ordinary shares ($1) 900 000
6% Preference shares (non-redeemable) 200 000
5% Debentures (2025) 100 000

The market price of one ordinary share at 31 December 2016 was $1.75.
Dividends of $0.08 per ordinary share have been paid during the year ended 31 December 2016.
REQUIRED
(a) State two advantages of ratio analysis to a user of the financial statements. [2]
(b) Calculate the following ratios at 31 December 2016 to two decimal places:
(i) earnings per share
Chapter 11 157 Ratio Analysis

(ii) price earnings ratio

(iii) dividend yield
(iv) dividend cover. [5]

Additional information
For the year ended 31 December 2016:
1 The profit for the year was 10% greater than the previous year.
2 There had been a share issue of 300 000 ordinary shares.
3 The dividend per share had fallen by 20%.
REQUIRED
(c) Calculate the same four ratios as in part (b) at 31 December 2015 to two decimal places.
The market price of one ordinary share at 31 December 2015 was $1.50. [4]
Additional information
An investor, Bevin, is considering acquiring ordinary shares in M plc. He has been advised that the directors intend
to raise extra funds by issuing a further 5% debenture (repayable 2027).
REQUIRED
(d) (i) Analyse the performance of M plc over the two years 2015 and 2016 using the ratios calculated in
parts (b) and (c). [8]
(ii) Advise Bevin whether or not he should make the intended investment. Justify your answer. [6]

QUESTION 19 NOVEMBER 2017 P32 Q4

Summarised financial information for E Limited for the year ended 31 August 2016 is as follows:
Summarised Income Statement
$000
Revenue 8 800
Cost of sales 5 045
Gross profit 3 755
Expenses 2 175
Profit from operations 1 580
Finance costs 235
Profit for the year 1 345

Summarised Statement of Financial Position

Assets $000
Non-current assets 4 815
Current assets 3 210
Total assets 8 025

3 000 000 ordinary shares of $0.50 each 1 500

Share premium 500
Retained earnings 2 540
4 540

Non-current liabilities – 8% debentures repayable 2020 2 935

Current liabilities – trade payables 550
8 025

Additional information
1 The market value of one ordinary share at 31 August 2016 was $1.55.
2 Dividends paid for the year ended 31 August 2016 were $325 000.
Chapter 11 158 Ratio Analysis

REQUIRED
(a) Calculate the following ratios to two decimal places:
(i) income gearing
(ii) gearing
(iii) dividend cover
(iv) price earnings [5]

Additional information
The directors of E Limited had expansion plans and on 1 September 2016 raised $2 000 000 by issuing 10%
debentures repayable in 2026. The profit from operations for the year ended 31 August 2017 was $1 600 000 and
the market price of one ordinary share on that date was $1.30. Dividends paid for the year were $275 000.
REQUIRED
(b) (i) Prepare an extract from the income statement for the year ended 31 August 2017, starting with
the profit from operations. [2]
(ii) Prepare the equity and non-current liabilities section of statement of financial position at 31
August 2017. [2]
(c) (i) Calculate the same ratios as in part (a) at 31 August 2017 to two decimal places. [4]
(ii) Assess the effect of the new debenture issue on these ratios. [8]
(d) Discuss two disadvantages to the company of the issue of the debentures. [4]

QUESTION 20 MAY 2018 P32 Q1

YGP Traders Limited has been trading for several years and has a year end of 31 December. It buys and sells a single
product and makes all its transactions on a credit basis. It has a large bank overdraft and the directors are concerned
about the working capital position of the business.
The following information is available for 2017:
1 Every month 1 000 units were sold at a selling price of $80 each.
2 Payment for half of all credit sales was received in the month following sale. The other half was
received two months after sale.
3 The company purchased 14 000 units during the year.
4 The purchase price has been $50 per unit for some years.
5 At 31 December, 3 500 units were in inventory.
6 Trade payables at the end of the year amounted to $62 000.
REQUIRED
(a) Calculate for 2017:
(i) revenue for the year [1]
(ii) cost of sales for the year [1]
(iii) trade receivables at the year end [1]
(iv) average inventory at cost price [3]
(b) State what is measured by the working capital cycle. [2]
(c) Calculate the working capital cycle for the year. [7]

Additional information
The directors of the business are considering a new strategy of increasing the selling price to $90 per unit and offering
10% cash discount for payment in the month following sale. The directors believe that demand will be unchanged
and that all customers will take the discount offered.
(d) Calculate a revised working capital cycle for 2017 if this strategy had been implemented from the start of
the year. [5]
(e) Advise the directors whether or not they should proceed with this strategy. Justify your answer. [5]
Chapter 11 159 Ratio Analysis

SOLUTION CHAPTER 11
QUESTION 1 NOVEMBER 2011 P41 Q2
(a) Phoenicia Ltd
Income Statement for the year ended 30 June 2011
$ $
Revenue ($248 000 ÷ 65%) 381 538
Cost of sales
Opening inventories 28 000
Purchases [$248 000 + ($34 000 − $28 000)] 254 000
282 000
Closing inventories (34 000)
Cost of sales ($31 000 × 8) 248 000
Gross profit ($381 538 × 35%) 133 538
Administrative expenses [($133 538 − $45 785) × 2/3] (58 502)
Distribution costs [($133 538 − $45 785) × 1/3] (29 251)
Operating profit ($381 538 × 12%) 45 785
Finance charges ($45 785 × 40%) (18 314)
Profit for the year 27 471
Ordinary dividends (250 000 shares @ $0.05) (12 500)
Retained profit for the year 14 971
(b)
(i) Gearing Algebra Vector
Fixed cost capital $600 000 $1 200 000
× 100 ×100= 64.52% ×100= 75.9%
Shareholders equity+Fixed cost capital $930 000 $1 580 000
(ii) Earnings per share
Profit after tax and preference dividends $60 000−$8 000 130 000−40 000
= $0.52 =$0.90
Total number of ordinary shares 100 000 shares 100 000 shares

(iii) Price/Earnings ratio

Market price per share $2.50 $3.25
= 4.81 times = 3.61 times
Earnings per share $0.52 $0.90
(iv) Dividend cover
Profit after tax and preference dividends $60 000−$8 000 130 000−40 000
=2.6 times =9 times
Ordinary dividend $20 000 $10 000

(v) Dividend per share

Total Ordinary dividends $20 000 $10 000
= $0.20 =$0.10
Total number of ordinary shares 100 000 shares 100 000 shares
(vi) Dividend yield
Dividend per share $0.20 $0.10
× 100 × 100 = 8.00% × 100 = 3.08%
Market price per share $2.50 $3.25

(c) Both companies especially Vector are highly geared companies and look as risky investment as more finance
charges will have to be paid before paying ordinary dividends.

Vector’s earnings per share is better than Algebra which may raise company’s ability to pay dividends at
higher rate or to retain reasonable amounts as reserves. This may also result in increase in value of shares
of Vector.
Price earnings ratio of Algebra is better than Vector. This would suggest that investors are more confident
in its ability to sustain its performance in future.
Chapter 11 160 Ratio Analysis

Higher Dividend cover of Vector indicates that Vector could probably maintain dividends at current or even
higher rates in the future
Dividend per share of Vector is half compared to Algebra. This also results in lower dividend yield and higher
dividend cover for Vector as calculated above.
Dividend yield Dividend yield of Vector is less than half compared to Algebra. This shows better returns for
ordinary shareholders on their investment in Algebra.
Overall, both businesses are showing mixed performances.

QUESTION 2 NOVEMBER 2011 P43 Q1(b & c)

(a) Ashburton Ltd
Statement of financial position after acquisition of the partnership
Non-current assets $ $
Goodwill (W 1) 26 950
Land & buildings ($125 000 + $115 000) 240 000
Fixtures & fittings ($67 750 + $32 000) 99 750
Motor vehicles ($24 975 + $15 000) 39 975 406 675
Current assets
Inventories ($22 875 + $22 000) 44 875
Trade receivables ($14 363 + $13 500) 27 863
Bank [$28 462 – $27 500 (W 2)] 962 73 700
Total assets 480 375
Shareholders’ Equity
Ordinary shares of $1 [$200 000 + (100 000 × $1)] 300 000
Share premium [$20 000 + ($100 000 × 0.5)] 70 000
Retained profit 48 795 418 795
Non-current liabilities
8% debentures 2020 (W 2) 37 500
Current liabilities
Trade payables ($14 630 + $9 450) 24 080
Total liabilities and equity 480 375
(b) Ashburton Ltd
Income statement for the year ended 30 June 2012
$
Turnover ($385 746 × 160%) 617 194
Cost of sales ($246 328 × 140%) 344 859
Gross profit 272 335
Expenses ($101 925 × 135%) 137 599
Operating profit 134 736
Interest payable ($37 500 × 8%) 3 000
Profit before taxation 131 736
Taxation 33 500
Profit after taxation 98 236
$10 000 ×300 000
Dividend paid ( ) 15 000
200 000
Retained profit for the year 83 236

Profit after Tax and Preference Dividends

(c) Earnings per share =
Total number of issued ordinary shares
$28 217
2011 = 200 000
= 14.11 ₵
$83 236
2012 =
300 000
Chapter 11 161 Ratio Analysis

= 32.74 ₵

QUESTION 3 NOVEMBER 2011 P43 Q2 (c & d)

(c) 2011 2010
Return on equity Profits attributable to equity shareholders $358 000 $312 000
×100 ×100 ×100
Shareholders equity $3 069 000 $1 821 000
11.7% 17.1%
Receivables turnover Trade receivables $639 000 $361 000
× 365 days ×365 ×365
Credit Sales $2 546 000 $1 458 000
91.6 days 90.4 days
Payables turnover Trade payables $347 000 $287 000
× 365 days × 365 × 365
Credit Purchases $981 000 $512 000
129.1 days 204.6 days
Income gearing Fixed interest charges $225 000 $80 000
×100 ×100 ×100
Operating profits $686 000 $486 000
32.8% 16.5%
Gearing ratio Fixed cost capital $2 500 000 $1 000 000
× 100 ×100 ×100
Shareholders equity+ Fixed cost capital $5 569 000 $2 821 000
44.9% 35.4%
(d) The bank should not authorise the loan as we can see that over the period all of the ratios have
worsened.
(i) Company’s return on equity has deteriorated which shows decrease in earning power of the equity
invested.
(ii) Trade receivables’ collection period is slightly worsened which means that cash is slower coming in
from its customers.
(iii) Company’s payables' turnover shows that either it has been given longer credit period to pay its
debts and enjoys more time to make use of that amount. On the other hand delayed payments
may result in loss of its credit facilities in future.
(iv) Gearing level has increased which shows more dependence of the business on external borrowings
and reveal more risk for the business.
(v) Increased gearing level also worsened income gearing as it is almost half of the last year. If this
trend continues company may not be able to serve its interest payment in future.
QUESTION 4 NOVEMBER 2012 P41 Q2
(a) (i) Calculation of profit for the year attributable to equity holders
Profit attributable to Total dividends Retained
Retained profits b/f +  =
equity holders paid profits c/f
Profit attributable to
$272 000 +  $140 000 = $319 000
equity holders
Profit attributable to
= $187 000
equity holders
(ii) Calculation of profit from operations
$000 $000
Operating profit (balancing figure) 264.5
Finance costs for the year excluding debenture interest (16.0)
Interest on debentures ($310 000 × 10% × 6/12) (15.5) (31.5)
Taxation provided (46.0)
Profit for the year attributable to equity holders 187.0
(b) Statement of Recognised income and expenses for the year ended 31March 2012
2012 2011
$000 $000
Chapter 11 162 Ratio Analysis

Revaluation surplus 350 –

Profit for the year 187 99
(c) Under International Financial Reporting Standards only purchased goodwill can be shown in the financial
statements. The increase in the value of goodwill therefore represents goodwill arising on purchase of
another business.

(d) 2012 2011

Income Interest Expense $16 000+$15 500 $20 000
× 100 × 100 × 100
gearing Operating Profit $264500 $(99+36+20)000
11.91% 12.9%

Fixed Cost Capital $310 000+$300 000 $300 000

Gearing × 100 × 100 × 100
Total Capital $2 879 000 $1 572 000
21.19% 19.08%

Profit after tax & 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 $187 000 −$18 000
(e) (i) Earnings per share
Number of issued ordinary shares 1600000+(800000×9÷12)
$ 0.0768 per share

Total Dividends paid $122 000

(ii) Dividends per share
Number of issued ordinary share 2 400 000 shares
= $0.0508 per share

(f) (i) Gearing has though increased from 19.08% to 21.19% in 2012 but Exa Emsig plc is still low geared
firm. This indicates a relative safe investment.
On the other hand, the income gearing has decreased slightly which indicates increase in profits at
a higher rate than interest. This indicates increase in company’s ability to pay debenture interest
from its operating profits.

(ii) As company is low geared so it is a safe investment for the ordinary shareholders as most of the
capital has been contributed by the equity holders. Low income gearing also ensures the better
ability of company to make consistent dividend payments.

QUESTION 5 NOVEMBER 2012 P42 Q1

(a) Abercrombie plc
Income statement
For the year ended 30 April 2012
$ $
Revenue (W 2) 1 125 000
Cost of sales
$81 250 ×100
Opening inventories ( ) 65 000
125
Ordinary goods purchased ($731 250 + $81 250 – $65 000) 747 500
Closing inventories (81 250)
Cost of sales (W 1) (731 250)
Gross profit 393 750
Distribution costs [($393 750  $168 750) × 1/3] 75 000
Administrative expenses [($393 750  $168 750) × 2/3] 150 000 (225 000)
Operating Profit ($1 125 000 × 15%) 168 750
Interest (W 3) (21 094)
Profit before tax 147 656
Taxation ($21 094× 50%) (10 547)
Retained earnings for the year 137 109
Chapter 11 163 Ratio Analysis

(b) Abercrombie plc Statement of financial position at 30 April 2012

$ $
$1 125 000
Non-Current Assets ( ) 562 500
2
Current Assets
Inventories 81 250
Trade receivables (W 4) 104 795
Cash & cash equivalents (W 5) 43 530
229 575
Current Liabilities
Trade payables (W 5) (120 829) 108 746
671 246
Non-Current Liabilities $
$21 094
10% Debentures – 2020 ( ) (210 940)
10%
460 306
Equity
$10 000
200 000 ordinary shares of $1 [( ) shares × $1] 200 000
$0.05
Retained earnings ($23 756 + $137 109) 160 865
Revaluation reserve (balancing figure) 99 441
460 306

(c) The proposed final dividend is not accounted for anywhere in the financial statements. This is only recorded
when is approved by the ordinary shareholders and until then it is disclosed as a note to the financial
statements.

WORKINGS
Cost of Sales
(W 1) Inventory turnover =
Average Inventory
Cost of Sales
10 =
($65 000+$81 250)/2
Cost of Sales = $731 250

(W 2) Sales  Cost of sales = Gross profit

x  $731 250 = 0.35x
$731 250
X (sales) =
0.65
= $1 125 000

Interest Charges
(W 3) Income gearing = × 100
Operating Profit
Interest Charges
12.5% =
$168 750
Interest = $21 094

Trade Receivables
(W 4) Receivables turnover = × 365
Credit Sales
Trade Receivables
34 = × 365
$1 125 000
Trade receivables = $104 795

Trade Payables
(W 5) Payables turnover = × 365
Credit Purchases
Trade Payables
59 = × 365
$747 500
Chapter 11 164 Ratio Analysis

Trade payables = $120 829

Current Assets
(W 6) Current Ratio =
Current Liabilities
$81 250+$104 795+Bank
1.9 =
$120 829
Bank = $43 530

QUESTION 6 NOVEMBER 2012 P43 Q2 (c)

Current Assets
Current ratio =
Current Liabilities
$198 000
=
$93 000
= 2.13:1

Current Assets −Closing Inventory

Acid test =
Current Liabilities
$90 000
=
$93 000
= 0.97:1

Operating Profit
Return on capital employed = × 100
Capital Employed
−$15 000
= × 100
$1 805 000
= 0.83%

Profit after tax and preference dividends

Return on Equity = × 100
Shareholders′ Equity
−$15 000
= × 100
$1 685 000
= 0.89%
The current ratio of Hyung Ltd signifies a good liquidity position. However, as it includes inventories so the use of
acid-test ratio, which excludes inventories from the calculations, could be a better option. The inventories levels look
as they are excessively high but even then acid-test ratio still look reasonable to cover its current liabilities as and
when they are due. Due to loss there is a small negative return both on capital employed and equity for the business.

QUESTION 7 MAY 2013 P43 Q2 (d & e)

(d) Calculation of ratios
$500 000
Gearing = × 100 = 16%
($500 000 +$2 625 000)
$200 000 +($500 000 ×10%)
Interest cover = = 5 times
$500 000 ×10%
$150 000/1 000 000 shares
Dividend yield = × 100 = 3.75%
$4.00

(e) The investment of $250 0000 in a bank deposit account at an annual interest rate of 3% is though a relatively
safe investment but may not be as profitable as investment in the shares of a company could have been.
The return on shares (dividend yield) for Company A is higher, but its gearing level is also higher than
company B so could be more risky than Company B.
The return on shares (dividend yield) for Company B is lower, but its gearing level is also lower than company
A so will be less risky.
If Winston prefers a better investment, then company B would be a better option. If higher return is
preference, then company A would be a better option.
Chapter 11 165 Ratio Analysis

QUESTION 8 NOVEMBER 2013 P43 Q3 (c & d)

(c) Trade receivables days = $9 304 = 57.7 days
x 365
$58 870
+ Inventory days = ($4 800+$5 150)/2 = 77.0 days
x 365
$23 470
− Trade payables days = $8932 = 137.2 days
x 365
$23 770
Working Capital Cycle (2.5) days

(d)  Improved (strict) credit terms for credit customers

 Negotiate more relaxed credit terms from the credit suppliers
 Use of debt factoring
 Reduction in inventory levels
 Sale of surplus non-current assets (if any)
 Take additional bank loan
 Additional capital invested by the owner
 Reduction in owner’s drawings

QUESTION 9 NOVEMBER 2014 P41 Q2

(a) Wotknot Limited
Income Statement for the year ended 30 April 2014
$ $
Revenue ($600 000 ÷ 60%) 1 000 000
Cost of Sales
Opening inventory ($80 000 × 50%) 40 000
Purchases (balancing figure) 640 000
680 000.
Closing inventory (80 000)
Cost of Sales [($40 000 + $80 000)/2} × 2] (600 000)
Gross profit ($1 000 000 × 40%) 400 000
Expenses
Administrative expenses 140 000
Distribution expenses ($210 000  $140 000) 70 000
Total operating expenses ($1 000 000 × 21%) (210 000)
Operating Profit 190 000
Finance costs ($50 000 × 10%) (5 000)
Profit for the year 185 000

(b) Statement of changes in equity for the year ended 30 April 2014
$
Profit for the year 185 000
Transfer to general reserve (20 000)
Dividends paid (200 000 shares @ $0.08) (16 000)
Retained earnings b/f (40 000)
Retained earnings c/f 109 000.

(c) Wotknot Limited

Statement of Financial Position at 30 April 2014
Assets $ $
Non-Current Assets ($1 000 000 × 0.2) 200 000
Current Assets
Chapter 11 166 Ratio Analysis

Inventory 80 000
Trade receivables ($1 000 000 × 40 ÷ 365) 109 589 189 589
Total assets 389 589
Equity and liabilities $ $
Ordinary share capital 100 000
General reserve ($40 000 + $20 000) 60 000
Retained earnings 109 000 269 000
Non-Current Liabilities
10% Debenture 50 000
Current Liabilities
Trade payables ($640 000 × 35 ÷ 365) 61 370
Bank overdraft 9 219 70 589
Total liabilities and Equity 389 589

(d) Siri Limited has a better inventory turnover and gross profit margin. This shows that Siri Limted is not only
able to sell its inventory at a faster pace but also with a better profit margin. However Wotknot Limited has
a better operating profit margin which reflects the better performance of Wotknot in controlling its
$189 589
operating expenses. The current ratio of Wotknot Limited is 2.69:1 ( ) which is higher than 2.0:1 of
$70 589
Siri Limited. This looks better but the higher inventory level and negative bank balance (overdraft) of
Wotknot Limited may indicate poor working capital management by Wotknot Limited.

Siri Limited seems slightly better(5 days) than Wotknot Ltd in collecting their debts however this benefit
was nullified by lengthy payment period (7 days) available to Wotknot in settling their current obligations.
$0.08
Siri Limited has a better dividend yield (12%) compared to Wotknot ratio of just 5%( ). Siri Limited,
$1.60
however has a worse gearing ratio of 60% which could be very risky in periods of falling profits whereas
$50 000
Wotknot has low gearing ratio of only 15.67%( ).
$319 000

QUESTION 10 MAY 2015 P43 Q2 (d & e)

(d)
Richards Limited Sobers Limited
Current Assets $500 000/2 $400 000/2
Current ratio
Current Liabilities $155 000 $95 000
1.61 : 1 2.11 : 1
Return on capital Operating Profit $66 000 $48 000
× 100 ×100 ×100
employed Capital Employed $270 000+$75 000 $205 000+$100 000
19.13% 15.74%
Fixed cost capital $75 0000 $100 000
Gearing ratio × 100 ×100 ×100
Total capital $270 000+$75 000 $205 000+$100 000
21.74% 32.79%
Fixed interest charges $6 000 $8 000
Income gearing × 100 × 100
Operating profit $66 000 $48 000
9.09% 16.67%
Profit for ord. shareholders $30 000 $20 000
Earnings per share
Total no of ordinary shares 150 000 shares 100 000 shares
$0.20 $0.20
Market price per share $1.80 $2.40
Price earnings ratio
Earnings per share $0.20 $0.20
9.00 12.00
Dividend per share $0.06 $0.09
Dividend yield ×100 × 100 ×100
Market price per share $1.80 $2,40
3.33% 3.75%
Chapter 11 167 Ratio Analysis

(e) Though current ratio of Richards Limited is a bit lower however current ratios of both companies look
reasonable to pay the current obligations as and when they become due.
The Return on Capital Employed of both companies is higher than the interest rate on debentures so would
help the business to give some additional returns for the ordinary shareholders after meeting fixed interest
charges. Richards Limited has the higher Return on Capital Employed so looks like more profitable
investment.
Both companies have low gearing being less than 50% showing that they rely less on outside borrowings
and most of the investment comes from owners.
Although neither company causes concern with income gearing, Richards Limited again has the better ratio
as it only pays 9% of its operating profits for interest compared to 16.67% of Sobers Limited.
Earnings per share indicate that both companies are at par. However, price earnings ratios show that stock
market is more confident about Sobers Limited’s performance in the future. Dividend yield of Sobers
Limited is also relatively better.
Though investments in both companies look viable, however Sobers Limited would be a better investment.

QUESTION 11 SPECIMEN 2016 P3 Q4

(a) Identify and calculate for each potential investor the ratio for ABC plc which would particularly interest
him or her. [10]

Investor Ratio Calculation of ratio

Jazgul Trade payables payment period (1) 56 days (1)
Jackson Dividend yield (1) 7.9% (1)
2.02 times (1)
Khan Dividend cover (1) (Also allow difference between earnings per
share and dividend per share.)
Madge Price earnings ratio (1) 6.29 (1)
Income gearing (1) 5.3% (1)
Bernard or or
gearing ratio (1) 15.9% (1)

(b) Explain what the ratio you have calculated for each investor shows the investor. [10]
Investor Explanation
Jazgul Enables investor to see that ABC plc pays its creditors 41 days sooner. (max 2 marks)
Jackson DEF plc has a dividend yield 3.8% higher. This means the investor will have a higher income by $760.
(max 2 marks)
Khan This is 0.83 times higher for ABC plc, which is nearly double. This means that more funds are being
retained in the business rather than distributed so that the net asset value of the company should
increase. (max 2 marks)
Madge This is 0.89 times higher in DEF plc which indicates that the stock market has more confidence in
DEF plc maintains its earnings. (max 2 marks)
Bernard This is 12.45% or 27.5% higher in DEF plc which means that DEF plc is more at risk from changes in
interest rates or from a need to repay debt. (max 2 marks)

For each: Developed explanation (2 marks)

Basic explanation (1 marks)

(c) Decide which is the most suitable investment for each investor. [5]
Investor Decision
Jazgul The investor will select ABC plc. (1)
Jackson The investor will select DEF plc. (1)
Khan The investor will select ABC plc. (1)
Chapter 11 168 Ratio Analysis

Madge The investor will select DEF plc. (1)

Bernard The investor will select ABC plc. (1)

QUESTION 12 MAY 2016 P31 Q3(d)

The calculations of return on capital employed by the marketing director as 51.67% are wrong as he used total
revenue instead of operating profit in the calculation($62 000/$120 000). As ROCE calculation is based on profits so
correct return would be 6.67% by dividing operating profits of $8 000 [$62 000 – $39 000 – $3 000 – $12 000
(depreciation) over capital invested of $120 000.
Since this return (6.67%) is less than the existing ROCE (9.81%) so the proposal would not increase ROCE. Moreover
the calculation of ROCE is based on profit before interest but if debenture interest of $9 600 is included then there
is a loss resulting in negative ROCE.
On the contrary, it may be necessary anyway to replace the existing machinery as and it had become unreliable and
unproductive. Moreover, because of its age as spare parts may no longer be available and the machinery may be
impossible to repair. The productivity of the machinery may fall further with time resulting in the reduction of
existing ROCE.

QUESTION 13 MAY 2016 P31 Q4

(a)
(i) Income gearing Winterbottom Ramsey
Fixed interest expense $300 000 $180 000
× 100 × 100
Profit before interest and tax $1 720 000 $1 576 000
= 17.44% = 11.42%
(ii) Earnings per share
Profits after tax and preference dividends $1 103 000 $1 084 000
Total number of ordinary shares 4 500 000 shares 2 500 000 shares
=$0.25 =$0.43
(iii) Price/Earnings ratio
Market price per share $3.50 $2.75
× 100
Earnings per shares $0.25 $0.43
= 14 times = 6.40 times
(iv) Dividend yield
Dividends per share $0.20 $0.35
× 100 × 100 × 100
Market price per shares $3.50 $2.75
= 5.71% = 12.73%
(v) Dividend cover
Profits after tax and preference dividends $1 103 000 $1 084 000
Ordinary Dividends 4 500 000×0.20 2 500 000×0.35
= 1.23 times = 1.24 times
(b) Income gearing shows interest expense in proportion to operating profits. Both companies have a lower
income gearing than the industry average and interest charges are comfortably covered by operating profits
so there should be no concerns with regard to interest payments.
The earnings per share of Ramsey is higher than the industry average while that of Winterbottom is lower
so Winterbottom’s performance may be a point of concern.
Price earnings ratio relates the market price of a share to its earnings. Ramsey has a lower PE ratio than
industry average but PE ratio for Winterbottom is higher which is indicating greater confidence of Investors
in the company.
Dividend yield expresses the dividend as a percentage of the market price of a share this will indicate to
investors how much they can expect as a return on each $ invested. The dividend yield of Winterbottom is
much lower than the industry average while that of Ramsey is higher so an investor who seeks short term
income would prefer Ramsey.
Chapter 11 169 Ratio Analysis

Dividend cover shows how many times the ordinary dividend can be paid out of profits after interest, tax
and preference dividends. The dividend cover of both companies is slightly higher than the industry average
so although apparently low there should not be major concerns.

(c) On the basis of financial ratios calculated in ‘b’ part, we can see the mixed performance indicators for both
companies. However if Alfredo is planning to make short term investment then Ramsey could be a better
option. Ramsey has lower income gearing ratio than both its competitor and industry average indicating its
better ability to handle its fixed interest obligations.
Both EPS and dividend yield for Ramsey are also higher than industry average and Winterbottom making
investment in Ramsey more attractive for Alfredo. Dividend cover for both companies is approximately
similar to industry average though Ramsey is again at a slight advantage.
Price earnings ratio is the only performance indicator which favours investment in Winterbottom as it
shows greater confidence of Investors in the company to sustain its earnings in the long run.

QUESTION 14 MAY 2016 P32 Q4

(a)  Ratios simplify the comprehension of financial statements. Ratios tell the whole story of changes in the
financial condition of the business
 Ratios facilitate inter-firm comparison. Ratios highlight the factors associated with successful and
unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms.
 Ratios help in planning and forecasting. Ratios can assist management, in its basic functions of
forecasting.
 Ratios make inter-firm comparison possible: Ratios analysis also makes possible comparison of the
performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency
or otherwise in the past and likely performance in the future.

Operating Profit $96 200

(c) (i) Return on capital employed × 100 × 100 9.37%
Capital Employed $477 000 + $550 000
Fixed Cost Capital $550 000
(ii) Gearing × 100 × 100 53.55%
Total Capital $477 000 + $550 000
Interest Charges $66 000 68.61%
(iii) Income gearing × 100 × 100
Operating Profit $96 200

(iv) Working capital cycle

Average Inventory ($88 800+$76 000)/2
Inventory turnover (days) × 365 × 365 71 days
Cost of Sales $425 800
Trade Receivables $132 400 × 365
+ Receivables turnover × 365 57 days
Credit Sales $843 000
Trade Payables $93 000 ×365
 Trade Payables Turnover × 365 77 days
Credit Purchases 425 800 + 88 800 – 76 000
Working capital cycle 51 days
Market price per share $2.60
(v) Price earnings ratio 17.22
Earnings per share $30 200/($400 000÷$2) shares

(c) Takie plc is low geared as gearing ratio is far below 50% as fixed cost capital is only 9.76% of total capital
employed and may pose less financial risk to the ordinary shareholders.
Low gearing also resulted in low income gearing. It shows that company’s finance charges are easily covered
by current operating profits. It also reflects small burden of interest charge.

Corim plc is high geared in relative terms as gearing ratio is just above 50% as fixed cost capital is 53.55% of
total capital employe.
Chapter 11 170 Ratio Analysis

This also caused higher income gearing due to higher proportion of interest to operating profits (i.e.
68.61%). This may pose higher financial risk to the ordinary shareholders as the lower the income gearing
the more secure are the interests of the debenture holders and the shareholders.

(d) The loan interest rate of Takie plc is 8%, which is lower than the return on capital employed of 9.32%.
Shareholders of Takie plc will benefit. On the other hand, the loan interest rate of Corim plc is 12%, which
is higher than the return on capital employed of 9.37%. Shareholders of Corim plc will suffer.
Takie plc is less risky as ROCE is higher than interest rate whereas opposite is true for Corim plc. Chen should
invest in Takie plc Limited as it would be in a better position to meet its fixed interest obligations.

QUESTION 15 NOVEMBER 2016 P31 Q3

Profits for the year
(a) (i) Profit margin = ×100
Sales Revenue
$160 000
= ×100
($100 000 ÷10%)
= 16.00%
Fixed Finance charges
(ii) Income gearing = Operating profits
×100
$16 000
= ×100
($160 000+$16 000)
= 9.09%
Profits after tax and preference dividends
(iii) Earnings per share =
Total number of ordinary shares
$160 000
=
400 000 shares
= $0.40 per share
Market price per share
(iv) Price earnings ratio =
Earnings per shares
$1.20
=
$0.40
= 3 times
Dividends per share
(v) Dividend yield = × 100
Market price per shares
$0.07
= × 100
$1.20
= 5.83%
(vi) Total dividend paid = Number of issued shares × Per share dividend
= 400 000  0.07
= $28 000
Profits after tax and preference dividends
(vii) Dividend cover =
Ordinary Dividends
$160 000
=
$28 000
= 5.71 times

(b) (i) Profit margin of Alpha plc is better which may be due to the following reasons
 higher selling price
 more sale of higher margin items
 better control over expenses

(ii) Income gearing of Alpha plc is better which may be due to the following reasons
 higher profits from operations
Chapter 11 171 Ratio Analysis

 lower financial costs (interest)

(iii) Earnings per share of Alpha pls is twice to Beta plc is better which may be due to the following
reasons
 higher profits attributable to ordinary shareholders
 lesser number of ordinary shares

(iv) Price earnings ratio of Beta plc is better which may be due to the following reasons
 Investors have more confidence in Beta plc’s prospects
 Market value of Beta’s plc shares may be overvalued
(v) Dividend yield of Beta plc is better which may be due to the following reasons
 Payment of a higher total dividend
 Lower market value per share
(vi) Market value of one share of Alpha plc is higher which may be due to the following reasons
 greater net assets
 greater confidence of investors in the ability of the company to maintain the EPS
 more demand for shares in the market

(c) Investment in shares of Alpha plc seems to be a better option due to better profitability indicators like
higher profit margins, higher dividend per share, and higher earnings per share.
Lower income gearing and better dividend cover entails that investment involves less risk.
Though dividend yield and price-earnings ratios are lower for Alpha plc but has higher market price per
share showing the confidence of stock market in its prospects.

QUESTION 16 MAY 2017 P31 & P33 Q4

(a)
(i) Earnings per share LM plc AB plc
Profits after tax and preference dividends $125 000−$4 000 $175 000−$6 000
Total number of ordinary shares (300 000 ÷ 0.50) shares (500 000 ÷ 1)shares
=$0.20 =$0.34
(ii) Price/Earnings ratio
Market price per share $2.00 ×90% $2.00 ×110%
× 100
Earnings per shares $0.20 $0.34
= 9.00 times = 6.47 times
(iii) Dividend yield LM plc AB plc
Dividends per share $0.10 $0.10
× 100 × 100 × 100
Market price per shares $2.00 ×90% $2.00 ×110%
= 5.56% = 4.55%
(iv) Dividend cover
Profits after tax and preference dividends $125 000−$4 000 $175 000−$6 000
Ordinary Dividends (600 000 shares @$0.1) (500 000 shares @$0.1)
= 2.02 times = 3.38 times

(b) Earnings per share shows how much profit (after interest, tax and preference dividends) is attributable to
each ordinary share. The ratio is used as a convenient measure of success. The EPS ratio of AB plc ($0.34) is
significantly better than LM plc ($0.20).
Price earnings ratio relates the market price of a share to its earnings. The current market price compared
to earnings per share of LM plc is higher indicating greater confidence of Investors in LM plc.
Chapter 11 172 Ratio Analysis

Dividend yield expresses the dividend as a percentage of the market price of a share this will indicate to
investors how much they can expect as a return on each $ invested. It is higher for LM plc (5.56%) compared
to 4.55% of AB plc.
Dividend cover shows how many times the ordinary dividend can be paid out of profits after interest, tax
and preference dividends. Though both companies paid dividend at the same rate of 10%, however higher
ratio of AB plc signifies greater ability of the company to maintain dividends payments in future.
Though, there have been mixed results for both companies but on overall basis, AB plc seems to have
performed in a better way.

(c) (i) Gearing is the proportion of company’s long-term funds, which have been provided by lenders.
There are several ways to calculate this, but a frequently used method of its calculation is as
follows:
Preference share capital+Long term loans
Gearing =
All share capitals and reserves+Long term loans
Fixed cost capital
(ii) Gearing ratio = × 100
Shareholders equity+ Fixed cost capital
$100 000 + $150 000
LM plc = ×100
$[300000+100 000+150 000+(50000+125 000−4000−60000)]
= 37.82%
$150 000 + $50 000
AB plc = ×100
$(500000+150 000+50 000+(125 000+175000−6000−50000)
= 21.19%
(iii) The gearing ratio of LM plc (37.82%) is above the industry average of 25% whilst AB plc gearing
level (21.19%) is below the industry average. The industry average is quite low as well indicating
that most of the companies are not too much dependent on external borrowings.
Both are low geared companies as their gearing level is below 50% indicating low financial risks.
James could therefore should be confident to receive future dividends provided that the
companies continue to be profitable.
(d) Both the companies have mixed financial results. LM plc has better price earnings and dividend yield ratios.
AB plc has better earnings per share and dividend cover. AB plc has low gearing compared to LM plc and
industry average and looks like a safer investment for Jmaes.
The increase in the market value of shares of AB plc have increased by 10% contrary to the reduction by
10% of LM plc shares. This signifies higher confidence of stock market on AB plc to maintain its EPS.
Based on better earnings per share, dividend cover, lower gearing level and higher market price of shares
James should invest in AB plc.
QUESTION 17 MAY 2017 P32 Q2
(a) (i) Return on capital employed
Operating Profit = $160 000 ÷40%
× 100 × 100 = 6.35%
Capital Employed $6 300 000

(ii) Earnings per share

Profits after tax and preference dividends = $160 000 ÷40%
= $0.40
Total number of ordinary shares (5 000 000 ÷5) shares

(iii) Price/Earnings ratio

Market price per share = $6.40
× 100 = 16.00 times
Earnings per shares $0.40

(iv) Dividend yield

Dividends per share = $240000(W 1)÷1000000
× 100 × 100 = 3.75%
Market price per shares $6.40

(iv) Dividend cover

Chapter 11 173 Ratio Analysis

Profits after tax and preference dividends = $160 000 ÷40%

= 1.67 times
Ordinary Dividends $240 000

(b) Statement to show share capital and reserves at 31 December 2017

$000
Ordinary shares capital [$5 000 000 + $1 000 000 (W 2)] 6 000
Share premium [$500 000 + $200 000 (W 2)] 700
Retained earnings (W 3) 1 034
7 734
WORKINGS
$160 000 ×60%
(W 1) = $240 000
40%

(W 2) Investment required in the project $1 200 000

Number of ordinary shares to be issued ($1 200 000 ÷ $6.00 ) 200 000 shares
Ordinary share capital (200 000 shares  $5.00) $1 000 000
Share premium (200 000 shares  $1.0) $200 000

(W 3) Retained earnings at year start 800 000

Profit for the year for 2017 ($400 000 + $185 000) 585 000
Dividend paid ($585 000  60%) (351 000)
Retained earnings at year end 1 034 000

(c) (i) Return on capital employed

Operating Profit $585 000 (W 2)
× 100 = × 100 = 7.56%
Capital Employed $7 734 000

(ii) Earnings per share

Profits after tax and preference dividends $585 000 (W 1)
Total number of ordinary shares
= (6 000 000 ÷5) shares
= $0.49

(d) The project independent rate of return is 15.42% ($185 000 / $1 200 000) which is far higher than the 2016
return on capital employed of 6.35% resulting in improvement of ‘return on capital employed’ from 6.35%
to overall ROCE of 7.56%.
Earnings per share will also improve from $0.40 to $0.49 per share.
Due to improved profitability and better earnings per share, the share price may also increase. On the
contrary, the share price may decrease due to issue of more shares.
Based on the above facts and improved profitability, M plc should make investment in the project.

QUESTION 18 NOVEMBER 2017 P31 Q3

(a) (i) Comparing one year with another of the same business (Trend analysis)
(ii) Comparing one business with another for the same year.
(iii) Ratios help the management in decision-making and also point out problem areas.
(iv) Ratios also highlight issues of performance that can be investigated.

Profits after tax and preference dividends $550 000 –$12000

(b) (i) Earnings per share = =
Total number of ordinary shares 900 000
= $0.60 per share

Market price per share 1.75

(ii) Price earnings ratio = =
Earnings per shares 0.60
= 2.92 times
Chapter 11 174 Ratio Analysis

Dividends per share 0.08

(iii) Dividend yield = × 100 = × 100%
Market price per shares 1.75
= 4.57%

Profits after tax and preference dividends $550 000 –$12 000
(iv) Dividend cover = =
Ordinary Dividends (900 000 ×$0.08)
= 7.47 times

Profits after tax and preference dividends $500 000 –$12 000
(c) (i) Earnings per share = =
Total number of ordinary shares (900 000−300 000)shares
= $0.81 per share
Market price per share 1.50
(ii) Price earnings ratio = =
Earnings per shares 0.81
= 1.85 times
Dividends per share ($0.80÷80%)
(iii) Dividend yield = × 100 = × 100%
Market price per shares 1.50
= 6.67%
Profits after tax and preference dividends $500 000 –$12 000
(iv) Dividend cover = =
Ordinary Dividends 60 000
= 8.13 times
(d) (i) There has been an increase in the amount of profit earned by the company but due to issue of
shares, the increase in share capital was more significant. The increase in share capital reduced
Earnings per share from $0.81 per share to $0.60 per share. The decrease in EPS indicates a lower
return for the shareholder. Though market price per share has reduced by $0.25 per share, but still
there is a rise of 57.84% in the PE ratio due to decrease in earnings per share at a higher rate.
Dividend yield worsened by 31.48% due to increase in market price from $1.50 to $1.75 and
decrease in dividend paid per share by 20%.
Dividend cover has deteriorated by 8.73% due to increase in total dividend paid at a higher
proportion compared to the profits available to pay ordinary dividend.
Though most of the ratios have worsened but increase in the price earnings ratio indicates
improved confidence by the investors in the shares of the company.
Ratios are not the only factor to make an obvious decision, other factors need to be considered.
Data is also of two years only so difficult to do a comprehensive analysis. Inter firm comparison or
comparison with industry averages could be a better option.

(ii)  Interest on the debentures must be paid whether the company makes a profit or a loss.
 Debenture interest is an allowable expense for tax purposes.
 If company’s makes huge profits, additional profit after paying debentures holders at a fixed
rate will be available for ordinary shareholders.
 If company’s makes low profits, the payment of ordinary dividend could be at risk.
 The issue of debentures will increase the gearing level.
 Needs to be redeemed after the agreed time period
QUESTION 19 NOVEMBER 2017 P32 Q4
Interest Charges $235 000
(a) Income gearing × 100 × 100 14.87%
Operating Profit $1 580 000
Fixed Cost Capital $2 935 000
Gearing × 100 × 100 39.26%
Total Capital $2 935 000 + 4 540 000
Profits after tax and preference dividends $1 345 000
Dividend cover 4.14 times
Ordinary Dividends $325 000
Chapter 11 175 Ratio Analysis

Market price per share $1.55

Price earnings 3.46 times
Earnings per share $1 345 000/3 000 000

(b) (i) Income statement (extract)

For the year ended 31 August 2017
$000
Profit from operations 1 600
Finance costs [($2 000 000 × 10%) + $235 000) (435)
Profit for the year 1 165
(ii) Statement of financial position (extract) to show equity and non-current liabilities section
As at 31 August 2017.
Equity and liabilities $000
Ordinary share capital - 3 000 000 ordinary shares of $0.50 each 1 500
Share premium 500
Retained earnings [$2 540 000 + $1 165 000 {b (i)} $275 000)] 3 430
Total equity 5 430

Non-current liabilities
8% debentures 2020 2 935
10% debentures 2026 2 000
4 935

Interest Charges $235 000+$200 000

(c) (i) Income gearing × 100 × 100 27.19%
Operating Profit $1 600 000

Fixed Cost Capital $2 935 000+2 000 000

Gearing Total Capital
× 100 × 100 47.61%
$5 430 000+$4 935 000

Profits after tax & pref. dividends $1 165 000 4.24

Dividend cover
Ordinary Dividends $275 000 times
Market price per share $1.30 3.35
Price earnings ratio Earnings per share $1165 000/3 000 000 times
(ii) There is a significant increase in income gearing from 2016 because of extra interest payable on
newly issued debentures. This is more risky for a shareholder. This will reduce profit available to
equity holders and therefore also impact other investment ratios.
The gearing ratio has also increased because of a greater increase in fixed cost capital than the
increase in retained earnings. This increases the risk of the company due to increased interest
burden and repayment of debt.
Dividend cover slightly increased due to decrease in the both profit available for distribution and
the ordinary dividends.
The price earnings ratio is almost stable. This reflects the confidence of the stock market on the
company. Both market price of a share and the earnings per share decreased at the same rate.
(d) The issue of the debentures will adversely affect gearing and the income gearing ratio. With the increase in
gearing level, the company will be more risky. The issue of debentures resulted in additional finance costs,
which has to be paid whether or not company makes a profit. This also reduced profits available to
distribute to shareholders.
Issue of debentures may also negatively affect company’s liquidity. The company has to make an effective
plan with regard to repayment of debentures and annual interest payment.
Issue of debentures does not involve any sharing of management control. Moreover, debenture interest is
an allowable expense for tax purposes
Chapter 11 176 Ratio Analysis

QUESTION 20 MAY 2018 P32 Q1

(a) (i) Units of sales × Per unit selling price = Total revenue
(1000 × 12) units × $80 = $960 000
(ii) Units of sales × Per unit cost price = Total cost
(1000 × 12) units × $50 = $600 000
(iii) Receivables at 31 = Receivables for December sales + Receivables for November
December sales
= (1000 × $80) + (1000 × $80 × 1/2))
= $120 000
(iv) Average inventory = Opening Inventory+Closing Inventory
2
= [1500(W1)×50]+[3500×50]
2
= $125 000

(W 1) Opening inventory = Units of sales + Closing inventory  Purchases

= (1000 × 12) + 3 500  14 000
= 1 500 units

(b) The working capital cycle is the time period between when a business pays cash to its suppliers for inventory
and receives cash from its customers.

Inventory + Trade receivables  Trade payables

(c) Working capital cycle =
turnover (days) collection (days) payment (days)
$125 000 + $120 000  $62 000
= × 365 × 365 × 365
$600 000 $960 000 $700 000
= 77 days + 46 days  33 days
= 90 days

Inventory + Trade receivables  Trade payables

(d) Working capital cycle =
turnover (days) collection (days) payment (days)
$125 000 + (1000 ×$90)  $62 000
= × 365 × 365 × 365
$600 000 (12 000 ×$90) $700 000
= 77 days + 31 days  33 days
= 75 days

(e) Though this strategy looks workable as it will reduce working capital cycle. The cycle could also be reduced
by managing inventory which has increased sharply during the year
Better credit control might have the same effect on working capital cycle as the discount
Payment to trade payables may be delayed through negotiations with the suppliers without affecting
creditability.
It will also increase profits by $1 per unit as increase in selling price per unit ($10) is greater than the
discount ($9) offered on per unit basis.
Directors’ assumption that all customers will take the discount may get wrong.
Directors may not be realistic in expecting constant sales demand.
Chapter 12 177 Statements of Cash Flows

CHAPTER 12 STATEMENTS OF CASH FLOWS

QUESTION 1 MAY 2011 P42 Q1 (a, b & d)
The statement of financial position (balance sheet) of Whane plc showed the following:
At 30 April 2011 At 30 April 2010
Intangible non-current assets $000 $000 $000 $000 $000 $000
Patents 125 150
Tangible non-current assets 3 430 3 173
3 555 3 323
Current assets
Inventory 124 106
Trade receivables 78 82
Cash and cash equivalents 58 260 – 188
Current liabilities
Trade payables 63 56
Taxation 28 24
Interest 4 14
Cash and cash equivalents – 95 165 42 136 52
3 720 3 375
Non-current liabilities: 10% debentures 2028 300 –
3 420 3 375
Equity
Ordinary shares of $1 each 2 000 1 000
Share premium 250 1 000
Revaluation reserve – 250
Retained earnings 1 170 3 420 1 125 3 375
Further information was available as follows:
1 The income statement for the year ended 30 April 2011 showed interest payable of $32 000 and taxation of
$28 000. Dividends paid during the year amounted to $30 000.
2 A bonus issue was made during the year which doubled the number of ordinary shares in issue. An issue of
debentures also took place.
3 At 30 April tangible non-current assets comprised:
2011 ($000) 2010 ($000)
Land at valuation 1600 1600
Buildings Cost 1200 1200
Accumulated depreciation (168) (144)
Plant and equipment Cost 1125 729
Accumulated depreciation (327) (212)
798 517
During the year plant which had cost $92 000 was sold for $20 000. Depreciation of $75 000 had been
provided on the plant.
4 There were no acquisitions or disposals of patents during the year.
REQUIRED
(a) Calculate, for the year ended 30 April 2011,
(i) the profit for the year attributable to equity holders [3]
(ii) the profit from operations [4]
(b) Prepare a statement of cash flows for the year ended 30 April 2011 [25]

QUESTION 2 NOVEMBER 2011 P43 Q2 (a & b)

Sabrina plc has been trading for many years as a worldwide supplier of office equipment. The summarised accounts
Chapter 12 178 Statements of Cash Flows

prepared for internal purposes for 2011 and 2010 are set out below.
Sabrina plc
Income Statement for the year ended 30 June
2011 2010
$000 $000
Revenue 2 546 1 458
Cost of sales 981 512
Gross profit 1 565 946
Depreciation 786 384
Other expenses 108 84
Profit on disposal of non-current assets 15 8
Operating profit 686 486
Interest 225 80
461 406
Taxation 103 94
Profit after taxation 358 312
Dividends 160 80
Retained profit for year 198 232
Retained profit b/f 821 589
Retained profit c/f 1 019 821
Statement of Financial Position (Balance Sheet) at 30 June
2011 2010
$000 $000
Non-current assets 5 214 2 576
Current assets
Inventories 441 227
Trade receivables 639 361
Bank – 78
1 080 666
Current liabilities
Trade payables 347 287
Dividends 80 40
Taxation 103 94
Bank 195 –
725 421
Working capital 355 245
Non-current liabilities
8% Debentures (2020) 2 500 1 000
3 069 1 821
Capital and reserves
Ordinary share capital 2 000 1 000
Share premium 50 –
Retained earnings 1 019 821
3 069 1 821
Note:
1 All sales and purchases are made on credit.
2 Non-current assets costing $40 000, with accumulated depreciation of $25 000, were sold during the year
REQUIRED
(a) Prepare a reconciliation between cash flows from operating activities and operating profit for the year
ended 30 June 2011. [9]
(b) Prepare a cash flow statement for the year ended 30 June 2011 in accordance with IAS 7. [17]
Chapter 12 179 Statements of Cash Flows

QUESTION 3 MAY 2012 P41 Q1 (a & b)

Swamp Circus plc provides the following information:
Statements of financial position
at 31 March 2012 31 March 2011
Non-current assets $000 $000 $000 $000 $000 $000
Intangible
Patents 220 180
Tangible
Property 2 400 1 700
Equipment 920 610
3 540 2 490
Current Assets $000 $000 $000 $000 $000 $000
Inventory 480 509
Trade receivables 611 569
Cash and cash equivalents 79 –
1 170 1 078
Current Liabilities
Trade payables 512 501
Other payables 76 54
Taxation 220 195
Cash and cash equivalents – 808 362 71 821 257
3 902 2 747
Non-Current Liabilities
Debentures 500 400
3 402 2 347
Equity
Ordinary share capital 1 500 1 200
Revaluation reserve 700 -
General reserve 400 200
Retained earnings 802 947
3 402 2 347
Income statement for the year ended 31 March 2012
$000
Profit from operations 636
Finance charges (61)
Taxation (220)
Profit for the year attributable to equity holders 355
Additional information:
1 During the year the directors transferred $200 000 to the general reserve and paid dividends of $300 000.
2 At 31 March 2011 equipment had cost $905 000 and was shown after the provision of $295 000
depreciation. At 31 March 2012 equipment had cost $1 240 000 and depreciation of $320 000 had been
provided.
3 During the year equipment which had cost $172 000 was sold for $90 000.
Depreciation of $101 000 had been provided on it.
4 Other payables include $21 000 unpaid interest at 31 March 2012 and $11 000 unpaid interest at 31 March
2011.
5 During the year an issue of both ordinary shares and debentures had taken place, and the property had
been re-valued.
REQUIRED
(a) Prepare a statement of changes in equity for the year ended 31 March 2012. [13]
(b) Prepare a statement of cash flows in accordance with the provisions of IAS 7 for the year ended 31 March
2012. [21]
Chapter 12 180 Statements of Cash Flows

QUESTION 4 MAY 2012 P43 Q1 (a & b)

Smilbo Smaggins plc has been manufacturing cutlery for many years. It provided the following financial statements:
Statements of financial position
As at 30 April
2012 2011
Non-Current Assets $ $ $ $
Plant and machinery 82 500 64 900
Office equipment 34 519 117 019 38 355 103 255
Current Assets
Inventories 18 758 16 521
Trade receivables 17 623 12 517
Cash and cash equivalents 27 754 64 135 6 459 35 497
Total Assets 181 154 138 752
Current Liabilities
Trade payables 22 758 18 654
Taxation 5 350 28 108 4 200 22 854
153 046 115 898
Non-Current Liabilities
4% Debentures 2020 30 000 50 000
Net assets 123 046 65 898
Equity
Ordinary share capital 60 000 40 000
Share premium 18 000 8 000
Retained earnings 45 046 123 046 17 898 65 898

Income statement
For the year ended 30 April 2012
$
Revenue 396 672
Cost of sales 259 329
Gross profit 137 343
Distribution costs 32 357
Administrative expenses 70 438
Profit from operations 34 548
Finance costs 1 600
Profit before taxation 32 948
Taxation 5 800
Profit attributable to equity holders 27 148

Additional information:
1 The debentures were redeemed at par.
2 Plant and machinery costing $27 500 was sold during the year for $10 000. It had been depreciated by $19
600.
3 Additional machinery was purchased at a cost of $35 000. There is no depreciation charge in the year of
acquisition.
4 There were no acquisitions or disposals of office equipment during the year.

REQUIRED
(a) Prepare a statement to show the net cash flow from operating activities. [16]
(b) Prepare a statement of cash flows for the year ended 30 April 2012 in accordance with IAS 7. [13]

QUESTION 5 NOVEMBER 2012 P43 Q2 (a & b)

Hyung Ltd has the following statements of financial position
Chapter 12 181 Statements of Cash Flows

At 31 March 2012 At 31 March 2011

$000 $000 $000 $000
Non-Current Assets (Note 1) 1 700 1 260
Current Assets
Inventories 108 82
Trade receivables 90 72
Cash and cash equivalents – 174
198 328
Current Liabilities
Trade payables 52 108
Cash and cash equivalents 41 –
93 105 108 220
Total assets less current liabilities 1 805 1 480
Non-Current Liabilities
8% Debentures 2010-2020 120 200
1 685 1 280
Equity And Reserves
Ordinary shares of $1 fully paid 1 400 1 000
Share premium 70 50
General reserve 200 200
Retained profits 15 1 685 30 1 280
Notes
1. Non-current assets
Freehold Property Motor Vehicles Total
At cost $000 $000 $000
At 31 March 2011 2 000 370 2 370
Additions 808 808
Disposals ____ (240) (240)
At 31 March 2012 2 000 938 2 938

Provisions for depreciation

At 31 March 2011 910 200 1 110
Disposals - (108) (108)
Charge for the year 100 136 236
At 31 March 2012 1 010 228 1 238
Net book value at 31 March 2011 1 090 170 1 260
Net book value at 31 March 2012 990 710 1 700

2. Proceeds from the sale of fixed assets

$
Motor Vehicles 130 000

3. No dividends were paid during the year.

REQUIRED
(a) Prepare, in accordance with IAS 7, a statement of cash flows for year ended 31 March 2012. [24]

(b) Explain the difference between cash and profit. [2]

QUESTION 6 MAY 2013 P43 Q2 (a to c)

Winston is a sole trader. He provides the following financial information in respect of his business.
Chapter 12 182 Statements of Cash Flows

Income statement for the year ended 31 December 2012

$000
Sales 3 380
Cost of sales (2 000)
Expenses (1 200)
Profit for the year 180

Statements of financial position at:

31 December 2011 31 December 2012
Non-Current Assets $000 $000 $000 $000
Freehold land 2 000 3 500
Plant and machinery at cost 900 1 020
Less: depreciation (500) 400 (470) 550
2 400 4 050
Current Assets
Inventory 310 320
Trade receivables 240 210
Cash and cash equivalents 10 -
560 530
Current Liabilities
Trade payables 200 160
Bank overdraft - 530
200 690
Non-current liability – loan 500 350
Net assets 2 260 3 540
Additional information
1 During the year the land was revalued by a professional valuer.
2 During the year Winston purchased new plant at a cost of $200 000. He also sold some plant that had a net
book value of $20 000 and had been depreciated by $60 000. This resulted in a loss on disposal of $2 000.
REQUIRED
(a) Calculate Winston’s drawings for the year ended 31 December 2012. [4]
(b) Prepare a statement of cash flows for the year ended 31 December 2012. [16]
(c) Explain why Winston has an overdraft at the end of 2012, despite making a profit for the year. [5]
QUESTION 7 NOVEMBER 2013 P41 Q1 (a & b)
Manchi plc are preparing their budgets for the forthcoming year ending 30 September 2014. They provide the
following information.
Statements of Financial Position at 30 September
Assets 2013 2014
(actual) (budgeted)
Non-Current Assets $000 $000
Property plant and equipment 3 050 3 190
Goodwill 400 450
Investments 300 240
3 750 3 880
Current Assets
Inventories 750 790
Trade and other receivables 460 425
Cash and cash equivalents 210 574
1 420 1 789
Total Assets 5 170 5 669
Chapter 12 183 Statements of Cash Flows

Equity $000 $000

Ordinary shares 1 200 1 400
Non-redeemable preference shares 500 500
Revaluation reserve 300 400
Retained earnings 930 834
Total equity 2 930 3 134
Liabilities
Non-Current Liabilities
7% debentures 1 000 1 300
Current Liabilities
Trade and other payables 960 1 075
Current tax liabilities 280 160
1 240 1 235
Total Liabilities 2 240 2 535
Total equity and liabilities 5 170 5 669

Budgeted Statement of Changes in Equity for Year Ending 30 September 2014

$000
Retained earnings at 1 October 2013 930
Budgeted profit for year 214
1 144
Dividends payable (110)
Transfer to share capital (bonus issue) (200)
Retained earnings at 30 September 2014 834
Additional information
1 The tax charge for the year ending 30 September 2014 has been budgeted as $160 000.
2 Income from investments is budgeted at $40 000.
3 Manchi plc issued additional 7% debentures on 1 October 2013. Interest for the year will be paid on all the
issued debentures on 30 September 2014.
4 A bonus issue of 1 new ordinary share for every 6 held is budgeted for 1 April 2014.
5 The following note was extracted from the financial statements at 30 September 2013.

Non-current assets Cost Depreciation Net book value

Property plant and equipment $000 $000 $000
Land 1500 - 1500
Buildings 800 250 550
Plant and equipment 1500 600 900
Motor vehicles 150 50 100
Total 3 950 900 3 050
6 The land is expected to increase in value by $100 000 during the year.
7 Budgeted capital expenditure for the year on buildings is $80 000; plant and equipment $280 000; motor
vehicles $30 000 and goodwill $50 000.
8 Budgeted depreciation for the year on buildings is $50 000; plant and equipment $255 000 and motor
vehicles $25 000.
9 Plant and equipment with an original cost of $35 000 and depreciation of $15 000 is budgeted to be disposed
of for proceeds of $10 000.
10 An impairment review has shown that the carrying value of the investments should be $240 000 at 30
September 2014.
REQUIRED
(a) Calculate company’s budgeted profit from operations for the year ending 30 September 2014. [5]
(b) Prepare a budgeted statement of cash flows for the year ending 30 September 2014 in accordance with IAS
7. [25]
Chapter 12 184 Statements of Cash Flows

QUESTION 8 NOVEMBER 2013 P42 Q2 (a & b)

Switfsure plc has provided the following financial information for the year ended 31 March 2013
Income Statement for the year ended 31 March
2013 2012
$000 $000
Revenue 756 942
Cost of sales (454) (528)
Gross profit 302 414
Distribution costs (126) (130)
Administrative expenses (200) (165)
Profit/(Loss) from operations (24) 119
Income from investments 5 4
Finance costs (12) (12)
Profit/(Loss) before tax (31) 111
Tax 0 (25)
Profit/(Loss) for the year attributable to equity holders (31) 86

Statement of changes in equity (to show changes in retained earnings)

For the year ended 31 March
2013 2012
$000 $000
Retained earnings balance at start of year 110 70
Profit/(Loss) for the year (31) 86
Dividends paid (49) (46)
Retained earnings balance at end of year 30 110

Statement of Financial Position at 31 March

Assets 2013 2012
Non-current assets $000 $000
Property plant and equipment 274 217
Goodwill 90 90
Investment 75 75
439 382
Current assets
Inventories 74 54
Trade and other receivables 95 65
Cash and cash equivalents - 76
169 195
Total assets 608 577
Equity
Ordinary shares 180 120
Non-redeemable preference shares 100 80
Share premium 30 -
Retained earnings 30 110
Total equity 340 310
Non-current liabilities: 6% debentures 150 200
Current liabilities
Trade and other payables 57 42
Current tax liabilities - 25
Bank overdraft 61 -
118 67
Total liabilities 268 267
Total equity and liabilities 608 577
Chapter 12 185 Statements of Cash Flows

Note to the statement of financial position at 31 March 2013

Buildings Plant & Motor Total
equipment vehicles
Cost $000 $000 $000 $000
Balance at 1 April 2012 240 110 24 374
Add Purchases 80 68 12 160
Less Disposals - (20) - (20)
Balance at 31 March 2013 320 158 36 514
Depreciation
Balance at 1 April 2012 87 62 8 157
Less Disposals - (12) - (12)
Add Charge for the year 55 28 12 95
Balance at 31 March 2013 142 78 20 240
Net book value
Balance at 31 March 2013 178 80 16 274
Balance at 31 March 2012 153 48 16 217
During the year plant and equipment was sold for $5 000.
Additional information
1 $50 000 of the 6% debentures were redeemed at par on 31 March 2013.
2 20 000 additional $1 non-redeemable preference shares were issued at par on 1 October 2012.
Preference dividends of $4 000 were paid during the year.
3 A rights issue of 1 new ordinary $1 share for every 2 held at a premium of $0.50 was made on 1 January
2013. No new shares had been issued in the year ended 31 March 2012.
4 A final dividend on the ordinary shares of $0.30 per share was paid on 30 June 2012 and an interim
dividend of $0.05 per share was paid on 31 March 2013.
REQUIRED
(a) Prepare a statement of cash flows for the year ended 31 March 2013 in accordance with IAS 7 [28]
(b) (i) Explain the difference between a cash budget and a statement of cash flows. [4]
(ii) State two purposes for which Swiftsure plc would use a statement of cash flows. [4]
QUESTION 9 NOVEMBER 2014 P43 Q3 (c & d)
The following extract from income statement has been prepared for Asteroid plc for the year ended 30 June 2014.
$000
Profit from operations 3 296
Estimated tax liability for the year 782
Profit on equipment disposal 395
Dividends received 750
On 1 May 2014 the directors issued $5 625 000 8% debentures redeemable in 2022.
Additional information
The last two statements of financial position were as follows:
Statement of financial position at 30 June
Assets 2014 2013
Non-Current Assets $000 $000
Property, plant and equipment (net book value) 19 735 10 509
19 735 10 509
Current Assets
Inventories 2 048 1 659
Trade receivables 1 562 1 158
Cash and cash equivalents 454 ____
4 064 2 817
Total assets 23 799 13 326
Chapter 12 186 Statements of Cash Flows

Equity and Liabilities

Equity $000 $000
Ordinary share capital ($1) 4 000 3 000
Share premium 2 000 1 500
Retained earnings 9 627 7 338
Total equity 15 627 11 838
Non-Current Liabilities
8% Debentures (2022) 5 625 -
Current Liabilities
Trade payables 1 735 796
Taxation 812 609
Bank overdraft 83
2 547 1 488
Total Liabilities 8 172 1 488
Total Equity and Liabilities 23 799 13 326
Other information is as follows:
1 During the year the company paid total dividends of $150 000.
2 During the year property, plant and equipment costing $840 000 was sold. The accumulated depreciation
on this property, plant and equipment was $715 000.
3 The total depreciation charge for the year was $2 050 000.
4 Gain on disposal was $395 000.
5 Dividends received during the year amounting to $750 000.
REQUIRED
(c) Prepare a statement to show the net cash from operating activities for the year ended 30 June 2014. [12]
(d) Prepare a statement of cash flows for the year ended 30 June 2014 in accordance with IAS 7. [16]

QUESTION 10 NOVEMBER 2016 P31 Q2 (a to d)

The directors of Hank Limited provide the following statements of financial position at 31 March:
Assets 2016 2015
$000 $000
Non-current assets (net book value) 259 224
Current assets
Inventories 128 102
Trade receivables 132 118
Cash and cash equivalents – 14
260 234
Total assets 519 458
Equity and Liabilities
Equity
Share capital 210 180
Share premium 15 –
Retained earnings 107 131
332 311
Non-current liabilities
Bank loan (repayable 2020) 42 20
Current liabilities
Trade payables 102 109
Bank overdraft 23 –
Other payables – taxation 20 18
145 127
Total equity and liabilities 519 458
Chapter 12 187 Statements of Cash Flows

Additional information
The following information relates to the year ended 31 March 2016:
1 The profit from operations was $30 000.
2 During the year non-current assets with a cost of $24 000 and accumulated depreciation of $19 000 were
sold for $8 000.
3 The depreciation charge for the year was $12 000. All non-current assets held at the end of the financial
year are depreciated over 25 years using the straight-line method.
4 Interest paid for the year was $9 000.
5 Dividends paid during the year were $25 000. A dividend of $30 000 had been proposed at the end of the
year.
6 The taxation charge was $20 000.

REQUIRED
(a) Explain the difference between a statement of cash flows and a cash budget. [2]
(b) Prepare a statement of cash flows for Hank Limited for the year ended 31 March 2016 in accordance with
IAS 7. [10]
(c) Explain with reference to the statement of cash flows whether Hank Limited has a strong or a weak cash
position. [4]
(d) Prepare a summarised schedule of non-current assets as it would appear as a note in the published accounts
for the year ended 31 March 2016. [5]
Chapter 12 188 Statements of Cash Flows

SOLUTION CHAPTER 12
QUESTION 1 MAY 2011 P42 Q1 (a & b)
(a) (i) $000
Profit for the year (balancing figure) 75
Dividends paid (30)
Current year retained earnings 45
Last year retained earnings 1 125
Retained earnings c/f 1 170
(ii) $000
Profit from operations (balancing figure) 135
Interest (32)
Taxation (28)
Profit for the year [a (i)] 75

(b) Statement of cash flows

For the year ended 30 April 2011
OPERATING ACTIVITIES $000 $000
Profit from operations 135
Amortisation of patents ($150 000 – $125 000) 25
Depreciation: Buildings ($168 000 – $144 000) 24
Plant (W 1) 190
Increase in inventory ($124 000 – $106 000) (18)
Decrease in trade receivables ($82 000 – $78 000) 4
Increase in trade payables ($63 000 – $56 000) 7
Profit on disposal [$20 000 – ($92 000 – $75 000)] (3)
Tax paid (24)
Interest paid ($32 000 + $14 000 – $4 000) (42) 163
Net cash from operating activities 298
Investing activities
Proceeds of sale of plant 20
Purchase of plant (W 2) (488) (468)
Net Cash inflow before Financing (170)
Financing activities
Proceeds of debenture issue 300
Dividend paid (30) 270
Net increase in cash and cash equivalents 100
Cash and cash equivalents at start of year (42)
Cash and cash equivalents at end of year 58
WORKINGS
(W 1) Provision for Depreciation (Plant)
$000 $000
Plant Disposal 75 Balance b/f 212
Balance c/d 327 Depreciation (balancing figure) 190
402 402

(W 2) Plant Account
$000 $000
Balance b/f 729 Plant Disposal 92
Bank (balancing figure) 488 Balance c/d 1 125
1 217 1 217
Chapter 12 189 Statements of Cash Flows

QUESTION 2 NOVEMBER 2011 P43 Q2 (a & b)

(a) Reconciliation of operating profit to net cash inflow from operating activities
$000
Operating profit 686
Depreciation 786
Profit on disposal of non-current assets (15)
Increase in inventories ($441 000 − $227 000) (214)
Increase in trade receivables ($639 000 − $361 000) (278)
Increase in trade payables ($347 000 − $287 000) 60
Cash from operations 1 025
Interest paid (225)
Tax paid (94)
Net cash from operating activities 706

(b) Cash Flow Statement of Sabrina plc

For the year ended 30 June 2011
$000 $000
Net cash from operating activities 706
Cash flows from investing activities
Payment for purchase of assets $[2 576 000 −786 000−(40 000−25000)−5214 000) (3 439)
Receipts from sale of assets [($40 000 − $25 000) + $15 000] 30
Net cash used in investing activities (3 409)
Cash flows from financing activities
Equity dividends paid ($160 000 + $40 000 − $80 000) (120)
Issue of debentures ($2 500 000 − $1 000 000) 1 500
Issue of shares [($2 000 000 − $1 000 000) + $50 000] 1 050
Net cash from financing activities 2 430
Net decrease in cash and cash equivalents (273)
Cash and cash equivalents at beginning of period 78
Cash and cash equivalents at end of period (195)

QUESTION 3 MAY 2012 P41 Q1 (a & b)

(a) Statement of changes in equity
For the year ended 31 March 2012
Ordinary share Revaluation General Retained
capital reserve reserve Earnings
$000 $000 $000 $000
Balance at 1 April 2011 1 200 200 947
Profit for the year 355
Transfer to General reserves 200 (200)
Revaluation reserve 700
Issue of shares ($1 500 000 − $1 200 000) 300
Dividends paid ____ ___ ___ (300)
Balance at 31 March 2012 1 500 700 400 802

(b) Statement of Cash flow

For the year ended 31 March 2012
$000 $000
Profit from operations 636
Depreciation [$320 000 – ($295 000 – $101 000)] 126
Profit on plant disposal [$90 000 – ($172 000 – $101 000)] (19)
Chapter 12 190 Statements of Cash Flows

Decrease in inventory ($509 000 − $480 000) 29

Increase in trade receivables ($611 000 − $569 000) (42)
Increase in trade payables ($512 000 − $501 000) 11
Increase in other payables excl. interest $[(76000−21000)−(54000−11000)] 12
Interest paid($11 000 + $61 000 − $21 000) (51)
Tax paid (195)
Net cash from operating activities 507
Cash flows from investing activities
Purchase of equipment [$1 240 000 – ($905 000 – $172 000)] (507)
Purchase of patents ($220 000 – $180 000) (40)
Proceeds of sale of non-current assets 90
Cash used in investing activities (457)
Cash flows from financing activities $000 $000
Proceeds of share issue ($1 500 000 – $1 200 000) 300
Proceeds of debenture issue ($500 000 – $400 000) 100
Dividend paid (300)
Cash from financing activities 100
Net increase in cash and cash equivalents 150
Cash and cash equivalents at beginning of year (71)
Cash and cash equivalents at end of year 79

QUESTION 4 MAY 2012 P43 Q1 (a & b)

(a) Statement to show the net cash flow from operating activities
$
Profit from operations 34 548
Depreciation: Plant & machinery [$64 900 – ($10 000 – $2 100) + $35 000 – $82 500] 9 500
Office equipment ($38 355 – $34 519) 3 836
Profit on plant disposal [$10 000 – ($27 500 – $19 600)] (2 100)
Increase in inventories ($18 758 – $16 521) (2 237)
Increase in trade receivables ($17 623 – $12 517) (5 106)
Increase in trade payables ($22 758 – $18 654) 4 104
Interest paid (1 600)
Tax paid ($4 200 + $5 800 – $5 350) (4 650)
Net cash from operating activities 36 295

(b) Statement of cash flows for year ended 30 April 2012

$ $
Cash flow from operating activities 36 295
Cash flows from investing activities
Purchase of machinery (35 000)
Proceeds from sale of machinery 10 000
Net cash used in investing activities (25 000)
Cash flows from financing activities
Proceeds from issue of shares [($60 000 – $40 000) + ($18 000 – $8 000)] 30 000
Redemption of debentures ($50 000 – $30 000) (20 000)
Net cash used in financing activities 10 000
Net increase in cash and cash equivalents 21 295
Cash & cash equivalents at start of year 6 459
Cash & cash equivalents at end of year 27 754

QUESTION 5 NOVEMBER 2012 P43 Q2 (a & b)

(a) Statement of cash flows for Hyung Ltd
For the year ended 31 March 2012
Chapter 12 191 Statements of Cash Flows

$000 $000
Net loss for the year [$30 000$15 000 (last year profit)+($200 000×8%) interest] 1
Depreciation 236
Loss on sale of non-current assets [($240 000  $108 000) – $130 000] 2
Interest paid ($200 000 × 8%) (16)
Increase in inventories($108 000  $82 000) (26)
Increase in trade receivables ($90 000  $72 000) (18)
Decrease in trade payables ($108 000  $52 000) (56) 122
Net cash flow from operating activities 123
Investing Activities $000 $000
Payments to acquire fixed assets (808)
Receipts from the sale of fixed assets 130 (678)
Financing Activities
Issue of share capital ($1400 000  $1 000 000) + ($70 000  $50 000) 420
Repayment of debentures ($200 000  $120 000) (80) 340
Net decrease in cash and cash equivalents (215)
Balance at 1 April 2011 174
Balance at 31 March 2012 (41)

(b) Cash is the actual amount of money physically held by a business, whereas profit is calculated as excess of
incomes over expenses and does not represent actual amount of money.

QUESTION 6 MAY 2013 P43 Q2 (a to c)

(a) Calculation of drawings
For the year ended 31 December 2012
$000
Opening capital 2 260
Add Revaluation surplus ($3 500 000  $2 000 000) 1 500
Net profit for the year 180
3 940
Less: closing capital (3 540)
Drawings 400

(b) Statement of cash flows for the year ended 31 December 2012
Operating activities $000 $000
Operating profit 180
Depreciation on non-current assets ($500 000  $60 000  $470 000) 30
Loss on disposal of non-current asset 2
Increase in inventory ($320 000  $310 000) (10)
Decrease in trade receivables ($240 000  $210 000) 30
Decrease in trade payables ($200 000  $160 000) (40) 12
Cash from operating activities 192
Investing Activities
Purchase of non-current assets (200)
Cash from disposal of non-current assets ($20 000  $2 000) 18 (182)
Financing Activities
Loan repayment ($500 000  $350 000) (150)
Drawings (from (a)) (400) (550)
Net Cash outflow for the year (540)
Cash and cash equivalents at start 10
Cash and cash equivalents at end (530)
Chapter 12 192 Statements of Cash Flows

(c) The reasons for having an overdraft at the end of 2012, despite making a profit are given below.
 purchase of new non-current assets for $200 000
 repayment of loan amounting to $150 000
 cash drawings amounting to $400 000
QUESTION 7 NOVEMBER 2013 P41 Q1 (a & b)
(a) Calculation of budgeted profit from operations
For the year ending 30 September 2014
$000 $000
Budgeted profit for the year 214
Less Income from investments: 40
Add Interest payable 91
Tax charge 160 251
Budgeted profit from operations 425
(b) Budgeted statement of cash flows from operations
For the year ending 30 September 2014
Operating Activities $000 $000
Budget profit from operations 425
Add Depreciation – buildings 50
– plant and equipment 255
– motor vehicles 25
Add Loss on sale of plant and equipment [$10 000  ($35 000  $15 000)] 10
Add Impairment of investments 60
Less Increase in inventories ($790 000  $750 000) (40)
Add Decrease in trade receivables ($460 000  $425 000) 35
Add Increase in trade payables ($1 075 000  $960 000) 115
Less Interest payable ($1 300 000 × 7%) (91)
Less Tax payable (280)
Budgeted net cash flow from operations 564
Investing activities $000 $000
Purchase of non-current assets
Buildings (80)
Plant and equipment (280)
Motor vehicles (30)
Goodwill (50)
Proceeds from sale of plant and equipment 10
Income from investments 40
Budgeted net cash flow from investing activities (390)
Financing activities
Proceeds of issue of debentures 300
Dividends payable (110)
Budgeted net cash flow from financing activities 190
Budgeted net increase in cash and cash equivalents 364
Cash and cash equivalents at 1 October 2013 210
Budgeted cash and cash equivalents at 30 September 2014 574

QUESTION 8 NOVEMBER 2013 P42 Q2 (a & b)

(a) Swiftsure plc
Statement of cash flows for the year ended 31 March 2013
Operating Activities $000 $000
Loss from operations (24)
Depreciation – buildings 55
– plan and equipment 28
Chapter 12 193 Statements of Cash Flows

– motor vehicles 12
Loss on sale of plant and equipment [$5 000  ($20 000  $12 000)] 3
Increase in inventories ($74 000  $54 000) (20)
Increase in trade receivables ($95 000  $65 000) (30)
Increase in trade payables ($57 000  $42 000) 15
Interest paid ($200 000 × 6%) (12)
Tax paid (last year) (25)
Net cash flow from operating activities 2
Investing Activities
Purchases: Buildings (80)
Plant and equipment (68)
Motor vehicles (12)
Proceeds of sale of plant 5
Income from investments __5 (150)
Financing Activities
Redemption of debentures (50)
Proceeds of issue of preference shares 20
Proceeds of issue of ordinary shares [(120 000 × 1/2) shares @ $1.50] 90
Dividends paid: Ordinary {(120 000 × $0.30) + (180 000 × $0.05)] (45)
Preference _(4) __11
Net decrease in cash and cash equivalents (137)
Cash and cash equivalents at 1 April 2012 __76
Cash and cash equivalents at 31 March 2013 _(61)
(b) (i) Cash flow statements are similar to cash budgets in the content that they show sources and uses
of cash but they are different in many respects some of which are given as follows.
(i) Cash flow statements are published for external use and they are part of a company’s
published financial statements whereas cash budgets are only used for internal purposes.
(ii) Cash flow statements are based on historic data and shows sources and uses of cash for
previous year whereas a cash budget shows the same for a coming period.
(iii) There is no set format of cash budgets but a cash flow statement has to be prepared in
compliance with FRS 1.
(iv) Cash flow statements show reasons for changes in cash for a whole year whereas
companies may prepare cash budgets to show changes in cash on monthly, weekly or
yearly basis.
(v) A company is bound to prepare a cash flow statement on annual basis whereas there is
no such compulsion for a cash budget.

(ii) Cash flow statement is intended to show information that is not available from examining the
financial statements. It is intended to fill in gaps in the available published information, between
opening and closing Balance Sheets. In simple words, a Cash Flow statement is nothing more than
a summary of a company’s cash book for the accounting period under review. This shows sources
and uses of cash during the year. Although a cash flow statement shows only historic data, it should
help to assess a company’s ability to;
(a) generate sufficient cash to fund its day-to-day operation.
(b) repay loans as they fall due and make payments of loan interest.
(c) replace and improve non-current assets as necessary.
(d) make the required payments of tax and maintain an acceptable level of dividend.
(e) the reason for the difference between profit and cash from operations.

QUESTION 9 NOVEMBER 2014 P43 Q3 (c & d)

(c) Statement to show the net cash from operating activities
For the year ended 30 June 2014
Chapter 12 194 Statements of Cash Flows

$000
Profit from operations 3 296
Depreciation charge for the year 2 050
Gain on disposal (395)
Dividends received (750)
Increase in inventories ($2 048 000  $1 659 000) (389)
Increase in trade receivables ($1 562 000  $1 158 000) (404)
Increase in trade payables ($1 735 000  $796 000) 939
Interest paid ($5 625 000 × 8% × 2/12) (75)
Tax paid ($782 000 + $609 000 – $812 000) (579)
Net cash from operating activities 3 693

(d) Statement of cash flows for year ended 30 June 2014

$000 $000
Cash flow from operating activities 3 693
Cash flows from investing activities
Purchase of assets ($10 509 $2 050  $125 – $19 735) (11 401)
Proceeds from property, plant & equip [($840 000$715 000)+$395 000] 520
Dividends received 750 (10 131)
Cash flows from financing activities
Proceeds from share issue [($4 000  $3 000) + ($2 000  $1 500)] 1 500
Proceeds from issue of debentures 5 625
Dividends paid (150) 6 975
Net increase in cash and cash equivalents 537
Cash and cash equivalents at start of year (83)
Cash and cash equivalents at end of year 454

QUESTION 10 NOVEMBER 2016 P31 Q2 (a to d)

(a) Cash flow statements are similar to cash budgets in the content that they show sources and uses of cash
but they are different in many respects some of which are given below.
(i) Cash flow statements are published for external use and they are part of a company’s published
financial statements whereas cash budgets are used for internal purposes.
(ii) Cash flow statements are based on historic data and shows sources and uses of cash for previous
year whereas a cash budget shows the same for a coming period.
(iii) There is no set format of cash budgets but a cash flow statement is prepared under IAS7.
(iv) Cash flow statements show reasons for changes in cash for a whole year whereas cash budgets
show changes in cash on monthly, weekly or yearly basis.
(v) A company is bound to prepare a cash flow statement on annual basis whereas there is no such
compulsion for a cash budget.

(b) Statement of Cash Flows for Hank Ltd

For the year ended 31 March 2016
Operating Activities $ $
Profit from operations 30 000
Add depreciation 12 000
Less profit on asset disposal [$8 000 – ($24 000  $19 000)] (3 000)
Less increase in inventories ($128 000 – $102 000) (26 000)
Less increase in trade receivables ($132 000 – 118 000) (14 000)
Less decrease in trade payables ($109 000 – $102 000) (7 000)
Less interest paid (9 000)
Less taxation paid ($18 000 + $20 000 – $20 000) (18 000) (65 000)
Net cash from operations (35 000)
Chapter 12 195 Statements of Cash Flows

Investing Activities
Proceeds from sale of non-current assets 8 000
Purchase of non-current assets [$224 000 (opening) – $12 000 (depn) –
{($24 000 – $19 000) disposal}– $259 000 (closing)] (52 000)
Net cash used in investing activities (44 000)
Financing Activities
Issue of shares [{$210 000 – $190 000(capital)} + $15 000 (premium)] 45 000
Dividends paid (25 000)
Increase in loan ($42 000 – $20 000) 22 000
Net cash from financing activities 42 000
Net decrease in cash and cash equivalents (37 000)
Cash and cash equivalents at the start of the year 14 000
Cash and cash equivalents at the end of the year (23 000)

(c) Hank has a weak cash position as its positive bank balance has been converted to bank overdraft at year
end. There has been a reduction in cash and cash equivalents over the period of $37 000. Though operating
profit was only $30 000 but company paid an ordinary dividend of $25 000 which seems quite high
considering the circumstances.
There are also negative movements in working capital items totaling $47 000 resulting in negative cash
from operations amounting to $35 000. Tax payments are quite high as well considering profit before tax
was only $21 000 ($30 000 - $9 000).
There was also an additional investment in non-current assets of $52 000 resulting in negative cash flows
from investing activities of $44 000.
Despite there was increase in the loan by $22 000 and issue of new shares for $45 000 there was a negative
net movement in cash and cash equivalents indicating the weak cash position of the business. It requires
reconsidering the policy of issuing shares or taking out loans on regular basis. Moreover the movements in
working capital also need reviewing.

(d) Note to the financial statements on non-current assets.

Schedule of Non-Current Assets
Non-current assets $
Cost at 1 April 2015 272 000
Additions 52 000
Disposals (24 000)
Cost at 31 March 2016 (W 1) 300 000

Depreciation at 1 April 2015 48 000

Charge for the year 12 000
Disposals (19 000)
Depreciation 31 March 2016 (b) 41 000

Net book value at 31 March 2016 (a  b) 259 000

Net book value at 1 April 2015 224 000

Cost−Scrap value
(W 1) Annual Depreciation =
Estimated life in years
Cost − Zero
$12 000 =
25 years
Cost = $12 000 × 25
= $300 000
Chapter 13 196 Manufacturing Accounts

CHAPTER 13 MANUFACTURING ACCOUNTS

QUESTION 1 MAY 2012 P22 Q1
Bart, a sole trader, provided the following trial balance for the year ended 30 April 2012.
$ $
Sales Revenue 799 000
Inventory at 1 May 2011 (at cost)
Raw materials 20 000
Work-in-progress 52 000
Finished goods 78 000
Purchase of raw materials 238 000
Purchase returns 10 000
Manufacturing wages 265 000
Indirect factory wages 46 000
Factory buildings at cost 600 000
Factory machinery at cost 260 000
Office equipment at cost 148 000
Provision for depreciation:
Factory machinery 60 000
Office equipment 44 000
Insurance 14 000
General factory expenses 6 000
Factory supervision salaries 15 000
Heat and light 6 000
Administrative expenses 33 000
Office salaries 55 000
Trade receivables 40 000
Provision for doubtful debts 2 000
Trade payables 32 000
Bank 3 000
Capital _______ 932 000
1 879 000 1 879 000
Additional Information:
1 Inventory at 30 April 2012 (at cost): $
Raw materials 56 000
Work-in-progress 58 000
Finished goods 72 000
2 Depreciation is provided on machinery and equipment at a rate of 20% per year using the reducing balance
method.
3 The following expenses should be apportioned as follows:
Factory Office
Insurance 70% 30%
Heat and light 80% 20%
4 On 30 April 2012 indirect factory wages of $5 000 were unpaid and insurance of $7 000 had been paid in
advance.
5 Provision for doubtful debts is to be maintained at 3% of trade receivables.
REQUIRED
(a) Prepare Bart’s manufacturing account for the year ended 30 April 2012. [19]
(b) Prepare Bart’s income statement for the year ended 30 April 2012. [8]
(c) State three examples of how the prudence concept has been applied in the preparation of Bart’s
manufacturing account and income statement. [3]
Chapter 13 197 Manufacturing Accounts

QUESTION 2 MAY 2012 P42 Q1

Asterix plc, a manufacturing company, has extracted the following balances from its books of account for the year
ended 30 April 2012:
$000
Revenues 6 500
Purchases of raw materials 1 450
Carriage inwards 130
Carriage outwards 75
Direct labour 1 675
Factory overheads 1 350
Office overheads 1 025
Inventories at 1 May 2011:
Raw materials 140
Work in progress 165
Finished goods (at transfer price) 330

Additional information:
1 Factory overheads of $70 000 are accrued at 30 April 2012.
2 Office overheads of $35 000 have been prepaid at 30 April 2012.
3 Depreciation for the year on the non-current assets totalled $150 000 and this is to be split between the
factory and the office in the ratio 2:1.
4 Completed production is transferred at a mark-up on cost of 20%.
5 Inventories were valued on 30 April 2012 as follows:
$000
Raw materials 235
Work in progress 320
Finished goods (at transfer price) 438
REQUIRED
(a) Prepare a manufacturing account and income statement for the year ended 30 April 2012. [26]
(b) Prepare an extract from statement of financial position at 30 April 2012 to show all inventories. [6]

QUESTION 3 NOVEMBER 2012 P23 Q1

On 31 March 2012 the following balances were extracted from the books of YCAT.
$
Inventory – 1 April 2011 Raw materials 53 000
Work in progress 80 000
Finished goods 76 000
Raw materials purchased 800 000
Revenue 2 500 000
Direct wages 450 000
Carriage inwards on raw materials 6 000
Indirect wages 68 000
Returns outwards on raw materials 18 500
Trade receivables 83 000
Revenue returns 22 000
Rates and insurance 38 000
General factory overheads 93 000
Loan interest paid 5 000
Office salaries 80 000
General office expenses 100 000
Premises 600 000
Factory machinery at cost 220 000
Chapter 13 198 Manufacturing Accounts

Provision for depreciation of factory machinery 40 000

10% Long term loan 100 000
Provision for doubtful debts 3 800
Additional information
1 Inventory - 31 March 2012 Raw materials $47 000
Work in progress 92 000
Finished goods 68 000
2 The provision for doubtful debts is to be 5% of trade receivables.
3 At 31 March 2012 rates and insurance owing amounted to $950. Rates and insurance are apportioned
between the factory and general office in the ratio of 4:1 respectively.
4 Depreciation is to be provided on premises at 5% per annum straight line. This is apportioned between the
factory and general office in the ratio of 4:1 respectively.
5 Depreciation on factory machinery is to be provided at 15% using the reducing balance method.
REQUIRED
(a) Prepare the manufacturing account for the year ended 31 March 2012. [13]
(b) Prepare the income statement for the year ended 31 March 2012. [11]
(c) Define the prudence concept. State three examples of how this has been applied in the financial statements.
[6]
QUESTION 4 NOVEMBER 2012 P43 Q1
Nathan Akrill is a sole trader who has successfully run a manufacturing business for many years. His business
manufactures one product, the squam.
On 1 January 2011 there were 1 000 squams in inventory. During the year 10 318 squams were produced by the
factory and transferred to the sales department. On 31 December 2011 there were 1 240 squams in inventory.
Nathan Akrill uses the FIFO method of inventory valuation.
Production is transferred from the factory to the sales department at cost plus 40%.
Unfortunately the book-keeper was taken ill at the year end and Nathan Akrill decided he would have to produce his
financial statements himself. He did not know how to value the inventory of finished goods at that date. Therefore
he decided to value each squam at the same value as had been used on 1 January 2011.
Nathan Akrill produced the following:
Income statement for the year ended 31 December 2011
$ $ $
Revenue 880 000
Inventory at 1 January 2011
Raw materials 31 000
Finished goods 58 800 89 800
Purchases of raw materials 261 000
Inventory at 31 December 2011 350 800
Raw materials 46 400
Finished goods 72 912 119 312 231 488
Gross profit 648 512
Expenses
Manufacturing wages 166 000
Supervisory wages 42 800
Factory rent 36 000
Office rent 21 000
Depreciation of factory machinery 13 800
Depreciation of office equipment 2 900
Direct expenses 9 200
Carriage on raw materials 2 500
Administrative and selling expenses 201 000 495 200
Profit for the year 153 312
Chapter 13 199 Manufacturing Accounts

Statement of Financial Position at 31 December 2011

$ $ $
Non-current assets 570 000
Current Assets
Inventory: Raw materials 46 400
Finished goods 72 912 119 312
Trade receivables 96 200
Bank 11 000
226 512
Current liabilities
Trade payables (84 100) 142 412
712 412
Capital
Balance at 1 January 2011 622 300
Profit for the year 153 312
Drawings (80 000) 695 612
REQUIRED
(a) Prepare, for the year ended 31 December 2011:
(i) the manufacturing account; [10]
(ii) the provision for unrealised profit account; [8]
(iii) a corrected income statement. [13]
(b) Prepare a corrected statement of financial position at 31 December 2011. [7]
(c) Explain your treatment of finished goods in the inventory valuation. [2]
QUESTION 5 MAY 2013 P23 Q1
Eagle Manufacturing Limited produces components for cars and lorries. The following figures have been taken from
their books of account.
$000
Revenue 816
Inventories at 1 April 2012
Raw materials 17
Work in progress 19
Finished goods 32
Factory machinery – cost 420
– accumulated depreciation 52
Office equipment – cost 30
– accumulated depreciation 10
Motor vehicles – cost 60
– accumulated depreciation 34
Purchases of raw materials 194
Labour 153
Electricity 25
Carriage inwards 6
Carriage outwards 22
Rent 60
Salaries 14
Sundry expenses 12
Insurances 18
Additional information:
1 Inventories at 31 March 2013 were:
Raw materials $18 000
Chapter 13 200 Manufacturing Accounts

Work in progress $15 000

Finished goods $41 000
2 Factory machinery and motor vehicles are to be depreciated at 25% using the reducing balance method.
Office equipment is to be depreciated at 10% on cost.
During the year a motor vehicle was sold for $4 000. The profit on disposal was $1 000. A new motor vehicle
was purchased for $9 000. All motor vehicles are used by the sales staff.
A full year’s depreciation is charged in the year of purchase, no depreciation is charged in the year of sale.
3 At 31 March 2013 electricity of $5 000 was accrued and rent of $10 000 was prepaid.
4 Labour costs include $16 000 for indirect labour. The balance is direct labour.
5 Electricity is apportioned between the factory and office in the ratio 4:1.
6 Rent is apportioned between factory and offices in the ratio 3:2.
7 Sundry expenses are apportioned between factory and offices in the ratio 1:2.
8 Insurances are apportioned between factory and offices in the ratio 5:1.

REQUIRED
(a) Prepare the manufacturing account for the year ended 31 March 2013. [12]
(b) Prepare the income statement for the year ended 31 March 2013. [10]
(c) Explain how the following will be affected if the company makes a loss in the year:
(i) Dividend payable for cumulative preference shares [2]
(ii) Dividend payable for ordinary shares [2]
(iii) Dividend payable on non-cumulative preference shares [2]
(iv) Interest payable on debentures. [2]

QUESTION 6 MAY 2014 P21 Q1 (b & c)

Shane Limited is a small manufacturing company.
Shane Limited’s financial statements also showed the following information for the 6 months ended 31 December
2013.

Inventories at 1 July 2013 $000

Raw materials 80
Work in progress 110
Finished goods 204
Purchases
Raw materials 780
Finished goods 150
Sales revenue 3 474
Return Inwards 60
Carriage inwards 128
Factory power (direct) 88
Factory machinery at cost 160
Motor vehicles at cost 140
Production wages 480
Electricity 138
Rent 326
Factory expenses 56
General office expenses 45

Additional information
1 Inventories at 31 December 2013
Raw materials $112 000
Work in progress $146 000
Finished goods $210 000
Chapter 13 201 Manufacturing Accounts

2 Rent prepaid at 31 December 2013, $26 000.

3 Expenses were allocated as follows:
2
Electricity /3 factory, 1/3 office
3
Rent /5 factory, 2/5 office
4 Motor vehicles were used solely for the distribution of finished goods.
5 Depreciation was provided annually on a straight-line basis as follows:
Factory machinery 20%
Motor vehicles 10%
REQUIRED
(b) Prepare Shane Limited’s manufacturing account for the 6 months ended 31 December 2013. [10]
(c) Prepare Shane Limited’s income statement for the 6 months ended 31 December 2013. [8]
QUESTION 7 NOVEMBER 2014 P22 Q1
The following information relates to the business of Nother Limited.
Trial Balance at 31 March 2014
Dr Cr
$000 $000
Share capital 1 500
Factory premises at cost 1 000
Factory machinery at cost 280
Provisions for depreciation: Premises 250
Machinery 140
Inventories at 1 April 2013: Raw materials 360
Work in progress 210
Finished goods 432
Revenue 5054
Purchases of raw materials 1 896
Manufacturing wages 1 250
Factory expenses 780
Administrative expenses 80
Sales expenses 416
Retained earnings 196
Trade receivables and payables 840 240
Provision for doubtful debts 36
Bank overdraft 144
Bad debts written off 16 ___
7 560 7 560
Additional information
1 Inventories at 31 March 2014
$
Raw materials 300 000
Work in progress 220 000
Finished goods 480 000
2 Other payables at 31 March 2014
$
Factory expenses 112 000
Sales expenses 56 000
Manufacturing wages 40 000
3 Prepayments at 31 March 2014
$
Administrative expenses 8 000
Chapter 13 202 Manufacturing Accounts

4 During the year ended 31 March 2014 a machine was sold for $14 000. This had been debited to the bank
account and credited to the sales account.
The machine had been purchased for $44 000 and depreciation of $24 000 had been written off up to 31
March 2013. A full year’s depreciation is provided in the year of purchase but none in the year of sale.
5 Depreciation is to be provided as follows:
Factory premises 1% straight line
Factory machinery 15% reducing (diminishing) balance.
6 The provision for doubtful debts is to be adjusted to 5% of trade receivables.
REQUIRED
(a) Prepare Nother Limited’s manufacturing account for the year ended 31 March 2014. [10]
(b) Prepare Nother Limited’s income statement for the year ended 31 March 2014. [10]
(c) Explain the following terms.
Direct costs [2]
Indirect costs [4]
Prime cost [2]
Production cost [2]

QUESTION 8 MAY 2015 P23 Q1

Vikran, a sole trader, has extracted the following trial balance from his books of account at 30 June 2014.
Dr ($) Cr ($)
Bank 7 600
Capital 200 000
Carriage inwards 4 200
Factory supervision salaries 12 400
General factory expenses 8 100
Heat and light 5 400
Indirect factory wages 36 800
Insurance 12 000
Inventory at 1 July 2013 at cost
Raw materials 39 000
Work in progress 48 000
Finished goods 57 000
Manufacturing wages 259 100
Office salaries 37 300
Office equipment at cost 90 000
Plant and machinery at cost 270 000
Provision for depreciation at 1 July 2013
Office equipment 38 000
Plant and machinery 90 000
Provision for doubtful debts 1 600
Purchase of finished goods 2 100
Purchase of raw materials 162 000
Returns outwards (raw materials) 1 200
Rent and rates 42 000
Returns inwards 1 800
Revenue 768 500
Trade payables 30 300
Trade receivables 34 800 _______
1 129 600 1 129 600
Additional information
1 Inventory at 30 June 2014 at cost:
Chapter 13 203 Manufacturing Accounts

$
Raw materials 46 000
Work in progress 54 000
Finished goods 52 000
2 Depreciation is to be provided on all non-current assets at 15% per annum using the reducing balance
method.
3 The following expenses are to be apportioned.
Factory Office
Rent and rates 85% 15%
Insurance 80% 20%
Heat and light 85% 15%
4 At 30 June 2014 insurance of $4 000 had been paid in advance.
5 At 30 June 2014 heat and light of $600 had accrued but remained unpaid.
6 A bad debt of $1 800 is to be written off at 30 June 2014.
7 The provision for doubtful debts is to be maintained at 3% of trade receivables.

REQUIRED
(a) Prepare Vikran’s manufacturing account for the year ended 30 June 2014. [14]
(b) Prepare Vikran’s manufacturing account for the year ended 30 June 2014. [12]
(c) Explain why a business should depreciate its non-current assets. [4]

QUESTION 9 NOVEMBER 2015 P42 Q1

A junior in the accounts department of Makewell plc produced the following draft financial statements for the year
ended 31 December 2014. These contained errors and omissions.

Makewell plc
Manufacturing account for the year ended 31 December 2014
$
Raw materials at 1 January 2014 30 000
Purchases of raw materials 410 000
Raw materials at 31 December 2014 (20 000)
420 000
Direct labour 310 000
730 000
Factory overheads 230 000
960 000
Factory profit 240 000
Transfer to income statement 1 200 000

Income statement for the year ended 31 December 2014

$ $
Revenue 1 500 000
Cost of sales
Finished goods at 1 January 2014 150 000
Cost of production 1 200 000
Finished goods at 31 December 2014 (180 000) (1 170 000)
Gross profit 330 000
Distribution costs (110 000)
Administrative expenses (240 000)
Loss for the year (20 000)
Chapter 13 204 Manufacturing Accounts

Additional information
1 Finished goods have been transferred from the factory to the warehouse at cost plus 25% for some years.
2 Non-current assets at 1 January 2014 had the following values.

Cost Provision for depreciation

$ $
Property 600 000 24 000
Factory and office equipment 310 000 86 000

The value of the property included $200 000 for the land. Property is depreciated at 2% per annum on the
straight-line basis. Of the property depreciation, 3/4 relates to the factory and 1/4 to the offices.
Equipment is depreciated at 10% per annum, on cost, and charged on a monthly basis.
On 1 January 2014 factory equipment had a cost of $250 000.
On 1 April 2014 new factory equipment was bought at a cost of $80 000.
On 1 July 2014 office equipment with an original cost of $20 000 was sold.
No depreciation had been provided in the draft financial statements.
3 Distribution costs included $3000 for carriage inwards.
4 Work in progress at 1 January 2014 was valued at $65 000 and on 31 December 2014 at $85 000.

REQUIRED
(a) Prepare for the year ended 31 December 2014:
(i) A corrected manufacturing account [8]
(ii) A corrected income statement. [9]

Additional information
1 On 1 January 2014 ordinary share capital of $1 shares was $500 000.
On 26 March 2014 a bonus issue was made of 2 ordinary shares for every 5 ordinary shares held.
On 1 November 2014 the directors issued 100 000 more ordinary shares at a price of $1.20 each.
2 On 1 January 2014 the balance on the retained earnings account was $380 000.
No dividend was paid during the year.
3 On 31 December 2014 other balances were as follows.
$
Goodwill 35 000
Trade receivables 126 000
Cash and cash equivalents 88 000
Trade payables 98 000
Other payables 26 000
4 On 19 January 2015 a fire in the warehouse destroyed finished goods which cost $17 000.
REQUIRED
(b) Prepare the statement of financial position at 31 December 2014 in accordance with IAS1. [23]

QUESTION 10 MAY 2016 P32 Q2

Kempes Limited is a company which manufactures a single product. Finished goods are transferred from the factory
at production cost plus 15%. Unsold goods are stored in the warehouse.
Selected balances extracted from the trial balance for the year ended 30 September 2015 were as follows:
$
Revenue 1 845 000
Purchases of raw materials 794 750
Carriage inwards 4 250
Factory production wages 382 500
Chapter 13 205 Manufacturing Accounts

Factory supervisory wages 64 000

Administrative wages 115 000
General expenses 78 000
Depreciation:
Factory plant and machinery 55 000
Office fixtures and fittings 37 500

Additional information
1 At 30 September 2015, there were accrued general expenses of $5 000 and prepaid general expenses of $3
000. 65% of the general expenses relate to the factory.
2 Details of inventories were as follows.

1 October 2014 30 September 2015

$ $
Raw materials 110 000 125 000
Work in progress 17 500 14 000
Finished goods at transfer price 19 550 21 505

REQUIRED
(a) Prepare the manufacturing account for the year ended 30 September 2015. [9]
(b) Prepare the income statement for the year ended 30 September 2015. [6]
(c) Explain why a business might create a provision for unrealised profit. [3]

Additional information
The budgeted closing inventory value of finished goods at transfer price at 31 October 2015 was $18 400.

REQUIRED
(d) Analyse the effect on the budgeted profit for the month of October 2015 due to the changes in the provision
for unrealised profit. [2]
Additional information
The price at which the product could be bought from an outside supplier is expected to increase.
It is now proposed to transfer finished goods at production cost plus 20%.
REQUIRED
(e) Advise the directors whether or not the mark-up should be increased. Justify your answer. [5]

QUESTION 11 NOVEMBER 2016 P32 Q2

Alpha Limited is a manufacturing business making a single product. Each year it produces and sells 1 000 units and
the only inventory it keeps is that of raw materials.
It provides the following information for the year ended 30 April 2016:
$
Revenue 95 000
Inventory of raw materials at 1 May 2015 1 000
Inventory of raw materials at 30 April 2016 3 100
Purchases of raw materials 12 200
Carriage inwards 1 100
Factory workers’ wages 17 500
Factory supervisor’s salary 8 200
Office salaries 8 500
Rent 8 000
Factory overheads 9 700
General office expenses 10 000
Chapter 13 206 Manufacturing Accounts

Additional information
1 Rent is allocated 75% to the factory and 25% to the offices.
2 Production is transferred to finished goods at cost plus 25%.

REQUIRED
(a) Prepare, for the year ended 30 April 2016,
(i) the manufacturing account [8]
(ii) the income statement. [7]
Additional information
Management has discovered that general office expenses are 50% fixed and 50% variable with the level of sales.
At the start of May 2016 management expected that in the next year the business would only be able to sell 900
units. There are no expected changes to the selling price or costs per unit.
There were two options.
Option 1
To continue to produce 1000 units and have an inventory of finished goods at the next year end.
Option 2
To reduce production to 900 units and continue to have no inventory of finished goods.
REQUIRED
(b) Calculate the expected annual profit if option 1 is implemented. Start your calculation with your profit from
(a) and adjust as appropriate. [5]
Additional information
The annual profit expected from option 2 was known to be $15 100.
REQUIRED
(c) Advise the management which of the two options it should implement. Justify your answer. [5]

QUESTION 12 NOVEMBER 2016 P33 Q1

M Limited manufactures a single product. The following balances have been extracted from the ledgers for the year
ended 31 December 2015:

Debit Credit
$ $
Inventories at cost at 1 January 2015
Raw materials 10 400
Work-in-progress 12 600
Finished goods at transfer price 14 904
Purchases of raw materials 146 200
Carriage inwards 3 160
Carriage outwards 2 790
Direct wages 249 400
Indirect wages 54 650
Rent 49 000
Heat, light and power 28 600
General expenses 12 600
Office salaries 24 780
Revenue 742 490
Provision for unrealised profit at 1 January 2015 2 484
Plant and machinery at cost 200 000
Office equipment at cost 15 000
Motor vehicles used by salesmen 25 000
Chapter 13 207 Manufacturing Accounts

Provision for depreciation:$2 484

plant and machinery 60 000
office equipment 4 600
motor vehicles 5 740
Additional information
1 Inventories at 31 December 2015
$
Raw materials at cost 11 750
Work-in-progress at cost 14 670
Finished goods at transfer price 15 750

2 Expenses are to be apportioned to the production department as follows:

4
Rent /5
Heat, light and power 4/5
3
General expenses /4
3 Rent has been prepaid by $4 000 at 31 December 2015.
4 Heat, light and power is in arrears by $3 500 at 31 December 2015.
5 Completed goods are transferred at a mark-up on factory cost of 20%.
6 Depreciation is to be provided as follows:
Plant and machinery 10% per annum on cost
Motor vehicles 25% per annum on cost
Office equipment 15% on the net book value

REQUIRED
(a) Prepare the manufacturing account for the year ended 31 December 2015. [9]
(b) Prepare the income statement for the year ended 31 December 2015. [10]
(c) Explain what is meant by the term transfer price. [2]
Additional information
10 000 units of the product were manufactured in the year, which is the maximum that can be produced. A supplier
has offered to supply the product to M Limited for $60 per unit in the future.
REQUIRED
(d) Advise the directors of M Limited whether or not they should accept this offer. Justify your answer on
financial grounds. [4]

QUESTION 13 MAY 2017 P32 Q1

Richard Ang is a sole proprietor manufacturing one type of sofa bed. The following balances are extracted from his
books of account at 31 July 2016.
$
Revenue 986 000
Purchases of direct materials 207 600
Carriage inwards 6 800
Carriage outwards 17 500
Returns inwards 12 000
Factory wages
Direct 168 000
Indirect 51 400
Overheads
Factory 155 000
Office 194 000
Chapter 13 208 Manufacturing Accounts

Additional information
1 Richard maintains a provision for unrealised profit account. Completed products are transferred from the
factory at a mark-up of 20%.
2 Inventories at 31 July 2015 were:

$
Raw materials 14 800
Work in progress 23 500
Finished goods (at cost) 32 000
3 Inventories at 31 July 2016 were:
$
Raw materials 16 400
Work in progress 20 200
Finished goods (at transfer price) 54 000
4 Unpaid direct wages at 31 July 2016 amounted to $3 500.
5 Rent had been allocated to factory overheads and office overheads at $24 000 and $16 000 respectively.
The allocation should have been in the ratio of 3 : 1 respectively.
REQUIRED
(a) Prepare the manufacturing account for the year ended 31 July 2016. [7]
(b) Prepare an income statement for the year ended 31 July 2016. [7]

Additional information
Richard Ang thought of taking some of the finished goods inventory at 31 July 2016 to help his sister set up a furniture
business on the same day.
REQUIRED
(c) Prepare an extract from the statement of financial position of Richard Ang’s business at 31 July 2016 to
show how inventories are recorded. [3]
(d) Explain why it is important for Richard to create a provision for unrealised profit. [4]
(e) State two advantages and two disadvantages to Richard Ang of helping his sister set up her
business. [4]

QUESTION 14 NOVEMBER 2017 P31 Q1

Ted is the owner of a manufacturing business.
The following information is available for the year ended 31 December 2016:
$
Factory machinery – at cost 330 000
Office equipment – at cost 142 000
Provision for depreciation at 1 January 2016
Factory machinery 276 000
Office equipment 67 000
Inventory at 1 January 2016
Raw materials 52 000
Work in progress 97 000
Finished goods (at cost) 122 000
Revenue 4 268 000
Purchases of raw materials 484 000
Factory direct wages 626 000
Factory indirect wages 132 000
Office salaries 548 000
Chapter 13 209 Manufacturing Accounts

Carriage inwards 21 000

Carriage outwards 87 600
Direct expenses 120 000
Factory overheads 510 900
General office expenses 276 000
Insurance and rates 92 000
Rent 440 000
Heat and light 178 000
Additional information
1 Goods are transferred from the factory at a mark-up of 20%. Increase in provision for unrealised profit at
31 December 2016 amounted to $15 840.
2 Inventory at 31 December 2016:
$
Raw materials 67 000
Work in progress 102 000
Finished goods ?
3 Non-current assets are depreciated at 15% per annum using the reducing balance method.
4 At 31 December 2016:
$
Rent owing 40 000
Insurance and rates prepaid 6 000
Insurance and rates, rent and heat and light are apportioned 3/4 factory and 1/4 general office.
5 Production for the year ended 31 December 2016 was 80 000 units.
REQUIRED
(a) Explain why a mark-up is added to the factory cost of production. [3]
(b) Prepare the manufacturing account for the year ended 31 December 2016. [10]
(c) Prepare the trading section of the income statement to show the gross profit for the year ended 31
December 2016. [6]
(d) Prepare an extract from the statement of financial position to show the value of finished goods inventory
at 31 December 2016. [2]
Additional information
In February 2017, Ted was approached by an existing customer for an extra order of 5000 units.
The budgeted production for 2017 was already set at the maximum production capacity. Ted considered whether
or not to source the extra 5000 units from an external supplier at a cost of $28 per unit.

REQUIRED
(e) Advise Ted whether or not he should have accepted the extra order. Justify your answer. [4]

QUESTION 15 MAY 2018 P31 & P33 Q1

JH Limited is a manufacturing business producing a single product. The transfer price of finished goods to the income
statement is cost plus a fixed percentage for factory profit. This percentage has remained unchanged for many years.
The following information is available for the year ended 31 October 2017.
$
Prime cost 252 000
Work in progress
at 1 November 2016 28 000
at 31 October 2017 32 000
Inventory of finished goods at transfer price
at 1 November 2016 108 000
at 31 October 2017 96 000
Revenue 1 860 000
Chapter 13 210 Manufacturing Accounts

Factory overheads 461 000

Distribution costs 216 000
Administrative expenses 412 000
Finance charges 28 000
Provision for unrealised profit
at 1 November 2016 18 000
The following information is also available.

1 Included in the distribution costs are:

$
Carriage inwards 18 000
Carriage outwards 34 000
2 Administrative expenses include an amount for buildings insurance of $60 000.
The following items relating to building insurance have not been adjusted:
an outstanding unpaid invoice of $3 000 for the year ended 31 October 2017
a payment in advance of $1 000 brought forward from the year ended 31 October 2016
the allocation of 75% of the total amount to the factory.

REQUIRED
(a) Explain why a manufacturing business might prepare a manufacturing account as part of its financial
statements. [4]
(b) Prepare the manufacturing account for the year ended 31 October 2017 in as much detail as possible. [5]
(c) Prepare the income statement for the year ended 31 October 2017. [9]

Additional information
The selling price of one unit is based on the transfer price from the factory plus a mark-up.
Bob, the financial director of JH Limited, has been notified that their main competitor has increased prices. He wishes
to increase the fixed percentage of the transfer price by 5%. The other directors are concerned that this will affect
profit.
(d) Advise the directors whether or not they should increase the transfer price. Justify your answer using any
relevant calculations. [7]
Chapter 13 211 Manufacturing Accounts

SOLUTION CHAPTER 13
QUESTION 1 MAY 2012 P22 Q1
(a) Manufacturing Account for the year ended 30 April 2012
Raw Material Cost $ $
Opening Inventory 20 000
Add Purchases of raw materials 238 000
Less Purchase returns (10 000) 228 000
Less Closing Inventory (56 000)
Cost of raw materials consumed 192 000
Direct labour costs 265 000
Prime cost 457 000
Factory Overhead
Indirect factory wages ($46 000 + $5 000) 51 000
Insurance ($14 000 – $7 000) × 70% 4 900
General factory expenses 6 000
Factory supervision salaries 15 000
Heat and light ($6 000 × 80%) 4 800
Depreciation on factory machinery ($260 000 – $60 000) × 20% 40 000 121 700
Total Manufacturing Cost 578 700
Add Work-in-progress: Opening inventory 52 000
Less Work-in-progress: Closing inventory (58 000) (6 000)
Factory cost of production 572 700
(b) Income Statement for the year ended 30 April 2012
$ $
Sales 799 000
Cost of Sales
Opening inventory of finished goods 78 000
Factory cost of production 572 700
650 700
Closing inventory of finished goods (72 000) (578 700)
Gross profit 220 300
EXPENSES $ $
Insurance($14 000 – $7 000) × 30% 2 100
Heat and light ($6 000 × 20%) 1 200
Administration expenses 33 000
Office salaries 55 000
Depreciation on office equipment ($148 000 – $44 000) × 20% 20 800 (112 100)
108 200
Other Incomes
Decrease in provision for doubtful debts [$2 000 – ($40 000 × 3%)] 800
Net profit 109 000

(c) Prudence concept may be applied in manufacturing accounts by

1 valuing inventories at lower of cost or net realisable value.
2 providing doubtful debts in the books of accounts
3 charging depreciation against profit

QUESTION 2 MAY 2012 P42 Q1

(a) Manufacturing Account and Income Statement
For the year ended 30 April 2012
Raw Material Cost $000 $000 $000
Chapter 13 212 Manufacturing Accounts

Raw materials at 1 May 2011 140

Purchases of raw materials 1 450
Carriage inwards 130 1 580
1 720
Raw materials at 30 April 2012 (235) 1 485
Direct Labour Cost 1 675
Prime cost 3 160
Factory Overheads
Factory overheads ($1 350 000 + $70 000) 1 420
Factory depreciation ($150 000 × 2/3) 100
4 680
Add Work in progress at 1 May 2011 165
Less Work in progress at 30 April 2012 (320) (155)
Factory cost of goods produced 4 525
Add Factory profit ($4 525 000 × 20%) 905
Market value of Transferred to trading account 5 430
Add Finished goods at 1 May 2011 330
Less Finished goods at 30 April 2012 (438)
Cost of sales (5 322)
Revenues 6 500
Gross profit 1 178
Operating Expenses
Office overheads ($1 025 000 – $35 000) 990
Carriage outwards 75
Office depreciation ($150 000 × 1/3) 50 (1 115)
Net profit on trading 63
Factory profit 905
Increase in provision for unrealised profit [(438 000 × 20/120)− (330 000×20/120) (18) 887
Overall net profit 950

(b) Asterix plc – extract of statement of financial position at 30 April 2012.

Current Assets $000 $000
Inventories: Raw materials 235
Work in progress 320
Finished goods 438
Less Provision for unrealised profit ($438 000 × 20/120) (73) 365
920

QUESTION 3 NOVEMBER 2012 P23 Q1

(a) Manufacturing account
For the year ended 31 March 2012
$ $ $
Raw Materials Costs
Opening inventory 53 000
Purchases of raw materials 800 000
Carriage inwards 6 000
Returns outwards (18 500) 787 500
840 500
Closing inventory (47 000)
Cost of raw materials consumed 793 500
Direct wages 450 000
PRIME COST 1 243 500
Chapter 13 213 Manufacturing Accounts

Add Factory Overheads $ $

Indirect wages 68 000
Rates and insurance [($38 000 + $950) × 4/5] 31 160
General factory overheads 93 000
Depreciation premises ($600 000 × 5% × 4/5) 24 000
Depreciation machinery [($220 000  $40 000) × 15%] 27 000 243 160
1 486 660
Add Opening work in progress 80 000 80 000
Less Closing work in progress (92 000) (12 000)
Cost of production 1 474 660

(b) Income Statement for the year ended 31 March 2012

$ $
Revenue 2 500 000
Revenue returns (22 000) 2 478 000
Cost of Sales
Opening inventory 76 000
Cost of Production 1 474 660
Closing inventory (68 000) 1 482 660
Gross profit 995 340
Expenses
Rates and insurance [($38 000 + $950) × 1/5] 7 790
Loan interest ($100 000 × 10%) 10 000
Office salaries 80 000
Depreciation: premises ($600 000 × 5% × 1/5) 6 000
Increase in provision for doubtful debts [($83 000 × 5%)  $3 800] 350
General office expenses 100 000 (204 140)
Profit for the year 791 200
(c) Prudence is a key accounting principle which makes sure that assets and income are not overstated and
liabilities and expenses are not understated. The examples of Prudence may include the valuation of
inventory at lower of cost or market, writing off of receivables as bad debts and providing for doubtful debts
etc.

QUESTION 4 NOVEMBER 2012 P43 Q1

(a) (i) Manufacturing account
For the year ended 31 December 2011
Raw Materials Cost $ $ $
Inventory at 1 January 2011 31 000
Add Purchases 261 000
Carriage 2 500 263 500
294 500
Inventory at 31 December 2011 (46 400) 248 100
Manufacturing wages 166 000
Direct expenses 9 200
Prime cost 423 300
Factory Overheads
Supervisory wages 42 800
Factory rent 36 000
Depreciation of machinery 13 800 92 600
Cost of Production 515 900
Factory profit ($515 900 x 40%) 206 360
Market value of production 722 260
Chapter 13 214 Manufacturing Accounts

(ii) Provision for unrealised profit

$ $
$86 800 × 40
Balance c/d( ) 24 800 Balance b/f 16 800
140
_____ Income statement (balancing figure) 8 000
24 800 24 800

WORKINGS
$722 260
(W 1) Per unit cost = = $70 per unit
10 318 units
(W 2) Cost of Closing inventory = 1 240 units @ $70 (W 1) = $86 800
$206 320 40
(W 3) Factory profit rate (%) = =
$722 260 140

(iii) Income statement for the year ended 31 December 2011

$ $
Sales 880 000
Cost of Sales
Inventory at 1 January 2011 - Finished goods (1 000 units) 58 800
Market Value of Production (10 318 units) 722 260
781 060
Inventory at 31 December 2011 - Finished goods (W 2) (86 800) 694 260
Gross profit 185 740
Factory profit 206 360
Less Increase in provision for unrealised profit (a ii) (8 000) 198 360
384 100
Expenses
Office rent 21 000
Depreciation of office equipment 2 900
Administrative and selling costs 201 000 (224 900)
Profit for the year 159 200

(b) Statement of Financial Position

As at 31 December 2011
$ $ $
Non-Current Assets 570 000
Current Assets
Inventory: Raw materials 46 400
Finished goods (W 3) 86 800
Provision for unrealised profit ($86 800 x 40/140) (24 800) 62 000
Trade receivables 96 200
Bank 11 000
215 600
Current Liabilities
Trade payables (84 100) 131 500
701 500
Equity
Capital at 1 January 2011 622 300
Profit for the year 159 200
Drawings (80 000) 701 500

(c) Under prudence concept inventory’s value should not include an element of profit so factory profit needs
to be removed from the value of finished goods inventory as it has not yet been earned or realised.
Chapter 13 215 Manufacturing Accounts

QUESTION 5 MAY 2013 P23 Q1

(a) Eagle Manufacturing Limited
Manufacturing Account for the year ended 31 March 2013
Raw Material Cost $000s $000s $000s
Opening inventory of raw materials 17
Add purchases 194
Add carriage in __6 200
Less closing inventory (18)
Direct materials used 199
Direct labour ($153 000  $16 000) 137
Prime cost 336
Factory Overheads
Indirect labour 16
Electricity [($25 000 + $5 000) × 4/5] 24
Rent [($60 000  $10 000 ) × 3/5] 30
Sundry expenses ($12 000 × 1/3) 4
Insurance ($18 000 × 5/6) 15
Depreciation on machinery [($420 000  $52 000) x25%] 92 181
517
Add Work in progress - Opening inventory 19
536
Less Work in progress - Closing inventory (15)
Cost of Production 521

(b) Income statement

For the year ended 31 March 2013
$000s $000s
Revenue 816
Cost of Sales
Finished goods - Opening inventory 32
Add Cost of Production 521
Finished goods - Closing inventory 41 (512)
Gross profit 304
Expenses
Electricity [($25 000 + $5 000) × 1/5] 6
Carriage out 22
Rent [($60 000  $10 000 ) × 2/5] 20
Salaries 14
Sundry expenses ($12 000 × 2/3) 8
Insurance ($18 000 × 1/6) 3
Depreciation on office fittings ($30 000 × 10%) 3
Depreciation on vehicles [($60 000  $34 000)  $3 000 + $9 000] × 25% 8 (84)
220
Profit on sale of motor vehicle __1
Profit for the year 221
(c) (i) The unpaid amount of preference dividends will be carried forward to the next year and paid to
the shareholders when there would be a profit.
(ii) In case of loss there is no need to pay or propose an ordinary dividend
(iii) In case of non-cumulative preference dividends there is no need to carry forward the unpaid
amount to the next year.
(iv) As it is binding on the business to pay interest so the interest will still have to be paid irrespective
of incurring loss.
Chapter 13 216 Manufacturing Accounts

QUESTION 6 MAY 2014 P21 Q1 (b & c)

(b) Manufacturing Account
For the 6 months ended 31 December 2013
Raw Material Costs $000 $000 $000
Opening Inventory 80
Purchases 780
Carriage in 128 908
988
Closing Inventory (112)
Cost of raw materials consumed 876
Production wages 480
Factory power (direct) 88 568
Prime cost 1 444
Factory overheads
Electricity ($138 000 × 2/3) 92
Rent and rates ($326 000 – $26 000) × 3/5 180
Factory expenses 56
Depreciation on machinery ($160 000 × 20% × 6/12) 16 344
1788
Add Opening Work in progress 110
Less Closing Work in progress (146) (36)
Cost of production 1 752
(c) Income statement for 6 months ended 31 December 2013
$000 $000 $000
Sales (‘a’ part) 3 474
Less Return Inwards (‘a’ part) (60) 3 414
Cost of Sales
Opening Inventory : Finished goods 204
Purchases of Finished Goods 150
Cost of production 1 752 1 902
2 106
Closing Inventory : Finished goods (210) (1 896)
Gross profit 1 518
Depreciation on motor vehicles ($140 000 × 10% × 6/12) 7
Electricity ($138 000 × 1/3) 46
Rent ($326 000 – $26 000) × 2/5 120
General office expenses 45
Bad debts (‘a’ part) 80 (298)
Profit for the year 1 220

QUESTION 7 NOVEMBER 2014 P22 Q1

(a) Nother Limited’s Manufacturing Account for the year ended 31 March 2014
Raw Material Cost $000 $000
Opening Inventory 360
Purchases 1 896
2 256
Closing Inventory (300)
Cost of raw material consumed 1 956
Manufacturing wages ($1 250 000 + $40 000) 1 290
Prime cost 3 246
Factory expenses ($780 000 + $112 000) 892
Depreciation: Premises ($1000 000 × 1%) 10
Chapter 13 217 Manufacturing Accounts

Machinery [($280 000–$44 000)] – ($140 000–$24 000)]×15% 18

Loss on machine disposal [$14 000  ($44 000 – $24 000)] 6 926
4 172
Work in progress: Opening Inventory 210
Work in progress: Closing Inventory (220) (10)
Factory cost of production 4 162

(b) Nother Limited’s Income Statement for the year ended 31 March 2014
$000 $000
Revenue ($5 054 000 –$14 000) 5 040
Cost of Sales
Finished goods: Opening Inventory 432
Cost of production 4 162
Finished goods: Closing Inventory (480) (4 114)
Gross profit 926
Expenses
Administrative expenses ($80 000 – $8 000) 72
Sales expenses ($416 000 + $56 000) 472
Bad debts written off 16
Increase in provision for doubtful receivables[($840 000 × 5%)–$36 000] 6 (566)
Profit for the year 360
(c) (i) Direct costs are the manufacturing costs which can be directly traced to a product unit.
Examples of direct costs include direct materials, direct labour etc.
(ii) Indirect costs are the manufacturing costs which cannot be economically traced to a product unit.
Examples of indirect costs include indirect wages, indirect materials, factory building expenses like
rent, factory machine expenses like depreciation etc.
(iii) Prime cost is simply the total of all direct expenses and is calculated as
Direct materials + direct labour + direct expenses
(iv) Production cost is the total cost of producing the goods in the factory. This is calculated as Prime
(direct) cost + Factory (indirect) overheads ± opening/(closing) work in progress
QUESTION 8 MAY 2015 P23 Q1
(a) Manufacturing account for the year ended 30 June 2014
Raw materials Costs $ $ $
Opening Inventory 39 000
Purchases 162 000
Purchase returns (1 200)
Carriage inwards 4 200 165 000
Closing Inventory (46 000) 158 000
Manufacturing wages 259 100
Prime cost 417 100
Factory Overheads
Factory supervision salaries 12 400
General factory expenses 8 100
Heat and light [($5 400 + $600) × 85%] 5 100
Indirect factory wages 36 800
Insurance [($12 000 – $4 000) × 80%] 6 400
Rent and rates ($42 000 × 85%) 35 700
Depreciation plant and machinery ($270 000 – $90 000) × 15% 27 000 131 500
548 600
Work in progress - Opening Inventory 48 000
Work in progress - Closing Inventory (54 000) (6 000)
Cost of Production 542 600
Chapter 13 218 Manufacturing Accounts

(b) Vikran
Income statement
Ffor the year ended 30 June 2014
$ $
Sales revenue 768 500
Returns inwards (1 800) 766 700
Cost of Sales
Opening inventory finished goods 57 000
Cost of production 542 600
Purchase of finished goods 2 100
601 700
Closing inventory finished goods (52 000) 549 700
Gross profit 217 000
Other Incomes
Decrease in Prov for doubtful debts[$1600{($34800$1 800)×3%}] 610
217 610
Expenses
Office salaries 37 300
Heat and light [($5 400 + $600) × 15%] 900
Rent and rates ($42 000 × 15%) 6 300
Insurance ($12 000 – $4 000) × 20% 1 600
Depreciation office equipment [($90 000 – $38 000) × 15%] 7 800
Bad debts 1 800 55 700
Profit for the year 161 910

(c) Depreciation represents that part of the cost of an asset that is used up during the accounting period. This
is charged under matching concept. The value of an asset reduces due to reasons like physical deterioration,
obsolescence, inadequacy etc. Depreciating the value of a non-current asset helps the business to include
a charge for use of a non-current asset and include them in the statement of financial position at a true and
fair view.

QUESTION 9 NOVEMBER 2015 P42 Q1

(a) Makewellplc
Manufacturing account
For the year ended 31 December 2014
Raw Materials Cost $000 $000
Raw materials at 1 January 2014 30
Purchases of raw materials 410
Add Carriage in 3
Raw materials at 31 December 2014 (20) 423
Direct Labour 310
Prime Cost 733
Factory Overheads
Factory building depreciation [($600 000  $200 000) × 2% × 3/4] 6
Factory equipment depreciation ($250 000 × 10%) + ($80 000 × 10% × 9/12) 31
Other Factory Overheads 230 267
1 000
Add Work in process at 1 January 2014 65
Less Work in process at 31 December 2014 (85)
980
Factory Profit ($980 000 × 25%) 245
Transfer to income statement/cost of production 1225
Chapter 13 219 Manufacturing Accounts

(ii) Income statement

For the year ended 31 December 2014
$000 $000
Revenue 1 500
Cost of sales
Finished Goods at 1 January 2014 150
Cost of production [a (ii)] 1 225
1 375
Finished goods at 31 December 2014 180 (1 195)
Gross profit 305
Operating Expenses
Distribution costs [$110 000 – $3 000 (carriage)] 107
Administrative expenses (W 1) 247 (354)
Profit from operating activities (49)
Factory profit [‘a (i)’part] 245
$180 000 × 25 $150 000 × 25
Increase in Provision for unrealized profit ( )( ) (6) 239
125 125
Profit for the year 190

(b) Statement of financial position at 31 December 2014

Assets $000 $000 $000
Non-current assets
Intangible – goodwill 35
Tangible
Property, plant and equipment 600
Provision for depreciation ($24 000 + $6 000 + $2 000) (32) 568
Factory and office equipment ($310 000 + $80 000  $20 000) 370
Provision for depreciation ($86 000 + $31 000 + $5 000) (122) 248 851
Current Assets
Inventory : Raw materials 20
Work in process 85
Finished goods 180
$180 000 × 25 (36) 144
Provision for unrealized profit ( )
125
Trade receivables 126
Cash and cash equivalents 88 463
Total assets 1 314
Equity and liabilities
Capital and reserves
Share capital [$500 000 + (500 000 × 2/5) Bonus issue + $100 000] 800
Share premium [100 000 share × ($1.20 – $1.00)] 20
Retained earnings [$380 000 – $200 000 (bonus) + $190 000 (profit)] 370 1 190

Current liabilities
Trade payables 98
Other payables 26 124
1 314

(W 1) Administrative expenses $240 000

Depreciation of property [($600 000  $200 000) × 2% × 1/4] 2 000
Office equipment depreciation [($60 000 × 10%)  ($20 000 × 10% × 6/12) 5 000
Total Administrative expenses $247 000
Chapter 13 220 Manufacturing Accounts

QUESTION 10 MAY 2016 P32 Q2

(a) Kempes Limited
Manufacturing account
For the year ended 30 September 2015
Raw Material cost $ $
Opening inventory 110 000
Purchases 794 750
Carriage inwards 4 250
909 000
Closing inventory (125 000)
Cost of raw materials used 784 000
Factory production wages 382 500
Prime cost 1 166 500
Factory Overheads
Factory supervisory wages 64 000
Depreciation – Factory plant and machinery 55 000
General expenses [($78 000 + $5 000  $3 000) × 65%] 52 000 171 000
1 337 500
Add Opening work in progress 17 500
Less Closing work in progress (14 000)
Cost of Production 1 341 000
Add Manufacturing profit ($1 341 000 × 15%) 201 150
Market value of Production transferred to trading account 1 542 150

(b) Kempes Limited

Income statement
For the year ended 30 September 2015
$ $
Revenue 1 845 000
Cost of Sales
Opening inventory of finished goods 19 550
Market value of Production 1 542 150
1 561 700
Closing inventory of finished goods (21 505) (1 540 195)
Gross profit 304 805
Add Manufacturing profit 201 150
505 955
Expenses
Administrative wages 115 000
General expenses [($78 000 + $5 000  $3 000) × 35%] 28 000
Depreciation on office fixtures & fittings 37 500
Increase in prov. for unrealised profit [(21505 × 15/115)− (19550×15/115) 255 (180 755)
Profit for the year 325 200

(c) The finished goods inventories are valued at cost plus the profit margin. IAS 2 clearly states that inventories
must be valued at lower of cost or NRV. Inventories should not include profit element as these profits are
not yet realized. As a result, provision for unrealised profit is created to remove the profit element from the
inventory of finished goods.

(d) Decrease in provision for unrealised profit [($18 400 × 15/115) − ($21 505 × 15/115) = $405
This will be shown as other income in the income statement of October.
Chapter 13 221 Manufacturing Accounts

(e) Factory profit is the difference between cost of producing the goods and the cost at which the same goods
could be bought from an outside supplier. Factory profit is added to cost of production so results in increase
in cost of sales and reduction in gross profit. However, as factory profit is added back to net profit, so net
profit remains unaltered.
Due to increase in the bought in price of finished goods, the transfer price should be increased accordingly
provided production cost remains the same. Therefore, the proposal to increase the mark-up to 20% should
be adopted.

QUESTION 11 NOVEMBER 2016 P32 Q2

(a) (i) Alpha Limited
Manufacturing Account for the year ended 30 April 2016
Raw Materials Cost $ $
Raw materials at 1 May 2015 1 000
Purchases of raw materials 12 200
Carriage inwards 1 100 13 300
14 300
Raw materials at 30 April 2016 (3 100)
Cost of raw materials consumed 11 200
Direct factory wages 17 500
Prime cost 28 700
Factory Overheads
Factory supervisor’s salary 8 200
Factory rent ($8 000 × 75%) 6 000
Factory overheads 9 700 23 900
Cost of production 52 600
Factory profit ($52 600 × 25%) 13 150
Market value of Production transferred to Income statement 65 750

(ii) Alpha Limited

Income Statement for the year ended 30 April 2016
$ $
Revenue 95 000
Market value of Production 65 750
Gross profit 29 250
Factory profit 13 150
Expenses
Office rent ($8 000 × 25%) 2 000
Office salaries 8 500
General office expenses 10 000 20 500
Profit for the year 21 900
(b) Statement to calculate the expected annual profit if option 1 is implemented
$
Profit for year ended 30 April 2016 21 900
Decrease in sales revenue ($95 000 × 100/1000) (9 500)
Increase in inventory ($65 750 × 100/1000) 6 575
Decrease in general office expenses ($10 000 × 50% × 100/1000) 500
Provision for unrealised profit ($13 150 × 100/1000) (1 315)
Expected profit under option 1 18 160
(c) Option 1 has the higher profit.
Option 1 involves keeping of inventory which will help to avoid sale losses and poor customer service with
losing customer confidence.
Chapter 13 222 Manufacturing Accounts

Buying same quantity from the supplier will help to keep good relationship with suppliers
Option 1 would help to achieve efficient production run
Smooth production operations would avoid difficulties in reducing workers’ hours/redundancies.
This fall in demand may be the start of a longer term trend.
If production continues to exceed demand there would be a large build-up of inventory.
Option 2 avoids inventory holding costs e.g. insurance.
Option 2 avoids the risk of inventory becoming obsolete/damaged.

QUESTION 12 NOVEMBER 2016 P33 Q1

(a) M Limited
Manufacturing Account for the year ended 31 December 2015
Raw Materials Cost $ $
Opening inventory 10 400
Purchases of raw materials 146 200
Carriage inwards 3 160
Less Closing inventory (11 750) 148 010
Direct wages 249 400
Prime cost 397 410
Factory Overheads
Indirect wages 54 650
Rent [($49 000  $4 000) × 4/5] 36 000
Heat, light and power [($28 600 + $3 500) × 4/5] 25 680
General expenses [($12 600 × 3/4] 9 450
Depreciation on plant ($200 000 × 10%) 20 000 145 780
543 190
Add Opening work-in-progress 12 600
Less Closing work-in-progress (14 670) (2 070)
Factory cost of finished goods 541 120
Add Factory profit ($541 120 × 20%) 108 224
Market value of production transferred to income statement 649 344

(b) M Limited
Income Statement for the year ended 31 December 2015
$ $
Revenue 742 490
Cost of Sales
Opening inventory of finished goods 14 904
Add Market value of production 649 344
Closing inventory of finished goods (15 750) 648 498
Gross profit 93 992
Expenses
Office salaries 24 780
Carriage outwards 2 790
Rent [($49 000  $4 000) × 1/5] 9 000
Heat, light and power [($28 600 + $3 500) × 1/5] 6 420
General expenses ($12 600 × 1/4) 3 150
Depreciation on motor vehicle ($25 000 × 25%) 6 250
Depreciation on office equipment [($15 000 – $4 600) × 15%] 1 560 (53 950)
Profit from operating activities 40 042
Add Factory profit 108 224
Less Increase in provision for unrealised profit[($15 750 × 20/120)  $2 484] (141) 108 083
Overall profit for the year 148 125
Chapter 13 223 Manufacturing Accounts

(c) Transfer price in manufacturing accounts represents the cost at which the manufactured goods could be
bought from an outside supplier. To calculate transfer price, Factory profit is added to cost of production so
it results in increase in cost of sales and reduction in gross profit. However, as factory profit is added back
to net profit, so net profit remains unaltered. This also results in overstatement of inventory of finished
goods which is adjusted through provision for unrealised profit in the balance sheet.

(d) The offered price is $60 which is higher than the factory cost which is $54.11. The transfer price is, however
$64.93, but will be irrelevant as it includes an element of factory profit. The company should not accept the
offer until they are not able to meet the demand from existing capacity of 10 000 units. However, the
products supplied must be of the same quality and delivery reliable.

QUESTION 13 MAY 2017 P32 Q1

(a) Richard Ang
Manufacturing account for year ended 31 July 2016
Raw Material Cost $ $
Opening inventory of raw materials 14 800
Purchases 207 600
Carriage inwards 6 800
229 200
Closing inventory of raw materials (16 400)
Cost of raw materials consumed 212 800
Direct wages ($168 000 + $3 500) 171 500
Prime cost 384 300
Factory overhead
Indirect wages 51 400
Factory rent [($24 000 + $16 000) × 3/4] 30 000
Other factory overheads ($155 000 – $24 000) 131 000 212 400
596 700
Add Opening work in progress 23 500
Less Closing work in progress (20 200) 3 300
Cost of production 600 000
Add Factory profit ($600 000 × 20%) 120 000
Market value of production transferred to Income Statement 720 000

(b) Richard Ang

Income statement for year ended 31 July 2016
$ $
Revenue 986 000
Return inwards (12 000)
974 000
Opening inventory of finished goods ($32 000 × 120%) 38 400
Add Market value transferred from Manufacturing Account 720 000
758 400
Less Closing inventory of finished goods (54 000) (704 400)
Gross profit 269 600
Operating expenses
Carriage outwards 17 500
Office rent [($24 000 + $16 000) × 1/4] 10 000
Other office overheads ($194 000 – $16 000) 178 000 (205 500)
64 100
Factory profit 120 000
Increase in provision for unrealised profit [($54 000 × 20/120) – ($32 000 × 20%)] (2 600) 117 400
Profit for the year 181 500
Chapter 13 224 Manufacturing Accounts

(c) Statement of financial position (extract to show inventories at 31 July 2106)

Current Assets $ $
Inventory
Raw materials 16 400
Work in progress 20 200
Finished goods 54 000
Less: Provisions for unrealised profit (9 000) 45 000
81 600

(d) Under prudence concept value of an inventory should not include an element of profit so factory profit
needs to be removed from the value of finished goods inventory as it has not yet been earned or realized.

(e) Richard Ang help to his sister in setting up a furniture business will improve family bonding. This may also
help Richard to expand the business and explore new markets.
On the other hand, the market may become more competitive. Her sister’s business may start price war
through selling at reduced rates. However, as Richard is selling finished goods only, so increase in
production volume may result in economies of scale for him.

QUESTION 14 NOVEMBER 2017 P31 Q1

(a) Factory profit is the difference between cost of producing the goods and the cost at which the same goods
could be bought from an outside supplier. Factory profit is added to cost of production so results in increase
in cost of sales and reduction in gross profit. However, as factory profit is added back to net profit, so net
profit remains unaltered.

The production department is a profit centre so adding mark up to the factory cost of production helps in
determining its contribution in the overall profits.

(b) Manufacturing account

For the year ended 31 December 2016
Raw Materials Cost $ $
Opening inventory of raw materials 52 000
Purchases 484 000
Carriage inwards 21 000
557 000
Closing inventory of raw materials (67 000)
Cost of raw materials used 490 000
Direct expenses 120 000
Direct wages 626 000
Prime cost 1 236 000
Factory Overheads
Indirect wages 132 000
Factory overheads 510 900
Depreciation of factory machinery [($330 000 – $276 000) × 15%] 8 100
Rent [($440 000 + $40 000) × 3/4] 360 000
Heat and light ($178 000 × 3/4) 133 500
Insurance and rates [($92 000 – $6 000) × 3/4] 64 500 1 209 000
2 445 000
Add Opening work in progress 97 000
Less Closing work in progress (102 000) (5 000)
Cost of production 2 440 000
Factory profit ($2 440 000 × 20%) 488 000
Transferred to the trading section of Income Statement 2 928 000
Chapter 13 225 Manufacturing Accounts

(c) Income Statement (trading section)

For the year ended 31 December 2016
$ $
Revenue 4 268 000
Opening inventory of finished goods ($122 000 × 120%) 146 400
Market value of production (80 000 units) 2 928 000
3 074 400
Closing inventory of finished goods [($122 000 × 20%) + $15 840] × 120/20 (241 440)
Cost of goods sold 2 832 960
Gross profit 1 435 040
(d) Statement of financial position (extract)
Current Assets $ $
Finished goods 241 440
Less : Unrealised profit [($122 000 × 20%) + $15 840] or [($241 440 × 20/120] (40 240) 201 200
$2 440 000
(e) Ted should consider accepting the extra order as his production unit cost $30.50 ( ) is higher than
80 000 units
the unit cost $28 demanded by the external supplier. Accepting the order can also maintain the goodwill
with the customer and would increase the customer base. However, he should make sure the quality of
purchased product is of standard quantity

QUESTION 15 MAY 2018 P31 & P33 Q1

The trader with a factory involving the manufacturing of goods has to prepare a manufacturing account or production
account. As its name suggests, a Manufacturing Account is concerned with the calculation of the cost of producing
goods for sale, either to other businesses or directly to the public. It is prepared for the following purposes.
 First and foremost the manufacturing account shows the production cost of goods manufactured for the
relevant period by bringing together all the costs involved in purchasing them in raw form and converting
them into completed goods (conversion costs).
 It shows profit or loss on manufacturing activities by comparing cost of producing the finished goods and
costs which were to be paid if these produced goods were bought from an outside supplier.
 The manufacturing account shows the costs of running and maintaining the factory in which the product is
made.

(b) Manufacturing account for JH Limited for year ended 31 October 2017
$
Prime cost ($252 000 + $18 000) 270 000
Factory overheads [$461 000 + ($60 000 + $3 000 + $1 000) × 75%] 509 000
779 000
Add Opening work in progress 28 000
Less Closing work in progress (32 000)
Cost of production 775 000
Factory profit ($775 000 × 20%*) 155 000
Market value of production 930 000
$18 000
* = 20%
$108 000−$18 000

(c) Income statement for JH Limited for year ended 31 October 2017
$ $
Revenue 1 860 000
Cost of Sales
Opening inventory of finished goods 108 000
Add Market value of production 930 000
Less Closing inventory of finished goods (96 000) 942 000
Gross profit 918 000
Chapter 13 226 Manufacturing Accounts

Factory profit 155 000

$155 000
Decrease in provision for unrealised profit- $18 000  ($96 000 × ) 2 000 157 000
$930 000
1075 000
Distribution costs ($216 000  $18 000) 198 000
Administration expenses ($412 000  $60 000 + ($60 000 + $3 000 + $1 000) × 25%] 368 000 (566 000)
Operating profit 509 000
Finance charges (28 000)
Profit for the year 481 000

(d) Original ($) Revised ($)

Cost of production 775 000 775 000
Add Factory profit ($775 000 × 20%) ; ($775 000 × 25%) 155 000 193 750
Market value of production 930 000 968 750
Gross profit [$918 000  (193 750  $155 000) + ($96 000 × 5%/120%] 918 000 883 250
Profit for the year 481 000 481 000

The mark-up over the production cost can be increased by 5%. This will increase the transfer price of goods, however
the impact on sale price is uncertain. The selling prices are usually based on production cost plus a fixed mark-up so
increase in transfer price will also increase selling price. This may make the product uncompetitive unless it has
inelastic demand. Its future demand will also be based on the price increase by the competitor. No change in selling
price may attract more customers.
Increase in transfer price will reduce gross profit but no effect on final profit for the year. The increase in transfer
price may affect bonuses and incentives to production staff which may improve productivity in future. From the
above discussion it looks better to have no increase in price.

.
Chapter 14 227 Absorption Costing

CHAPTER 14 ABSORPTION COSTING

QUESTION 1 NOVEMBER 2012 P43 Q3
Kriti Singh manufactures one product, and uses absorption costing in valuation and pricing decisions.
Each product requires 3 kilos of raw material costing $8 per kilo, and 4 hours of direct labour at $7.50 per hour.
Other direct production costs amount to $4 per unit.
The salesman is paid a commission and earns $2.50 for each item sold. The factory supervisor is paid $18 000 a
year.
Costs of shipping to customers is $1 each.
Every time 50 units are completed maintenance costing $30 is performed on the machinery.
Factory rent is $24 000 a year.
Other fixed manufacturing costs amount to $12 000 a year. Variable administration costs amount to $8.20 per unit
sold.
On 1 April 2012 there were no units in inventory. During the month 1250 units were produced. On 30 April 2012
there were 150 units unsold.
REQUIRED
(a) Calculate the value of one unit of inventory. [10]
Additional information
Kriti Singh uses a mark-up of 30% on total cost to calculate the selling price.
REQUIRED
(b) Starting with your answer from (a), calculate the selling price of one unit. [6]
(c) Prepare an income statement for the month of April 2012. [7]
(d) Reconcile the total profit with the mark-up per unit. [3]

Kriti Singh is considering expanding her business and manufacturing an additional product.
Projected costs and revenues for this product are:
Direct production costs $60 per unit Variable administration and distribution costs $10 per unit Rent of second
factory $30 000 a year Supervisor’s salary $22 000 a year.
Other fixed manufacturing costs $18 000 a year.
Production is expected to be 2000 units a year with no inventory of finished goods being held. She will use the
same mark-up for the new product as at present.

REQUIRED
(e) Calculate the expected profit for the year. [2]
(f) Calculate the sensitivity of the expected profit to changes in:
(i) sales price; [2]
(ii) sales volume; [6]
(iii) variable costs; [2]
(iv) fixed costs. [2]
Chapter 14 228 Absorption Costing

SOLUTION CHAPTER 14
QUESTION 1 NOVEMBER 2012 P43 Q3
(a) Calculation of per unit cost of inventory
$
Raw material (3 kilos @$8 each) 24.0
Direct labour (4 hours @ $7.5 each) 30.0
Direct costs 4.0
$18 000 ÷ 12
Supervisor’s Salary ( ) 1.2
1 250 units
$24 000 ÷ 12
Rent ( ) 1.6
1 250 units
$30
Maintenance ( ) 0.6
50 units
$12 000 ÷ 12
Fixed manufacturing costs ( ) 0.8
1 250 units
Per Unit Cost 62.20
(b) Calculation of selling price per unit
$
Total production cost per unit (“a” part) 62.20
Salesman Commission 2.50
Distribution (Shipping Cost) 1.00
Administration 8.20
Total Costs 73.90
Profit ($73.90 × 30%) 22.17
Selling price per unit 96.07
(c) Income statement for the month of April 2012
$ $
Sales [1 100 units (W 1) × $96.07 (b)] 105 677
Cost of Sales
Production costs (1 250 units x $62.2 (a)] 77 750
Closing inventory (150 units × $62.20) (9 330) (68 420)
Gross profit 37 257
Operating Expenses [1 100 units × ($1.00 + $2.50 + $8.2)] (12 870)
Operating Profit 24 387

(d) Statement to reconcile mark-up per unit with the total profit
Per unit mark-up (‘b’ part) $22.17
× Units Sold × 1 100
Total Profit (same as shown in “c” part) 24 387

(e) Calculation of the expected profit for the year

$
Variable costs [2 000 units × ($60 + $10)] 140 000
Fixed costs ($30 000 + $22 000 + $18 000) 70 000
210 000
Profit rate × 30%
Expected profit ($210 000 × 30%) 63 000

(f) Sensitivity of the expected profit to changes in:

$63 000
(i) Sales price = × 100 = 23.08%
$210 000+$63 000
Chapter 14 229 Absorption Costing

2 000−1 053 (W 2)
(ii) Sales volume = × 100 = 47.35%
2 000
$63 000
(iii) Variable costs = × 100 = 45.00%
$140 000
$63 000
(iv) Fixed costs = × 100 = 90.00%
$70 000

WORKINGS
(W 1) Opening Inventory + Purchases  Closing inventory = Units of Sales
Nil + 1 250  1 100 = 150

$70 000
(W 2) Break-Even = = 1 053 units
66.5
Chapter 15 230 Budgeting

CHAPTER 15 BUDGETING
QUESTION 1 MAY 2011 P41 Q3
Echoes plc has the following statement of financial position (balance sheet) at 30 April 2011.
$000 $000 $000
Non-current assets Cost Depreciation NBV
Land and buildings 1200 50 1150
Equipment 230 90 140
Motor vehicles 210 115 95
1640 255 1 385
Current assets
Inventory 150
Trade receivables 122
Prepaid rates and insurance 8 280
Current liabilities
Trade payables 75
Tax 30
Cash and cash equivalents 15 120 160
1545
Equity
Ordinary shares of $0.50 each 800
Share premium 100
Retained earnings 645 1545
Sales and purchases budgets have been produced for Echoes plc for the year ending 30 April 2012 as follows:
$000 $000
Sales Purchases
May to February 1 060 560
March 100 60
April 100 60
Total 1 260 680
Other information is as follows:
1 All sales are on credit. 50% of customers pay in the month after sale and the remaining customers pay in
the second month. On 1 May 2011 the company is introducing a 5% cash discount for customers paying in
the month after sale, applicable to sales made on or after that date.
Discount will only be accounted for when funds are received.
2 Purchases accrue evenly over the month. The company pays its suppliers 1½ months after receipt
of goods.
3 The company pays rates six months in advance on 1 June and 1 December each year.
Each payment amounts to $9 000.
4 The company pays an annual premium for insurance, in advance, on 1 October each year. It is
expected that in 2011 the premium will be $30 000.
5 All other selling, distribution and administration payments for the year, including wages and salaries, are
expected to amount to $184 000.
6 The company plans to modernise its equipment and upgrade its vehicles during the year.
It plans to sell all the vehicles for $80 000 and buy new ones at a total cost of $400 000.
It also plans to sell half the equipment for $75 000 and replace it with new equipment costing $310 000.
7 The cost of land and buildings is split $800 000 for the land and $400 000 for the buildings.
8 The company provides a full year’s depreciation on non-current assets purchased during the year but
none in the year of disposal. Annual depreciation rates are:
Buildings 2.5% on cost
Equipment 20% on cost
Motor vehicles 30% on net book value
Chapter 15 231 Budgeting

9 The company plans to issue 100 000 new shares at a price of $1.70 on 1 July 2011 to part fund the purchase
of the non-current assets.
It also plans to issue $300 000 6% debentures, redeemable in 2028, on 1 July 2011. The first interest
payment on the debentures will be paid on 30 April 2012.
10 Tax is provided for at 20% of profit after finance charges and is paid ten months after the financial
year end.
11 Inventory is expected to increase by 10% over the year.
12 The company intends to pay a dividend of $0.03 per share on 30 June 2011.
REQUIRED
(a) Calculate the bank balance expected on 30 April 2012. [14]
(b) Prepare forecast income statement for the year ending 30 April 2012. [12]
(c) Prepare the statement of financial position (balance sheet) at 30 April 2012. [14]

QUESTION 2 MAY 2011 P43 Q3

Gala Ltd manufactures one product, the Durrell. Its sales for a six month period are expected to be:
2011 Durrells
July 800
August 1 050
September 1 400
October 1 100
November 950
December 850
On 1 July Gala Ltd expects to have 100 Durrells in inventory. It intends to hold inventory levels of 250 Durrells at the
end of July and August, 200 at the end of September and October, and 100 thereafter.
REQUIRED
(a) Prepare a monthly production budget for Gala Ltd for the six months July to December. [6]
Each Durrell requires 2 kilos of raw material. Until 31 August this is expected to cost $4 per kilo and $4.50 from 1
September to 30 November and $5 per kilo thereafter.
REQUIRED
(b) Prepare a monthly raw materials purchasing budget for the six months July to December. [6]
Selling prices for the Durrell are expected to be $190 each in July, August and September and $200 each thereafter.
All sales are on credit.
50% of debtors pay in the month following sale and receive 4% cash discount, and the remainder pay in the second
month following sale.
REQUIRED
(c) Calculate the expected value of trade receivables on 1 September. [2]
(d) Prepare a monthly trade receivables budget for the four months September to December. [21]
(e) State three advantages to Gala Ltd of using budgets. [3]
(f) (i) Name one item which may appear in an income statement but cannot appear in a cash budget[1]
(ii) Name one item which may appear in a cash budget but cannot appear in income statement. [1]
QUESTION 3 NOVEMBER 2011 P42 Q3
Ada Campellini runs a business which retails high quality clothing. It is particularly busy during the festive season.
The budgeted sales and purchases figures for September 2012 to January 2013 are as follows: Additional
information:
September ($) October ($) November ($) December ($) January ($)
Sales 215 000 225 000 310 000 425 000 195 000
Purchases 175 000 190 000 245 000 135 000 135 000
1 50% of sales are expected to be paid for by cash and these customers will receive a 6% discount.
50% of the remaining sales are expected to be paid in the following month and these customers will receive
a 3% discount.
The remainder will pay 2 months after the sale.
Chapter 15 232 Budgeting

2 30% of purchases are expected to be paid for in the month of purchase and will receive a 4%
discount.
40% of purchases are expected to be paid for in the month after purchase and will receive a
2% discount.
The remainder are paid for 2 months after purchase.
3 The inventories held on 1 November 2012 are budgeted at $180 000.
The inventories held on 31 January 2013 are budgeted at $129 000.
4 Total general expenses are budgeted at $18 000 in November 2012 with an expected 10% rise in December
and a 15% reduction (on the December total) in January 2013.
All general expenses are expected to be paid in full in the month in which they occur.
5 Depreciation on non-current assets acquired before November 2012 will be $1 750 per month.
6 On 1 November 2012 Ada will acquire a new storage system at a cost of $24 000 and will pay
50% of the cost immediately. The remainder will be paid in equal instalments over the following
12 months without any interest charges.
This new non-current asset will be depreciated at 10% per annum on a monthly basis.
7 Ada will make drawings of $3 000 every month except for December 2012. In this month she
expects to draw 1.5% of the month's expected sales.
8 The bank balance at 1 November 2012 is expected to be $34 850.
REQUIRED:
(a) Prepare a cash budget, in columnar format, for the 3 months commencing November 2012. [30]
(b) Prepare a budgeted income statement in as much detail as possible from the given information for this 3
month period ending in January 2013. [10]

QUESTION 4 MAY 2012 P42 Q3 (a, b, c, e & f)

Hiemstra Limited manufactures a single product. It operates a flexible budgetary control system.
REQUIRED
(a) Explain what is meant by flexible budgetary control. [3]
(b) Explain why flexible budgetary control is better than a fixed budget to monitor the costs of a business. [4]
The budgeted sales in units for the next three months are:
Month Units
1 1 200
2 1 400
3 1 600
At the start of month 1 it will have 200 units of finished goods in stock. It wishes to reduce the closing stock of finished
goods by 20 units a month.

REQUIRED
(c) Prepare the company's production budget in units for months 1-3. [8]
Additional information:
The revenue and cost information for one unit:
Selling price $29 per unit
Direct material 2 kilograms of material at $3 per kilogram
Direct labour 0.5 hours at $10 per hour
Budgeted factory overheads: Variable @$4 per unit
Fixed $15 000
Other budgeted fixed costs $23 500
Additional information:
The actual results for the three-month period were:
Sales 4 400 units
Selling price $28 per unit
Chapter 15 233 Budgeting

Direct material 2 kilograms at $4 per kilogram

Direct labour 0.4 hours at $10 per hour
Factory overheads $36 200
Fixed overheads $18 000
REQUIRED
(e) Prepare a flexible budget statement for the three-month period, clearly showing the actual and budgeted
data and any variances. [10]
(f) Explain why, despite an increase in units sold, the actual profit was less than the budgeted profit . [8]

QUESTION 5 MAY 2013 P41 Q3

Zeresh Limited provides the following information from its sales budget for 2014.
Units Sales price per unit ($)
January 10 000 20
February 11 000 20
March 11 000 21
April 12 000 21
May 12 000 21
June 14 000 24
Additional information
Inventory of finished goods at each month end is maintained at 20% of the units expected to be sold in the following
month.
Each unit requires 0.5 kilos of raw materials, which costs $3 a kilo.
Half a month’s inventory of raw materials is maintained, based on the expected usage in the following month. The
total production cost of each unit is $11 and this is the value used for inventory valuation.
REQUIRED
(a) (i) Prepare the production budget for each of the five months January to May 2014. [11]
(ii) Prepare the purchases budget for raw materials for each of the four months January to April 2014.
Show purchases of raw materials in both kilos and dollars. [9]
(b) Calculate the value of finished goods & raw materials inventory at both 1 January 2014 & 30 April 2014. [4]
(c) (i) Prepare a summarised manufacturing account for the four month period ending 30 April 2014.
[6]
(ii) Prepare the trading account section of the income statement for the same period . [6]
(d) State two advantages & two disadvantages to a company of using a budgetary control system. [4]

QUESTION 6 MAY 2013 P42 Q3

Alfonso Trading Limited provides the following budgeted data for 2014.
January February March April May
Budgeted sales (units) 5 000 5 200 5 600 5 800 5 500
Sales price per unit $10 $10 $9 $9.50 $10
Purchase price per unit $4 $4 $4.20 $4.20 $4.20
The following information is also available:
1 The company uses the FIFO method of inventory valuation.
2 The directors aim to maintain inventory levels at 25% of the following month’s sales.
They expect to achieve this on 31 December 2013 but know it will not be possible every month. The
company can buy in a maximum of 5 500 units in any one month.
3 All sales are on credit. 50% of customers pay in the month following sales and receive a cash discount of 4%.
The remaining customers pay two months after sale.
4 Trade receivables on 1 January 2014 are expected to be $24 000 from November’s sales and $49 000 from
December’s sales
5 Trade payables on 1 January 2014 are expected to total $20 000. The company pays for all its purchases in
the month after purchase, receiving a discount of 5% for prompt payment.
Chapter 15 234 Budgeting

REQUIRED
(a) Prepare for each of the four months January to April 2014:
(i) Purchases budget. Show purchases for each month in both units and value. [8]
(ii) Trade receivables budget. [14]
(iii) Trade payables budget. [10]
(b) Prepare an extract from the statement of financial position at 30 April 2014 showing current assets and
current liabilities. [3]
Additional information relating to April 2014 is as follows:
$
Budgeted total variable costs 24 900
Budgeted total fixed costs 16 700
REQUIRED
(c) Calculate for April 2014:
(i) the sensitivity of performance to changes in the selling price [2]
(ii) the selling price per unit at which profit would be zero [1]
(iii) the sensitivity of performance to changes in variable cost. [2]

QUESTION 7 NOVEMBER 2013 P43 Q3 (a & b)

Riffatulah, a retailer, is preparing his budgets for the year ending 31 May 2014. He provides the following
information.
Statement of Financial Position at 31 May 2013
Assets $ $ $
Non-Current Assets Cost Depreciation NBV
Fixtures and fittings 19 200 7 100 12 100
Vehicle 15 100 11 200 3 900
34 300 18 300 16 000
Current Assets
Inventories 4 800
Trade receivables 11 900
Other receivables (insurance) 350
Cash and cash equivalents 6 600 23 650
Total Assets 39 650
Capital
Total Capital 25 550
Non-Current Liabilities
Bank loan (6%) 8 000
Current Liabilities
Trade payables 6 100
Total Liabilities 14 100
Total Capital and Liabilities 39 650
He prepares budgets using three month periods as follows:
Period
1 1 June to 31 August
2 1 September to 30 November
3 1 December to 28 February
4 1 March to 31 May

He provides the following budgeted information for the year ending 31 May 2014.
Period 1 2 3 4
Sales (units) 4 200 4 800 4 600 4 500
Unit selling price $3.10 $3.20 $3.40 $3.30
Chapter 15 235 Budgeting

1 2 3 4
Purchases (units) 4 700 4 600 4 500 4 500
Unit purchase price $1.20 $1.30 $1.30 $1.40

Schedule of receipts and payments

1 2 3 4
Receipts $ $ $ $
Customer receipts 16 500 14 200 14 000 15 000
Legacy from uncle 5 000
Proceeds of vehicle sale _____ _____ 3 400 _____
Total receipts 16 500 19 200 17 400 15 000
Payments
Supplier payments 5 800 5 700 5 200 4 000
Purchase of new vehicle 18 000
Purchase of fixtures 3 800
Rent 2 500 2 500 2 500 2 500
Loan interest 240
Drawings 3 000 4 000 3 000 5 000
Insurance 2 000
Administration costs 2 400 2 600 2 600 2 700
Total payments 13 700 20 840 31 300 14 200

Additional information
1 Inventory on 31 May 2014 is expected to have a value of $5 100.
2 Discount allowed for the year is expected to be 2% of total sales. Bad debts are expected to be 1% of total
sales.
3 Discount received is expected to be 1% of purchases.
4 Riffatulah depreciates vehicles at a rate of 40% a year on the reducing balance basis.
He depreciates fixtures and fittings at a rate of 10% a year on cost. He provides a full year’s depreciation in
the year of purchase and none in the year of disposal. He only keeps one vehicle at a time.
5 The insurance policy runs from 1 September to 31 August each year.
REQUIRED
(a) Prepare a budgeted income statement for the year ending 31 May 2014. [13]
(b) Prepare a budgeted statement of financial position at 31 May 2014. [17]
(c) Using only figures from your answers to (a) and (b), calculate Riffatulah’s working capital cycle. [7]
(d) Suggest three ways Riffatulah could improve his working capital cycle and reduce his bank overdraft. [3]
QUESTION 8 MAY 2014 P43 Q3
MW Limited manufactures a single product, a Tu. The finance director prepares monthly budgets.
The following budgeted information is available for the first three months of 2015.
1 The selling price will be fixed at $60 per unit. In January 2015 sales are expected to be 24 000 units. It is
anticipated that there will be a 5% increase in sales volume in every subsequent month up to April 2015.
2 The finished goods inventory level at the end of each month will be maintained at one-third of the expected
sales volume in the following month. The inventory of finished goods at 31 December 2014 is expected to
be 7 500 units with a value of $242 000. The finished goods inventory value at 31 March 2015 is expected
to be $298 000.
3 Each unit of Tu requires 10 kilos of raw material. The closing inventory of raw materials each month is
expected to meet 20% of the production requirement of the following month. The inventory of raw
materials at 31 December 2014 is expected to be 48 000 kilos. The purchase price will remain at $1.50 per
kilo.
Direct labour for the first three months of 2015 is expected to be $850 000. Manufacturing overhead is
expected to be 50% of direct labour.
Chapter 15 236 Budgeting

REQUIRED
(a) Prepare the sales budget for the period January to March 2015. State the units and revenue for each month.
[6]
(b) Prepare the production budget for the period January to March 2015. State the units for each month. [9]
(c) Prepare the purchases budgets for the period January to March 2015. State the units and cost for each
month. [15]
(d) Prepare the budgeted trading section of the income statement for the three months ending 31 March 2015.
[10]
QUESTION 9 NOVEMBER 2014 P42 Q3
The directors of Drosnan Retail Limited provide the following budgeted information.
Monthly Administration
Revenue Purchases
depreciation Costs
2014 $ $ $ $
November 24 000 14 000 120 6 300
December 26 000 17 000 120 6 200
2015
January 30 000 18 000 120 6 200
February 26 000 15 000 120 6 800
March 28 000 19 000 150 7 100
April 32 000 13 000 150 6 700
Other information is as follows.
1. 10% of all revenue are cash sales.
2. 50% of credit customers pay in the month following the sale and receive a 4% cash discount. Remaining
trade receivables pay in the second month following the sale.
3. All purchases are on credit and are paid for in the month following purchase, after deducting a 5% early
settlement discount.
4. The business rent is $9 000 a year. This is paid in two equal installments on 1 February and 1 August each
year.
5. A dividend of $3 100 is expected to be paid on 19 January 2015.
6. Administration costs are paid in the month after the one in which they are incurred.
7. The company expects to take out a bank loan of $10 000 with an interest rate of 7.8% p.a on 1 March 2015.
This is to help finance the purchase of a new vehicle in March which is expected to cost $12 000. The loan
is to be repaid in full together with the interest after one year.
8. The company directors intend to sell an old vehicle in April 2015. This originally cost $7 200 and by the date
of disposal will have accumulated depreciation of $5 100. The sales proceeds are anticipated to be $1 100.
9. Inventory on 1 January 2015 is expected to have a value of $2 100. Inventory on 30 April 2015 is expected
to be valued at $3 800.
10. It is expected that there will be a bank overdraft of $1 303 on 1 January 2015.
REQUIRED
(a) Prepare a cash budget for each of the four months January to April 2015. [15]
(b) Prepare a budgeted income statement for the four month period ending 30 April 2015. [14]
(c) Explain two reasons why the change in the bank balance calculated in (a) is different from the profit figure
in (b). [4]
(d) State two reasons why management prepares a cash budget. [2]
Additional information
Drosnan Retail Limited has a financial year end of 31 July 2015.
40% of its annual profit is expected to arise in the four month period ending 30 April. The dividend in January will be
the interim dividend; the final dividend is expected to be double the interim dividend.
REQUIRED
(e) Calculate the expected dividend cover for the year ending 31 July 2015. [5]
Chapter 15 237 Budgeting

QUESTION 10 NOVEMBER 2014 P43 Q2

The financial statements of Seko Limited for the year ended 30 June 2014 were as follows.
Income statement for the year ended 30 June 2014
$000 $000
Revenue 3 000
Cost of Sales 1 650
Gross profit 1 350
Operating Expenses
Administrative salaries 700
Heating and lighting 98
Rent and rates 340
Depreciation on plant and machinery 60
Depreciation on motor vehicles 48
Bad debts 4
Sundry expenses 72 (1 322)
Profit for the year 28
Statement of financial position at 30 June 2014
Assets $000 $000
Non-Current Assets
Plant and machinery 300
Accumulated provision for depreciation (160) 140
Motor vehicles 240
Accumulated provision for depreciation (150) 90
230
Current Assets
Inventory 120
Trade receivables 245
Cash and cash equivalents 86 451
Total assets 681
Equity and Liabilities
Equity and reserves
200 000 ordinary shares of $1 each 200
Retained earnings 286
486
Current Liabilities
Trade payables 186
Accrued administrative salaries 9
Total Liabilities 195
Total equity and liabilities 681
Seko Limited plans to expand its business in the following year and would like to prepare a budget for the year ending
30 June 2015.
1 Additional plant and machinery $220 000 and motor vehicles $130 000 are to be purchased on 1 July 2014.
To finance the non-current assets, a 4-year 10% loan $100 000 and a new issue of 250 000 ordinary shares
at $1 each will be raised on the same day. The first payment of loan interest and capital will be made on 1
July 2015.
2 Sales volume is expected to increase by 60% and the selling price is expected to increase by 10%.
3 Gross profit as a percentage of sales is expected to decrease by 5%.
4 Sales and purchases are expected to be made evenly during the year. All sales and purchases are on credit.
The sales credit period will be one month while the purchases credit period will be two months.
5 The closing inventory is expected to be $180 000 on 30 June 2015.
6 Two salesmen will be employed to strengthen the selling activities. Apart from their total annual salaries of
$123 000, the salesmen will be entitled to:
Chapter 15 238 Budgeting

Commission – 3% of gross sales (payable in July 2015)

Bonus – 5% of the profit for the year after charging the bonus (payable in July 2015)
7 All other expenses are expected to increase by 5% in line with the expected inflation rate.
8 Depreciation on non-current assets held at 30 June 2015 will be charged at 20% on the straight-line basis.
9 No bad debts are anticipated. However, a provision for doubtful debts will be made at 2% of the trade
receivables at the year end.
REQUIRED
(a) Prepare the budgeted income statement for the year ending 30 June 2015. [16]
(b) Prepare the budgeted bank account for the year ending 30 June 2015. [8]
(c) Prepare the budgeted statement of financial position at 30 June 2015. [12]
(d) Explain two reasons why a business prepares a budget. [4]

QUESTION 11 MAY 2015 P41 & P42 Q1

The financial statements for Zapf plc for the year ended 30 September 2014 have been completed.
The following information is available.
Zapf plc
Summarised Income Statement for the year ended 30 September 2014
$
Revenue 756 000
Cost of sales (454 000)
Gross profit 302 000
Distribution costs (96 000)
Administrative expenses (180 000)
Profit from operations 26 000
Income from investments 5 000
Finance costs (12 000)
Profit before taxation 19 000
Taxation (4 000)
Profit for the year 15 000

Extract from Statement of Changes in Equity for the year ended 30 September 2014
Retained
earnings
$
Balance at 1 October 2013 24 000
Profit for the year 15 000
Dividends paid (9 000)
Balance at 30 September 2014 30 000
Zapf plc
Statement of Financial Position at 30 September 2014
Non-Current Assets $ $
Tangible
Property, plant and equipment 304 000
Investments 75 000 379 000
Intangible
Goodwill 60 000
439 000
Current Assets
Inventories 74 000
Trade and other receivables 95 000 169 000
Total Assets 608 000
Chapter 15 239 Budgeting

Equity $ $
Ordinary shares of $1 each 180 000
5% Non-redeemable preference shares 100 000
Share premium 30 000
Retained earnings 30 000 340 000
Non-Current Liabilities
6% Debentures (2021) 150 000
Current Liabilities
Trade and other payables 53 000
Taxation 4 000
Cash and cash equivalents 61 000 118 000
Total equity and liabilities 608 000

Extract from notes to the financial statements

Property, plant and equipment Buildings Plant and Motor Total
equipment vehicles
$ $ $ $
Cost 320 000 158 000 36 000 514 000
Depreciation 112 000 78 000 20 000 210 000
Net book value 208 000 80 000 16 000 304 000
The company accountant is now preparing the budgeted financial statements for the year ending 30 September
2015.
Budgeted information for the year ending 30 September 2015 is available.
1 Revenue is expected to increase by 4%.
2 The percentage of gross profit to sales is expected to increase to 42%.
3 Distribution costs and administrative expenses are both expected to increase by 3%.
4 Income from investments is not expected to change.
5 Finance costs are expected to decrease to $10 000.
6 The tax rate will be 20% on the profit before taxation.
7 No dividends are expected to be paid on the ordinary shares during the year.
8 Capital expenditure for the year is expected to be:
$40 000 on buildings
$18 000 on plant and equipment
$9 000 on motor vehicles
No disposals are expected.
9 Depreciation for the year is expected to be:
$18 000 on buildings
$44 000 on plant and equipment
$12 000 on motor vehicles
Depreciation is included in administrative expenses.
10 The trade receivables collection period is expected to be 45 days. All sales will be on credit.
11 Closing inventory is expected to be valued at $70 000.
12 The trade payables payment period is expected to be 40 days. All purchases will be on credit.

A proposed final dividend of $0.10 per ordinary share is due to be paid on 31 October 2015.
REQUIRED
(Make all calculations to nearest thousand $.)
(a) Prepare the following for the year ending 30 September 2015.
(i) the budgeted income statement [12]
(ii) the budgeted statement of changes in equity (retained earnings column only). [5]
(b) Prepare the following:
Chapter 15 240 Budgeting

(i) the property, plant and equipment section of the non-current assets note to the budgeted financial
statements for the year ending 30 September 2015. [7]
(ii) the budgeted statement of financial position at 30 September 2015. [16]

QUESTION 12 NOVEMBER 2015 P42 Q2(a)

Jamal is a sole trader. He is concerned that during the next few months he may have insufficient cash to pay his
expenses.
He provides the following information.
1 Sales revenue $000
Actual sales per month
2015
September 135
October 187
Budgeted sales per month 2015
November 209
December 225
2016
January 258
February 293
1 20% of the sales are for cash.
2 80% of the sales are on credit. 60% of the credit customers pay in the month following the sale. The balance
is received two months after the sale.
3 Jamal purchases goods one month before their sale. He marks up his goods at a uniform rate of 50%. He
pays for 75% of these goods in the month following purchase. The balance is paid two months after
purchase.
4 Administration expenses are 10% of sales revenue and will be paid in the month following the sale.
5 Wages of $18 000 will be paid each month.
6 A delivery van costing $20 000 will be purchased in November 2015 and paid for in full by cheque.
7 Equipment which originally cost $25 000 will be sold on 1 December 2015 for $10 000.
Payment will be received, half at the time of sale and half one month later.
8 Equipment costing $30 000 will be purchased in November 2015. A deposit of 30% will be paid on delivery.
Equal monthly payments of 10% of the balance remaining will then be paid. (Ignore any interest)
9 Jamal intends to take cash drawings of $2000 per month in November and December 2015 and $3 000 cash
drawings each month in 2016.
10 A bank loan, $25 000, taken out in 2011 will be repaid in full in January 2016.
11 The balance on the business bank account at 1 November 2015 is expected to be $18 000 debit.
REQUIRED
Prepare a monthly cash budget for each of the three months from November 2015 to January 2016. Show all
workings and work to the nearest thousand dollars. [30]

QUESTION 13 NOVEMBER 2016 P32 Q6

The directors of Slanting Stores Limited have prepared a cash budget.
REQUIRED
(a) (i) State one difference between a cash budget and a statement of cash flows. [1]
(ii) State two benefits of preparing a cash budget. [2]

Additional information
Slanting Stores Limited makes all its sales on credit. Half of all credit customers pay in the month of sale, receiving a
cash discount for early payment. The remainder pay in the following month. Purchases for resale are paid for in the
month after purchase.
The cash budget for the three months ending 31 March 2017 is as follows:
Chapter 15 241 Budgeting

Cash budget for the three months ending 31 March 2017

January February March
$ $ $
Opening balance 17 800 17 300 (1 600)
Receipts – month of sale 28 500 26 125 30 875
Receipts – month following sale 40 000 30 000 27 500
Payments to suppliers (44 000) (33 000) (35 750)
Wages (10 000) (10 125) (8 575)
Other expenses (15 000) (14 800) (12 200)
Dividend paid – (8 000) –
Purchase of non-current asset – (9 100) –
Closing balance 17 300 (1 600) 250
REQUIRED
(b) Calculate
(i) the value of sales for each of the three months January to March 2017, [3]
(ii) the value of cash discount for each of the three months January to March 2017, [3]
(iii) the rate of cash discount given. [1]

(c) Prepare the trade receivables budget for each of the three months January to March 2017. Trade
receivables at 1 January 2017 are expected to be $40 000. [8]

Additional information
The directors wish to eliminate the expected deficit in cash at the end of February. They are considering paying $15
000 in January for an advertising campaign which is expected to increase sales from February onwards.

REQUIRED
(d) Calculate the required increase in February’s sales, after the advertising campaign, needed to avoid the
negative cash balance. [5]
(e) Suggest two possible actions the directors could take, other than the advertising campaign, to improve the
cash flow. [2]

QUESTION 14 NOVEMBER 2016 P33 Q6

Sunil is preparing the annual budgets for his manufacturing business.
REQUIRED
(a) Explain what is meant by a master budget. [2]

Additional information
The finished goods inventory held at 1 January 2017 is expected to be 200 units. This is expected to increase by 20
units each month until 31 March 2017.
Unit sales from December 2016 to April 2017 are expected to be:

December January February March April

350 370 410 380 430
REQUIRED
(b) Prepare a production budget for each of the four months from January to April 2017. [4]

Additional information
1 Goods will be sold on credit with a selling price of $30 per unit. One third is expected to be received in the
month of sale with the balance being received in the following month.
2 Other income will arise from the interest received on an investment of $50 000 at 4% per annum. Interest
will be received quarterly starting 1 January 2017.
Chapter 15 242 Budgeting

3 Unit product costs are expected to be as follows:

$
Direct materials 7
Direct labour 5
Overheads 6
18
4 Direct materials will be purchased to meet the current month’s production. Half the amount due will be
paid by cash in the month of production and the balance will be paid in the following month. The number
of units produced in December 2016 is expected to be 340.
5 Direct labour will be paid in the month that the cost is incurred.
6 Four-fifths of the overheads will be paid in the month in which they are incurred with the balance being
paid in the following month.
7 Some new equipment is expected to be acquired on 1 January 2017 at a cost of $12 000. A 50% deposit will
be paid on delivery, with the remainder being paid on 1 April 2017. This equipment will be depreciated at
10% using the straight-line method.
8 The bank account balance at 1 January 2017 is expected to be overdrawn by $10 450.

REQUIRED
(c) Prepare a cash budget for each of the three months from January to March 2017. [10]
(d) Analyse the options available to Sunil to avoid using a bank overdraft. [6]
(e) Advise Sunil whether or not he should apply for a loan rather than maintain an overdraft. Justify your
answer. [3]

QUESTION 15 NOVEMBER 2017 P32 Q6 (a to c)

J Limited sells a single product at a mark-up of 25%. The following information is available:
1 Sales revenue:
$
2017
November 150 000
December 180 000

2018
January 200 000
February 210 000
March 225 000
April 240 000

2 All sales are on credit and customers have a credit period of 2 months.
3 All purchases are on credit and suppliers are paid in the month following purchases.
4 Inventory level at the end of each month will be maintained at 25% of the sales volume in the following
month.
5 Monthly operating costs are expected to be $18 000, which includes $3 000 depreciation.
6 Balance at bank at 1 January 2018 is expected to be $4 500.

REQUIRED
(a) Prepare the cash budget for each of the three months from January to March 2018. [9]
(b) Prepare a budgeted income statement for the three-month period ending 31 March 2018. [3]
(c) Prepare a reconciliation of the profit from operations for the three-month period ending 31 March 2018 to
the net cash at 31 March 2018. [8]

QUESTION 16 NOVEMBER 2017 P33 Q6

Luke’s business is due to start on 1 April 2018, selling a single product obtained from a sole supplier.
Chapter 15 243 Budgeting

The purchase price is $40 per unit and Luke will sell each unit at a mark-up of 60%.
He also wants to maintain inventory at a level sufficient to cover 50% of the next month’s sales.
Budgeted unit sales for the first four months of trading are as follows:

April May June July

5 000 8 000 4 000 3 000

The following information is also available:

1 Luke will introduce $150 000 capital into the business bank account on 1 April 2018. On the same day,
equipment costing $48 000 will be purchased by cheque.
2 Equipment will be depreciated over a period of 60 months with no residual value.
3 All purchases are expected to be paid one month after the purchases are made.
4 All sales will be on credit.
20% of customers are expected to take a cash discount of 11/2% and pay in the month of sale.
30% of customers are expected to pay one month after the sales are made.
The remaining customers are expected to pay two months after the sales are made.
5 Monthly operating expenses will be paid in the month they are incurred. They are expected to be $43 000
including depreciation.
REQUIRED
(a) State two benefits of preparing a cash budget. [2]
(b) Prepare the cash budget for each of the three months April, May and June 2018. [11]
(c) Comment on Luke’s working capital management. [6]
(d) Prepare a budgeted income statement for the three-month period ending 30 June 2018. [6]

QUESTION 17 MAY 2018 P31 & P33 Q5

C Limited is a small manufacturing company which operates a budgetary control system.
The following information is available:
1 The budgeted sales in units for the first five months of 2019 are expected to be:
Jan Feb Mar Apr May
3 500 4 000 4 750 3 750 4 250
2 The inventory of finished goods at 1 January 2019 is expected to be 10% of the budgeted January sales.
The monthly closing inventory of finished goods is to be maintained at the same percentage of the following
month’s budgeted sales.
3 There is a maximum inventory holding of 450 units.

REQUIRED
(a) State three advantages and two disadvantages of operating a budgetary control system. [5]
(b) Prepare the production budget in units for each of the four months from January to April 2019. [6]

Additional information
Each unit produced requires 3 kilos of raw material which is expected to cost $2 per kilo.
The opening inventory of raw material at 1 January 2019 is expected to be 200 kilos. The closing inventory of raw
material is expected to remain the same for January. It is then expected to increase by 10% for February and a further
10% for March. After that it will remain unchanged.
(c) Prepare the purchases budget in both kilos and dollars for each of the four months from January to April
2019. [6]
Additional information
The directors are expecting an increase in demand later in the year and are considering a proposal to increase the
storage capacity of the warehouse. The proposal will be beneficial to the company as it will allow an increase in the
maximum inventory of finished goods holding to 500 units. The cost associated with the storage of each unit (holding
cost) is $10.
Chapter 15 244 Budgeting

(d) Calculate for the month of February the difference between the current holding cost for the closing
inventory of finished goods and the holding cost if the proposal is accepted. [4]
Additional information
The cost of increasing the storage capacity is expected to be $20 000. A cash budget which includes this proposed
cost has been prepared. This shows an overdrawn bank balance of $18 000 at the end of February.
However, the bank has refused to give the business an overdraft. The directors are now considering investing their
own money as a loan to the business to finance the proposal.
(e) Discuss the advantages and disadvantages to the directors of investing their own funds into the
business. [4]
Chapter 15 245 Budgeting

SOLUTION CHAPTER 15
QUESTION 1 MAY 2011 P41 Q3
(a) Bank Account
$000 $000
Receivables (W 1) 1 203 Balance b/f 15
Sale of vehicles 80 Trade Payables (W 2) 665
Sale of equipment 75 Rates ($9 000 + $9 000) 18
Debentures 300 Insurance 30
Share issue 170 Purchase of vehicle 400
Purchase of equipment 310
Selling, distribution & admin. Expenses 184
Tax (last year) 30
$800 000 ×0.03 48
Dividend( )
0.5
Interest 15
___ _ Balance c/d 113
1 828 1 828
(b) Echoes plc
Forecast income statement for the year ending 30 April 2012
$000 $000
Sales 1 260
Cost of Sales
Opening inventory 150
Ordinary goods purchased 680
Closing inventory ($150 000 × 110%) (165) 665
Cost of sales
Other Incomes
Profit on sale of equipment [$75 000 − ($140 000 × 50%)] 5
600
Expenses
Discount allowed ($1 160 000 × 50% × 5%) 29
Rates & insurance [(18 000+$30 000+$8 000−($9 000×1/6)−($30 000×5/12)] 42
Loss on sale of vehicles ($95 000 − $80 000) 15
Depreciation : Land and buildings ($400 000 × 2.5%) 10
Equipment [($230 000 × 50%) + $310 000] × 20% 85
Vehicles ($400 000 × 30%) 120
Selling, distribution & administration expenses 184 485
Operating profit 115
Finance charges ($300 000 × 6% × 10/12) 15
Profit before tax 100
Tax ($100 000 × 20%) 20
Profit for the year 80

QUESTION 2 MAY 2011 P43 Q3

(a) Production budget
Jul Aug Sep Oct Nov Dec
Opening inventory 100 250 250 200 200 100
Production units (balancing figure) 950 1 050 1 350 1 100 850 850
1 050 1 300 1 600 1 300 1 050 950
Sales (800) (1 050) (1 400) (1 100) (950) (850)
Closing inventory 250 250 200 200 100 100
Chapter 15 246 Budgeting

(b) Raw materials purchasing budget

Jul Aug Sep Oct Nov Dec
Production units (‘a’ part) 950 1 050 1 350 1100 850 850
Number of kilos required per unit ×2 ×2 ×2 ×2 ×2 ×2
Total kilos needed for production 1 900 2 100 2 700 2 200 1 700 1 700
Price per kilo ×4 ×4 ×4.5 × 4.5 × 4.5 ×5
Cost in $ 7 600 8 400 12 150 9 900 7 650 8 500
(c) Receivables at 1 September = July sales × 50% + August sales
= (800 × $190 × 50%) + (1 050 × $190)
= $76 000 + $199 500
= $275 500
(d) Trade receivables budget
September October November December
$ $ $ $
Opening balance 275 500 365 750 353 000 300 000
Sales (1 400 × 190); (1 100; 950; 850) units @$200 266 000 220 000 190 000 170 000
541 500 585 750 543 000 470 000
Cash Receipts: (Last month sales × 50% ×96%) 95 760 127 680 105 600 91 200
(Two months earlier sales × 50%) 76 000 99 750 133 000 110 000
Discounts allowed (Last month sales × 50% × 4%) 3 990 5 320 4 400 3 800
Closing trade receivables 365 750 353 000 300 000 265 000

(e)  Budgets establish targets for the operating departments to follow.

 Budgets predict shortages of cash/labour/materials
 Mangers of different departments are forced to work together in order to integrate their individual
plans. This enhances inter-departmental communication, coordination and spirit of teamwork.
 Budgets can be used as yardsticks to compare with actual performance in order to highlight the
strengths and weaknesses of an organisation.
(f) (i) Depreciation, bad debts
Increase in Provision for doubtful debts
(ii) Loan repayment
Purchase of non-current asset
QUESTION 3 NOVEMBER 2011 P42 Q3
(a) Ada Campellini
Cash Budget for the three months ended 31 January 2013
Receipts November ($) December ($) January ($)
Sales: Current month sales × 50% × 94%) 145 700 199 750 91 650
last month sales × 50% × 50% × 97% 54 563 75 175 103 062
two months earlier sales × 50% × 50% 53 750 56 250 77 500
Total receipts (a) 254 013 331 175 272 212
Payments
Purchases: Current month purchases × 30% × 96% 70 560 38 880 38 880
last month purchases × 40% × 98% 74 480 96 040 52 920
two months earlier purchases × 30% 52 500 57 000 73 500
General expenses [18 000; (18 000×110%); (19 800 × 85%)] 18 000 19 800 16 830
Storage system ($24 000 × 50%);[($24 00012 000) × 1/12] 12 000 1 000 1 000
Drawings ($425 000 × 1.5%) 3 000 6 375 3 000
Total Payments (b) 230 540 219 095 186 130
Net receipts(payments) (a  b) 23 473 112 080 86 082
Bank balance at start 34 850 58 323 170 403
Bank balance at end 58 323 170 403 256 485
Chapter 15 247 Budgeting

(b) Ada Campellini

Income Statement
For the three months ended 31 January 2013
$ $
Sales ($310 000 + $425 000 + $195 000) 930 000
Cost of Sales
Inventories on 1 November 2012 180 000
Purchases ($245 000 + $135 000 + 135 000) 515 000
Inventories on 31 January 2013 (129 000) (566 000)
Gross Profit 364 000
Expenses
General expenses ($18 000 + $19 800 + $16 830) 54 630
Depreciation: Storage Device ($24 000 × 10% × 3/12) 600
Depreciation on other assets ($1 750 + $1 750 + $1 750) 5 250
Discount allowed [($310 000 + $425 000 + $195 000)× 50% × 6%] + [($225
000 + $310 000 + $425 000)× 50% × 50% × 3%) 35 100 (95 580)
268 420
Other Incomes
Discount received [($245 000 + $135 000 + 135 000) × 30% × 4%] +
[($190 000 +$245 000 + $135 000) × 40% × 2%] 10 740
Net Profit 279 160

QUESTION 4 MAY 2012 P42 Q3 (a, b, c , e & f)

(a) A company sets a budget for a certain level of output. If the actual level of activity is higher or lower than
the original estimate. The flexible budget adjusts to changes in activity level by flexing the data of original
budget in accordance with the actual level.

(b) Fixed budget is a budget based on a single level of activity (e.g., a particular volume of sales or production)
and is not adjusted for changes in the volume of output. Businesses using fixed budgets have no allowances
for possible changes in their budgetary needs. If actual output is different from budgeted output It will be
difficult to identify the reason for any difference or what actions to take to correct any problems

(c) Production budget

For months 1–3 (all figures in units)
Month 1 2 3
Units Units Units
Sales 1 200 1 400 1 600
Closing inventory 180 160 140
1 380 1 560 1 740
Opening inventory (200) (180) (160)
Production (balancing figure) 1 180 1 380 1 580

(e) Flexible budget statement for Months 1–3

Details Actual Budget Variance
$ $ $
Sales (4 400 × 28) ; (4 400 × 29) 123 200 127 600 (4 400)
Direct material (4 400 × 2 × 4) ; (4 400 × 2 × 3) (35 200) (26 400) (8 800)
Direct labour (4 400 × 0.4 × 10) ; (4 400 × 0.5 × 10) (17 600) (22 000) 4 400
Factory overheads [(4 400 × 4) + $15 000] (36 200) (32 600) (3 600)
Other fixed costs (18 000) (23 500) 5 500
Profit 16 200 23 100 (6 900)
Chapter 15 248 Budgeting

(f) The following are the reasons that despite of an increase in units sold, the actual profit was less than
the budgeted profit.
 Lower selling price per unit may be to attract more sales volume
 Increase in direct material cost resulting in negative impact on profits

The following items had positive effect on profit

 The direct labour hours worked were lower than budget
 Reduction in factory and other fixed overheads
 Reduction in certain expenses could not offset the additional costs and reduced selling price which
led to a lower profit than budgeted.

QUESTION 5 MAY 2013 P41 Q3

(a) (i) Production Budget
For five months ending 30 April 2014
January February March April May
$ $ $ $ $
Sales (units) 10 000 11 000 11 000 12 000 12 000
Add Finished Goods- closing (following month sales × 20%) 2 200 2 200 2 400 2 400 2 800
12 200 13 200 13 400 14 400 14 800
Less Finished Goods - opening (2 000) (2 200) (2 200) (2 400) (2 400)
Budgeted production (units) 10 200 11 000 11 200 12 000 12 400

(ii) Purchases Budget

For four months ending 30 April 2014
January February March April
Budgeted production (units) 10 200 11 000 11 200 12 000
Material usage per unit × 0.5 × 0.5 × 0.5 × 0.5
Raw materials usage (kilos) 5 100 5 500 5 600 6 000
Add Raw materials-closing (following month usage×50%) 2 750 2 800 3 000 3 100
7 850 8 300 8 600 9 100
Less Raw materials - opening (2 550) (2 750) (2 800) (3 000)
Budget purchases (kilos) 5 300 5 550 5 800 6 100
× Per kilo cost ×3 ×3 ×3 ×3
Budget purchases (value) $15 900 $16 650 $17 400 $18 300

(b) Calculation of Values of inventories of Raw materials and finished goods

Inventories at 1 January 2014 $ $
Raw materials [2 550 units (a i) × $3] 7 650
Finished goods [2 000 units (a i) × $11] 22 000 29 650
Inventories at 30 April 2014
Raw materials [3 100 units (a i) × $3] 9 300
Finished goods [2 400 units (a i) × $11] 26 400 35 700

(c) (i) Summarised manufacturing account

For four months ending 30 April 2014
Raw Materials Cost $
Opening Inventory (b) 7 650
Purchases of raw materials ($15 900 + $16 650 + $17 400 +$18 300) 68 250
Closing Inventory (b) (9 300)
Cost of raw materials used [(10 200 + 11 000 + 11 200 + 12 000) × 0.5 kilos @ $3] 66 600
Direct labour and production overheads (Balancing figure) 421 800
Cost of production [(10 200 + 11 000 + 11 200 + 12 000) units × $11] 488 400
Chapter 15 249 Budgeting

(ii) Summarised income statement for four months ending 30 April 2014
$ $
Revenue [(10 000 × $20) + (11 000 × $20) + (11 000 × $21) + (12 000× $21)] 903 000
Cost of Sales $ $
Opening inventory - Finished goods (‘b’ part) 22 000
Cost of production [(c iii)] 488 400
510 400
Closing inventory - Finished goods (‘b’ part) (26 400) (484 000)
Gross profit 419 000

(d) Budgetary control offers several advantages to managers. Some of these are:
 Budgetary control coordinates activities across departments.
 Budgetary control translates strategic plans into action. It specifies the resources, revenues, and
activities required to carry out the strategic plan for the coming year.
 Budgetary control provides an excellent record of organizational activities.
 Budgetary control improves communication with employees.
 Budgetary control improves resources allocation, because all requests are clarified and justified.
 Budgetary control provides a tool for corrective action through reallocations.
 Budgetary control helps to control costs.

However, budgets control can also create problems. The disadvantages of budgets are:
 The major problem occurs when budgetary control is applied mechanically and rigidly.
 Budgetary control can de-motivate employees because of lack of participation. If the budgets are
arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures,
and will not be committed to them.
 Budgetary control can cause perceptions of unfairness.
 Budgetary control can create competition for resources and politics.
 A rigid budgetary control reduces initiative and innovation at lower levels, making it impossible to
obtain money for new ideas.

QUESTION 6 MAY 2013 P42 Q3

(a) (i) Purchases budget (in both units and value)
January February March April
Units of sales 5 000 5 200 5 600 5 800
Units in closing inventory (Balancing figure) 1 300 1 400 *1 300 *1 000
6 300 6 600 6 900 6 800
Units in opening inventory (current month sales × 25%) (1 250) (1 300) (1 400) 1 300
Units of purchases (to the maximum of 5 500 units) 5 050 5 300 5 500 5 500
Purchase price per unit $4.00 $4.00 $4.20 $4.20
Purchases (value) $20 200 $21 200 $23 100 $23 100

(ii) Trade Receivables Budget

January February March April
$ $ $ $
Trade receivables b/f ($24 000 + $49 000) 73 000 74 500 77 000 76 400
Add Credit sales (Units of sales × per unit sales price) 50 000 52 000 50 400 55 100
123 000 126 500 127 400 131 500
Less Receipts
Last month sales × 50% × 96% 23 520 24 000 24 960 24 192
Two months earlier sales × 50% 24 000 24 500 25 000 26 000
Discount allowed (last month sales × 50% × 4%) 980 1 000 1 040 1 008
48 500 49 500 51 000 51 200
Trade receivables c/f 74 500 77 000 76 400 80 300
Chapter 15 250 Budgeting

(iii) Trade Payables Budget

January February March April
$ $ $ $
Trade payables b/f 20 000 20 200 21 200 23 100
Add Credit purchases 20 200 21 200 23 100 23 100
40 200 41 400 44 300 46 200
Less Cash paid (last month purchases × 95%) 19 000 19 190 20 140 21 945
Discount received (last month purchases × 5%) 1 000 1 010 1 060 1 155
20 000 20 200 21 200 23 100
Trade payables c/f 20 200 21 200 23 100 23 100

(b) Statement of financial position (extract)

As at 30 April 2014 to show current assets & liabilities
Current Assets $ $
Inventory [1 000 units { a (i)} × $4.2] 4 200
Trade receivables [a (ii)] 80 300 84 500
Current Liabilities
Trade payables [a (iii)] 23 100
$13 500 (W 1)
(c) (i) Sensitivity of performance to changes in selling price = × 100
$55 100 (W 1)
= 24.5%
(ii) Selling price per unit at which profit would be zero = $9.50 × (100% – 24.5%)
= $7.17
$13 500
(iii) Sensitivity of performance to changes in variable cost= × 100
$24 900
= 54.22%
WORKINGS
(W 1) Calculation of profits for April 2014
$
Sales [5 800 units { a (i)} × $9.5] 55 100
Less Variable costs (24 900)
Contribution 30 200
Less Fixed costs (16 700)
Profit for the year 13 500

QUESTION 7 NOVEMBER 2013 P43 Q3 (a & b)

(a) Budgeted income statement
For the year ending 31 May 2014
$ $
Revenue [(4 200 × $3.10) + (4 800 × $3.20)+ (4 600 × $3.40)+ (4 500 × $3.30)] 58 870
Cost of Sales
Opening inventory 4 800
Purchases [(4 700 × $1.20)+(4 600×$1.30)+(4 500×$1.30)+(4 500×1.40)] 23 770
Closing inventory (5 100) 23 470
Gross profit 35 400
Expenses
Discount allowed ($58 870 × 2%) 1 177
Bad debts ($58 870 × 1%) 589
Rent ($2 500 × 4) 10 000
Administration costs ($2 400 + $2 600 + $2 600 + $2 700) 10 300
Interest ($8 000 × 6%) 480
Chapter 15 251 Budgeting

Insurance [$2 000  ($2 000 × 3/12) + $350] 1 850

Loss on disposal ($3 900  $3 400) 500
Depreciation Fixtures and fittings [$19 200 + $3 800) × 10%] 2 300
Vehicle ($18 000 × 40%) 7 200 (34 396)
1 004
Other Incomes
Discount received ($23 770 × 1%) 238
Budgeted profit for the year 1 242

(b) Budgeted statement of financial position

As at 31 May 2014
Non-current assets Cost Depreciation Book Value
$ $ $
Fixtures and fittings ($19 200 + $3 800); ($7 100 + $2 300) 23 000 9 400 13 600
Vehicle 18 000 7 200 10 800
41 000 16 600 24 400
Current Assets
Inventory 5 100
Trade receivables (W 1) 9 304
Other receivables - insurance ($2 000 × 3/12) 500
14 904
Current liabilities
Trade payables (W 2) 8 932
Other payables - interest ($480  $240) 240
Cash and cash equivalents ($6 600 + paymentsreceipts) 5 340 14 512 392
24 792
Non-current liabilities
Bank loan (6%) (8 000)
16 792
EQUITY
Capital at 1 June 2013 25 550
Add Capital introduced (Legacy from uncle) 5 000
Profit for the year 1 242
31 792
Less Drawings ($3 000 + $4 000 + $3 000 + $5 000) 15 000 16 792

WORKINGS
(W 1) Trade Receivables
$ $
Balance b/f 11 900 Bank $(16 500+14 200+14 000+15 000) 59 700
Sales (Income statement) 58 870 Discount allowed ($58 870 × 2%) 1 177
Bad debts ($58 870 × 1%) 589
Balance c/d (balancing figure) 9 304
70 770 70 770

(W 2) Trade Payables
$ $
Bank $(5 800+ 5 700 + 5 200 + 4 000) 20 700 Balance b/f 6 100
Discount received ($23 770 × 1%) 238 Purchases (Income statement) 23 770
Balance c/d (balancing figure) 8 932 _____
29 870 29 870
Chapter 15 252 Budgeting

(c) Forecast Statement of Financial Position at 30 April 2012

Cost Dep NBV
Non-current assets $000 $000 $000
Land and buildings ($50 000 + $10 000) 1 200 60 1 140
Equipment[($230000×50%)+$310000];[($90000×50%)+$85000] 425 130 295
Vehicles ($400 000 × 30%) 400 120 280
2 025 310 1 715
Current assets
Inventory ($150 000 × 110%) 165
Receivables [($100 000(April Sales)+($100000×50%(March sales)] 150
Prepaid rates and insurance [($9 000 × 1/6) + ($30 000 × 5/12)] 14
Cash and cash equivalents 113
442
Current liabilities
Tax payable 20
Trade payables 90 110 332
2 047
Non-current liabilities
Debentures 300
1 747
Equity
Ordinary shares of $0.50 each [$800 000 + ($100 000 × 0.5)] 850
Share premium [$100 000 + ($100 000 × 1.2)] 220
Retained earnings ($645 000 − $48 000 + $80 000) 677 1 747

WORKINGS
(W 1) Trade Receivables Account
$000 $000
Balance b/f 122 Discount allowed ($1 160 000 × 50% × 5%) 29
Sales 1 260 Bank (balancing figure) 1 203
____ Balance c/d[$100 000 + ($100 000 × 50%)] 150
1 382 1 382

QUESTION 8 MAY 2014 P43 Q3

(a) Sales budget for the period January to March 2015
January February March
Sales in volume (units) (W 1) 24 000 25 200 26 460
Sales price per unit × $60 × $60 × $60
Sales revenue ($) 1 440 000 1 512 000 1 587 600

(b) Production Budget for the period January to March 2015

January February March
Units Units Units
Sales (W 1) 24 000 25 200 26 460
Closing inventory (W 1) 8 400 8 820 9 261
Opening inventory (7 500) (8 400) (8 820)
Units to be produced 24 900 25 620 26 901

(W 1) Calculation of Sales and Closing inventory

Sales Closing Inventory
January 25 200 × 1/3 = $8 400
February 24 000 × 1.05 = 25 200 26 460 × 1/3 = $8 820
March 25 200 × 1.05 = 26 460 27 783 × 1/3 = $9 261
April 26 460 × 1.05 = 27 783 27 783 × 1/3 = $9 261
Chapter 15 253 Budgeting

(c) Purchases Budget

For the period January to March 2015
January February March
Units Units Units
Units to be produced 24 900 25 620 26 901
× Kilos required per unit × 10 × 10 × 10
Raw materials required 249 000 256 200 269 010
Closing inventory (following month material required × 20%) 51 240 53 802 55 566
Opening inventory (48 000) (51 240) (53 802)
Purchases 252 240 258 762 270 774
× Cost per Kg × 1.5 × 1.5 × 1.5
Purchases at cost 378 360 388 143 406 161

(d) Budgeted Income statement

For three months ending 31 March 2015
$ $
Sales revenue ($1 440 000 + $1 512 000 + $1 587 600) 4 539 600
Cost of Sales
Opening inventory : Finished Goods 242 000
Cost of Production (working 1) 2 436 315
Closing inventory : Finished Goods (298 000) 2 380 315
Gross profit 2 159 285
WORKING
Raw Material Cost $ $
Opening inventory – raw materials (48 000 × $1.5) 72 000
Purchases ($378 360 + $388 143 + $406 161) (W 3) 1 172 664
Closing inventory – raw materials (55 566 × $1.5) (83 349) 1 161 315
Direct labour 850 000
Manufacturing overhead ($850 000 × 50%) 425 000
Cost of Production 2 436 315

QUESTION 9 NOVEMBER 2014 P42 Q3

(a) Cash budget 2015
Receipts January February March April
$ $ $ $
Cash sales (current month sales × 10%) 3 000 2 600 2 800 3 200
Last month credit sales × 90% × 50% × 96% 11 232 12 960 11 232 12 096
Two months earlier credit sales × 90% × 50% 10 800 11 700 13 500 11 700
Loan received 10 000
Proceeds from sale of vehicle _____ _____ _____ 1 100
Total Receipts (a) 25 032 27 260 37 532 28 096
Payments
Last month purchases × 95% 16 150 17 100 14 250 18 050
Vehicle purchase 12 000
Rent ($9 000 × 50%) 4 500
Dividend paid 3 100
Administration costs (last month) 6 200 6 200 6 800 7 100
Total payments (b) 25 450 27 800 33 050 25 150
Net receipts (payments) (a  b) (418) (540) 4 482 2 946
Bank balance at start (1 303) (1 721) (2 261) 2 221
Bank balance at end (1 721) (2 261) 2 221 5 167
Chapter 15 254 Budgeting

(b) Budgeted income statement for the four months ending 30 April 2015
$ $
Revenue ($30 000 + $26 000 + $28 000 + $32 000) 116 000
Cost of sales
Opening inventory 2 100
Purchases ($18 000 + $15 000 + $19 000 + $13 000) 65 000
Closing inventory (3 800) 63 300
Gross profit 52 700
Expenses
Administration costs ($6 200 +$6 800 + $7 100 + $6 700) 26 800
Discount allowed ($26 000 + $30 000 + $26 000 + $28 000)×45%×4%) 1 980
Loss on disposal [($7 200  $5 100)  $1 100] 1 000
Depreciation ($120 + $120 + $150 + $150) 540
Interest ($10 000 × 7.8% × 6/12) 130
Rent ($9 000 × 4/12) 3 000 (33 450)
Other Incomes
Discount received [($17 000 + $18 000 + $15 000 + $19 000)× 5%] 3 450
Profit for the period 22 700

(c) Capital expenditures like purchase of non-current assets appear in the cash budget but not in the income
statement.
Capital receipts like receipts from sale of assets, new capital investment, borrowing of loans appear in the
cash budget but not in the income statement.
Non-cash items like depreciation, discount allowed etc. appear in the income statement but not in the cash
budget.
Credit sales, credit purchases are recorded in the income statement but not in the cash budget.

(d)  Cash budgets show cash flows on cash surpluses, which can be used, or deficits, which have to be
funded.
 Short end long-term cash needs can be identified and funded by business in an appropriate
manner.
 A detailed cash budget will encourage efficiency within business and will ease borrowing when
necessary by showing control being exercised over resources.
$22 700÷ 0.40
(e) Dividend cover =
$3 100+($3 100 ×2)
= 6.1 times

QUESTION 10 NOVEMBER 2014 P43 Q2

(a) Budgeted income statement
For the year ended 30 June 2015
$ $
Revenue ($3 000 000 × 160% × 110%) 5 280 000
Cost of Sales
Opening Inventory 120 000
Purchases (Balancing Figure) 3 228 000
3 348 000
Closing Inventory (180 000) 3 168 000
Gross profit [$5 280 000 × 40% (W 1)] 2 112 000
Operating Expenses
Administrative salaries ($700 000 × 105%) 735 000
Heating and lighting ($98 000 × 105%) 102 900
Rent and rates ($340 000 × 105%) 357 000
Sundry expenses ($72 000 × 105%) 75 600
Chapter 15 255 Budgeting

Depreciation:
Plant and machinery [($300 000 + $220 000) × 20%] 104 000
Motor vehicles [($240 000 + $130 000) × 20%] 74 000
$5 280 000 8 800
Increase in provision for doubtful debt ( × 2%)
12
Salaries to salesmen 123 000
Commission to salesmen ($5 280 000 × 3%) 158 400
Loan interest ($100 000 × 10%) 10 000 (1 748 700)
Budgeted profit before bonus 363 300
Bonus ($363 300 × 5/105) (17 300)
Budgeted net profit for the year 346 000
(b) Bank account (for the year 2015)
$ $
Balance b/f 86 000 Plant & machinery 220 000
Trade receivables (W 2) 5 085 000 Motor vehicles 130 000
Loan 100 000 Trade payables (W 3) 2 876 000
Share capital 250 000 Admin salaries($735 000 + $9 000) 744 000
Heating and lighting 102 900
Rent and rates 357 000
Sundry expenses 75 600
Salaries to salesmen 123 000
_______ Balance c/d 892 500
5 521 000 5 521 000
Balance b/d 892 500

(c) Budgeted statement of financial position at 30 June 2015

Assets $ $ $
Non-Current Assets
Plant and machinery ($300 000 + $220 000) 520 000
Accumulated provision for depreciation ($160 000 + $104 000) 264 000 256 000
Motor vehicles ($240 000 + $130 000) 370 000
Accumulated provision for depreciation ($150 000 +$74 000) 224 000 146 000
402 000
Current Assets
Closing Inventory 180 000
$5 280 000 440 000
Trade receivables ( )
12
Provision for doubtful debts ($440 000 × 2%) (8 800) 431 200
Cash and cash equivalent 892 500 1503 700
Total assets 1905 700
Equity and liabilities
Equity
Ordinary share capital ($200 000 + $250 000) 450 000
Retained earnings ($286 000 + $346 000) 632 000 1082 000
Non-current liabilities
10% Loan 100 000
Current liabilities
$3 228 000 ×2 538 000
Trade payables ( )
12
Accrued commission ($5 280 000 × 3%) 158 400
Accrued bonus 17 300
Accrued interest ($100 000 × 10%) 10 000 723 700
Total equity and liabilities 1905 700
Chapter 15 256 Budgeting

WORKINGS
$1 350 000
(W 1) Gross profit (%) for 2014 = × 100
$3 000 000
= 45%
Gross profit (%) for 2015 = 45% – 5
= 40%

(W 2) Trade Receivables Account

$ $
Balance b/f 245 000 Bank (Balancing Figure) 5 085 000
$5 280 000
Sales 5 280 000 Balance c/d ( ) 440 000
12
5 525 000 5 525 000

(W 3) Trade Payables Account

$ $
Bank (Balancing Figure) 2 876 000 Balance b/f 186 000
$3 228 000 ×2
Balance c/d ( ) 538 000 Purchases 3 228 000
12
3 414 000 3 414 000

(d)  They compel management to look ahead for the company as a whole instead of focusing its attention
solely on daily problem solving.
 Mangers of different departments are forced to work together in order to integrate their individual
plans. This enhances inter-departmental communication, coordination and spirit of teamwork.
 Budgets can be used as yardsticks to compare with actual performance in order to highlight the
strengths and weaknesses of an organisation.
 As managers set the budgets for their own department, they will be more aware of the responsibility
they bear to achieve the goals set.
 Participation in setting a budget makes a person psychologically involved in the company. Often the
employee becomes more committed and motivated to achieve the target set.
 Budgets establish targets for the operating departments to follow.
QUESTION 11 MAY 2015 P41 & P42 Q1
(a) (i) Zapf plc
Budgeted income statement
For the year ending 30 September 2015
$000 $000
Revenue ($756 000 × 104%) 786
Cost of sales
Opening Inventory 74
Purchases (Balancing figure) 452
526
Closing Inventory (70) (456)
Gross profit ($786 000 × 42%) 330
Expenses
Distribution costs ($96 000 × 103%) (99)
Administrative expenses ($180 000 × 103%) (185) (284)
Operating Profit 46
Financial Incomes : Income from investments 5
Finance costs (10)
Profit before taxation 41
Taxation ($41 000 × 20%) (8)
Profit for the year 33
Chapter 15 257 Budgeting

(ii) Extract from Statement of Changes in Equity for the year ended 30 September 2015
Retained earnings $000
Balance at 1 October 2014 30
Profit for the year 33
Preference dividends paid (100 000 × 5%) (5)
Balance at 30 September 2015 58

(b) (i) Zapf plc

Note to the budgeted statement of financial position
For the year ending 30 September 2015
Property, plant and Buildings Plant and Motor Total
equipment equipment vehicles
Cost $000 $000 $000 $000
Balance at 1 October 2014 320 158 36 514
Additions 40 18 9 67
Balance at 30 September 2015 360 176 45 581
Depreciation
Balance at 1 October 2014 112 78 20 210
Charge for the year 18 44 12 74
Balance at 30 September 2015 130 122 32 284
Net book value at 30 September 2015 230 54 13 297

(ii) Zapf plc

Budgeted statement of financial position
As at 30 September 2015
Non-current assets $000 $000
Tangible
Buildings 130
Plant and equipment 54
Motor vehicles 13
Investments 75 372
Intangible
Goodwill 60
432
Current assets
Closing Inventory 70
$786 000 ×45
Trade receivables ( ) 97 167
365
Total assets 599
Equity and liabilities
Capital and reserves
Ordinary shares 180
5% Non-redeemable preference shares 100
Share premium 30
Retained earnings 58 368
Non-current liabilities
6% Debentures (2021) 150
Current liabilities
$452 000×40
Trade payables ( ) 50
365
Taxation due 8
Cash and cash equivalents 23 81
Total equity and liabilities 599
Chapter 15 258 Budgeting

QUESTION 12 NOVEMBER 2015 P42 Q2 (a)

Jamal – Cash budget for the 3 months ending January 2016
NOV DEC JAN
Receipts $000 $000 $000
Cash Sales (current with sales × 20%) 42 45 52
Last month sales × 80% × 60% 90 100 108
Two months earlier credit sales × 80% × 40% 43 60 67
Sale of equipment ($10 000 × 1/2) ___ 5 5
Total Receipts (a) 175 210 232
Payments
Last month purchases × 75% 104 113 129
Two months earlier purchases × 25% 31 35 37
Administration expenses (last month’s sales × 10%) 19 21 23
Wages 18 18 18
Purchase of Delivery Van 20
Purchase of Equipment 9
Equipment installments ($30 000 – $9 000) × 10% 2 2
Drawings 2 2 3
Repayments of loan ___ ___ 25
Total Payments (b) 203 191 237
Net Cash receipts (payments) (a – b) (28) 19 (5)
Bank balance at start 18 (10) 9
Bank balance at end (10) 9 4

WORKINGS
Month Sale ($000) Purchase ($000)
100
September 135 $187 × = $125
150
100
October 187 $209 × = $139
150
100
November 209 $225 × = $150
150
100
December 225 $258 × = $172
150
100
January 258 $293 × = $195
150
February 293

QUESTION 13 NOVEMBER 2016 P32 Q6

(a) (i) Cash flow statements are similar to cash budgets in the content that they show sources and uses
of cash but they are different in many respects some of which are given below.
 Cash flow statements are published for external use and they are part of a company’s
published financial statements whereas cash budgets are only used for internal purposes.
 Cash flow statements are based on historic data and shows sources and uses of cash for
previous year whereas a cash budget shows the same for future periods.
 There is no set format of cash budgets but a cash flow statement has to be prepared in
compliance with IAS7.
 Cash flow statements show reasons for changes in cash for a whole year whereas companies
may prepare cash budgets to show changes in cash on monthly, weekly or yearly basis.
 A company is bound to prepare a cash flow statement on annual basis whereas there is no
such compulsion for a cash budget.
(ii)  Cash budget will show the pattern of future cash flows giving information on cash surpluses,
which can be used, or deficits, which have to be funded.
Chapter 15 259 Budgeting

 Short end long-term cash needs can be identified and funded by Roland in an appropriate
manner.
 A detailed cash budget will encourage efficiency within business and will ease borrowing
when necessary by showing control being exercised over resources.

(b) (i) Calculation of sales

$
January ($30 000 × 2) 60 000
February ($27 500 × 2) 55 000
March ($30 875 × 27 500/26 125) or ($30 875 × 30 000/28 500) 65 000

(ii) Calculation of Cash discount

$
January ($30 000  $28 500) 1 500
February ($27 500  $26 125) 1 375
March [($65 000 × 50%)  $30 875) 1 625

$1 500 $1 375
(iii) Rate of cash discount = or
$60 000 ×50% $55 000 ×50%
= 5%

(c) Slanting Stores Limited

Trade receivables budget for the 3 months ended 31 March 2017
January February March
$ $ $
Opening balance (Last month sales × 1/2) 40 000 30 000 27 500
Add Credit sales [b (i)] 60 000 55 000 65 000
(a) 100 000 85 000 92 500
Receipts from current month’s sales (given in question) 28 500 26 125 30 875
Receipts from last month’s sales (given in question) 40 000 30 000 27 500
Discount allowed [b (ii)] 1 500 1 375 1 625
(b) 70 000 57 500 60 000
Closing balance (Current month sales × 1/2) or ( a – b) 30 000 27 500 32 500

(d) Increase in cash needed = $15 000 (advertising) + $1 600 (cash deficit)
= $16 600

Increase in sales to avoid shortage = $16 600 ÷ 0.95 × 2

= $34 948

(e)  do nothing if indeed the cash deficit is only for one month
 reschedule payments
 get trade receivables to pay more quickly
 negotiate temporary overdraft facility
 try to get more credit from suppliers
 delay purchase of non-current asset
 other sensible solutions to be rewarded accordingly

QUESTION 14 NOVEMBER 2016 P33 Q6

(a) A master budget is a set of interconnected budgets of sales, production costs, purchases, incomes, etc. and
it also includes pro forma financial statements.
Chapter 15 260 Budgeting

(b) Production budget

For Four months ending 31 April 2017
January February March April
Sales 370 410 380 430
Closing inventory (increase @20 units up to March) 220 240 260 260
590 650 640 690
Opening inventory (increase @20 units per month) (200) (220) (240) (260)
Units of production 390 430 400 430

(c) Cash budget

For three months ending 31 March 2017
Receipts January February March
1
Sales – (current month units sold × $30 × /3) 3 700 4 100 3 800
– (last month units sold × $30 × 2/3) 7 000 7 400 8 200
Interest ($50 000 × 4% × 1/4) 500 _____ _____
Total receipts (a) 11 200 11 500 12 000
Payments
Purchases – cash (current month units produced × $7 × 1/2) 1 365 1 505 1 400
January February March
Purchases – credit (last month units produced × $7 × 1/2) 1 190 1 365 1 505
Direct labour (current month units produced × $5) 1 950 2 150 2 000
Overheads (current month units produced × $6 × 4/5) 1 872 2 064 1 920
Overheads (last month units produced × $6 × 1/5) 408 468 516
Purchase of equipment ($12 000 × 50%) 6 000 -------- ------
Total payments (b) 12 785 7 552 7 341
Net receipts (payments) (a – b) (1 585) 3 948 4 659
Bank balance at month start (10 450) (12 035) (8 087)
Bank balance at month end (12 035) (8 087) (3 428)

(d)  If the overdraft will cause problems then make an attempt to reschedule some of the payments
etc.
 Trade receivables may be offered cash discounts for early payments.
 Purchase of non-current assets may be deferred
 Better control on overheads

(e) A long term loan should be more appropriate tool of financing if overdraft balance is expected
throughout the year as the interest on a loan tends to be lower than an overdraft.

QUESTION 15 NOVEMBER 2017 P32 Q6 (a to c)

(a) Cash budget
For three months from January to March 2018
Jan Feb March
$ $ $
Balance at month start 4 500 (8 500) (5 500)
Receipts
Receipts from trade receivables (two months earlier sales) 150 000 180 000 200 000
Payments
Payments to trade payables – last month purchases (W 1) 148 000 162 000 171 000
Monthly operating costs ($18 000  $3 000) 15 000 15 000 15 000
Balance at month end (8 500) (5 500) 8 500
Chapter 15 261 Budgeting

(b) Budgeted income statement

For the three-month period ended 31 March 2018
$ $
Sales ($200 000 + $210 000 + $225 000) 635 000
Cost of Sales
Opening inventory (W 1) 40 000
Purchases ($162 000 + $171 000 + $183 000) 516 000
Closing inventory (W 1) (48 000) (508 000)
Gross profit 127 000
Expenses
Cash expenses ($15 000 × 3) 45 000
Depreciation ($3 000 × 3) 9 000 (54 000)
Profit for the quarter 73 000

(c) Statement to reconcile profit from operations

For quarter ending 31 March to the net cash
$
Profit from operations 73 000
Depreciation 9 000
Increase in inventory ($48 000 – $40 000) (8 000)
Increase in trade receivables [($210 000 + 225 000) – ($150 000 + $180 000)] (105 000)
Increase in trade payables ($183 000 – $148 000) 35 000
Increase in cash 4 000
Cash at 1 January 2018 4 500
Cash at 31 March 2018 8 500

WORKINGS
(W 1) Calculation of Purchases
Nov Dec Jan Feb Mar April
$ $ $ $ $ $
Revenue 150 000 180 000 200 000 210 000 225 000 240 000

Cost of sales (sales/1.25) 120 000 144 000 160 000 168 000 180 000 192 000
Closing inventory (following month sales × 25%) 36 000 40 000 42 000 45 000 48 000

Cost of sales 120 000 144 000 160 000 168 000 180 000
Add Closing inventory 36 000 40 000 42 000 45 000 48 000
Less Opening inventory (36 000) (40 000) (42 000) (45 000)
Purchases 148 000 162 000 171 000 183 000

QUESTION 16 NOVEMBER 2017 P33 Q6

(a) Cash budget will show to Roland the pattern of future cash flows giving information on cash surpluses, which
can be used, or deficits, which have to be funded.

Short end long-term cash needs can be identified and funded by Roland in an appropriate manner.
A detailed cash budget will encourage efficiency within Roland business and will ease borrowing when
necessary by showing control being exercised over resources.

(b) Cash budget for the three months ending 30 June 2018
Receipts April ($) May ($) June ($)
Capital introduced 150 000
Chapter 15 262 Budgeting

Receipts from customers

Current month units sold (W 1) × $64 × 20% × 98.5% 63 040 100 864 50 432
Last month units sold (W 1) × $64 × 30% 96 000 153 600
Two months earlier sales × $64 × 50% ______ _______ 160 000
Total receipts (a) 213 040 196 864 364 032
Payments
Payments to suppliers [last month purchases (W 1)] 0 360 000 240 000
Purchase of equipment 48 000
Operating expenses [$43 000  (48 000 ÷ 60 months)] 42 200 42 200 42 200
Total payments (b) 90 200 402 200 282 200
Net receipts (payments) (a  b) 122 840 (205 336) 81 832
Opening balance 0 122 840 (82 496)
Closing balance 122 840 (82 496) (664)

(c) There is a negative cash balance of $664 on 30 June but at that time liquidity position does not look bad as
the cash position was even worse at the end of May.
Almost half of trade receivables pay two months after sale which were received first time for the sale of
first month of business in June. This reduced cash deficit from $82 496 to $664. Luke should consider to
tighten its credit policy. Discounts on making prompt payments may be offered to customers. Currently
only 20% of trade receivables take the advantage of cash discount, Luke may consider to increase the cash
discount.
There are frequent changes in sales volume may be due to seasonal fluctuations. Sale promotion schemes,
offering of trade discounts in low sale period could have been an option.
On the other hand, as Luke is buying a single product from a sole supplier so it looks like that Luke does not
have much bargaining power as he has to pay within one month following the purchases and is not allowed
any cash discount.
Inventory levels are also very high and are having negative impact on cash flows.
It can, however, be expected that in July business will have positive net cash balance at the end of the
month due to receipt of $256 000 on account of May sales. Luke should, therefore, concentrate to avoid
the huge cash deficit in May.
WORKING
(W 1) Purchases Budget
April May June July
Units of sales 5 000 8 000 4 000 3 000
Add Closing inventory (following month sales × 50%) 4 000 2 000 1 500 2 000
Less Opening inventory (last month closing inventory) (0) (4 000) (2 000) (1 500)
Purchases (in unit) 9 000 6 000 3 500 3 500
× Per unit purchase price × 40 × 40 × 40 × 40
Purchases ($) 360 000 240 000 140 000 740 000
(c) Cash flow not bad, i.e. has net operating cash inflow; cash received from customers $994 560 ($63 040 +
$196 864 + $364 032 + $370 624) is greater than operating cash outflows $908 800 ($360 000 + $240 000 +
$140 000 + $42 200 × 4)
Cash deficit in May and June, should plan ahead.
Sales not evenly distributed, i.e. seasonal trade and this will affect the regularity of cash inflow.
Not many trade receivables take the advantage of cash discount, Luke may consider to increase the cash
discount.
More than 50% of trade receivables pay 2 months after sale, Luke should consider to tighten its credit policy
Maybe the business is a new business and Luke has only one supplier. It appears that Luke does not have
much bargaining power as he has to pay within one month following the purchases and is not allowed any
cash discount.
Keeping too much inventory may have negative impact on cash flow.
Chapter 15 263 Budgeting

(d) Income statement for the three-month period ending 30 June 2018
$ $
Revenue [(5 000 + 8 000 + $4 000) units @$64] 1 088 000
Cost of sales
Purchases ($360 000 + $240 000 + $140 000) 740 000
Closing inventory [1 500 units (W 1) × $4] (60 000) (680 000)
Gross profit 408 000
Expenses
Discount allowed Current month sales × 20% × 1.5% 3 264
Depreciation [($48 000 ÷ 60 months) × 3] 2 400
Other operating expenses [($43 000  $800) × 3] 126 600 132 264
Profit for the period 275 736

QUESTION 17 MAY 2018 P31 & P33 Q5

(a) Advantages:
 Budgetary control coordinates activities across departments.
 Budgetary control translates strategic plans into action. It specifies the resources, revenues, and
activities required to carry out the strategic plan for the coming year.
 Budgetary control provides an excellent record of organizational activities.
 Budgetary control improves communication with employees.
 Budgetary control improves resources allocation, because all requests are clarified and justified.

Disadvantages
 The major problem occurs when budgetary control is applied mechanically and rigidly.
 Budgetary control can de-motivate employees because of lack of participation. If the budgets are
arbitrarily imposed top down, employees will not understand the reason for budgeted
expenditures, and will not be committed to them.
 A rigid budgetary control reduces initiative and innovation at lower levels, making it impossible to
obtain money for new ideas.
 Budgets could be inaccurate

(b) Production budget (units) for each of the four months from January to April 2019
Jan Feb Mar Apr
Units of sales 3 500 4 000 4 750 3 750
Closing inventory (Following month sales × 10%) or 450 whichever is higher 400 450 375 425
3 900 4 450 5 125 4 175
Opening inventory (Current month sales × 10%) or 450 whichever is higher (350) (400) (450) (375)
Units of production 3 550 4 050 4 675 3 800

(c) Purchases budget for each of the four months from January to April 2019
Jan Feb Mar Apr
Units of production (‘b’ part) 3 550 4 050 4 675 3 800
Direct materials required per unit ×3 ×3 ×3 ×3
Direct material to be used in production 10 650 12 150 14 025 11 400
Add Closing Inventory of direct material (200 × 110%) ; (220 × 110%) 200 220 242 242
10 850 12 370 14 267 11 642
Less Opening Inventory of direct material (200 × 110%) ; (220 × 110%) (200) (200) (220) (242)
10 650 12 170 14 047 11 400
Purchase price per unit ($) ×2 ×2 ×2 ×2
Budgeted purchases ($) 21 300 24 340 28 094 22 800
Chapter 15 264 Budgeting

(d) $
Storage cost for inventory of February if maximum storage capacity is 500 units (475  10) 4 750
Storage cost for inventory of February if maximum storage capacity is 450 units (450  10) (4 500)
Increase in holding cost 250

(e) Advantages
The return on directors’ investment more likely to be above the market rate.
The company may pay finance charges on directors’ loan below the rate of bank finance charges
Disadvantages
Directors may not have sufficient liquid funds
Company may not have sufficient funds to pay the directors interest at market rate.
Chapter 16 265 Standard Costing

CHAPTER 16 STANDARD COSTING

QUESTION 1 MAY 2012 P41 Q3 (a to d)
Aston Manufacturing Company has recently implemented a new standard costing system.
(a) Explain the purpose of standard costing. [4]

Budgeted data for the month of April 2012 was:

Sales and production 5000 units
Materials per unit 8 kilograms
Materials cost per kilogram $6
Labour per unit 3 hours
Labour cost per hour $7.50
Overheads per unit 3 hours at $3.50 per hour
The standard selling price gives a standard profit margin of 19%.
REQUIRED
(b) Calculate the standard selling price per unit. [7]

Additional information:
The actual results for April 2012 were:
Production 5 300 units
Sales 5 100 units
Sales revenue $522 750
Materials used 43 460 kilograms
Materials cost $271 625
Labour hours 15 500 hours
Labour cost $120 125

REQUIRED
(c) Calculate the following variances, stating clearly whether the variance is adverse or favourable.
(i) Sales price [4]
(ii) Sales volume [2]
(iii) Material price [2]
(iv) Material usage [2]
(v) Labour rate [2]
(vi) Labour efficiency [2]
(d) Suggest a possible reason for each of the variances. [6]

QUESTION 2 NOVEMBER 2012 P42 Q3

Lourien Ltd operates a standard costing system. Its budget for the month was
$ $
Sales (22 000 units at $21) 462 000
Direct materials (28 600 kilos at $2) 57 200
Direct labour (48 400 hours at $6) 290 400 347 600
Contribution 114 400
Actual results for the month were
$ $
Sales (21 400 units at $20.80) 445 120
Direct materials (28 400 kilos at $2.05) 58 220
Direct labour (47 200 hours at $5.90) 278 480 336 700
Contribution 108 420
Chapter 16 266 Standard Costing

REQUIRED
(a) Calculate the following variances
(i) sales volume [2]
(ii) sales price [2]
(iii) total sales [2]
(iv) direct materials usage [2]
(v) direct materials price [2]
(vi) total direct materials [2]
(vii) labour efficiency [2]
(viii) labour rate [2]
(ix) total labour [2]
(b) A company operates a standard costing system. State with reasons what effects might be
observed if:
(i) raw material is of a higher quality than usual. [6]
(ii) direct labour has a lower skill level than usual. [6]
(c) State which costing method is best suited to the following situations:
(i) a company wishes to calculate a break-even point. [2]
(ii) a customer requires a quote for the manufacture of a large, one-off item. [2]
(iii) goods are produced in a sequence of continuous manufacturing operations. [2]
(iv) production costs need to contain an element of the costs of support or service departments. [2]
(v) a price is needed for one item out of a set of identical items. [2]

QUESTION 3 MAY 2013 P42 Q1

Gladwall Ltd makes one product. Budgeted information is as follows:

Honeybush Limited operates a standard costing system. Monthly standard data is as follows.
Sales are 6 000 units with a selling price of $26 per unit
Each unit requires 2.4 kilos of raw material costing $3 per kilo
Each unit requires 1.5 hours of direct labour time costing $7 an hour

REQUIRED
(a) Calculate the expected monthly contribution per unit and in total. [8]
(b) Calculate the quantity of raw materials in kilos normally purchased each month. Assume inventory levels
remain constant. [2]

Early in 2013 a new supplier entered the market, selling the required raw material at $1.80 per kilo. In April
Honeybush Limited bought all its raw material from this new supplier.
This raw material was more difficult to work with. Therefore each unit required 2.6 kilos and labour took 40% longer
than usual to produce each unit. Overtime premiums caused the average wage rate to rise to $7.80 an hour.
Honeybush Limited managed to produce and sell the usual 6000 units. The selling price had risen by $0.50 per unit.

REQUIRED
(c) Calculate the following variances for April 2013:
(i) Sales price
(ii) Direct materials usage
(iii) Direct materials price
(iv) Total direct materials
(v) Direct labour efficiency
(vi) Direct labour rate
(vii) Total direct labour [14]
Chapter 16 267 Standard Costing

(d) Starting with the original expected total contribution from (a) use these variances to calculate the actual
total contribution. [7]
(e) Calculate the change in contribution for Honeybush Limited arising from its decision to change supplier.
[5]
(f) Explain what is meant by the expression ‘flexing a budget’. [4]

QUESTION 4 MAY 2013 P43 Q3(a to d)

Gladwall Ltd makes one product. Budgeted information is as follows:
Per unit
Selling price $55
Direct materials 4 kilos at $5 per kilo
Direct labour 2 hours at $9 per hour
During April 10 000 units were produced and sold. The following variances arose from the production and sales:
$
Sales price variance 20 000 favourable
Materials price variance 8 400 Favourable
Materials usage variance 10 000 Adverse
Labour rate variance 2 050 Adverse
Labour efficiency variance 4 500 Adverse

REQUIRED
(a) State the formula used to calculate each of these five variances. [5]
(b) Calculate, for April, the actual:
(i) selling price per unit [2]
(ii) quantity of materials used in total [2]
(iii) material price per kilo [3]
(iv) number of labour hours worked in total [2]
(v) labour rate paid per hour. [3]
(c) Starting with the original total budgeted contribution, calculate the actual total contribution for the month.
[7]
(d) For each event listed below identify which variance would be affected and give one example of a variance
which might arise. State whether the effect would be favourable or adverse.
(i) Theft of raw materials
(ii) Changing suppliers making raw materials more expensive
(iii) Giving sales discounts for bulk buying
(iv) Investment in more reliable machinery
(v) Use of higher grade raw materials
(vi) Decrease in overtime hours. [12]

QUESTION 5 NOVEMBER 2015 P41 Q3

In April Amit introduced a new standard costing system.
He produces and sells one item. The standard production is 5 000 units. Amit does not have any opening inventory.
Closing inventory is valued at full standard cost.
The standard costs per unit were as follows:
Direct materials 3 kilos at $5 per kilo
Direct labour 4 hours at $8 per hour
Overheads 2 hours at $3.50 per hour

The selling price will allow Amit a profit on the full standard cost of 17.5%.

REQUIRED
(a) Calculate the standard selling price per unit. [3]
Chapter 16 268 Standard Costing

Additional information
The actual results for April were:
Production 5 100 units
Sales 5 040 units @$65.25 each
Direct material is used 15 450 kilos
Direct material cost $78 795
Direct labour hours 20 250
Direct labour cost $172 125
Overhead variance $300 adverse

REQUIRED
(b) Calculate the following variances for April, clearly identifying which variance you have calculated.
(i) Sales price
(ii) Sales volume
(iii) Total sales
(iv) Direct material price
(v) Direct material usage
(vi) Total material
(vii) Direct labour rate
(viii) Direct labour efficiency
(ix) Total labour [18]
(c) Explain how the direct labour variances may have arisen during April. [5]
(d) Calculate the actual profit for April. [4]
(e) Calculate the budgeted profit for the actual units sold for April. [3]
(f) Prepare a statement reconciling the budgeted profit with actual profit. Start your statement with your
answer is part (e). [7]

QUESTION 6 NOVEMBER 2015 P42 Q3

Peter Parfitt produces a single product and operates a standard costing system.

REQUIRED
(a) Explain what is meant by a standard costing system. [4]

Additional information
The standard selling price per unit is $52.
Budgeted monthly production and sales for October were 800 units.
The standard costs per unit were as follows:

Direct materials 2 kilos at $7 per kilo

Direct labour 3.5 hours at $6 per hour
Overheads 2 hours at $4.50 per hour
The actual results for October were as follows:
Inventory No opening or closing inventory
Sales 815 units at $51 each
Direct materials used 1580 kilos
Direct material cost $12 000
Direct labour hours 2 900
Direct labour cost $18 100
Overheads $200 greater than standard
REQUIRED
(b) Prepare the income statement for Peter Parfitt for the month of October. [3]
Chapter 16 269 Standard Costing

(c) Calculate the following variances for October clearly identifying which variance you have calculated.
(i) Sales price
(ii) Sales volume
(iii) Total sales
(iv) Material price
(v) Material usage
(vi) Total material
(vii) Labour rate
(viii) Labour efficiency
(ix) Total labour [18]
(d) Calculate the total budgeted gross profit for October. [3]
(e) Prepare a statement reconciling the total budgeted gross profit with the actual profit. [8]
(f) Describe how standard costing would be useful to Peter Parfitt. [4]

QUESTION 7 NOVEMBER 2015 P43 Q3

Ayanda Limited manufactures one product. The company keeps no inventory of raw materials or finished goods.
The following budgeted information for a standard month is provided.
Sales 1000 units at $130 each
Raw materials 600 kilos at $18 per kilo
Production labour 1500 hours at $7.50 per hour
Variable overheads $28 000
Fixed overheads $34 000
Variable overheads arise from selling and distribution activities. Fixed overheads include both production and other
overheads.

REQUIRED
(a) Prepare the budget for a standard month, showing total contribution and profit. [4]

Additional information
Actual results for March were as follows.

Sales 1200 units at $132 each

Raw materials 780 kilos at $14 per kilo
Production labour 2050 hours at $8.50 per hour
Variable overheads $35 100
Fixed overheads $34 100
(b) Prepare the flexed budget for March, showing total contribution and profit. [6]
(c) Calculate the actual total contribution and profit for March. [4]
(d) Prepare a statement reconciling the total of actual direct production costs in (c) with the total of direct
production costs from the flexed budget in (b). Start your answer with the actual costs. Your answer should
involve four relevant variances. [12]

Additional information
In March the company bought raw materials which were of a lower quality than usual.
REQUIRED
(e) Explain how the purchase of lower quality raw materials had affected the variances in your reconciliation in
(d). [8]
(f) Advise the directors whether this purchase of lower quality materials has benefitted the business. [6]

QUESTION 8 SPECIMEN 2016 P3 Q6

Aziz Manufacturing Limited produces one product.
The budgeted costs and revenues are as follows.
Chapter 16 270 Standard Costing

Units produced and sold 800 per month

Standard selling price $100 per unit
Standard direct materials 4 kilos at $6 per kilo
Standard direct labour 3 hours at $12 per hour
All overheads are fixed.
In April 850 units were produced and sold. Selling price was maintained at $100 per unit. Actual costs were as follows.
Direct materials 3485 kilos costing $19 516 in total
Direct labour 2720 hours costing $35 360 in total
REQUIRED
(a) Prepare the original budget & the flexed budget for April to show total budgeted contribution. [8]
(b) Calculate the actual total contribution achieved in April. [1]
(c) Prepare a statement to reconcile the contribution from the flexed budget in (a) with the actual contribution
from (b). [10]
(d) Suggest one reason why each of the following variances had arisen.
(i) Material usage variance [2]
(ii) Labour rate variance [2]
(e) State two similarities in use between standard costing and activity based costing. [2]

QUESTION 9 MAY 2016 P32 Q6

Khalid owns a business making blankets. He currently uses a standard costing system.
REQUIRED
(a) Explain the term standard costing. [2]
Additional information
 For the year ending 31 August 2015 Khalid budgeted to sell 2 700 blankets at $40 each.
 Each blanket requires 1.5 metres of material at $10 per metre and 30 minutes of labour. All of his workforce
are employed full time and paid $14 per hour.
 For the year ended 31 August 2015 his actual sales were 2 700 blankets. He used 4 320 metres of material
at a cost of $34 560 and 2 025 hours of labour were required at a cost of $24 300.
REQUIRED
(b) Calculate the following variances for the year ended 31 August 2015:
(i) the material price and material usage variances
(ii) the labour rate and labour efficiency variances. [8]
(c) Prepare a statement reconciling the budgeted costs with the actual costs for the year ended 31 August 2015.
[4]
(d) Discuss possible reasons why Khalid’s actual costs are different to the budgeted costs. [6]
Additional information
In an attempt to control costs, Khalid is considering to:
1 Stop the quality assurance checks usually made during the production process.
2 Find a cheaper supplier for materials to make the blankets.
3 Keep the selling price at $40 per blanket.
REQUIRED
(e) Recommend to Khalid which option or options he should choose. Justify your answer. [5]

QUESTION 10 NOVEMBER 2016 P31 Q5

Billyjo makes a single product. His business operates a standard costing system. All goods produced in the month
are sold and no inventories are held.
REQUIRED
(a) Explain what is meant by ‘standard costing’. [2]
Chapter 16 271 Standard Costing

Additional information
1 Budgeted monthly production and sales for April 2016 were 3 500 units.
2 The standard costs per unit were as follows:
Direct material 3 kilos at $1.40 per kilo
Direct labour 0.5 hours at $4.60 per hour
Overheads 1 hour at $2.80 per hour

3 The actual results for April were as follows:

Production and Sales 3 750 units
Materials used 10 950 kilo
Materials cost $15 768
Labour hours 1 930
Labour cost $8 492
REQUIRED
(b) Calculate the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance [8]

(c) Analyse possible reasons for the variances calculated in (b). [8]
Additional information
The standard selling price per unit is $12. A 2% discount was given to all customers in April.
Actual overhead rate was 10% above standard.
REQUIRED
(d) Calculate the actual profit made by Billyjo for April. [4]
(e) Recommend how Billyjo can improve the performance of his business. [3]
QUESTION 11 MAY 2017 P31 & P33 Q5
EF plc manufactures a single product. No inventories of materials or finished goods are maintained.
The following budgeted information is available for March:
Production and sales 1 000 units
Unit revenue and costs
Selling price $150
Direct material 4 kilos at $6 per kilo
Direct labour 6 hours at $10 per hour
Variable overhead $2 per direct labour hour
Fixed overhead $14 per unit
In March the company actually made and sold 800 units.
REQUIRED
(a) State two reasons why a business prepares a flexed budget. [2]
(b) Prepare a statement to show the budgeted profit for the month of March. [6]
Additional information
The actual cost of direct labour in March was $50 176. Staff had been paid at the rate of $9.80 per hour.
REQUIRED
(c) Calculate the following variances for March:
(i) direct labour rate [2]
(ii) direct labour efficiency [2]
(iii) total direct labour [1]
Chapter 16 272 Standard Costing

Additional information
In April the staff continued to be paid at $9.80 per hour. The variances for April were calculated as follows:
direct labour rate $1 620 favourable
direct labour efficiency $18 000 adverse
REQUIRED
(d) Calculate
(i) the number of hours actually worked in April [2]
(ii) the number of units actually made and sold in April. [5]
(e) Suggest two possible reasons why the efficiency variance was adverse in April. [2]

Additional information
The management of the company is evaluating a plan to retrain the existing workers to improve their efficiency.

REQUIRED
(f) Discuss the disadvantages to EF plc if they proceed with this plan. [3]

QUESTION 12 MAY 2017 P32 Q5

SM Limited makes a single product. In a normal month 1 000 units are made and sold for $150 each. Standard costs
are as follows:
$
Direct labour (4 000 hours at $10.50) 42 000
Direct materials (3 000 kilos at $12.20) 36 600
Variable overheads 10 000
Fixed overheads 19 300

In April the company received an order for the supply of 800 units in addition to the usual production and sales.
REQUIRED
(a) Prepare the flexed budget for April showing total budgeted profit. [6]
Additional information
During April the employees were required to work extra hours to meet increased production. The inclusion of
overtime rates caused the average wage to rise to $13.10 per hour.
Staff worked 7 300 hours in total and used 5 500 kilos of raw material which had been purchased for $11.50 per kilo.
The raw materials were of the usual quality.

REQUIRED
(b) Calculate the following variances for the month of April.
(i) labour efficiency [2]
(ii) labour rate [2]
(iii) materials usage [2]
(iv) materials price [2]
(c) Suggest one cause for each of the materials usage and materials price variances. [2]

Additional information
One of the directors stated that new staff should have been employed. This would have resulted in fewer overtime
payments although extra training costs would have been incurred.
The director believed that 7 800 hours would have been worked at a cost of $10.80 per hour.

REQUIRED
(d) Advise the directors whether or not they should have taken this action. Support your answer with
calculations where appropriate. [6]
(e) State three advantages to the company of operating a standard costing system. [3]
[Total: 25]
Chapter 16 273 Standard Costing

QUESTION 13 NOVEMBER 2017 P31 Q5

WT Limited manufactures a single product. The following information is available from its master budget for the
month of December:
Monthly sales 1000 units
Selling price per unit $90
Direct materials per unit 4 kilos costing $5.10 per kilo
Direct labour per unit 3 hours costing $10 per hour
Total monthly fixed costs $33 000
Competing businesses charge a selling price between $85 and $90 for the same product.
The directors are proposing to reduce the selling price to $80 per unit. They believe that monthly sales would
increase to 1 500 units. The change in demand would cause material costs to fall to $5.02 per kilo and labour costs
to rise to $12 per hour. Total monthly fixed costs would remain unchanged.
REQUIRED
(a) Suggest reasons why the cost per unit could change with the increase in sales for:
(i) direct material
(ii) direct labour. [4]
(b) Calculate:
(i) the total budgeted profit and budgeted profit per unit for December [3]
(ii) the total profit and profit per unit if the directors’ proposal is adopted for December [3]
(iii) the increase or decrease in profit which would arise if the directors’ proposal is adopted. [1]
(c) Calculate the following variances which would arise if the directors’ proposal is adopted:
(i) sales price
(ii) sales volume
(iii) materials price
(iv) labour rate. [8]
(d) Explain why total of variances calculated in part (c) does not equal the change in profit in part (b)(iii). [3]
(e) Advise the directors whether or not they should go ahead with the proposal. Justify your answer. [3]

QUESTION 14 NOVEMBER 2017 P33 Q5 (a to d)

S Limited makes perfume. Budgeted data for the month of July is as follows:
Units produced and sold 15 000 bottles
Standard direct materials (liquids) 0.25 litres at $15 per litre
Standard direct materials (packaging) 1 bottle at $0.80 per bottle
Standard direct labour 6 minutes at $9 per hour
Fixed production overheads for July were budgeted to be $26 250 and are absorbed on a direct labour hour basis.
In July 16 000 bottles were produced and sold. Actual costs were as follows:
Direct materials (liquids) 3 725 litres costing $62 875
Direct materials (packaging) 16 000 bottles costing $12 800
Direct labour 1 700 hours costing $16 320
Fixed production overheads $31 375
REQUIRED
(a) Calculate the total standard cost of the actual production for July. [6]
(b) Calculate the total actual cost of production for July. [3]
(c) Calculate the following variances.
(i) Direct labour rate
(ii) Direct labour efficiency
(iii) Fixed overhead expenditure
(iv) Fixed overhead volume [8]
Additional information
The direct materials (liquids) price variance for the month has been calculated as $7 000 adverse.
Chapter 16 274 Standard Costing

The direct materials (liquids) usage variance was $4 125 favourable.

There was no direct materials (packaging) price or usage variance.
REQUIRED
(d) Prepare a statement to reconcile the total standard cost of actual production for July with the total actual
cost of production. (Your statement should start with the total standard cost of actual production.) [4]

QUESTION 15 MAY 2018 P32 Q6

C Limited produces tables. Each table requires the following:

raw materials 3 metres of wood at $80 per metre

direct labour 12 hours at $30 per hour
fixed production overhead $10 per direct labour hour
Budgeted production is 5 000 tables.
Actual production was 4 800.
Actual production costs were:
$
direct materials 15 360 metres 1 190 400
direct labour 55 200 hours 1 766 400
fixed production overhead 579 600
All tables produced were sold.

REQUIRED
(a) State two limitations of a standard costing system. [2]
(b) Calculate the following variances:
(i) direct materials price
(ii) direct materials usage
(iii) direct labour rate
(iv) direct labour efficiency
(v) fixed overhead expenditure
(vi) fixed overhead volume [12]
(c) Prepare a statement reconciling the budgeted cost of producing 4800 tables with the actual cost. [8]

Additional information
The directors are considering using higher quality wood and increasing the selling price.
(d) Advise the directors whether or not they should make these changes. Justify your answer. [3]
Chapter 16 275 Standard Costing

SOLUTION CHAPTER 16
QUESTION 1 MAY 2012 P41 Q3 (a to d)
(a) The purpose of standard costing is to improve business efficiency by helping the management in the planning
and control of the business and to facilitate the preparation of budgets. It provides a ‘yardstick’ against which
actual performance may be measured and identifies areas where savings could be made. It enable areas of
inefficiency/efficacy to be identified and quantified by means of variance analysis.
(b) Calculation of standard selling price per unit
$
Materials (8 kilos @ $6) 48.00
Labour (3 hours @ $7.50) 22.50
Overheads (3 hours @ $3.50) 10.50
Total Cost 81.00
Margin ($81 × 19/81) 19.00
Selling Price 100.00
(c) (i) Actual volume × Actual price $
5 100 × $522 750
$102.5 ( ) 522 750
5 100
Actual volume × Standard price
5 100 × $100.0 510 000
Sales price variance (favourable) 12 750
(ii) Actual volume × Standard price
5 100 × $100.0 510 000
Budgeted volume × Standard price
5 000 × $100.0 500 000
Sales volume variance (favourable) 10 000
(iii) Actual material quantity × Standard material rate
43 460 × $6.0 260 760
Standard material quantity × Standard material rate
(5 300 × 8) × $6.0 254 400
Material usage variance (adverse) 6 360
(iv) Actual material price × Actual material quantity
$271 625 × 43 460 271 625
$6.25 ( )
43 460
Standard material price × Actual material quantity
$6.0 × 43 460 260 760
Material Price variance (adverse) 10 865
(v) Actual labour hours × Standard labour rate
15 500 × $7.50 116 250
Standard labour hours × Standard labour rate
5 300 × 3 × $7.50 119 250
Labour Efficiency Variance (favourable) 3 000
(vi) Actual labour hours × Actual labour rate
$120 125
15 500 × $7.75 ( ) 120 125
15 500
Actual labour hours × Standard labour rate
15 500 × $7.50 116 250
Labour Rate Variance (adverse) 3 875

(d) Sales volume – Increased demand for product

Sales Price – increase in sales price because of increased demand or change in market conditions
Chapter 16 276 Standard Costing

Material price – Buying superior quality material than planned

Material usage – greater rate of scrap (wastage) than expected
Labour rate - Hiring of higher grade (skill) of workers than planned
Labour efficiency - Hiring of higher grade (skill) of workers than planned

QUESTION 2 NOVEMBER 2012 P42 Q3)

(a) (i) Actual volume × Standard price $
21 400 × $21 449 400
Standard volume × Standard price
22 000 × $21 462 000

Sales volume variance (adverse) 12 600

(ii) Actual volume × Actual price
21 400 × $20.8 445 120
Actual volume × Standard price
21 400 × $21 449 400
Sales price variance (adverse) 4 280

(iii) Actual volume × Actual price

21 400 × $20.8 445 120
Standard volume × Standard price
22 000 × $21 462 000
Total Sales variance (adverse) 16 880

(iv) Actual material quantity × Standard material rate

28 400 × $2.00 56 800
Standard material quantity × Standard material rate
28 600 ×21 400
27 820 ( ) × $2.00 55 640
22 000
Material usage variance (adverse) 1 160

(v) Actual material price × Actual material quantity

$2.05 × 28 400 58 220
Standard material price × Actual material quantity
$2.00 × 28 400 56 800
Material Price variance (adverse) 1 420

(vi) Actual material quantity × Actual material rate

28 400 × $2.05 58 220
Standard material quantity × Standard material rate
28 600 ×21 400
27 820 ( ) × $2.00 55 640
22 000
Total Material Variance (adverse) 2 580

(vii) Actual labour hours × Standard labour rate $

47 200 × $6.00 283 200
Standard labour hours × Standard labour rate
48 400 ×21 400
47 080 ( ) × $6.00 282 480
22 000
Labour Efficiency Variance (adverse) 720

(viii) Actual labour hours × Actual labour rate $

47 200 × 5.90 278 480
Actual labour hours × Standard labour rate
47 200 × $6.00 283 200
Labour Rate Variance (favourable) 4 720
Chapter 16 277 Standard Costing

(ix) Actual labour hours × Actual labour rate

47 200 × 5.90 278 480
Standard labour hours × Standard labour rate
48 400 ×21 400
47 080 ( ) × $6.00 282 480
22 000
Total Labour Variance (favourable) 4 000

(b) (i) Due to purchase of better quality material, the material price variance is likely to be adverse due
to purchases at higher rate. However, as better quality of materials would result in less wastage &
spoilage so material usage variance is likely to be favourable. In addition, due to use of better
quality material, labour efficiency may improve resulting in favourable efficiency variance.

(ii) The use of low skilled labour would be cheaper resulting in favourable labour rate variance.
However, the Labour efficiency and Material usage variances are likely to be adverse due to slow
speed, improper handling of production facilities and by making more mistakes in using material.

(c) (i) Marginal costing

(ii) Absorption costing
(iii) Job costing
(iv) Batch or unit costing
(v) Process costing

QUESTION 3 MAY 2013 P42 Q1

(a) Calculation of per unit and total expected monthly contribution
$ $
Sales per unit 26.00
Variable Costs per unit
Direct material (2.4 x 3) (7.20)
Direct labour(1.5 x 7) (10.50) (17.70)
Per unit Contribution (8.30)
× Number of Units sold 6 000
Total Contribution 49 800

(b) Budgeted Quantity of Raw Material Purchases = 6 000 units x 2.4

= 14 400 kg

(c) (i) Actual volume × Actual price $

6 000 × $26.50 159 000
Actual volume × Standard price
6 000 × $26.00 156 000
Sales price variance (favourable) 3 000
(ii) Actual material quantity × Standard material rate
15 600 (6 000 units x 2.6) × $3.00 46 800
Standard material quantity × Standard material rate
14 400 (6 000 units x 2.4) × $3.00 43 200
Material usage variance (adverse) 3 600
(iii) Actual material price × Actual material quantity
$1.80 × 15 600 (6 000 units x 2.6) 28 080
Standard material price × Actual material quantity
$3.00 × 15 600 (6 000 units x 2.6) 46 800
Material Price variance (favourable) 18 720
Chapter 16 278 Standard Costing

(iv) Actual material quantity × Actual material price $

15 600 (6 000 units x 2.6) × $1.80 28 080
Standard material quantity × Standard material rate
14 400 (6 000 units x 2.4) × $3.00 43 200
Total material variance (favourable) 15 120
(v) Actual labour hours × Standard labour rate
12 600 (9 000 × 1.4) × $7.00 88 200
Standard labour hours × Standard labour rate
9 000 (6 000 × 1.5) × $7.00 63 000
Labour efficiency variance (adverse) 25 200

(vi) Actual labour hours × Actual labour rate

12 600 × $7.80 98 280
Actual labour hours × Standard labour rate
12 600 × $7.00 88 200
Labour rate variance (adverse) 10 080

(vii) Actual labour hours × Actual labour rate

12 600 × $7.80 98 280
Standard labour hours × Standard labour rate
9 000 (6 000 × 1.5) × $7.00 63 000
Total labour variance (adverse) 35 280

(d) Calculation of Actual Total contribution

$ $
Original budgeted contribution 49 800
Sales price variance 3 000
Material usage variance (3 600)
Material price variance 18 720
Total material variance 15 120
Labour efficiency variance (25 200)
Labour rate variance (10 080)
Total labour variance (35 280)
Actual contribution 32 640

(e) Calculation of change in contribution due to change in supplier

$
Actual contribution 32 640
Less Original budgeted contribution (49 800)
Difference in contribution (17 160)
Add Change due to increase in selling price (3 000)
Loss due to change in supplier 20 160

(f) When actual activity level is different from budgeted activity level then budgets are flexed to adjust original
budgeted figures according to actual activity level. This is done to have a proper comparison between actual
and budgeted values.

QUESTION 4 MAY 2013 P43 Q3 (a to d)

(a)
Sales price variance = (Actual Quantity × Actual Price ) – (Actual Quantity × Standard Price)
Materials price variance = (Actual Quantity × Actual Price) – (Actual Quantity × Standard Price)
Chapter 16 279 Standard Costing

Materials usage variance = (Actual Quantity × St. Price ) – (Standard Quantity × St. Price)
Labour rate variance = (Actual Quantity × Actual Rate) – (Actual Quantity × Standard Rate)
Labour efficiency variance = (Actual Quantity × St. Rate ) – (Standard Quantity × St. Rate)

(b) (i) Actual sales volume × Actual price $

$𝟓𝟕𝟎 𝟎𝟎𝟎
10 000 units × $57 ( ) 570 000
𝟏𝟎 𝟎𝟎𝟎
Actual sales volume × Standard price
10 000 units × $55 550 000
Sales price variance (favourable) 20 000

(ii) Actual material quantity × Standard material price

$𝟐𝟏𝟎 𝟎𝟎𝟎
42 000 ( ) × $5.00 210 000
$𝟓.𝟎𝟎
Standard material quantity × Standard material price
(10 000 × 4) × $5.00 200 000
Material usage variance (adverse) 10 000

(iii) Actual material quantity × Actual material price $

$𝟐𝟎𝟏 𝟔𝟎𝟎
42 000 × $4.80 ( ) 201 600
𝟒𝟐 𝟎𝟎𝟎
Actual material quantity × Standard material price
42 000 × $5.00 210 000
Material price variance (favourable) 8 400

(iv) Actual labour hours × Standard labour rate

$𝟏𝟖𝟒 𝟓𝟎𝟎
20 500 hours ( ) × $9.00 184 500
$𝟗.𝟎𝟎
Standard labour hours × Standard labour rate
(10 000 × 2) × $9.00 180 000
Labour Efficiency Variance (adverse) 4 500

(v) Actual labour hours × Actual labour rate

$𝟏𝟖𝟔 𝟓𝟓𝟎
20 500 hours × $9.10 ( ) 186 550
𝟐𝟎 𝟓𝟎𝟎
Actual labour hours × Standard labour rate
20 500 hours × $9.00 184 500
Labour Rate Variance (adverse) 2 050

(c) Calculation of Actual Contribution

$ $
Actual sales (10 000 at $57) 570 000
Actual variable costs
Material (42 000 kilos at $4.8 per kilo) 201 600
Labour (20 500 hours at $9.1 per hour) 186 550 388 150
Actual contribution 181 850

(d) (i) Materials usage variance Adverse

(ii) Materials price variance Adverse
(iii) Sales price variance Adverse
(iv) Labour efficiency variance Favourable
OR Materials usage variance Favourable
(v) Materials price variance Adverse
OR Materials usage variance Favourable
(vi) Labour rate variance Favourable
Chapter 16 280 Standard Costing

QUESTION 5 NOVEMBER 2015 P41 Q3

(a) Calculation of selling price per unit
$
Total costs [(3 kilos @ $5) + (4 hours @ $8) +(2 hours @ $3.50)] 54.00
Add Profit ($54 × $17.5%) 9.45
Selling price per unit 63.45

(b) (i) Actual volume × Standard price $

5 040 × $63.45 319 788
Budgeted volume × Standard price
5 000 × $63.45 317 250
Sales volume variance (favourable) 2 538

(ii) Actual volume × Actual price

5 040 × $65.25 328 860
Actual volume × Standard price
5 040 × $63.45 319 788
Sales price variance (favourable) 9 072

(iii) Actual volume × Actual price

5 040 × $65.25 328 860
Budgeted volume × Standard price
5 000 × $63.45 317 250
Total sales variance (favourable) 11 610

(iv) Actual material price × Actual material quantity

× 15 450 kilos 78 795
Standard material price × Actual material quantity
$5.00 × 15 450 kilos 77 250
Material Price variance (adverse) 1 545

(v) Actual material quantity × Standard material rate

15 450 kilos × $5.00 77 250
Standard material quantity × Standard material rate
5 100 × 3 × $5.00 76 500
Material usage variance (adverse) 750

(vi) Actual material quantity × Actual material price

15 450 kilos × 78 795
Standard material quantity × Standard material rate
5 100 × 3 × $5.00 76 500
Total material variance (adverse) 2 295

(vii) Actual labour hours × Actual labour rate $

20 250 hours × 172 125
Actual labour hours × Standard labour rate
20 250 hours × $8.00 162 000
Labour rate variance (adverse) 10 125

(viii) Actual labour hours × Standard labour rate

20 250 hours × $8.00 162 000
Standard labour hours × Standard labour rate
(5 100 × 4) hours × $8.00 163 200
Labour efficiency variance (favourable) 1 200
 Chapter 16 281 Standard Costing

(ix) Actual labour hours × Actual labour rate $

20 250 hours × 172 125
Standard labour hours × Standard labour rate
(5 100 × 4) hours × $8.00 163 200
Total labour variance (adverse) 8 925

(c) The labour was paid at a higher rate (adverse) showing increase in labour cost than expectation. This may
be due to a more highly skilled workforce.
Labour produced 5 100 units in 20 250 hours which were 150 hours (20 400  20 250) less than the hours
allowed for the same output. This may be due to the more highly skilled workforce or better quality material
The total labour variance is adverse due to higher adverse rate variance than the favourable efficiency rate
variance.

(d) Calculation of Profit for the year

$ $
Sales (5 040 units @ $65.25) 328 860
Cost of sales
Cost of Production: Materials (given in question) 78 795
Labour (given in question) 172 125
Overheads [(5 100 × 7) + $300] 36 000
286 920
Less Closing inventory [(5 100 units  $5 040) × $54 (‘a’ part)] (3 240) (283 680)
Profit for the year 45 180

(e) Calculation of budgeted profit for 5040 items sold

$
Sales (5 040 × $63.45) 319 788
Cost of sales (5 040 × $54) 272 160
Standard profit 47 628

(f) Statement reconciling actual and budgeted profit for April

$
Standard profit for 5 040 units 47 628
Add: sales price variance 9 072 F
Add: labour efficiency variance 1 200 F
Less: material price variance (1 545) A
Less: material usage variance (750) A
Less: labour rate variance (10 125) A
Less: overhead variance (300) A
Actual profit 45 180

QUESTION 6 November 2015 P42 Q3

(a) The purpose of standard costing is to help management in the planning and control of the business and
links with the budgetary control system. It provides a benchmark to measure actual performance 1 and
identifies areas where savings could be made.
(b) Income statement for October (based on actual value)
$ $
Sales (815 units × $51) 41 565
Cost of sales
Materials (as given) 12 000
Labour (as given) 18 100
Overheads [(815 units × 2) hours @ $4.5] + $200 7 535 37 635
Gross profit 3 930
Chapter 16 282 Standard Costing

(c) (i) Actual volume × Standard price $

815 × $52.00 42 380
Budgeted volume × Standard price
800 × $52.00 41 600
Sales volume variance (favourable) 780

(ii) Actual volume × Actual price

815 × $51.00 41 565
Actual volume × Standard price
815 × $52.00 42 380
Sales price variance (adverse) 815

(iii) Actual volume × Actual price

815 × $51.00 41 565
Budgeted volume × Standard price
800 × $52.00 41 600
Total sales variance (adverse) 35

(iv) Actual material price × Actual material quantity

× 1 580 kilos 12 000
Standard material price × Actual material quantity
$7.00 × 1 580 kilos 11 060
Material Price variance (adverse) 940

(v) Actual material quantity × Standard material rate

1 580 kilos × $7.00 11 060
Standard material quantity × Standard material rate
(815 × 2) kilos × $7.00 11 410
Material usage variance (favourable) 350

(vi) Actual material quantity × Actual material price

1 580 kilos × 12 000
Standard material quantity × Standard material rate
(815 × 2) kilos × $7.00 11 410
Total material variance (adverse) 590

(vii) Actual labour hours × Actual labour rate

2 900 hours × 18 100
Actual labour hours × Standard labour rate
2 900 hours × $6.00 17 400
Labour rate variance (adverse) 700

(viii) Actual labour hours × Standard labour rate

2 900 hours × $6.00 17 400
Standard labour hours × Standard labour rate
(815 × 3.5) hours × $6.00 17 115
Labour efficiency variance (adverse) 285

(ix) Actual labour hours × Actual labour rate

2 900 hours × 18 100
Standard labour hours × Standard labour rate
(815 × 3.5) hours × $6.00 17 115
Total labour variance (adverse) 985

(d) Statement to calculate Budgeted Gross profit for October

Chapter 16 283 Standard Costing

$ $
Budgeted Sales (815 units × $52) 42 380
Budgeted cost of sales
Materials (815 units × 2) kilos @ $7 11 410
Labour (815 units × 3.5) hours @ $6 17 115
Overheads (815 units × 2) hours @ $4.5 7 335 (35 860)
Budgeted total gross profit 6 520

(e) Statement reconciling budgeted and actual profit for April

$
Budgeted gross profit (as per ‘d’ part) 6 520
Sales variances : Price (815) (A)
Material variances : Price (940) (A)
Usage 350 (F)
Labour variances : Rate (700) (A)
Efficiency (285) (A)
Overhead variance (200) (A)
Actual gross profit 3 930
(f) The following are the advantages of using standard costing
 Standard costing helps management in the planning and control of the business.
 It makes budgets easier to prepare
 It makes budgets more realistic
 It aids setting of selling price.
 It aids decision making
 It helps with controlling resources.
 It provides a benchmark to measure actual performance
 It identifies areas where savings could be made.
 It enables the use of responsibility accounting.

QUESTION 7 NOVEMBER 2015 P43 Q3

(a) Original budget for a standard month
$ $
Sales (1 000 units @ $130) 130 000
Variable costs
Direct material (600 kilos @$18) 10 800
Direct labour (1 500 hours @$7.5) 11 250
Variable overheads 28 000 (50 050)
Contribution 79 950
Fixed overheads 34 000
Standard Profit 45 950

(b) Flexed budget for March

$ $
Sales (1 200 units @ $130) 156 000
Variable Costs
$600 × 1 200
Direct material ( ) kilos @ $18 12 960
1 000
$1 500 × 1 200
Direct labour ( ) hours @ $7.5 13 500
1 000
$28 000 × 1 200
Variable overheads ( ) 33 600 (60 060)
1 000
Contribution 95 940
Fixed overheads (34 000)
Profit 61 940
Chapter 16 284 Standard Costing

(c) Calculation of Actual profit for March

$ $
Sales (1 200 units @$132) 158 400
Variable Costs
Direct material (780 kilos × 14) 10 920
Direct labour (2 050 hours × 8.5) 17 425
Variable overheads 35 100 (63 445)
Contribution 94 955
Fixed overheads (34 100)
Actual profit for March 60 855

(d) Direct Production Statement to reconcile standard and actual direct production costs
$
Actual costs ($10 920 + $17 425) 28 345
Material price variance [ 780 kilos × ($18  $14)] 3 120 F
Material usage variance [(780 720) kilos × $18] (1 080) A
Labour rate variance (2 050 hours × ($8.5 – $7.5) (2 050) A
Labour efficiency variance (2 050 – 1 800) hours × $7.5 (1 875) A
Budgeted costs ($12 960 + $13 500) 26 460

(e) Purchase of lower quality materials will result in lower purchase prices. This will lead to favourable material
price variance.
Material usage variance was adverse as
Due to use of lower quality more materials have been used than was planned with more wastage resulting
in adverse material usage variance.
Labour efficiency variance was adverse as due to lower quality materials labour found it harder to work
with and completed the task in more hours.
Labour rate variance was adverse as the increase in hours worked resulted in more hours being paid at
higher overtime rates

(f) The material price variance was favourable ($3 120) but material usage variance was adverse ($1 080).
However, in total, material variance was favourable ($2 040).
The effect on total direct costs was adverse as actual total direct costs were higher than the budgeted total
costs. As a result, actual contribution was lower than budgeted contribution.
Business was able to pass on the increased direct costs to customers through the increased selling price.
Despite increase in sales price, the number of units sold also increased showing positive impact of change
in material quality on sales output.
Profit; however was slightly less than budget so doesn’t look like as a good option, provided there was no
change in any variable other than change in material quality. Lastly, directors might have to buy the cheap
quality material due to non-availability of the usual material.

QUESTION 8 SPECIMEN 2016 P3 Q6

(a) Original budget Flexed budget
$ $
Revenue 80 000 (1) 85 000 (1)
Direct materials 19 200 (1) 20 400 (1)
Direct labour 28 800 (1) 30 600 (1)
Total budgeted contribution 32 000 (1) 34 000 (1)

(b) $30 124 (1)

Chapter 16 285 Standard Costing

(c) Statement to reconcile the contribution from the flexed budget with the actual contribution
$ $ $
Contribution from flexed budget 34 000 (1of)
Variances Favourable Adverse
Material price variance 1 394 (2)
Material usage variance 510 (2)
Labour rate variance 2 720 (2)
Labour efficiency variance 2 040 (2)
1 394 5 270 (3 876)
Actual contribution 30 124 (1of)
(d) (i) Materials usage variance
Example:
Materials usage variance – cheaper materials led to more wastage [2]
Developed reason (2 marks)
Basic reason (1 mark)
(ii) Labour rate variance
Example:
Labour rate variance – increased hours led to overtime premium being paid [2]
Developed reason (2 marks)
Basic reason (1 mark)
(e) State two similarities in use between standard costing and activity based costing. [2]
Responses could include:
• both seek to control costs
• both can help set selling prices. (1 mark) × two valid points
QUESTION 9 MAY 2016 P32 Q6
(a) In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and
evaluating cost management performance through variance analysis.

(b) Variances for the year ended 31 August 2015

(i) Actual usage × Actual price $
4 320 × 8.0 34 560
Actual usage × Standard price
4 320 × 10.0 43 200
Material Price Variance (favourable) 8 640
(ii) Actual usage × Standard cost per kg
4 320 × 10.0 43 200
Standard usage × Standard cost per kg
(2 700 × 1.5) × 10.0 40 500
Material Usage Variance (adverse) 2 700
(iii) Actual hours × Actual rate
2 025 × 12.00 24 300
Actual hours × Standard rate
2 025 × 14.00 28 350
Labour Rate Variance (favourable) 4 050
(iv) Actual hours × Standard rate
2 025 × 14.00 28 350
Standard hours × Standard rate
(2 700 × 0.5) × 14.00 18 900
Labour Efficiency Variance (adverse) 9 450
Chapter 16 286 Standard Costing

(c) Statement reconciling the budgeted costs with the actual costs
$ $
Budgeted costs [(2 700 × 1.5 meters × 10) + (2 700 × 0.5 hours × 14)] 59 400
material variances : Price 8 640F
Usage 2 700A 5 940 F
labour variances : Rate 4 050F
Efficiency 9 450A 5 400 A
Actual costs ($34 560 + $24 300) 58 860

(d) Favourable material price variance indicates decrease in material price than expected. This may be due to
change in supplier or purchase of low quality materials. The cheap quality of materials resulted in a greater
usage of material per blanket leading to adverse usage variance. At the same time, it negatively affected the
efficiency of the workforce which may also be due to use of low skilled labour. The less skilled labour may
also account for the greater usage of materials. The favourable labour rate variance indicates that labour is
paid less per hour than expected which may be due to their low skill as they have used more hours.

(e) If business stops the quality assurance checks usually made during the production process then cost may
reduce but it may affect quality of product resulting in ultimate reduction of sales and profits. This would
then be supplemented by more skilled labour force as long as the cost does not exceed the benefit.
Cheap or low quality materials may lead to adverse material and labour efficiency variance and will reduce
sales/profit. Reputation of the business may also suffer.
Keeping the selling price at $40 per blanket will not have a direct effect on costs

QUESTION 10 NOVEMBER 2016 P31 Q5

(a) Standard costing system is a tool for planning budgets, managing and controlling costs. It
evaluates cost management performance through variance analysis.

(b) (i) Actual material price × Actual material quantity $

$1.44 × 10 950 kilo 15 768
Standard material price × Actual material quantity
$1.40 × 10 950 kilo 15 330
Material Price variance (adverse) 438
(ii) Actual material quantity × Standard material rate
10 950 kilo × $1.40 15 330
Standard material quantity × Standard material rate
11 250 kilos (3 750 × 3) × $1.40 15 750
Material usage variance (favourable) 420
(iii) Actual labour hours × Actual labour rate
1 930 hours × $4.40 8 492
Actual labour hours × Standard labour rate
1 930 hours × $4.60 8 878
Labour rate variance (favourable) 386
(iv) Actual labour hours × Standard labour rate
1 930 hours × $4.60 8 878
Standard labour hours × Standard labour rate
1 875 hours (3 750 × 0.5) × $4.60 8 625
Labour efficiency variance (adverse) 253

(c) Adverse material price variance:

 unpredictable increase of market prices;
 change of supplier with worse terms;
 buying superior quality than planned;
Chapter 16 287 Standard Costing

Favourable material usage variance:

 Use of superior quality than planned
 change in production techniques
 lower rate of scrap (wastage) than expected
 hire of higher grade (skill) of workers

Favourable labour rate variance

 hiring of lower grade (skill) of workers than planned
 unplanned decrease in overtime or bonus payments
 unexpected decrease in wage rates may be due to market conditions

Adverse labour efficiency variance

 Use of low grade (skill) of labour
 use of superior or inferior material
 poor supervision
 change in production process (techniques)

(d) Statement to calculate actual profit for the year

$ $
Sales (3 750 units @ $12 × 98%) 44 100
Expenses
Materials 15 768
Labour 8 492
Overheads [(3 750 × 1 × $2.80) × 110%] 11 550 (35 810)
Actual profit for the year 8 290

(e) The business may contract for cheaper supplies of material of the same quality
The workforce may be trained to improve efficiency
Overheads should be controlled by following streamlined procedures

QUESTION 11 MAY 2017 P31 & P33 Q5

(a) Flexible budget recognises the existences of fixed, variable and mixed (semi-fixed, semi variable) costs. A
company sets a budget for a certain level of output. If the actual level of activity is higher or lower than the
original estimate. The flexible budget adjusts to changes in activity level by flexing the data of original budget
in accordance with the actual level.
(b) EF plc
Budgeted profit for March
$ $
Revenue (800 units @ $150) 120 000
Variable costs
Direct material [(800 × 4) kilos @ $6] 19 200
Direct labour [(800 × 6) hours @ $10] 48 000
Variable overhead [(800 × 6) hours @ $2] 9 600 (76 800)
Contribution 43 200
Fixed overhead (1 000 units @ $14) (14 000)
Profit 29 200

(c) (i) Actual hours × Actual rate $

$50 176 50 176
5 120 ( ) × 9.80
$9.80
Actual hours × Standard rate
5 120 × 10.00 51 200
Labour Rate Variance (favourable) 1 024
Chapter 16 288 Standard Costing

(ii) Actual hours × Standard rate $

5 120 × 10.00 51 200
Standard hours × Standard rate
4 800 (800  6) × 10.00 48 000
Labour Efficiency Variance (adverse) 3 200
(iii) Actual hours × Actual rate
5 120 × 9.80 50 176
Standard hours × Standard rate
4 800 (800  6) × 10.00 48 000
Total Labour Variance (adverse) 2 176
(d) (i) Labour Rate Variance = Actual hours × (Actual rate  Standard rate)
1 620 (favourable) = Actual hours × ($10.00  $9.80)
1 620
Actual hours =
0.20
Actual hours = 8 100 hours

(ii) Labour eff. Variance = Standard rate × (Actual hours  Standard hours)
18 000 (adverse) = 10.00 × [$8 100  (Actual units × 6)
Actual units × 6 = $8 100  ($18 000 / $10)
Actual units × 6 = 6 300
6 300
=
6
= 1 050 units
(e)  Lack of staff training
 Lower skill level of workers
 Low quality materials
 Poor supervision
 Machine breakdown
(f)  Once fully trained, staff may leave for better paid jobs
 Financial cost of training may be high
 Work time is lost when staff are being trained
 Quality of training must be high for it to have a positive effect
QUESTION 12 MAY 2017 P32 Q5
(a) Flexed budget for April
$ $
Sales 270 000
Variable costs
1 800
Direct labour [4 000 × ( )] hours@ $10.50 75 600
1 000
1 800
Direct materials [3 000 × ( )] kg @ $12.20 65 880
1 000
1 800
Variable overheads [10 000 × ( )] 18 000 (159 480)
1 000
Contribution 110 520
Fixed overheads (19 300)
Profit 91 220
(b) (i) Actual labour hours × Standard labour rate
7 300 hours × $10.50 76 650
Standard labour hours × Standard labour rate
1 800
7 200 hours [4 000 × ( )] × $10.50 75 600
1 000
Labour efficiency variance (adverse) 1 050
Chapter 16 289 Standard Costing

(ii) Actual labour hours × Actual labour rate $

7 300 hours × $13.10 95 630
Actual labour hours × Standard labour rate
7 300 hours × $10.50 76 650
Labour rate variance (adverse) 18 980
(iii) Actual material quantity × Standard material rate
5 500 kg × $12.20 67 100
Standard material quantity × Standard material rate
1 800 × 65 880
5 400 kgs [(3 000 × )] $12.20
1 000
Material usage variance (adverse) 1 220
(iv) Actual material price × Actual material quantity
$11.50 × 5 500 kg 63 250
Standard material price × Actual material quantity
$12.20 × 5 500 kg 67 100
Material Price variance (favourable) 3 850
(c) Material Price Variance:
 standard price set unrealistically;
 losing trade (quantity) discounts by paying in smaller quantities;
 change in market conditions e.g. inflation, increase in duties like import duties, change in interest
rates etc
Material Usage Variance:
 Use of superior or inferior quality than planned
 change in production techniques
 greater or lower rate of scrap (wastage) than expected

(d) The suggestion to hire new staff seems to be a profitable option because the actual labour costs of $95 630
are higher than the suggested labour costs of $84 240. However there are both advantages and limitations
of hiring new staff which are discussed below.
Advantages
 Passionate to work: New fresh staff will be much active and vigorous to work when compared to
the experienced employees.
 Optimists: The new staff with open mind will accept the assigned roles and responsibilities
because they do not have experience to urge for a particular role.
 High Productivity: The new staff will try to excel and will try to impress with their initial results.
This will improve the productivity of organization.
 Easy to manage: It is easy to manage new staff. They are bound to each policy designed by the
organization.
 Versatility: One cannot grow with same old way of techniques, there should be a change in
process. The new staff may lack experience but not lack of knowledge.
 Cost to company is low: The hiring of new staff will reduce labour cost. Few companies enforce
security deposit, in the event the employee does not complete the prohibition period, the total
training cost will be recovered from that amount.
Disadvantages
 Lack of Stability: Many of the young employees join for a company and once they find any other
good opportunity they will switch to other companies. Since the effort and time invested in
providing benefits and training will be a huge loss for the employers
 Lack of skills: For some specific roles the organisations need experienced staff so that they can
handle the task in a professional manner. The new inexperienced staff may cause damage to the
company’s resources resulting in adverse efficiency variance.
Chapter 16 290 Standard Costing

 Discipline Issues: Not all, but most of them are unaware of work culture environment. They do not
turn up on time, they do not strictly follow the HR rules. Many of them try to take leaves more
than they are provided with. They may damage the work force environment due to lack of maturity
about work culture.
 Frustration: The new staff may lose patience and get frustrate when something went wrong. In
critical times, the older employees would manage it perfectly because of their experience in
particular field.
 Lack of experience: They do not have much awareness about business. Every situation is new to
them, they may have bookish knowledge but when coming to practical it needs experience. So the
burden automatically increases, since they have no idea of what consequences occur to the
organization.
 They find difficulty to accept feedback: There will be heap of instructions and guidelines for the
new employees. Most of them receive negative feedback, they find it difficult to accept it. This is
also one of the cons of hiring them.

(e)  Standard costing makes budgets easier to prepare

 It makes budgets more realistic
 It aids setting of selling price.
 It aids decision making
 It helps with controlling resources.
 It provides a benchmark to measure actual performance
 It provides a ‘yardstick’ against which actual performance may be measured.
 It identifies areas where savings could be made.
 It enables the use of responsibility accountingby allocating responsibility for variances to different
managers.
 It facilitates the preparation of budgets.

QUESTION 13 NOVEMBER 2017 P31 Q5

(a) Direct material costs per units usually decreases with the increase in the units of sales and production due
to bulk buying discount, reduction in carriage costs on per unit basis.
Direct labour cost per unit may increase due to increase in the units of production due to increase in
overtime cost or non-availability of labour with required skill at current labour rate.

(b) (i) Total Profit = Contribution  Fixed Costs

= 1 000 units × [$90  {(4 kilos × 5.1) + (3 hours × $10)}]  $33 000
= $6 600

Total profit
Profit per unit =
Total units
$6 600
= = $6.60 per unit
1 000 units

(ii) Total Profit = Contribution  Fixed Costs

= 1 500 units × [$80  {(4 kilos × 5.02) + (3 hours × $12)}]  $33 000
= $2 880

Total profit
Profit per unit =
Total units
$2 880
= = $1.92 per unit
1 500 units

(iii) Change in profit = Existing profit  Proposed profit

= $6 600  $2 880
= $3 720 decrease
Chapter 16 291 Standard Costing

(c) (i) Revised price × Revised volume $

$80 × 1 500 120 000
Original price × Revised volume
$90 × 1 500 135 000
Sales Price variance (adverse) 15 000

(ii) Revised volume × Original price

1 500 × $90 135 000
Budgeted volume × Original price
1 000 × $90 90 000
Sales volume variance (favourable) 45 000

(iii) Revised material price × Revised material quantity

$5.02 × 6 000 (1500 × 4) 30 120
Original material price × Revised material quantity
$5.10 × 6 000 (1500 × 4) 30 600
Material Price variance (favourable) 480

(iv) Revised labour hours × Revised labour rate

4 500 (1500 × 3) × $12.00 54 000
Revised labour hours × Original labour rate
4 500 (1500 × 3) × $10.00 45 000
Labour rate variance (adverse) 9 000

(d) Variances are calculated through comparing a flexed budget and actual data. However, the sales volume
variance is determined through comparing the original budget with the flexed budget. As a result, the total
of variances including sales volume variance does not equal the change in the flexed budgeted profits and
actual profits.

(e) If directors’ proposal is implemented then it will increase the market share of the company but it would
reduce the overall profits by $3 720. Moreover, as the competitors are selling at a price between $85 and
$90 for the same product so price cutting approach may start a new price war.
The price cutting policy could be damaging for the whole industry so it is not advisable to reduce the selling
price.

QUESTION 14 NOVEMBER 2017 P33 Q5 (a to d)

(a) Statement to calculate the total standard cost of the actual production for July
$
Direct materials - liquid (16 000  0.25  $15) 60 000
Direct materials - packaging (16 000  $0.80) 12 800
Direct labour [(16 000  6/60) hours @ $9] 14 400
Fixed production overheads [(16 000  /60) hours @ 17.50]
6 28 000
Total standard cost for 16 000 units 115 200

(b) Statement to calculate the total actual cost of production for July
$
Direct materials - liquid (3 725 litres) 62 875
Direct materials - packaging (16 000 bottles) 12 800
Direct labour (1 700 hours) 16 320
Fixed production overheads 31 375
Total actual cost for 16 000 units 123 370
Chapter 16 292 Standard Costing

(c) (i) Actual labour hours × Actual labour rate $

$16 320
1 700 hours × $9.6 ( ) 16 320
1 700 hours
Actual labour hours × Standard labour rate
1 700 hours × $9.00 15 300
Labour rate variance (adverse) 1 020

(ii) Actual labour hours × Standard labour rate

1 700 hours × $9.00 15 300
Standard labour hours × Standard labour rate
(16 000  6/60) hours × $9.00 14 400
Labour efficiency variance (adverse) 900

(iii) Actual hours × Actual rate per hour

1 700 × 31 375
Original budgeted hours × Standard rate per hour
$26 250
(15 000  6/60) hours × $17.50 (
1 500 hours
) 26 250
Fixed overhead expenditure variance (adverse) 5 125

(iv) Flexed budgeted hours × Standard rate per hour

(16 000  6/60) hours × $17.50 28 000
Original budgeted hours × Standard rate per hour
(15 000  6/60) hours × $17.50 26 250
Fixed overhead volume variance (favourable) 1 750

(d) Statement to reconcile total standard cost of actual production with the total actual cost of production
$ $ $
Standard cost of actual production (‘a’ part) 115 200
Favourable Adverse
Direct materials (liquids) price variance (as given) 7 000
Direct materials (liquids) usage variance (as given) 4 125
Direct labour rate variance 1 020
Direct labour efficiency variance 900
Fixed overhead expenditure variance 5 125
Fixed overhead volume variance 1 750 _____
Total variances 5 875 14 045 8 170
Actual cost of actual production 123 370

QUESTION 15 MAY 2018 P32 Q6

(a)  The fixing of standard requires a high degree of technical skill. Therefore it is costly.
 The conditions of the business are ever changing so fixing of standard requires the revision at frequent
intervals which is a tedious process.
 The industries liable for frequent technological changes will not be suitable for standard costing system.
 Under standard costing system, the employees cannot work at their wishes. Hence, the freedom of
work of employees is curtailed and there is no possibility of developing innovative idea.
 Sometimes it creates adverse psychological effects. If the standard is set at a high level its non-
achievement results in frustration and builds up resistance. It acts as a discouragement rather than
incentive for better efficiency.
 It is partly determined on the basis of past experience and partly on the basis of forecast of future
expenses. Thus uncertainties are around standard and determination of correct standard is very
difficult.
Chapter 16 293 Standard Costing

(b) (i) Actual material price × Actual material quantity $

× 15 360 1 190 400
Standard material price × Actual material quantity
$80 × 15 360 1 228 800
Material Price variance (favourable) 38 400
(ii) Actual material quantity × Standard material rate
15 360 × 80 1 228 800
Standard material quantity × Standard material rate
(4 800 × 3) × $80 1 152 000
Material usage variance (adverse) 76 800
(iii) Actual labour hours × Actual labour rate
55 200 hours × 1 766 400
Actual labour hours × Standard labour rate
55 200 hours × $30 1 656 000
Labour rate variance (adverse) 110 400
(iv) Actual labour hours × Standard labour rate
55 200 hours × $30 1 656 000
Standard labour hours × Standard labour rate
(4 800 × 12) × $30 1 728 000
Labour efficiency variance (favourable) 72 000
(v) Actual hours × Actual OH rate
55 200 hours × 579 600
Original Budgeted hours × Budgeted OH rate
(5 000 × 12) hours × $10 600 000
Fixed overhead expenditure variance (favourable) 20 400
(vi) Flexed budgeted hours × Budgeted OH rate
(4 800 × 12) hours × $10 576 000
Original budgeted hours × Budgeted OH rate
(5 000 × 12) hours × $10 600 000
Fixed overhead volume variance (adverse) 24 000

(c) Statement to reconcile the budgeted cost of producing 4800 tables with the actual cost
$
Budgeted production cost for 4 800 units (W1) 3 456 000
Direct material price variance (favourable) (38 400)
Direct material usage variance (adverse) 76 800
Direct labour rate variance (adverse) 110 400
Direct labour efficiency variance(favourable) (72 000)
Fixed OH expenditure variance (favourable) (20 400)
Fixed OH volume variance (adverse) 24 000
Actual production cost for 4 800 units 3 536 400

WOIRKINGS
(W 1) Calculation of Budgeted Cost for 4 800 units
$
Direct materials [(4 800 @ 3) metre) × $80] 1 152 000
Direct labour [(4 800 @ 12) hours × $30] 1 728 000
Production overhead [(4 800 @ 12) hours × $10] 576 000
Budgeted production cost for 4 800 units 3 456 000
Chapter 16 294 Standard Costing

(d) If directors choose higher quality material then it will l adversely affect the material price variance but may
improve material usage variance and labour efficiency variance.
Increase in selling price may lose existing customers but improved reputation and high quality products
would attract new customers.
Chapter 17 295 Capital Investment Appraisal

CHAPTER 17 CAPITAL INVESTMENT APPRAISAL

QUESTION 1 NOVEMBER 2011 P43 Q3
Bradley Ltd is considering investing in a project which requires an initial outlay of $800 000.
A net cash inflow of $235 000 is expected at the end of the first year and this is expected to rise by 10% annually
until the end of year 4. The project is fully complete and has no residual value at the end of year 5 and the anticipated
net cash inflow at this time is just 20% of the initial investment.
The company’s cost of capital is 8%.
Extracts from present value tables for $1
Year 8% 15%
1 0.926 0.870
2 0.857 0.756
3 0.794 0.658
4 0.735 0.572
5 0.681 0.497
REQUIRED
(a) Calculate the net present value (NPV) of the project at the company’s cost of capital and advise the directors
whether the project is acceptable. [13]
(b) Determine the discounted payback period. [7]
(c) Explain briefly what you understand by the internal rate of return (IRR) of a project. [2]
(d) Calculate the IRR of the project. [14]
(e) Identify four other factors other than NPV which may be used to determine the acceptability of the project.
[4]

QUESTION 2 MAY 2012 P43 Q3

The directors of a clothing company are proposing to manufacture coats. They anticipate that the coats would stay
in fashion for the next 4 years.
This would require the purchase of additional equipment at a cost of $250 000 which would be scrapped after 4
years.
Sales are expected to be 4000 coats in year 1. In years 2 and 3 the expected number of coats sold will increase by
10% on the previous year but will fall to 3500 in year 4.
The selling price of the coats will be $80 in year 1, $90 in years 2 and 3 and $75 in the final year.
Variable costs will be $65 per coat for years 1 and 2, rising to $70 for years 3 and 4.
The company’s cost of capital is 10%. The discount factors are:
Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683
REQUIRED
(a) Calculate the net cash flows for each year. [13]
(b) Calculate the accounting rate of return. [7]
(c) Calculate the net present value of the proposal. [11]
(d) Advise the directors whether they should proceed with the proposal. [4]
(e) (i) Explain what you understand by the internal rate of return (IRR). [2]
(ii) Identify how IRR could be used to appraise this proposal. [3]

QUESTION 3 MAY 2014 P41 Q3, MAY 2014 P42 Q3

The directors of Drake plc wish to invest in a new production plant, and must choose between Project Utopia and
Project Sylvania.
Chapter 17 296 Capital Investment Appraisal

In each case the investment will be financed with a bank loan for the full amount. This will be received in full on the
day the plant is purchased. The loan will be repaid in full in a single payment at the end of year five, however interest
is payable throughout the useful life of the plant at 10% per annum.
The useful life of the plant will be 5 years, and it will then be scrapped with no sale proceeds.
The following information is available for Project Utopia:
Cost of production plant $200 000
Cost of capital 10%
Depreciation rate 30% reducing balance
Revenue in year 1 $110 000
Direct costs in year 1 $40 000
Revenue each year will be 5% higher than the year before.
Costs each year will be 3% higher than the year before.
Discount factors showing net present value of $1
Year 10% 40%
1 0.909 0.714
2 0.826 0.510
3 0.751 0.364
4 0.683 0.260
5 0.621 0.186
REQUIRED
(a) Complete the table from the information given to calculate the net cash flow for each year and in total for
Project Utopia. [7]
(b) Calculate the net present value for Project Utopia. [7]
(c) Calculate the accounting rate of return (ARR). [5]
(d) Calculate the internal rate of return (IRR). [7]
Additional information
The following information has also been calculated for Project Sylvania.
Net present value $41 680
Accounting rate of return (ARR) 19.48%
Internal rate of return (IRR) 17.29%
REQUIRED
(e) State, with reasons, in which project the directors of Drake plc should invest. [4]
Additional information
The directors of Drake plc could finance the new project by issuing new ordinary shares and not using a bank loan.
REQUIRED
(f) Explain how financing the new project from the proceeds of issuing new ordinary shares would affect the
accounting rate of return (ARR). [6]
(g) State and explain two other sources of finance for the project. [4]

QUESTION 4 NOVEMBER 2014 P42 Q2(a to f)

The directors of Ragley Limited are considering a new business opportunity. This involves the purchase of machinery
costing $600 000.
Units produced by the machine are expected to have a selling price of $50 each and the variable costs of production
are expected to be $31.10 per unit. Fixed costs are expected to be $120 000 per annum excluding depreciation.
The machinery is expected to lose its value evenly over four years and then be scrapped.
The directors expect to produce and sell 20 000 units a year.
Chapter 17 297 Capital Investment Appraisal

REQUIRED
(a) Calculate the following expected annual values. Label each answer.
(i) Total contribution
(ii) Net cash flow
(iii) Profit [6]
(b) Calculate the expected annual breakeven level of production, both in units and sales revenue. [5]

Additional information
Ragley Limited has a cost of capital of 10%. Discount factors are as follows.

Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683
3.169

The directors provide the following incorrect net present value calculation as an aid to decision making.
Annual surplus $108 000
x Discount factor for four years 3.169
Net present value $342 252
REQUIRED
(c) Explain why the directors’ net present value calculation is incorrect. [4]
(d) Calculate the correct net present value of the machinery. [6]
(e) Calculate the sensitivity of the project to changes in the cost of the machinery. [4]
(f) Calculate the sensitivity of the project to changes in the selling price. [9]

QUESTION 5 NOVEMBER 2014 P43 Q3(c to f)

The summarised financial statements of Firgo plc for the year ended 31 December 2013 showed the following.
Income statement for the year ended 31 December 2013
$000
Revenue 6 000
Revenue expenditure excluding depreciation 5 600
Depreciation 300
The directors consider that, without expansion plans, these costs and revenues will remain constant in future years.
Additional information
The directors believe they can improve profitability if they start manufacture of a new product.
This would involve the purchase of new machinery costing $400 000 on 31 December 2014. The total annual revenue
of the company would then be expected to increase to:
$000
2015 6 500
2016 6 700
2017 7 100
2018 6 300
The annual running costs of the new machinery are expected to be:
$000
2015 300
2016 490
2017 740
2018 610
Chapter 17 298 Capital Investment Appraisal

On 31 December 2018 the machinery would be scrapped. There would be no residual value.
Firgo plc has a cost of capital of 10%. Discount factors are as follows.
Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683
REQUIRED
(c) Calculate the net present value of the machinery. Assume all cash flows arise on the last day of the
year. [15]
Additional information
Using a cost of capital of 15% the net present value of the machinery is $ (7 830).
REQUIRED
(d) Calculate the internal rate of return. [5]
(e) Calculate the accounting rate of return of the machinery correct to one decimal place. [6]
(f) Advise the directors on the proposed purchase of machinery. [6]

QUESTION 6 MAY 2015 P41 & P42 Q3(a to d)

Abdul has a taxi business and is considering investing in an additional taxi, the London or the Paris.
The useful life of the taxi is expected to be 5 years, and it will then be scrapped with no sale proceeds. Depreciation
will be provided on the straight-line basis.
The following information is available about the London taxi.
Cost of vehicle $20 000
Additional revenue in year 1 $10 000
Annual rate of increase in revenue 5%
Additional direct costs in year 1 $2 000
Annual rate of increase of direct costs 3%
Annual fixed costs $1 600
Cost of capital 8%
Discounting factors showing net present value of $1
Year 8% 25%
1 0.926 0.800
2 0.857 0.640
3 0.794 0.512
4 0.735 0.410
5 0.681 0.328
REQUIRED
(a) Calculate the net present value of the investment in the London taxi using a rate of 8%. [12]
(b) (i) Calculate the net present value of the investment in the London taxi using a discount factor of 25%.
[6]
(ii) Calculate the internal rate of return (IRR) on the investment in the London taxi.
Show your workings in detail and give your answer to two decimal places. [4]
Additional information
The following information is available for the Paris taxi.
Net present value $7489
Internal rate of return 24.56%
Average accounting rate of return 30.10%

REQUIRED
(c) Calculate the accounting rate of return for the London taxi. [6]
(d) State, with reasons, which of the two makes of taxi Abdul should buy. [4]
Chapter 17 299 Capital Investment Appraisal

QUESTION 7 SPECIMEN 2016 P3 Q5

Harko runs a successful retail business. His typical annual results have been as follows:
$
Revenue 210 000
Cost of sales 115 500
Gross profit 94 500
Variable selling and administrative expenses 48 000
Fixed expenses 19 500
Profit for the year 27 000
Harko is now considering building an extension to his premises.
The following information is available:
1 The building cost would be $265 000.
2 Because of the increase in floor space he anticipates that sales volume would increase by 40%.
3 The gross profit margin would be maintained.
4 The inventory level would need to be increased by $10 000 in year 1 only.
5 The existing variable expenses would increase by 30%.
6 The business would in future have to rent garage space for the vehicle at a cost of $2000 a year.
7 Harko intends to retire at the end of year 4 and sell the business as a going concern. He expects the purchase
consideration for the business (including inventory) to be $600 000 without the extension or $910 000 if he
proceeds with the extension.
REQUIRED
(a) Calculate the annual cash flows arising from the building of the extension. [8]
Additional information
Harko’s cost of capital is 10%. Discount factors are as follows.
Year Discount factor
0 1.000
1 0.909
2 0.826
3 0.751
4 0.683
REQUIRED
(b) Calculate the net present value (NPV) of building the extension. Round calculations to the nearest dollar ($)
[8]
(c) Advise Harko whether he should proceed with the extension, based on your figures from (b). [2]
(d) Outline why Harko might have doubts about proceeding with the extension, based on the NPV. [3]
(e) Explain why Harko chose to use net present value as a basis for his decision rather than the payback method.
[4]
QUESTION 8 MAY 2016 P31 Q6
One of the assembly machines at Artem Limited needs to be replaced.
A replacement machine will cost $300 000, which will be paid on purchase. The replacement machine is expected to
last for three years. It will need complete maintenance check-up in year 2 at a cost of $75 000.
The existing machine assembles 4000 units per year.
The number of units assembled by the replacement machine is expected to be 35% lower in year 1 than the existing
machine due to the time lost during installation and testing.
In year 2 it is expected that 4 500 units will be assembled and this will increase by 20% each year compared to the
previous year.
The replacement machine will produce units at a cost of $24 each. From year 2 this will increase by 25% each year
compared to the previous year.
The selling price will be $45 per unit. This will increase by 30% each year compared to the previous year.
Chapter 17 300 Capital Investment Appraisal

The cost of capital is 14%.

The following is an extract from the present value tables for $1.
14%
Year 1 0.877
Year 2 0.769
Year 3 0.675
It is assumed that all production will be sold.

REQUIRED
(a) Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b) Calculate the expected net cash flows for each year for the replacement machine. [8]
(c) Calculate the payback period for the replacement machine. [2]
(d) Calculate the net present value for the replacement machine. Assume that revenues are received and costs
are paid at the end of each year. [6]
(e) (i) Analyse the benefits to the business of purchasing the replacement machine. [3]
(ii) Recommend whether or not the managers of Artem Limited should purchase the replacement
machine. Justify your answer. [2]

QUESTION 9 NOVEMBER 2016 P31 Q6

Alexander intends to start a new project producing either Product X or Product Y. Each product will require an
additional capital cost of $50 000. Both products are expected to last 4 years.
The following information is available on Product X:
1 Sales volume in year 1 would be 10 000 units with a selling price of $7.
2 The volume would rise by 5% in year 2 and by another 5% in year 3.
3 Popularity is then expected to fall in year 4 and there would be a 20% fall in volume.
4 The selling price would not change.
5 The variable costs will be $3 per unit in year 1, will rise to $4 in year 2 and will then remain unchanged.
6 Annual fixed costs payable will be $11 000 and will remain unchanged.
REQUIRED
(a) Calculate the net cash flows for each year and in total for Product X. [8]

Additional information
Alexander’s cost of capital is 10% and the discount factors are:

Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683
REQUIRED
(b) Calculate the net present value of Product X. [7]
Additional information
Alexander has carried out the same calculations for Product Y. He has calculated the net present value of Product Y
as $30 400.
REQUIRED
(c) Advise Alexander which product he should make based solely on the net present value.
Justify your answer. [2]
(d) State one advantage & one disadvantage of using net present value for investment appraisal. [2]
(e) Explain why Alexander may or may not use the payback method of investment appraisal. [3]
(f) State three non-financial factors Alexander should consider when choosing between Product X and Product
Y. [3]
Chapter 17 301 Capital Investment Appraisal

QUESTION 10 NOVEMBER 2016 P33 Q5

N Limited is planning a new project, which has an initial cost of $225 000. If the project runs for four years the
marginal revenues and costs will be as follows:
Year Revenues Costs
$ $
1 100 000 31 000
2 110 000 40 000
3 125 000 59 000
4 90 000 48 000
The directors have two options.
Option 1 To stop the project at the end of year 2 when the scrap value of the project’s assets will amount
to $175 000.
Option 2 To continue with the project until the end of year 4 when the scrap value of the assets will be
$75 000.
The company’s cost of capital is 10%. Discount factors for this cost of capital are as follows:
Year Discount factor
1 0.909
2 0.826
3 0.751
4 0.683
REQUIRED
(a) Calculate the net present value (NPV) of each option. [10]
(b) Advise the directors which option they should choose. Justify your answer. [2]
Additional information
Before the directors make a decision, the finance director wishes to have further data on the project.
REQUIRED
(c) Calculate, to two decimal places, the sensitivity of the option selected in your answer to (b) to changes in
the initial cost of the project. [3]
(d) Calculate, to two decimal places, the accounting rate of return (ARR) of the option selected in your answer
to (b). (Add scrap value to cost when calculating average investment.) [6]
(e) Explain to the directors which is the more valid method of investment appraisal. Give reasons. [4]

QUESTION 11 MAY 2017 P32 Q6

Tisha is considering buying a new machine for her factory. The machine will cost $125 000. At the end of Year 5 the
machine will be sold for $65 000. The machine will be used to manufacture one of Tisha’s existing products.
The following information is available:
1 The current annual sales volume of the existing product is 10 000 units. This will remain constant over the
5-year period.
2 The selling price per unit is currently $12. Tisha plans to increase this to $13 per unit to help cover her costs
of the new machine.
3 The variable cost is currently $5 per unit. This is expected to fall to $3 per unit by using the new machine.
4 The maintenance cost for the new machine will increase the annual fixed costs by $5 000.
5 At the end of Year 1, Tisha will have to pay a one-off service fee of $1 000.

REQUIRED
(a) Prepare one table which shows the change in cash flows for each of the Years 0 to 5 that arise as a result
of the purchase of the machine. [5]
(b) Calculate the payback period for the machine. [2]
(c) State three reasons why payback may be a useful investment appraisal technique. [3]
Chapter 17 302 Capital Investment Appraisal

Additional information
Tisha’s cost of capital is 10%. Discount factors are as follows:
Year Discount factor
0 1.000
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621

REQUIRED
(d) Calculate the Net Present Value (NPV) of buying the machine. [3]

Additional information
When using a discount factor of 20%, the machine had a negative NPV of $24 953.

REQUIRED
(e) Calculate the Internal Rate of Return (IRR) of the machine to three decimal places. [4]

Additional information
Tisha has recently discovered an alternative machine that would also be suitable for producing the same product.
This also has an expected life of 5 years. Tisha has a limited amount of capital available and only needs one machine.
The following information has been calculated for the alternative machine:

Capital outlay NPV IRR Payback period

$ $ %
135 000 10 350 9.597 4 years 6 months

REQUIRED
(f) Recommend, with reasons, which machine Tisha should buy. [4]
(g) Discuss which factors, other than those you have considered in (f), Tisha should consider when making her
decision. [4]

QUESTION 12 NOVEMBER 2017 P32 Q5

Wong Ho owns a small factory. A machine has started to break down regularly and needs to be replaced.
A replacement machine is expected to cost $55 000. It is expected to last 5 years and will be depreciated using the
straight-line method of depreciation. At the end of the period the machine will be scrapped with no residual value.
The following information is available for the replacement machine:
1 The selling price for each unit produced by the machine is expected to be $40 for years 1 and 2.
This is expected to increase by 25% for year 3.
There is no expected change for year 4.
However, the selling price is expected to increase by a further 10% for year 5.
2 The cost of production for each unit produced is expected to be $20 for years 1 and 2. This will increase by
25% for year 3 and then remain unchanged.
3 The present value for the net cash flows for the years 1 to 5 have been calculated as follows:
Year Discount factor 14% Present value $
1 0.877 3 683.40
2 0.769 6 536.50
3 0.675 9 483.75
4 0.592 14 977.60
5 0.519 21 019.50
Chapter 17 303 Capital Investment Appraisal

REQUIRED
(a) Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b) Calculate the expected net present value for the replacement machine. [1]
(c) (i) Calculate the annual net cash flows for years 1 to 5 for the replacement machine. [5]
(ii) Calculate the payback period for the replacement machine. [2]
(iii) Calculate the number of units for each year that Wong Ho expects to produce with the
replacement machine. [8]
(d) Recommend whether or not Wong Ho should purchase replacement machine. Justify your answer. [5]

QUESTION 13 MAY 2018 P32 Q5

Jason is considering investing in building a property in order to receive rental income.
He could buy the land now (year 0) for $100 000. Construction costs of $180 000 would be paid in year 1.
The building would have ten flats and each would have an annual rental of $5 000. Jason thinks that he could rent
out flats as follows:
Year Number of flats rented out
1 Nil
2 7
3 8
4 10
Total annual maintenance and management charges for the flats would cost $12 000 plus 10% of the rent received.
At the end of the year 4 he would sell the building. Jason has consulted two different property dealers, Alan and
Bob. Alan estimates the building could be sold for $290 000. Bob estimates it could be sold for $315 000.
Jason’s cost of capital is 10%. The discount factors to be used to account for this are as follows.
Year 1 0.909
2 0.826
3 0.751
4 0.683
All cash flows are assumed to take place on the last day of the year.

REQUIRED
(a) (i) Calculate the net present value (NPV) of investing in the building, using Alan’s estimation of the
sale proceeds. [12]
(ii) Calculate the net present value (NPV) of investing in the building, using Bob’s estimation of the sale
proceeds. [3]
(b) Calculate the sales proceeds at the end of year 4 which would result in a net present value of zero. [3]
(c) Advise Jason whether or not he should proceed with investing in the building. Justify your answer. [5]
(d) State two reasons why the calculation of the payback period is a less useful investment appraisal technique
than the calculation of net present value (NPV). [2]
Chapter 17 304 Capital Investment Appraisal

SOLUTION CHAPTER 17
QUESTION 1 NOVEMBER 2011 P43 Q3
(a) Calculation of Net Present Value (NPV)
Year Cash flow ($) Present value of $1 @ 8% Present value of Cash Flows ($)
0 (800 000) 1.000 (800 000)
1 235 000 0.926 217 610
2 258 500 (W 1) 0.857 221 535
3 284 350 (W 2) 0.794 225 774
4 312 785 (W 3) 0.735 229 897
5 160 000 (W 4) 0.681 108 960
Net Present Value @ 8% 203 776
$135 081 (W 5)
(b) Discounted Payback period = 3 years + × 365
$229 897(W 5)
= 3 years & 214 days
(c) The internal rate of return is the discount rate at which net present value of the project is zero. If a project
has a discount rate below IRR then it will be a viable project and vice versa.

$203 776 (a part)

(d) Internal Rate of Return = 8% + × 7%
$203 776−$45 411 (W 6)
= 17.0%

(e)  Environmental issues.

 Compatibility with existing projects
 Reliability of project’s forecast in long run
 Quality of output

WORKINGS
(W 1) $235 000 × 110% = $258 500
(W 2) $258 500 × 110% = $284 350
(W 3) $284 350 × 110% = $312 785
(W 4) $800 000 × 20% = $160 000
(W 5) Year Discounted Cash Flows ($) Net Discounted Cash Flows ($)
0 (800 000) (800 000)
1 217 610 (582 390)
2 221 535 (360 855)
3 225 774 (135 081)
4 229 897 94 816
5 108 960 203 776

(W 6) Calculation of Net Present Value @15%

Year Cash flow ($) Discount factor Present value of cash flows ($)
0 (800 000) 1.000 (800 000)
1 235 000 0.870 204 450
2 258 500 0.756 195 426
3 284 350 0.658 187 102
4 312 785 0.572 178 913
5 160 000 0.497 79 520
Net Present Value @ 15% 45 411
Chapter 17 305 Capital Investment Appraisal

QUESTION 2 MAY 2012 P43 Q3

(a) Calculation of Annual Net Cash Flows
Year Cash Inflows ($) − Cash Outflows ($) = Net Cash Inflows ($)
1 (4 000 × $80) − (4 000 × $65) = 60 000
2 [(4 000 × 110%) × $90] − [(4 000 × 110%) × $65] = 110 000
3 [(4 400 × 110%) × $90] − [(4 400 × 110%) × $70] = 96 800
4 (3 500 × $75) − (3 500 × $70) = 17 500
Average Profit ×100
(b) Accounting Rate of Return (ARR) =
Average Investment
$8 575 (W 1) ×100
=
$125 000 (W 2)
= 6.86%
WORKINGS
Total Profits
(W 1) Average Profit =
Total life (years)
Total Net cash Inflows − Total Depreciation
=
Total life (years)
$284 300−$250 000
=
4 years
= $8 575
Original Cost+Scrap Value
(W 2) Average Investment =
2
$250 000+Nil
=
2
= $125 000
(c) Calculation of Net Present Value (NPV)
Year Net Cash flows ($) Present Value of $1 @10% Present value of cash flows @10%
0 (250 000) 1.000 (250 000)
1 60 000 0.909 54 540
2 110 000 0.826 90 860
3 96 800 0.751 72 697
4 17 500 0.683 11 953
Net Present Value @10% (19 950)
(d) As the project yields negative net present value so the directors should not proceed with the
proposal. In addition the accounting rate of return (ARR) seems to be quite low and is even below
the cost of capital. Management should also consider other non-financial factors.
(e) (i) The internal rate of return is the discount rate at which net present value is zero. In other words it
is the discount rate at which present value of inflows is equal to present value of outflows.
(ii) If cost of capital is lower than the internal rate of return then the proposal should be rejected and
vice versa. The negative NPV reveals that the IRR is lower than the cost of capital.
QUESTION 3 MAY 2014 P41 Q3, MAY 2014 P42 Q3
(a) Calculation of Net Cash flows
Year Revenue ($) Costs ($) Interest ($) Net cash flows ($)
0 (200 000) (200 000)
1 110 000 (40 000) (20 000) 50 000
2 115 500 (41 200) (20 000) 54 300
3 121 275 (42 436) (20 000) 58 839
4 127 339 (43 709) (20 000) 63 630
5 133 706 (45 020) (20 000) 68 686
Total 407 820 (212 365) (100 000) 95 455
Chapter 17 306 Capital Investment Appraisal

(b) Calculation of Net Present Value

Year Net cash flows 10% Factor Net present value
0 (200 000) 1.000 (200 000)
1 50 000 0.909 45 450
2 54 300 0.826 44 852
3 58 839 0.751 44 188
4 63 630 0.683 43 459
5 68 686 0.621 42 654
Net present value 20 603
Average Profit
(c) Accounting rate of return = × 100
Average Investment
$95 455 / 5
= × 100
($200 000+zero)/2
$19 091
= × 100
$100 000
= 19.09%
(d)
Year Net cash flow Discounted value of $1 @40% Discounted Cash flows @40% ($)
0 (200 000) 1.000 (200 000)
1 50 000 0.714 35 700
2 54 300 0.510 27 693
3 58 839 0.364 21 417
4 63 630 0.260 16 544
5 68 686 0.186 12 775
Total Net present value (85 871)
$20 603
Internal rate of return (IRR) = 10% + ( ) × 30%
$20 603−(−$85 871)
= 15.81%
(e) Drake should invest in Project Sylvania, because the accounting rate of return is greater, the net present
value is greater, and the internal rate of return is greater than Project Utopia.
(f) If project is not financed through loan then interest would not be charged to the project, therefore the
profits should be higher. This will result in a higher accounting rate of return as calculated below.
Average Profit
Accounting rate of return = × 100
Average Investment
($95 455+$100 000)/ 5
= × 100
($200 000+zero)/2
$39 091
= × 100
$100 000
= 39.09%

(g) Preference shares: Preference dividends are paid at fixed rate. Preference dividend and capital amounts
are paid in priority to ordinary shareholders. Preference dividend on redeemable preference shares is a
chargeable expense against profits for tax purposes.
Debentures: These are usually secured on the asset. Interest charged may be at a lower rate than on the
bank loan. Interest is charged before dividend is paid to ordinary and preference shareholders. Interest is
also a chargeable expense against profits for tax purposes.

QUESTION 4 NOVEMBER 2014 P42 Q2(a to f)

(a) Contribution Units of sales × Per unit contribution
20 000 units × ($50 – $31.1)
$378 000
Chapter 17 307 Capital Investment Appraisal

Net cash flow Contribution – Fixed costs excluding depreciation

$378 000 – $120 000
$258 000
Profit Net cash flow – Depreciation
$258 000 – $150 000 ($600 000/4)
$108 000

Total Fixed costs

(b) Break-even (units) =
Contribution per unit[a(i)]
$120 000 +$150 000
=
$50 – $31.1
= 14 286 units

Break-even (value) = Break even units × Per unit selling price

= 14 286 × $50
= $714 300
(c) The cash outflow on purchase of machinery was not included in the calculation.
The cash outflow on purchase of machinery should had been subtracted from present value of cash inflows.
Calculation was based on profits whereas for calculating Net Present Value cash flows should have been
considered.
The annual cash flows should not include depreciation as depreciation does not involve any outlay of cash.
(d)
Year Cash flow Discount factor @10% Discounted cash flow @10% ($)
0 (600 000) 1.000 (600 000)
1–4 258 000 3.169 817 602
Net Present Value 217 602

Net Present value

(e) Sensitivity to changes in machine cost = × 100 = 36.27
Orignal Cost of Machine
217 602
= × 100
600 000
= 36.27%
Net Present value
(f) Sensitivity to changes in selling price = × 100 = 36.27
Present value of sales
217 602
= × 100
20 000 units ×$50 ×3.169
= 6.87%

QUESTION 5 NOVEMBER 2014 P43 Q3(c to f)

(c)
Year Additional Revenues Additional Payments Net Cash PV of $1 Net cash flow ($)
($000) ($000) flows ($000) @10%
0 (2014) (400) 1.000 (400 000)
1 (2015) 6 500  6 000 =500 300 200 0.909 181 800
2 (2016) 6 700  6 000 =700 490 210 0.826 173 460
3 (2017) 7 100  6 000 = 1 100 740 360 0.751 270 360
4 (2018) 6 300  6 000 = 300 610 (310) 0.683 (211 730)
Net Present Value (NPV) 13 890

$13 890
(d) Internal Rate of Return (IRR) = 10% + [( ) × 5%]
$13 890+$7 830
= 13.20%
Chapter 17 308 Capital Investment Appraisal

Average Profits
(e) Accounting Rate of Return (ARR) = × 100
Average Investments
$15 000 (W 1)
= × 100
$200 000 (W 2)
= 7.5%
Net Cash Inflow −Depreciation
(W 1) Average profit =
4
(200 000 +$210 000 +$360 000 −$310 000)− $400 000
= 4
= 15 000 per annum

Orignal Cost+Scrap Value

(W 2) Average Investment =
42
$400 000+ Zero
= 2
= $200 000

(f) The directors should purchase the machinery. The machine has a positive Net Present Value of $13 890.
The Internal Rate of Return is also greater than cost of capital.
As there is a loss and negative cash flows in the fourth & final year of asset’s life so it might be good for the
business to close the project at the end of year 3. This would not only help the business to avoid the losses
expected in year 4 but may also realise some amount on disposal of asset.

QUESTION 6 MAY 2015 P41 & P42 Q3 (a to d)

(a) Calculation of Net Present Value
Year Revenue ($) Direct Fixed Net cash 8% discount Present value of
costs($) costs($) flows($) factor cash flows($)
0 20 000 (20 000) 1.000 (20 000)
1 10 000 2 000 1 600 6 400 0.926 5 926
2 10 500 2 060 1 600 6 840 0.857 5 862
3 11 025 2 121 1 600 7 304 0.794 5 799
4 11 576 2 185 1 600 7 791 0.735 5 726
5 12 155 2 251 1 600 8 304 0.681 5 655
Net present value 8 968

(b) (i) Calculation of Net Present Value @25%

Year Net cash 25% discount Present value of cash flows
Flows ($) Factor @25% ($)
0 (20 000) 1.000 (20 000)
1 6 400 0.800 5 120
2 6 840 0.640 4 377
3 7 304 0.512 3 740
4 7 791 0.410 3 194
5 8 304 0.328 2 724
Net present value (845)
0.25−0.08
(ii) Internal rate of return = 0.08 + ( ) × $8 968
$8 968−(−$845)
= 0.2354 0r 23.54% approximately
Average Profit
(c) Accounting rate of return = × 100
Average Investment
$3 328 (W 1)
= × 100
$10 000 (W.2)
= 33.28%
Chapter 17 309 Capital Investment Appraisal

WORKINGS
Total profit over the entire life
(W.1) Calculation of Average Profits =
Estimated life (in years)
$6 400+$6 840+7 304+$7 791+$8 304 −$20 000
=
5 years
= $3 328

Original cost+Scrap Value

(W.2) Average Investment = =
2
$20 000 + Nil
=
2
= $10 000
(d) The London taxi has higher Net Present Value and higher Accounting Rate of Return. The Internal Rate of
Return is however lower for the London taxi. Amongst all methods, NPV is a better measure as it takes into
account time value of money and cash flows over the entire life. Abdul, therefore, should buy the London
taxi

QUESTION 7 SPECIMEN 2016 P3 Q5

(a) Cash inflows
Year 0 Year 1 Year 2 Year 3 Year 4
$ $ $ $ $
Outlay (265 000) (1)
Inventory (10 000) (1)
Sales 84 000 84 000 84 000 84 000 (1) all
Purchases (46 200) (46 200) (46 200) (46 200) (1) all
Expenses (14 400) (14 400) (14 400) (14 400) (1) all
Parking (2 000) (2 000) (2 000) (2 000) (1) all
Purchase Consideration 310 000 (1)
Total (265 000) 11 400 21 400 21 400 331 400 (1of) all

(b) Calculation of net present value (NPV)

Year 0 Year 1 Year 2 Year 3 Year 4 Total
$ $ $ $ $ $
Cash flow (265 000) 11 400 21 400 21 400 331 400 (1of)
Discount factor 1 0.909 0.826 0.751 0.683
Discounted cash flow (265 000) 10 363 17 676 16 071 226 346 (1of) for each
Net present value (1) 5456 (1of)

(c) NPV is positive (1of). Therefore he should proceed (1of). (1 mark) × two valid points
(d) Responses could include:
• NPV is very small in relation to the outlay
• The outcome is very sensitive to small differences between anticipated and actual costs and
revenues.
Credit for correct use of terminology, for example ‘sensitive’.
Developed explanation (2–3 marks)
Basic explanation (1 mark)
(e) Responses could include:
• NPV is considered the investment appraisal method giving the most accurate results
• Payback does not consider the time value of money whereas NPV takes into account the
discounted value of money.
• Payback does not take into account cash flows arising after the payback period
Chapter 17 310 Capital Investment Appraisal

Accept any reasonable alternative.

Developed explanation (3–4 marks)
Basic explanation (1–2 marks)
QUESTION 8 MAY 2016 P31 Q6
(a) Payback does not consider the time value of money whereas net present value is based on time value of
money.
Payback ignores all cash flows which arise after the payback period whereas net present value considers
cash flows over the entire life of the project.
Payback is easy to calculate and understand whereas NPV involves complex calculations

(b) Calculation of annual net cash flows

Revenue per Net revenue
Cost per unit net cash flows (units of
years Units of sale unit (cash (inflow) per
(cash outflow) sales × per unit net inflow)
Inflow) unit
1 2 600 (4000 × 65%) 45.0 24.0 21.00 54 600
2 4 500 58.5 (45 × 130%) 30.0 (24 × 125%) 28.50 128 250 – 75000 = 53250
3 5 400 (4500×120%) 76.05 (58.5×130%) 37.5 (30 × 125%) 38.55 208170

$192 150
(c) Payback period = 2 years +
$208 170
= 2.923 years
= 2 years and 337 days
WORKINGS
(W 1)
Year Cash Flows Net Cash Flows
$ $
0 (300 000) (300 000)
1 54 600 (245 400)
2 53 250 (192 150)
3 208 170 16 020

(d) Calculation of Net Present Value (NPV)

Year Cash flow ( Present value of $1 @ 14% Present value of Cash Flows
$ $
0 (300 000) 1.000 (300 000)
1 54 600 0.877 47 884
2 53 250 0.769 40 949
3 208 170 0.675 140 515
Net Present Value @ 14% (70 652)

(e) (i) The net cash flow generated over the 3 years is $16 020 ($54 600 + $53 250 + $208 170  $300
000). The positive net cash inflow can be used for other projects within the business.
There is also an increase in production output by 35% i.e. from 4000 units to 5400 units.
This will help the business to increase its market share and improve its profit potential.

(ii) As the project yields negative net present value so the managers of Artem Ltd should not proceed
with the proposal of purchasing the machine. Though payback is within the life of the machine
however discounted net cash flows do not cover the cost of investment and the present values
generated are not enough to cover the initial cost of the investment.
Chapter 17 311 Capital Investment Appraisal

QUESTION 9 NOVEMBER 2016 P31 Q6

(a) Calculation of Net Cash flows of Product X
Year Inflows Outflows Net Cash
Capital cost Variable Costs Fixed Costs Flow
$ $ $ $ $
0 (50 000) (50 000)
1 70 000 (10 000 × 7) 30 000 (10 000 × 3) 11 000 29 000
2 73 500 (70 000 × 105%) 42 000 (10 000×105%× 4) 11 000 20 500
3 77 175 (73 500 × 105%) 44 100 (42 000 × 105%) 11 000 22 075
4 61 740 (71 175 × 80%) 35 280 (44 100 × 80%) 11 000 15 460
37 035

(b) Calculation of Net present value of Product X

Year Net Cash flows ($) Present value of $1 @10% Present Value of cash flows ($)
0 (50 000) 1.000 (50 000)
1 29 000 0.909 26 361
2 20 500 0.826 16 933
3 22 075 0.751 16 578
4 15 460 0.683 10 559
Net Present Value 20 431
(c) Alexander should choose Product Y because it generates a higher net present value
(d) Advantages
 time value of money used
 easy to understand
 greater importance given to earlier cash flows
Disadvantages
 difficult to predict cash flow
 length of project difficult to predict
 cost of capital may change during project

(e) Advantages
 Easy to calculate and understand
 Based on cash flows (more objective than profits)
 Useful for risky proposals (shorter payback is preferred)
 Useful in liquidity crises
Disadvantages
 Ignores the time value of money unless discounted payback is calculated
 Ignores all cash flows which arise after the payback period
 Ignores the size of investment and its overall cost/benefit

(f)  Delivery and installation time of assets to be bought.

 Can quality of output be maintained or not.
 Whether or not the workforce would need training to use the assets.
 New assets may be dangerous to use.
 Environmental issues.
 Compatibility with existing projects
 Reliability of project’s forecast in long run
 Workers availability with required skills
 Political stability
 Current economic conditions
 Chapter 17 312 Capital Investment Appraisal

QUESTION 10 NOVEMBER 2016 P33 Q5

(a)
Cash flow Discount factor of Discounted cash flow
Year Option 1 ($) Option 2 ($) $1 @10% Option 1 ($) Option 2 ($)
0 (225 000) (225 000) (225 000) (225 000)
1 69 000 69 000 0.909 62 721 62 721
2 245 000 70 000 0.826 202 370 57 820
3 66 000 0.751 49 566
4 117 000 0.683 ______ 79 911
Net Present Value 40 091 25 018

Working
(W 1) Option 1 Option 2
Year Inflows ($)  Outflows Net Cash Inflows ($)  Outflows Net Cash
($) flow ($) ($) flow ($)
0  225 000 (225 000)  225 000 (225 000)
1 100 000  31 000 69 000 100 000  31 000 69 000
2 (110 000 + 175 000)  40 000 245 000 110 000  40 000 70 000
3 125 000  59 000 66 000
4 (90 000 + 75 000)  48 000 117 000

(b) The directors should adopt option 1 because it has the higher Net present value.

$40 091
(c) Sensitivity of option 1 to changes in the initial cost =  100
$225 000
= 17.82%

Average Profits (W.1)

(d) Accounting rate of return = × 100
Average Investments (W.2)
$44 500
=  100
$200 000
= 22.25%
(e) Net present value as it takes account of time value and money. It is based on cash flow which is more
objective than accounting profit. Moreover it takes account of the cost of capital.

WORKINGS
$210 000 (revenue)−$71 000(cash exp)−$50 000 (Depn)
(W 1) Average profit = 2
= $44 500
$225 000 + $175 000
(W.2) Average Investment =
2
= $200 000

QUESTION 11 MAY 2017 P32 Q6

(a) Statement to show cash flows in each year of asset’s life
Year 0 Year 1 Year2 Year 3 Year 4 Year 5
Initial outlay (purchase price of machine) (125 000)
Scrap value 65 000
Increase in sales revenue [10 000 × ($13  $12)] 10 000 10 000 10 000 10 000 10 000
Decrease in variable cost [10 000 × ($5  $3) 20 000 20 000 20 000 20 000 20 000
One-off service fee (1 000)
Maintenance costs ---------- (5 000) (5 000) (5 000) (5 000) (5 000)
Total cash flows (125 000) 24 000 25 000 25 000 25 000 90 000
Chapter 17 313 Capital Investment Appraisal

(b) Calculation of payback period

Year Annual cash inflow ($) Net cash flow ($)
0 (125 000) (125 000)
1 24 000 (101 000)
2 25 000 (76 000)
3 25 000 (51 000)
4 25 000 (26 000)
5 90 000 64 000
$26 000
Payback period = 4 years +
$90 000
= 4 years and 3.46 months

(c)  Easy to calculate and understand

 Based on cash flows (more objective than profits)
 Useful for risky proposals (shorter payback is preferred)
 Useful in liquidity crises
(d) Statement to calculate the Net Present Value (NPV)
Year Total cash flows Discount factor Discounted cash flow
0 (125 000) 1.000 (125 000)
1 24 000 0.909 21 816
2 25 000 0.826 20 650
3 25 000 0.751 18 775
4 25 000 0.683 17 075
5 90 000 0.621 55 890
Net Present Value 9 206

$9 206 (d part)
(e) Internal Rate of Return = 10% + × 10%
$9 206 −(−$24 953)
= 12.695%

(f) Both machines have positive NPV but alternative machine has the better NPV however it also has higher
outlay. The first machine has the better IRR which is good as it adds more profit to the business. Moreover
the first machine has shorter payback period. In view of lower outlay, better payback and IRR, first machine
should be chosen.

(g)  Delivery and installation time of assets to be bought.

 Can quality of output be maintained or not.
 Whether or not the workforce would need training to use the assets.
 New assets may be dangerous to use.
 Environmental issues.
 Compatibility with existing projects
 Reliability of project’s forecast in long run
 Workers availability with required skills
 Political stability
 Current economic conditions

QUESTION 12 NOVEMBER 2017 P32 Q5

(a)  Payback does not consider the time value of money whereas net present value does
 Payback considers the net cash flow within the payback period only whereas net present value
considers the cash flow for the whole life of the project.
 Payback ignores timings of cash flows but Net present value does.
Chapter 17 314 Capital Investment Appraisal

(b) Calculation of net present value for the replacement machine

$
Present value of inflows ($3 683.40 + $6 536.50 + $9 483.75 + $14 977.60 + $21 019.50) 55 700.75
Present value of outflows (cost) (55 000.00)
Net present value 700.75

(c) (i) Statement to calculate the annual net cash flows for the replacement machine
Year Present value ($) Discount factor Net cash flows ($)
[PV/discount factor]
1 3 683.40 0.877 4 200
2 6 536.50 0.769 8 500
3 9 483.75 0.675 14 050
4 14 977.60 0.592 25 300
5 21 019.50 0.519 40 500
$2 950 (W 1) × 365
(ii) Payback = 4 years & ( )
$40 500 (W 1)
= 4 years & 27 days
(W 1)
Year Net cash flows ($) Cumulative Cash Flows
0 (55 000) (55 000)
1 4 200 (50 800)
2 8 500 (42 300)
3 14 050 (28 250)
4 25 300 (2 950)
5 40 500 37 550

(iii) Statement to calculate the number of units for each year

Year Net cash flow From (c)(i) ÷ Contribution per unit = Units
1 4 200 ÷ ($40 – $20) = 210
2 8 500 ÷ ($40 – $20) = 425
3 14 050 ÷ ($50 – $25) = 562
4 25 300 ÷ ($50 – $25) = 1 012
5 40 500 ÷ ($55 – $25) = 1 350

(d) The machine has a very low net present value, but still it is positive. The payback is very lengthy as cost is
expected to be recovered in the final year of asset’s life.
Due to very small net present value and lengthy payback, Wong Ho should not purchase the machine. As
all calculations are based on estimated data so any negative change in estimated contribution per unit, life
expectancy, cost of capital etc may turn the small positive net present value into negative NPV. Likewise,
the payback may exceed life span of the machine. There could be additional non-financial factors like
availability of spare parts, training costs, quality of output etc which need to be considered.

QUESTION 13 MAY 2018 P32 Q5

(a) (i) Calculation of Net Present Value using Alan’s estimation of the sale proceeds
Year Net cash flow (W 1) Discounted value of $1 @10% Discounted cash flows
0 (100 000) 1.000 (100 000)
1 (180 000) 0.909 (163 620)
2 19 500 0.826 16 107
3 24 000 0.751 18 024
4 323 000 0.683 220 609
Net Present value (8 880)
Chapter 17 315 Capital Investment Appraisal

(a) (ii) Calculation of Net Present Value using Bob’s estimation of the sale proceeds
Year Net cash flow (W 1) Discounted value of $1 @10% Discounted cash flows
0 (100 000) 1.000 (100 000)
1 (180 000) 0.909 (163 620)
2 19 500 0.826 16 107
3 24 000 0.751 18 024
4 348 000 (W 2) 0.683 237 684
Net Present value 8 195

$100 000+$163 620 −$16 107 −$18 024

(b) Total Cash inflow in year 4 to have zero NPV =
0.683
= $336 001
Sales proceeds to make NPV equal to zero = $336 001  [(10 × 5 000)  (12 000 + 5 000)]
= $303 001
WORKINGS
(W 1)
Inflows Outflows
Year Rental Sale Total Purchase Construction Maintenance & Total Net cash
income proceeds inflows price cost management outflows flow
0 100 000 (100 000) (100 000)
1 180 000 (180 000) (180 000)
2 (7 × 5 000) 35 000 (12 000 + 3 500) 15 500 19 500
3 (8 × 5 000) 40 000 (12 000 + 4 000) 16 000 24 000
4 (10 × 5 000) 290 000 340 000 (12 000 + 5 000) 17 000 323 000

(W 2) Operating Cash inflows at end of year 4

Rental income  Maintenance & Management outflow + Sale proceeds = Net inflow
(10 × 5 000)  (12 000 + 5 000) + 315 000 = 348 000

(c) Net present values in both situations are not significant so difficult to make a decision on this ground. The
project under both proposals would only be able to recover cash flows (payback) in final year of project’s
life. Operating cash flows are not very significant so decision is mainly based on final sale proceeds of the
building. The calculations assume that annual rent of each flat will be $5 000 and there will be no increment.
There are lot of assumptions in the calculation to achieve a meager NPV like amount of annual rent,
occupancy of flats, amount of final proceeds etc. On the financial grounds, the project seems to be risky so
should not be undertaken. Jason should also consider to sell the building immediately.

(d) Payback method ignores the time value of money

Payback does not consider cash flows over the entire life of a project
Payback ignores cash flows arising after the payback period
Chapter 18 316 Activity Based Costing

CHAPTER 18 ACTIVITY BASED COSTING

QUESTION 1 MAY 2016 P31 Q5
Chetna runs a business printing logos on sweatshirts. The sweatshirts come in two types, Standard and Superior. The
selling price is set at cost plus 30%.

The following information is available for the year.

Standard Superior
Number of sweatshirts sold 22 500 9 000
Purchase cost per sweatshirt $5 $8
Printing materials per sweatshirt $0.50 $0.50
Labour time to print each sweatshirt 5 minutes 5 minutes

Overheads were as follows:

$
Machine set up costs 18 900
Other production overheads 5 850
Selling and administration 17 250
Total 42 000

REQUIRED
(a) Calculate an overhead absorption rate based on labour hours. [2]

Additional information
Staff printing the logos are paid $10 an hour.

REQUIRED
(b) (i) Calculate the total cost allocated to each type of sweatshirt. [4]
(ii) Calculate the selling price for each sweatshirt. [2]

Additional information
Chetna has suggested that it would be better to allocate the machine set up cost to each product based on the
number of times the machine is set up. The machine has to be set up each time there is a different logo.

During the year the machine was set up 600 times for Standard sweatshirts and 975 times for Superior sweatshirts.
Other overheads are still allocated on the basis of labour hours.

REQUIRED
(c) (i) Calculate the total costs allocated to each type of sweatshirt when machine set up costs are
allocated using the number of set up times. [4]
(ii) Calculate the revised selling price for each type of sweatshirt. [2]
(iii) Calculate the change in selling price for each type of sweatshirt. [2]
(d) Explain three differences between activity based costing and absorption costing. [6]
(e) Advise Chetna which method she should use. Justify your answer. [3]

QUESTION 2 MAY 2016 P32 Q5

Explorer Limited produces two products, Y and Z, and has always used absorption costing to allocate overheads to
each product. The directors are now considering adopting activity based costing (ABC).

REQUIRED
(a) Compare how overheads are apportioned using absorption costing and ABC. [4]
Chapter 18 317 Activity Based Costing

Additional information
The budgeted data for the two products for the year ending 31 December 2017 is as follows:
Y Z
Raw materials used (kilo) 2 3
Direct labour hours 0.75 1
Unit selling price $19 $25
Annual production and sale 2 500 4 000

The cost of raw materials is $2.50 per kilo and the labour force are paid $8 per hour.
Annual overheads are as follows:
$
Machine maintenance overheads 8 500
Purchasing overheads 17 000
Selling and distribution overheads 18 750

REQUIRED
(b) Calculate the cost per unit for each product using absorption costing. [7]

Additional information
Y Z
Number of production runs 20 16
Number of purchase orders 55 65
Number of sales deliveries 85 160

REQUIRED
(c) Calculate the cost per unit for each product using ABC. [7]
(d) (i) Compare the total profit per product using absorption costing and ABC. [4]
(ii) Comment on the results. [1]
(e) Advise the directors whether or not ABC should be adopted. Justify your answer. [2]
[Total: 25]

QUESTION 3 NOVEMBER 2016 P32 Q5

“The idea behind this method of costing is that it is the cause of a cost which is important and not whether it is fixed
or variable.”
REQUIRED
(a) Identify the costing method described in the quotation. [1]
Additional information
Haruka Limited produces a single product.
The factory is operational 5 days a week for 50 weeks a year. It produces one batch of 200 units each day.
Overheads amount to $79 000 a year.
REQUIRED
(b) Calculate the overhead cost per unit to two decimal places. [2]
Additional information
These overheads comprised:
$
Machine set-up costs 2 000
Production quality inspections 5 000
Production stoppage costs 4 000
Machine maintenance 8 000
Machine running costs 60 000
Chapter 18 318 Activity Based Costing

The machines were set up at the start of each working day.

There was a quality inspection every week.
The machines were maintained each day.
Production was stopped on average once every 4 weeks for unexpected maintenance.
Samir, the finance director, asks Sara, the factory accountant, to analyse the overhead cost per unit across each of
the five overheads incurred.
REQUIRED
(c) Prepare an analysis showing how the total overhead cost per unit (from part b) is split between each of the
individual overheads. [12]
Additional information
Sara has complained to Samir that producing this analysis is not worthwhile.
REQUIRED
(d) Advise Samir whether or not he should continue to ask for this analysis in the future years. Justify your
answer by considering the benefits and drawbacks of this costing method. [10]

QUESTION 4 MAY 2017 P31 & P33 Q6

Ahmed manufactures two products. He has recently started using Activity Based Costing (ABC) for allocating the
overhead costs to these products. The budgeted data for one month is available as follows:
Product X Product Y
Demand (units) 10 000 14 000
Number of orders 20 60
Number of production runs 12 36
Product X Product Y
Per unit Per unit
Direct labour hours 0.75 1.5
Machine hours 2.5 0.5
Direct costs ($) 100 50

Total factory overhead costs $

Machine maintenance costs 264 000
Ordering costs 54 000
Production run costs 24 000
342 000
REQUIRED
(a) Calculate the full cost per unit for Product X and Product Y using ABC. [10]
Additional information
Ahmed previously used direct labour hours as a basis to charge overheads to each product.
REQUIRED
(b) Calculate the overhead charged to each product using the direct labour hour rate. [3]
(c) Explain the effect that changing the method has had on the overhead cost of each
product. [4]
Additional information
A customer requires 50 units of Product X and has offered to pay Ahmed a total of $8 450 for them. Ahmed uses
40% mark-up on all his products.
REQUIRED
(d) Recommend whether or not Ahmed should accept the offer. Justify your decision sing appropriate
calculations and considering both financial and non-financial factors. [6]
(e) State two reasons why a business may use ABC for allocating overhead costs. [2]
Chapter 18 319 Activity Based Costing

QUESTION 5 NOVEMBER 2017 P31 Q6

PMW Limited produces and sells two products, A and B. It provided the following information for a year:
Product A Product B
Sales 20 000 units 18 000 units
Selling price per unit $12 $20
Direct material per unit $3.20 $4.90
Direct labour per unit $1.80 $2.10
Total overheads amounted to $300 000. These are currently apportioned to the two products on the basis of total
sales value.
REQUIRED
(a) Calculate the value of overheads apportioned to each product. [3]
(b) Calculate the profit or loss per unit for each product. [5]

Additional information
Beryl, the accountant, has analysed the overheads. She discovered that the total of $300 000 included costs for
delivery to customers and order processing costs. The following information was available.
1 Analysis of orders received
Product A Product B Total
Orders received for more than 100 units 17 23 40
Orders received for 100 units or fewer 664 446 1 110
Total orders received 681 469 1 150
2 Costs of delivery amounted to $30 per order for orders received for more than 100 units, and $20 per order
for orders of 100 units or fewer.
3 Order processing costs amounted to $25 per order irrespective of size.
4 Remaining overheads should now be apportioned to sales units.
REQUIRED
(c) Calculate total overheads apportioned to each product in accordance with the accountant’s analysis. [5]
(d) Calculate the revised profit or loss per unit for each product. [5]
Additional information
Beryl believes that her method of apportioning overheads is more realistic than the current method. She has
recommended to the directors that the method be changed in the future.
REQUIRED
(e) Discuss whether or not the directors should change the method of apportioning overheads.
Justify your answer using both financial and non-financial factors. [5]
(f) State what is meant by the terms ‘cost driver’ and ‘cost pool’. [2]

QUESTION 6 NOVEMBER 2017 P33 Q5 (e)

The directors of S Limited are considering using production units rather than direct labour hours as the basis of
absorbing fixed overheads.
REQUIRED
Advise the directors whether or not they are correct to absorb fixed overheads on the basis of direct labour hours.
Justify your answer. [4]

QUESTION 7 MAY 2018 P31 & P33 Q6

B Limited manufactures two products Alpha and Omega. The following budgeted figures are available.
Alpha Omega
Budgeted production and sales units 20 000 8 000
Direct materials used per unit 5 kilo 11 kilo
Direct materials cost per kilo $20 $11
Labour hours per unit 2 1
Direct labour cost per hour $12 $6
Chapter 18 320 Activity Based Costing

The fixed overheads are forecast as $396 000 and are allocated on the basis of labour hours.
(a) Calculate for each product:
(i) the total production costs [3]
(ii) the production cost per unit [1]
Additional information
The sales price per unit is calculated by adding 50% to the cost.
(b) Calculate the selling price per unit for each product. [2]

Additional information
The directors of the company have been advised that they should adopt activity based costing to allocate the
production overheads. They have identified the four major activities involved in the production cycle as machine
set-up, materials handling, maintenance of machinery and production inspection and packing. The costs of each
activity have been established and the overheads apportioned between the activities as follows:

Production Overheads Alpha Omega

$
Machine set-up 90 000 15 times 10 times
Materials handling 80 000 6 receipts 14 receipts
Machine maintenance 46 000 130 hours 100 hours
Inspection and packing 180 000 40 hours 20 hours
396 000
(c) State two disadvantages to a business of adopting activity based costing. [2]
(d) Calculate the total production overhead to be allocated to each product using activity based costing. [4]
(e) Recalculate the cost per unit and selling price of each product maintaining the 50% mark-up. [3]
(f) Explain three reasons why B Limited should change the method of allocating overheads to using activity
based costing. [6]
Additional information
It has been suggested that customers will not accept the increase in price of Omega. The directors are therefore
considering changing the profit margins to 60% on Alpha and 30% on Omega.
(g) (i) Calculate the new total profit for each product if this change is adopted. [2]
(ii) Give two reasons why B Limited should adopt this change. [2]
Chapter 18 321 Activity Based Costing

SOLUTION CHAPTER 18
QUESTION 1 MAY 2016 P31 Q5
Total Overheads for the year
(a) Overhead absorption rate =
Number of labour hours
$42 000
=
2 625 Labour hours (W 1)
= $16 per direct labour hour
(W 1) Calculation of Number of Direct Labour Hours
Standard [(22 500 × 5) minutes] ÷ 60 1 875 hours
Superior [(9 000 × 5) minutes] ÷ 60 750 hours
Total labour hours 2 625 hours
(b) (i) Calculation of total cost allocated to each type of sweatshirt
Standard Superior
$ $
Direct materials [22 500 × (5 + 0.5)] : [9 000 × (8 + 0.5)] 123 750 76 500
Direct labour [(22 500×5/60) hours×10] ; [(9 000×5/60)hours×10] 18 750 7 500
Overheads [(22 500×5/60) hours×16] ; [(9 000×5/60)hours×16] 30 000 12 000
Total costs 172 500 96 000
(ii) Calculation of selling price of each type of sweatshirt
Standard Superior
$ $
$172 500 $96 000
Per unit cost( ); ( ) 7.67 10.67
22 500 units 9 000 units
Profit ($7.67 × 30%); ($10.67 × 30%) 2.30 3.20
Per unit selling price 9.97 13.87

(c) (i) Calculation of total cost allocated to each type of sweatshirt

Standard Superior
$ $
Direct materials 123 750 76 500
Direct labour 18 750 7 500
Set up costs [600 × 12 (W 2)] ; [(975 × 12 (W 2)] 7 200 11 700
Other overheads (1 875 hrs × 8.8 (W 3)] ; [750 hrs × 8.8(W 3)] 16 500 6 600
Total costs 166 200 102 300
Total setup costs for the year
(W 2) Machine setup rate =
Number of machine setups
$18 900
=
(600+975) set ups
= $12 per set up
Total Production,selling and administration OHs
(W 3) Overhead rate =
Number of labour hours
$5 850+$17 250
=
2 625 Labour hours (W 1)
= $8.8 per direct labour hour
(ii) Calculation of revised selling price of each type of sweatshirt
Standard Superior
$166 200 $102 300
Per unit cost( ); ( ) 7.39 11.37
22 500 units 9 000 units
Profit ($7.39 × 30%) ; ($11.36 × 30%) 2.21 3.41
Per unit selling price 9.60 14.78
Chapter 18 322 Activity Based Costing

(iii) Calculation of Change in selling price

Standard Superior
Revised per unit selling price 9.60 14.78
Original per unit selling price 9.97 13.87
Per unit selling price (0.37) 0.91

(d) Activity based costing identifies relevant activities before producing products whereas absorption costing
identifies relevant costs before producing products.
Activity based costing overhead costs uses cost centre or cost pools whereas absorption costing uses
production and service departments.
In ABC, there is no need to allocate and re- distribution of overhead of service departments to production
departments in contrast to absorption costing.
In ABC there is separate overhead rate for each activity whereas in absorption costing, a single overhead
rate is used for the whole department.
Activity based costing is expensive to set up whereas absorption costing is easy to set up.

(e) Product Variety and Process Complexity also create problems as a result hard-to-make products show big
profits and easy-to-make products show losses. Though change in selling price is not significant in either
case. However, the reduction in the selling price of Standard may increase the number of units sold and
vice versa for Superior. As a result, activity based costing should be used to show and earn realistic profit.

QUESTION 2 MAY 2016 P32 Q5

(a) The traditional method of costing relied on the arbitrary addition of a proportion of overhead costs on to
direct costs to attain a total product cost. The traditional approach to cost allocation relies on three basic
steps.

1. Accumulate costs within a production or non-production department.

2. Allocate non-production costs to production departments.
3. Allocate the resulting production department costs to various products, services or customers.

In contrast to traditional cost accounting systems, ABC systems first accumulate overheads for each
organisational activity. Costs are then collected into cost pools. They then assign these costs to products,
services or customers (referred to as cost objects) causing that activity.

Total estimated overheads

(b) Overheads absorption rate (B) =
Total Direct labour hours
$8 500 + $17 000 + $18 750
=
[(2 500 ×0.75)+(4 000 ×1)] hours
= $7.53 per direct labour hour

Y Z
Raw materials (2 kilos × $2.50) ; (3 kilos × $2.50) 5.00 7.50
Direct labour (0.75 hours × $8) ; (1 hour × $8) 6.00 8.00
Overheads (0.75 hours × $7.53) ; (1 hour × $7.53) 5.65 7.53
Total cost per unit 16.65 23.03

(c) Statement to calculate the cost per unit for each product using ABC
Y Z
Raw materials (2 kilos × $2.50) ; (3 kilos × $2.50) 5.00 7.50
Direct labour (0.75 hours × $8) ; (1 hour × $8) 6.00 8.00
Overheads (see workings) 7.61 6.31
18.61 21.81
Chapter 18 323 Activity Based Costing

Working Allocation of overheads:

Y Z Total
$8 500
Machine maintenance overheads ((20+16)production ) × 20 ;16 4 722 3 778 8 500
runs
$17 000
Purchasing overheads ((55+65)purchase ) × 55 ; 65 7 792 9 208 17 000
orders
$18 750
Selling & distribution overheads ((85+160)deliveries) × 85 ; 160 6 505 12 245 18 750
Total overheads under ABC 19 019 25 231 44 250
$19 019 $25 231
Overhead cost per unit under ABC ( );( ) $7.61 $6.31
2 500 units 4 000 units

(d) (i)
Y Z
Total profit using absorption costing[2500 × ($19.016.65)] ; [4000 × (25.023.03)] 5 875 7 880
Total profit using ABC [2500 × ($19.018.61)] ; [4000 × (25.021.81)] 975 12 760
Difference in profits 4 900 4 880

(d) (ii) The results show different levels of profits due to different mechanisms used in the allocation of
overheads to the products.

(e) Traditional costing system faces problems with cost allocations due to lack of commonality in overhead
costs. Product Variety and Process Complexity also create problems as a result hard-to-make products show
big profits and easy-to-make products show losses. In view of this, the directors should adopt activity based
costing.

QUESTION 3 NOVEMBER 2016 P32 Q5

(a) Activity Based Costing

Total estimated overheads

(b) Overheads absorption rate (B) =
Total Direct output (units)
$79 000
=
[(200 ×5 ×50)] units
= $1.58 per unit

(c) Calculation of total overhead cost per unit

Per unit ($)
$2 000
Machine set up costs ( ) ÷ 200 units 0.04
(5×50)set up days
$5 000
Production quality inspections [(( )] ÷ 200 units 0.10
5×50) days
$4 000
Machine stoppage costs ( ) ÷ 200 units 0.08
(5×50) days
$8 000
Machine maintenance ( ) ÷ 200 units 0.16
(5×50) days
$60 000
Machine running costs( ) ÷ 200 units 1.20
(5×50) days
Total overhead cost per unit 1.58

(d) Advantages
 Allows the company or the business institution to have the most accurate costing of the
products/services, thereby allowing the company to have known the cost which is friendly to both
the manufacturer and to the consumer.
Chapter 18 324 Activity Based Costing

 Easier to be understood. This method or approach does not require a deeper way of understanding. It
is never hard to be understood since this is focusing on the reality how the process is being
undertaken.
 The unit cost is properly utilize rather than its total cost.
 Is helpful in the integration of continues improvement programs for the company.
 Benchmarking is being facilitated.
 Performance management and scorecards are being supported.
Limitations
 If the overhead costs are high for reasons such as volume, there are very limited benefits to be
reaped from activity based costing.
 It also is not very efficient if the overhead costs of the business only represent a very small portion of
the costs.
 ABC method of costs may not be best if the overhead waste is perceived to be relatively low. This is
because it can be very costly to implement activity based costing into a business. Experts must be
brought in for an extended period of time, and other measures may be necessary for the ABC to be
effective.
 There is a long time period that is involved in using an activity based costing in a business.
 ABC requires many different departments and individuals to collect and input data. Even the smallest
flaw in this information can damage the entire process and the outcome would be tainted. This is one
of the biggest risks that are taken on when using this method.

QUESTION 4 MAY 2017 P31 & P33 Q6

(a) Statement to calculate the full cost per unit for Product X and Product Y using ABC
Product X Product Y
$ $
Machine maintenance [(10 000 × 2.5) ; (14 000 × 0.5)] hours @ $8.25(W 1) 206 250 57 750
Ordering costs (20 ; 60) orders @ $675 each (W 2) 13 500 40 500
Production run costs (12 ; 36) production runs @ $500 each (W 3) 6 000 18 000
225 750 116 250
÷ Number of units ÷ 10 000 ÷ 14 000
Factory overhead cost per unit 22.58 8.30
Direct costs per unit 100.00 50.00
Full cost per unit 122.58 58.30

(b) Calculation of total overheads per unit for Product X and Product Y
Product X Product Y
$ $
Total overheads [(10 000 × 0.75) ; (14 000 × 1.5)] hours @ $12.00 (W 4) 90 000 252 000
÷ Number of units ÷ 10 000 ÷ 14 000
Factory overhead cost per unit $9.00 $18.00

WORKINGS
Overhead costs OH rate per cost driver
$264 000
(W 1) Machine maintenance costs = $8.25 per machine hour
[(10 000 ×2.5)+(14 000 ×0.5)] hours
$54 000
(W 2) Ordering costs = $675 per order
(20+60) orders
$24 000
(W 3) Production run costs = 500 per production run
(12+36) production runs
$342 000
(W 4) Total OHs per labour hour = $12.00 per labour hour
[(10 000 × 0.75) ; (14 000 × 1.5)] hours
Chapter 18 325 Activity Based Costing

(c) If Ahmed uses ABC as overhead allocation method then the overhead cost of X will increase and the cost of
Y will decrease. Ahmed was previously using ‘direct labour hours’ for overheads allocation. As product X
uses 0.75 (one half) labour hours compared to 1.5 labour hours of product Y therefore product X has half
share of overhead costs on per unit basis.
Under ABC overheads are allocated on the basis of activities consumed by different products. Product X has
less set ups and orders than Y so takes less share of ordering costs. On the other hand, product X has more
machine hours than Y so takes larger portion of machine based overheads. Product X has five times more
machine hours per unit than Y so gets the largest portion
Of machine maintenance costs.

(d) Calculation of selling price based on usual mark-up

$
Full cost per unit under ABC (‘a’ part) 122.58
Add Profit ($122.58 × 40%) 49.03
Selling price per unit 171.61
Selling price for the complete order price (50 units × $171.61) 8 580.50
On financial grounds, Ahmed should reject the offer as the offer price ($8 450) is less than his required price ($8
580.50) based on usual mark up. However if capacity permits and relationships with other customers are not affected
then offer may be accepted as Ahmed will still make a profit. Moreover, he may be able to build relationship with
customer.
(e)  ABC allows the company or the business institution to have the most accurate costing of the
products/services, thereby allowing the company to have known the cost which is friendly to both
the manufacturer and to the consumer.
 ABC is easier to be understood. This method or approach does not require a deeper way of
understanding. It is never hard to be understood since this is focusing on the reality how the
process is being undertaken.
 ABC is helpful in the integration of continues improvement programs for the company.
 Performance management and scorecards are being supported.
QUESTION 5 NOVEMBER 2017 P31 Q6
(a) Statement to calculate the value of overheads apportioned to each product
Product A Product B
$300 000 × $240 000 $300 000 × $360 000
Overheads ( ) ; ((20 000 ×12)+(18 000 ×20)) $120 000 $180 000
(20 000 ×12)+(18 000 ×20)

(b) Statement to calculate the profit or loss per unit for each product
Product A ($) Product B ($)
Selling price 12 20
Direct cost ($3.2 + $1.8) ; ($4.9 + $2.1) (5) (7)
Overheads ($120 000 ÷ 20 000 units); ($180 000 ÷ 18 000 units) (6) (10)
Profit per unit 1 3
(c) Calculation of total overheads apportioned to each product as per accountant’s analysis
A ($) B ($) Total ($)
Delivery costs – large orders (17 orders × $30) ; (23 orders × $30) 510 690
Delivery costs – small orders (664 orders × $20) ; (446 orders × $20) 13 280 8 920
13 790 9 610
Order processing (681 orders @ $25) ; (469 orders @ $25) 17 025 11 725
30 815 21 335 52 150
$300 000−$52 150 $300 000−$52 150
Other overheads ( ) × 20 000 ; ( ) × 18 000 130 447 117 403 247 850
38 000 units 38 000 units
Total overheads 161 262 138 738 300 000
Chapter 18 326 Activity Based Costing

(d) Statement to calculate the revised profit or loss per unit for each product
Product A Product B
$ $
Selling price 12.00 20.00
Direct cost ($3.2 + $1.8) ; ($4.9 + $2.1) (5.00) (7.00)
Overheads ($161 262 ÷ 20 000 units); ($138 738 ÷ 18 000 units) (8.06) (7.71)
Profit per unit (1.06) 5.29

(e) If method for apportioning overheads is changed to Activity based costing then there would be a loss of
$1.06 on per unit basis despite the product has a positive contribution towards fixed costs. On the other
hand profit per unit for B has increased.
The change of method doesn’t seem to solve the issue. The company should consider increase in the selling
price of product A. another option could have been to charge delivery charges separately as an addition to
the unit price.
The method suggested by accountant looks more accurate to have meaningful allocation of overhead costs
and uses multiple cost drivers so recognises complexity of operations.
On the other hand it would require many different departments and individuals to collect and input data.
Even the smallest flaw in this information can damage the entire process and the outcome would be tainted.
This is one of the biggest risks that are taken on when using this method.

(f) Cost drivers are commonly used for the allocation of production overhead to units of production, as
required by several accounting frameworks.
A cost pool is a grouping of individual costs, typically by department or service center.

QUESTION 6 NOVEMBER 2017 P33 Q5 (e)

Units of production base may be appropriate in this case as company is producing only one type of product which is
identical in nature. Moreover, Production is not labour intensive so company may switch from labour hours base to
units of production base provided change in method is expected to calculate more accurate value of production
overheads.

QUESTION 7 MAY 2018 P31 & P33 Q6

(a) (i) Calculation of Total Production Cost
Alpha Omega
$000 $000
Direct materials (20 000  5 × 20) ; (8 000 × 11 × 11) 2 000 968
Direct labour (20 000 × 2 × 12) ; (8 000 × 1 × 6) 480 48
Overheads [20 000 × 2 × 8.25 (W 1)] ; (8 000 × 1 × 8.25 (W 1)] 330 66
Total production costs 2 810 1 082

Total Production Cost

(ii) Production cost per unit =
Total Units
$2 810 000
Alpha =
20 000 units
= $140.50 per unit
$1 082 000
Omega =
8 000 units
= $135.25 per unit
WORKINGS
Total Fixed Overheads
(W 1) Overhead rate per hour =
Total Labour hours
$396 000
=
[(20 000 ×2)+(8 000 ×1] ℎ𝑜𝑢𝑟𝑠
= $8.25 per labour hour
Chapter 18 327 Activity Based Costing

(b) Alpha Omega

$ $
Cost per unit 140.50 135.25
Add profit per unit (Cost per unit × 50%) 70.25 67.63
Selling price per unit 210.75 202.88

(c)  ABC is often of little benefit if there is only one product because the overhead cost per unit will be the
same.
 It is not possible to attribute all costs to activities.
 There are still cost pools that are not caused by one particular cost driver but by several e.g.
marketing
 It takes additional costs as usually specialist employees are required or extensive training may be
required.
 The costs for implementing such a system for a small business often outweigh the benefits
 The level of accuracy may be immaterial for management decisions

(d) Statement to calculate total production overhead to be allocated to each product using ABC
Overhead Alpha Omega Total
$ $ $
$90 000
Machine set-up ( ) × 15 ; 10 54 000 36 000 90 000
(15+10)set ups
$80 000
Materials handling ( ) × 6 ; 14 24 000 56 000 80 000
(6 +14) receipts
$46 000
Machine maintenance ( ) × 130 ; 100 26 000 20 000 46 000
(130 +100) hours
$180 000
Product inspection ( ) × 40 ; 20 120 000 60 000 180 000
(40 +20) hours
Total overheads per unit 224 000 172 000 396 000

(e) Statement to calculate Cost & selling price per unit using ABC
Alpha Omega
$ $
Materials [as in a(i)] 2 000 000 968 000
Labour [as in a(i)] 480 000 48 000
Production overheads (‘d’ part) 224 000 172 000
Total cost 2 704 000 1 188 000
÷ Number of units produced ÷20 000 ÷ 8 000
Cost per unit 135.20 148.50
Add Profit per unit (Cost per unit × 50%) 67.60 74.25
Selling Price per unit 202.80 222.75

(f) The application of ABC usually results in more accurate costs and more realistic sales price due to the use
of multiple cost drivers for multiple levels.
Under the existing method of overheads apportionment Alpha absorbed a higher amount of overheads
resulting in an unrealistic higher selling price.
On the other hand, under the existing method Omega absorbed lower overheads resulting in an unrealistic
lower selling price.
Use of ABC would be helpful in fixing the cost of a product or service. The more accurate cost estimates help
in better planning, preparing more reliable budgets, making pricing decisions and making quotations.
Chapter 18 328 Activity Based Costing

(g) (i) Statement to calculate TOTAL PROFITS per unit using ABC
Alpha Omega
$ $
Cost per unit (as in e) 135.20 148.50
Add Profit per unit ($135.20 × 60%) ; ($148.50 × 30%) 81.12 44.55
× Sales (Units) × 20 000 × 8 000
Total profits per unit 1 622 400 356 400

(ii) As a result of profit adjustment, the actual total profit will rise from $1 946 000 [(20 000 × $67.6) +
(8 000 × $74.25)] to $1 978 800 ($1 622 400 + $356 400) so there will be an increase of $32 800.
Due to adjustment, the price of Alpha will decrease whereas it will rise for Omega. The new prices
will not only increase overall profits but will also be closer to the original prices.
The high demand of Alpha, use of higher labour work by the labour force with higher machining
activities justifies increase in price for Alpha and decrease in price for Omega which does not
require specialist workforce as the rate of labour is lower with relatively lower machining activities.
Specimen 2016 329 Paper 3

SPECIMEN 2016 PAPER 03

QUESTION 1
Ayanda and Bola have been in partnership for many years, sharing profits in the ratio of 3 : 2 respectively. The annual
profit has been $60 000 for some years.
On 1 June 2013 the partnership books of account showed the following balances.

$
Capital account Ayanda 40 000
Bola 25 000
Current account Ayanda 17 000 Cr
Bola 2 500 Dr
Bank 3 500 Dr
Trade payables 4 000

On that date the business was sold to Hetl Limited for a purchase consideration of $140 000.
This consisted of 50 000 $1 ordinary shares in Hetl Limited with a market value of $1.80, to be shared equally, and
the balance in cash. Hetl Limited took over all the assets and liabilities of the business with the exception of the bank
account and the trade payables.

REQUIRED
(a) Calculate the gain on realisation arising from the sale of the partnership. [5]
(b) Calculate the amount in cash due to each partner on the sale of the partnership. [5]
(c) Prepare the partnership bank account showing the entries to close the account. [5]

Additional information
Bola thinks it is unfair that Ayanda received more cash than she did.

REQUIRED
(d) Give four reasons why it is fair that Ayanda received more cash than Bola. [4]

Additional information
Hetl Limited pays a dividend of $0.25 per share each year. Surplus funds can be put on deposit in a bank and earn
6% interest a year.
Ayanda has accepted a job with Hetl Limited at a salary of $20 000 a year.

REQUIRED
(e) Compare Ayanda’s current income with his earnings as a partner. [5]
(f) Suggest one non-financial reason why Ayanda might prefer to be an employee rather than a partner. [1]

QUESTION 2
Lee started a business in Indonesia on 1 January 2013 selling lawn mowers.
During the first year of trading Lee bought 1000 lawn mowers at $50 each. He shipped 400 of these to Albert, his
agent in Jamaica. Lee also sold 550 lawn mowers in Indonesia.
The following additional information is available.
Freight charges paid by Lee $3 600
Landing duties paid by Albert $400
Rate of commission paid to Albert 10%
Cash remitted by Albert to Lee $19 000
Lee’s income statement for the year ended 31 December 2013 included the following.
Specimen 2016 330 Paper 3

$
Gross profit 22 000
Consignment profit 6 720
Selling, distribution and administration costs (arising in Indonesia) 17 600
Lee’s statement of financial position at 31 December 2013 included the following inventory.
$
Jamaica 4 800
Indonesia 2 500
Total inventory 7 300
REQUIRED
(a) Prepare the consignment account in the books of Lee for the year ended 31 December 2013. [8]
(b) Prepare Albert’s account in the books of Lee for the year ended 31 December 2013. [6]
(c) Calculate the number of unsold lawn mowers Albert was holding on 31 December 2013. [5]

Additional information
Lee is considering whether to concentrate his efforts on sales in Indonesia or in Jamaica.

REQUIRED
(d) Advise Lee where to concentrate his sales effort. Support your answer with calculations. [6]

QUESTION 3
The following information is available about Whittlesford plc on 31 December 2011.
$
500 000 ordinary shares of $1 each 500 000
Share premium 200 000
General reserve 70 000
Retained earnings 298 300
Further information is as follows:
1 The draft profit for the year ended 31 December 2012 was $122 800.
2 On 1 January 2012 property was revalued from $520 000 to $780 000.
3 On 31 January 2012 a rights issue of 1 share for every 5 held was made at a premium of $0.25 each.
4 On 30 June 2012 an interim dividend of $0.08 per share was paid.
5 On 31 October 2012 a bonus issue of shares of 1 for every 4 held was made. The directors decided to keep
the reserves in their most flexible form.
6 On 31 December 2012 $40 000 was transferred to general reserve and a final dividend of $0.12 per share
was proposed.
7 On 5 January 2013 it was discovered that a customer who had owed $4200 at the year end had been
declared bankrupt. It was also discovered that goods in inventory at the year end, with a cost of $3000, had
been water damaged and could now only be sold for $600.
8 On 17 January 2013 a burglary at the business premises resulted in the loss of computer equipment, $15
700.
REQUIRED
(a) Explain what is meant by keeping reserves in their most flexible form. [3]
(b) Prepare the statement of changes in equity for Whittlesford plc for the year ended 31 December
2012. [13]
(c) Explain whether the event on 17 January 2013 was an adjusting or a non-adjusting event. [2]
(d) State three characteristics of an auditor’s report. [3]
Specimen 2016 331 Paper 3

Additional information
The auditor’s report for Whittlesford plc did not give an unqualified opinion on the financial statements because
$150 000 of investments included in non-current assets have become worthless but have not been written off.
REQUIRED
(e) Assess the effect that this auditor’s report will have on shareholders. [4]

QUESTION 4
Five friends each have $20 000 to invest and are considering whether to invest in ABC plc or
DEF plc. The following information is available from the latest financial statements of ABC plc.
Summarised income statement
$
Revenue 4 700 000
Cost of sales 2 115 000
Gross profit 2 585 000
Expenses 1 645 000
Profit from operations 940 000
Debenture interest 50 000
Profit for the year 890 000
Summarised statement of financial position
$ $
Non-current assets 2 100 000
Current assets
Inventory 880 000
Trade receivables 480 000
Cash and cash equivalents 10 000 1 370 000
Total assets 3 470 000
1 000 000 ordinary shares of $1 each 1 000 000
Share premium 400 000
Revaluation reserve 800 000
Retained earnings 450 000 2 650 000
Non-current liabilities – debentures 500 000
Current liabilities – trade payables 320 000
3 470 000
Other information about ABC plc is as follows:
1 The dividends paid in the year amounted to $440 000.
2 All sales and purchases are made on credit.
3 The value of inventory has remained stable over several years.
4 The market value of one share is $5.60.
The following information is also available about DEF plc.
Earnings per share $0.57
Dividend per share $0.48
Gearing ratio 43.4%
Income gearing 17.7%
Trade payables payment period 97 days
Price earnings ratio 7.18
Dividend cover 1.19 times
Dividend yield 11.7%
Par value of one share $1
The five friends all have different criteria for their investment decision.
Jazgul is an ethical investor and is concerned that suppliers get their money in good time.
Specimen 2016 332 Paper 3

Jackson needs a good cash flow and seeks a high return in terms of cash in the short term.
Khan seeks capital growth.
Madge wishes to be confident in a company’s ability to maintain earnings in the future.
Bernard is risk averse and wants to invest in a company which is on a sound financial footing.
REQUIRED
(a) Identify and calculate for each potential investor the ratio for ABC plc which would particularly interest him
or her. [10]
(b) Explain what the ratio you have calculated for each investor shows the investor. [10]
(c) Decide which is the most suitable investment for each investor. [5]

QUESTION 5
Harko runs a successful retail business. His typical annual results have been as follows:
$
Revenue 210 000
Cost of sales 115 500
Gross profit 94 500
Variable selling and administrative expenses 48 000
Fixed expenses 19 500
Profit for the year 27 000
Harko is now considering building an extension to his premises.
The following information is available:
1 The building cost would be $265 000.
2 Because of the increase in floor space he anticipates that sales volume would increase by 40%.
3 The gross profit margin would be maintained.
4 The inventory level would need to be increased by $10 000 in year 1 only.
5 The existing variable expenses would increase by 30%.
6 The business would in future have to rent garage space for the vehicle at a cost of $2000 a year.
7 Harko intends to retire at the end of year 4 and sell the business as a going concern. He expects the purchase
consideration for the business (including inventory) to be
$600 000 without the extension or $910 000 if he proceeds with the extension.
REQUIRED
(a) Calculate the annual cash flows arising from the building of the extension. [8]
Additional information
Harko’s cost of capital is 10%. Discount factors are as follows.
Year Discount factor
0 1.000
1 0.909
2 0.826
3 0.751
4 0.683
REQUIRED
(b) Calculate the net present value (NPV) of building the extension. Round calculations to the nearest dollar ($)
[8]
(c) Advise Harko whether he should proceed with the extension, based on your figures from (b). [2]
(d) Outline why Harko might have doubts about proceeding with the extension, based on the NPV. [3]
(e) Explain why Harko chose to use net present value as a basis for his decision rather than the payback method.
[4]
Specimen 2016 333 Paper 3

QUESTION 6
Aziz Manufacturing Limited produces one product.
The budgeted costs and revenues are as follows.
Units produced and sold 800 per month
Standard selling price $100 per unit
Standard direct materials 4 kilos at $6 per kilo
Standard direct labour 3 hours at $12 per hour
All overheads are fixed.
In April 850 units were produced and sold. Selling price was maintained at $100 per unit. Actual costs were as follows.
Direct materials 3485 kilos costing $19 516 in total
Direct labour 2720 hours costing $35 360 in total
REQUIRED
(a) Prepare the original budget & the flexed budget for April to show total budgeted contribution. [8]
(b) Calculate the actual total contribution achieved in April. [1]
(c) Prepare a statement to reconcile the contribution from the flexed budget in (a) with the actual contribution
from (b). [10]
(d) Suggest one reason why each of the following variances had arisen.
(i) Material usage variance [2]
(ii) Labour rate variance [2]
(e) State two similarities in use between standard costing and activity based costing. [2]
2016 May 334 Paper 31 & 33

2016 May PAPER 31 & 33

QUESTION 1
The Pavey Sports and Social Club is a not for profit organisation. Accounts are prepared annually to 31 March. The
membership has been constant for some years at 350 members paying an annual subscription of $100.

A life membership scheme was introduced to try to boost membership. On 1 April 2015, there were 25 new members
who joined under this scheme, each paying $750. It was agreed that the life membership fund would be transferred
to the income and expenditure account over 15 years.

The following receipts and payments account was prepared for the year ended 31 March 2016.

Receipts $ Payments $
Balance b/d 12 120 Purchase of fixtures and fittings 34 500
Annual subscriptions 34 000 Payments to restaurant suppliers 6 950
Life membership 18 750 Restaurant wages 5 450
Donations 8 500 Administrative expenses 4 750
Restaurant takings 17 450 Balance c/d 39 170
Balance b/d 90 820 90 820

The following information is available for the year ended 31 March 2016.

1 1 April 2015 31 March 2016

Number of members Number of members
Subscriptions in advance 4 3
Subscriptions in arrears 10 ?
2 1 April 2015 31 March 2016
$ $
Restaurant suppliers owing 845 955
Restaurant wages owing – 280
Administrative expenses owing – 350
Administrative expenses prepaid – 200

3 No inventories of restaurant supplies were held.

4 Fixtures and fittings acquired on 1 April 2013 had cost $20 000. Depreciation is charged at 20% per annum
using the reducing balance method. A full year’s depreciation is charged in the year of acquisition.
5 All donations are capitalised.
6 The opening balance on the accumulated fund at 1 April 2016 was $24 675.

REQUIRED
(a) Distinguish between the terms ‘capital’ and ‘accumulated fund’. [2]
(b) Prepare the income and expenditure account for the year ended 31 March 2016, clearly identifying the
profit or loss from the restaurant within the account. [14]
(c) Explain why a club may capitalise donations received from its members. [2]
Additional information
The club is considering modernising the pavilion which will cost $75 000.

REQUIRED
(d) (i) Compare and contrast two sources of finance which the club could use. [4]
(ii) Advise the club members which source of finance would be most appropriate. Justify your answer.
[3]
2016 May 335 Paper 31 & 33

QUESTION 2
Ahmed and Bashmir have separate garage businesses and have agreed to form a joint venture to buy and sell second
hand cars.
They have agreed to share the profits and losses as two thirds to Ahmed and one third to Bashmir.
They record purchases and sales of cars in their own books of account.
The following financial information is available for the period of the joint venture.

Ahmed Bashmir
$ $
Credit purchases 24 500 17 600
Expenses 3 200 2 300
Commissions received 1 000
Discount received 500 100
Cash sales 6 000 4 800
Credit sales 32 000 50 700
Returns inwards 4 500
Irrecoverable debts 300

It was agreed that Bashmir would take over the inventory of unsold cars at the end of the venture. Bashmir has
advised that he has an inventory of unsold cars at the end of the venture valued at $6 500.

REQUIRED
(a) Prepare the memorandum joint venture account. [9]
(b) Prepare the joint venture account in the books of Ahmed and show the balance due to or from Bashmir.
[8]
(c) State the heading under which the balance due will be shown in Ahmed’s statement of financial
position. [1]
Additional information
Ahmed has discovered that Bashmir did not hold any inventory but had sold the closing inventory of cars for $12 500.

REQUIRED
(d) Calculate:
(i) the correct total profit for the joint venture. Start your calculation with your answer from (a). [3]
(ii) the extra profit due to Ahmed from the joint venture. [1]
(e) Evaluate whether or not Ahmed should have entered into the joint venture with Bashmir. Justify your
answer. [3]
QUESTION 3
ACM plc provided the following information about its non-current assets.
Accumulated depn Cost at Cost at
at1 January 2015 1 January 2015 31 December 2015
$ $ $
Property 17 000 200 000 200 000
Plant and machinery 210 000 258 000 310 000
Delivery vans 10 000 23 000 23 000

Additional information
1 Half of the value of property relates to land. Property is depreciated at the rate of 1% per annum using the
straight-line method.
2 Plant and machinery is depreciated at the rate of 10% per annum using the straight-line method. A full year’s
depreciation is provided in the year of purchase and none in the year of disposal.
2016 May 336 Paper 31 & 33

On 1 June 2015 a machine, bought on 10 July 2007, was sold for $17 800. This resulted in a profit on disposal
of $13 000.
3 The delivery vans are depreciated at the rate of 25% per annum on the reducing balance basis.

REQUIRED
(a) Prepare the disposal of machinery account for the year ended 31 December2015. [6]
(b) Prepare the non-current assets schedule for inclusion in the published financial statements of the company
for the year ended 31 December 2015 in accordance with International Accounting Standards. [8]
(c) Explain why a business depreciates its non-current assets. [3]

Additional information
The Return on Capital Employed (ROCE) of the company was 9.81%. This was lower than the industry average and
the directors wished to find a way to increase it.
Some of the machinery was 10 years old at the start of January 2016 and it had become unreliable and unproductive.
The marketing director suggested that it should be scrapped and replaced at a cost of $120 000, to be financed by
the issue of 8% debentures. This would increase production. Annual sales and costs would be as follows:

$
Revenue 62 000
Prime costs 39 000
Selling and distribution costs 3 000

He calculated that the return from the new machinery would be 62 000 / 120 000 or 51.67%, which, being higher
than the existing 9.81%, would cause the Return on Capital Employed (ROCE) to increase.

REQUIRED
(d) Evaluate the marketing director’s proposal. Support your answer with calculations. [8]

QUESTION 4
Winter bottom plc and Ramsey plc are two similar trading companies which have been successfully trading for many
years. Their financial statements prepared for internal purposes are shown below:
Income statements for the year ended 30 June 2015
Winterbottom Ramsey
$000 $000
Revenue 6 279 4 527
Cost of sales (2 075) (1 254)
Gross profit 4 204 3 273
Depreciation (1 285) (720)
Other expenses (1 227) (992)
Profit on disposal of non-current assets 28 15
Profit from operations 1 720 1 576
Finance charges (300) (180)
Profit before taxation 1 420 1 396
Taxation (317) (312)
Retained profit for the year 1 103 1 084

Statements of financial positions at 30 June 2015

Winter bottom Ramsey

Assets $000 $000
Non-current assets 9 864 6 192
Current assets
Inventories 782 451
2016 May 337 Paper 31 & 33

Trade receivables 1 362 742

Cash and cash equivalents 135 98
2 279 1 291
Total assets 12 143 7 483
Equity and liabilities
Equity
Ordinary share capital ($1 each) 4 500 2 500
Share premium 200 –
Retained earnings 1 447 1 244
6 147 3 744
Current liabilities
Trade payables 679 427
Taxation 317 312
996 739
Non-current liabilities
6% Debentures (2024) 5 000 3 000
Total equity and liabilities 12 143 7 483

Additional information
1 Neither company has paid an interim dividend during the year ended 30 June 2015.
2 The directors of Winterbottom plc propose a dividend of $0.20 per share and those of Ramsey plc $0.35 per
share for the year ended 30 June 2015.
3 At 30 June 2015, the market value of an ordinary share in Winterbottom plc is $3.50 and in Ramsey plc
$2.75.
REQUIRED
(a) Calculate the following ratios for both companies to two decimal places.
(i) Income gearing
(ii) Earnings per share
(iii) Price earnings ratio
(iv) Dividend yield
(v) Dividend cover [10]

Additional information
Alfredo is considering investing in one of the companies but is uncertain which will offer the best return.
Recent industry averages were as follows:
Income gearing 20.25%
Earnings per share $0.33
Price earnings ratio 12.50
Dividend yield 10.45%
Dividend cover 1.20 times

REQUIRED
(b) Analyse the performance of both companies compared to the industry averages. [10]
(c) Advise Alfredo which company he should invest in. Justify your answer. [5]

Section B: Cost and Management Accounting

QUESTION 5
Chetna runs a business printing logos on sweatshirts. The sweatshirts come in two types, Standard and Superior. The
selling price is set at cost plus 30%.

The following information is available for the year.

2016 May 338 Paper 31 & 33

Standard Superior
Number of sweatshirts sold 22 500 9 000
Purchase cost per sweatshirt $5 $8
Printing materials per sweatshirt $0.50 $0.50
Labour time to print each sweatshirt 5 minutes 5 minutes

Overheads were as follows:

$
Machine set up costs 18 900
Other production overheads 5 850
Selling and administration 17 250
Total 42 000

REQUIRED
(a) Calculate an overhead absorption rate based on labour hours. [2]

Additional information
Staff printing the logos are paid $10 an hour.
REQUIRED
(b) (i) Calculate the total cost allocated to each type of sweatshirt. [4]
(ii) Calculate the selling price for each sweatshirt. [2]

Additional information
Chetna has suggested that it would be better to allocate the machine set up cost to each product based on the
number of times the machine is set up. The machine has to be set up each time there is a different logo.

During the year the machine was set up 600 times for Standard sweatshirts and 975 times for Superior sweatshirts.
Other overheads are still allocated on the basis of labour hours.

REQUIRED
(c) (i) Calculate the total costs allocated to each type of sweatshirt when machine set up costs are
allocated using the number of set up times. [4]
(ii) Calculate the revised selling price for each type of sweatshirt. [2]
(iii) Calculate the change in selling price for each type of sweatshirt. [2]
(d) Explain three differences between activity based costing and absorption costing. [6]
(e) Advise Chetna which method she should use. Justify your answer. [3]

QUESTION 6
One of the assembly machines at Artem Limited needs to be replaced.

A replacement machine will cost $300 000, which will be paid on purchase. The replacement machine is expected to
last for three years. It will need complete maintenance check-up in year 2 at a cost of $75 000.

The existing machine assembles 4000 units per year.

The number of units assembled by the replacement machine is expected to be 35% lower in year 1 than the existing
machine due to the time lost during installation and testing.
In year 2 it is expected that 4 500 units will be assembled and this will increase by 20% each year compared to the
previous year.

The replacement machine will produce units at a cost of $24 each. From year 2 this will increase by 25% each year
compared to the previous year.
2016 May 339 Paper 31 & 33

The selling price will be $45 per unit. This will increase by 30% each year compared to the previous year.

The cost of capital is 14%.

The following is an extract from the present value tables for $1.
14%
Year 1 0.877
Year 2 0.769
Year 3 0.675

It is assumed that all production will be sold.

REQUIRED
(a) Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b) Calculate the expected net cash flows for each year for the replacement machine. [8]
(c) Calculate the payback period for the replacement machine. [2]
(d) Calculate the net present value for the replacement machine. Assume that revenues are received and costs
are paid at the end of each year. [6]
(e) (i) Analyse the benefits to the business of purchasing the replacement machine. [3]
(ii) Recommend whether or not the managers of Artem Limited should purchase the replacement
machine. Justify your answer. [2]
2016 May 340 Paper 32

2016 May PAPER 32

Section A: Financial Accounting

QUESTION 1
The Seagulls Boating Club is a small not for profit organisation which generates income from members’ subscriptions
and a café.

REQUIRED
(a) State two differences between the financial statements of a not for profit organisation and those of a limited
company. [2]

Additional information
The following information is available for the café for the year ended 31 March 2016.
1 The café takings were $25 750 and $8 850 was paid to suppliers.
2 An assistant received monthly wages of $600. On 31 March 2016, the assistant also received a bonus of 10%
of the annual café takings.
3 The following balances were available:

1 April 2015 31 March 2016

$ $
Café inventory 3 875 3 423
Café trade payables 2 831 2 952

REQUIRED
(b) Prepare the café trading account for the year ended 31 March 2016. [5]

Additional information
The club has 310 members who pay an annual subscription of $80.
The following information was available for members’ subscriptions.

1 April 2015 31 March 2016

Number of members Number of members
Subscriptions in advance 4 3
Subscriptions in arrears 9 12

REQUIRED
(c) Prepare the subscriptions account for the year ended 31 March 2016. [4]

Additional information
The following information is also available for the year ended 31 March 2016.
1 General expenses of $2 500 were incurred which included a paid insurance invoice for the period from 1
March 2016 to 31 May 2016 for $180.

2 Fixtures and fittings were acquired on 1 April 2013 at a cost of $16 000 and are depreciated at 25% using
the reducing balance method.

REQUIRED
(d) Prepare the income and expenditure account for the year ended 31 March 2016. [5]
Additional information
The treasurer currently maintains the records using a manual book-keeping system and is now considering
transferring the records to a computerised accounting system.
2016 May 341 Paper 32

REQUIRED
(e) Recommend to the treasurer whether or not he should introduce a computerised accounting system. Justify
your answer analysing both benefits and limitations to the club. [9]

QUESTION 2
Kempes Limited is a company which manufactures a single product. Finished goods are transferred from the factory
at production cost plus 15%. Unsold goods are stored in the warehouse.

Selected balances extracted from the trial balance for the year ended 30 September 2015 were as follows:

$
Revenue 1 845 000
Purchases of raw materials 794 750
Carriage inwards 4 250
Factory production wages 382 500
Factory supervisory wages 64 000
Administrative wages 115 000
General expenses 78 000
Depreciation:
Factory plant and machinery 55 000
Office fixtures and fittings 37 500

Additional information
1 At 30 September 2015, there were accrued general expenses of $5 000 and prepaid general expenses of $3
000. 65% of the general expenses relate to the factory.
2 Details of inventories were as follows.

1 October 2014 30 September 2015

$ $
Raw materials 110 000 125 000
Work in progress 17 500 14 000
Finished goods at transfer price 19 550 21 505

REQUIRED
(a) Prepare the manufacturing account for the year ended 30 September 2015. [9]
(b) Prepare the income statement for the year ended 30 September 2015. [6]
(c) Explain why a business might create a provision for unrealised profit. [3]
Additional information
The budgeted closing inventory value of finished goods at transfer price at 31 October 2015 was $18 400.
REQUIRED
(d) Analyse the effect on the budgeted profit for the month of October 2015 due to the changes in the provision
for unrealised profit. [2]
Additional information
The price at which the product could be bought from an outside supplier is expected to increase.
It is now proposed to transfer finished goods at production cost plus 20%.
REQUIRED
(e) Advise the directors whether or not the mark-up should be increased. Justify your answer. [5]

QUESTION 3
Anjali and Bailey trade as partners. They share profits and losses in the ratio 3 : 2.
2016 May 342 Paper 32

At 30 April 2016 the statement of financial position of the partnership was as follows:

Assets $
Non-current assets
Premises 115 000
Machinery 40 000
Vehicles 78 000
233 000
Current assets
Inventory 15 000
Trade receivables 4 000
19 000
Total assets 252 000
Capital and liabilities
Capital
Anjali 130 000
Bailey 110 000
240 000
Current liabilities
Trade payables 7 500
Cash and cash equivalents 4 500
12 000
Total capital and liabilities 252 000

The partners agreed to form a limited company, XY Limited, to take over their business.

Additional information

The following information relates to the partnership.

1 Two vehicles were taken over by the partners at the following valuations.
$
Anjali 15 000
Bailey 12 500

2 The remaining assets were transferred to XY Limited at the following agreed values.
$
Premises 170 000
Machinery 30 000
The remaining vehicles 35 000
Inventory 9 000

3 Cash collected from trade receivables was $3 900.

4 Trade payables accepted $7 100 in full settlement of amounts due to them.
5 Costs involved in dissolving the partnership were $3 800.
6 The purchase consideration for the partnership of Anjali and Bailey was $255 000. This was made as
follows:
60 000 7% preference shares of $1 each distributed in profit-sharing ratios.
The balance as ordinary shares of $1 at a premium of $0.25 per share distributed to the partners in
proportion to their capital account balances at 30 April 2016.
7 Anjali and Bailey agreed to pay into the business bank account sufficient money to cover any deficit on their
capital accounts after the shares had been issued.
2016 May 343 Paper 32

REQUIRED
(a) (i) Prepare the realisation account for Anjali and Bailey. [7]
(ii) Prepare the capital accounts of Anjali and Bailey on the realisation of the partnership. [7]
(iii) Calculate the total amount of share premium payable to Anjali and Bailey. [2]
(b) Assess the effect for Anjali and Bailey if the ordinary shares have been distributed in the profit sharing ratio
rather than in proportion to their capital balances. [4]
(c) Explain whether or not Anjali and Bailey made the correct decision to form a limited company. Justify your
answer. [5]

QUESTION 4
The directors of Corim plc are using accounting ratios to analyse the performance of the company.
REQUIRED
(a) Explain two benefits of using accounting ratios. [4]
Additional information
All sales and purchases of Corim plc are on credit.
The following are the income statement and statement of financial position for Corim plc.

Income Statement
For the year ended 31 December 2015
$
Revenue 843 000
Cost of sales (425 800)
Gross profit 417 200
Operating expenses (321 000)
Profit from operations 96 200
Finance costs (66 000)
Profit for the year 30 200

Statement of Financial Position

As at 31 December 2015
Assets $
Non-current assets
Plant and equipment 884 000
Current assets
Inventory 88 800
Trade receivables 132 400
Cash and cash equivalents 14 800
236 000
Total assets 1 120 000
Equity and liabilities
Equity
Ordinary share capital (of $2 each) 400 000
Retained earnings 77 000
Total equity 477 000
Non-current liabilities
12% loan 550 000
Current liabilities
Trade payables 93 000
Total equity and liabilities 1 120 000
2016 May 344 Paper 32

Additional information
1 Inventory at 1 January 2015 was $76 000.
2 The market price of one ordinary share at 31 December 2015 was $2.60.

REQUIRED
(b) Calculate the following ratios for Corim plc:
(i) return on capital employed
(ii) gearing
(iii) income gearing
(iv) working capital cycle (in days)
(v) price earnings.
Calculation should be to two decimal places where appropriate. [14]

Additional information
Takie plc is the major competitor of Corim plc. Takie plc’s capital employed was $1 025 000 at 31 December 2015
including a 8% loan of $100 000.

Some of its comparative ratios are:

Return on capital employed 9.32%
Gearing 9.76%
Income gearing 8.38%

REQUIRED
(c) Compare each company’s gearing and income gearing ratios. [4]
Additional information
Chen has surplus fund and is considering whether or not to invest in the shares of either Takie plc or Corim plc.

REQUIRED
(d) Identify which company Chen should invest in. Justify your answer. [3]
[Total: 25]

Section B: Cost and Management Accounting

QUESTION 5
Explorer Limited produces two products, Y and Z, and has always used absorption costing to allocate overheads to
each product. The directors are now considering adopting activity based costing (ABC).

REQUIRED
(a) Compare how overheads are apportioned using absorption costing and ABC. [4]

Additional information
The budgeted data for the two products for the year ending 31 December 2017 is as follows:
Y Z
Raw materials used (kilo) 2 3
Direct labour hours 0.75 1
Unit selling price $19 $25
Annual production and sale 2 500 4 000

The cost of raw materials is $2.50 per kilo and the labour force are paid $8 per hour.
Annual overheads are as follows:
$
Machine maintenance overheads 8 500
2016 May 345 Paper 32

Purchasing overheads 17 000

Selling and distribution overheads 18 750

REQUIRED
(b) Calculate the cost per unit for each product using absorption costing. [7]

Additional information
Y Z
Number of production runs 20 16
Number of purchase orders 55 65
Number of sales deliveries 85 160

REQUIRED
(c) Calculate the cost per unit for each product using ABC. [7]
(d) (i) Compare the total profit per product using absorption costing and ABC. [4]
(ii) Comment on the results. [1]
(e) Advise the directors whether or not ABC should be adopted. Justify your answer. [2]

QUESTION 6
Khalid owns a business making blankets. He currently uses a standard costing system.

REQUIRED
(a) Explain the term standard costing. [2]

Additional information
 For the year ending 31 August 2015 Khalid budgeted to sell 2 700 blankets at $40 each.
 Each blanket requires 1.5 metres of material at $10 per metre and 30 minutes of labour. All of his workforce
are employed full time and paid $14 per hour.
 For the year ended 31 August 2015 his actual sales were 2 700 blankets. He used 4 320 metres of material
at a cost of $34 560 and 2 025 hours of labour were required at a cost of $24 300.

REQUIRED
(b) Calculate the following variances for the year ended 31 August 2015:
(i) the material price and material usage variances
(ii) the labour rate and labour efficiency variances. [8]
(c) Prepare a statement reconciling the budgeted costs with the actual costs for the year ended 31 August 2015.
[4]
(d) Discuss possible reasons why Khalid’s actual costs are different to the budgeted costs. [6]

Additional information
In an attempt to control costs, Khalid is considering to:
1 Stop the quality assurance checks usually made during the production process.
2 Find a cheaper supplier for materials to make the blankets.
3 Keep the selling price at $40 per blanket.

REQUIRED
(e) Recommend to Khalid which option or options he should choose. Justify your answer. [5]
[Total: 25]
November 2016 346 Paper 31

NOVEMBER 2016 - PAPER 31

QUESTION 1
International Dancing is a dance club charging an annual subscription of $500 per member.
A summary of its subscriptions account for the year ended 31 December 2015 was as follows:

Subscriptions account
2015 $ 2015 $
Jan 1 Balance b/d 2 000 Jan 1 Balance b/d 1 500
Dec 31 Income and expenditure a/c 106 500 Dec 31 Bank 105 500
Balance c/d 2 500 Balance c/d 4 000
111 000 111 000

Additional information
1 The club’s only other receipts came from the sale of music CDs to members. These receipts amounted to
$5 800 for the year.
2 Payments for the year were as follows:
$
Rent 15 000
Staff costs 61 000
Insurance and administration 4 200
Purchase of music CDs for resale 2 600
Purchase of equipment 11 700
Purchase of CDs for club use 4 000
3 The bank balance at 1 January 2015 was $13 500 debit. All receipts and payments are made through the
bank.
4 CDs purchased for club use are not considered to have a useful life of more than 12 months.
5 The club maintains an inventory of CDs for resale. This amounted to $180 at 1 January 2015 and $280 at 31
December 2015.
6 Equipment was valued at $17 200 at 1 January 2015 and $21 300 at the end of the year.
7 At 31 December 2015 prepaid insurance was $300 and accrued administration costs were $50.

REQUIRED
(a) Prepare the club’s income and expenditure account for the year ended 31 December 2015. [9]

Additional information
In 2016 the club is given the opportunity to buy its premises for $142 000. If it is agreed that this purchase should go
ahead, three sources of finance would be used.
1 Half the balance at bank on 31 December 2015 would be used.
2 Life membership of the club would be introduced. The life membership fee would be $5 000 per person
and this would be credited to the income and expenditure account in equal instalments over a 10-year
period. It is expected that 10 existing members of the club would take up life membership, and the funds
raised would be used in the purchase.
3 A 5-year bank loan, at 10% interest per annum, would finance the balance of the purchase price.

REQUIRED
(b) (i) Calculate the bank balance at 31 December 2015. [2]
(ii) Calculate the amount of the loan which would be taken out. [3]
(c) Assess the effect the purchase of the premises would have on annual cash flows in future years. [4]
(d) Recommend to the managing committee of the club whether or not they should proceed with the purchase
of the premises. Justify your answer by discussing both advantages and disadvantages of the purchase. [7]
November 2016 347 Paper 31

QUESTION 2
The directors of Hank Limited provide the following statements of financial position at 31 March:
Assets 2016 2015
$000 $000
Non-current assets (net book value) 259 224
Current assets
Inventories 128 102
Trade receivables 132 118
Cash and cash equivalents – 14
260 234
Total assets 519 458
Equity and Liabilities
Equity
Share capital 210 180
Share premium 15 –
Retained earnings 107 131
332 311
Non-current liabilities
Bank loan (repayable 2020) 42 20
Current liabilities
Trade payables 102 109
Bank overdraft 23 –
Other payables – taxation 20 18
145 127
Total equity and liabilities 519 458
Additional information
The following information relates to the year ended 31 March 2016:
1 The profit from operations was $30 000.
2 During the year non-current assets with a cost of $24 000 and accumulated depreciation of $19 000 were
sold for $8 000.
3 The depreciation charge for the year was $12 000. All non-current assets held at the end of the financial
year are depreciated over 25 years using the straight-line method.
4 Interest paid for the year was $9 000.
5 Dividends paid during the year were $25 000. A dividend of $30 000 had been proposed at the end of the
year.
6 The taxation charge was $20 000.

REQUIRED
(a) Explain the difference between a statement of cash flows and a cash budget. [2]
(b) Prepare a statement of cash flows for Hank Limited for the year ended 31 March 2016 in accordance with
IAS 7. [10]
(c) Explain with reference to the statement of cash flows whether Hank Limited has a strong or a weak cash
position. [4]
(d) Prepare a summarised schedule of non-current assets as it would appear as a note in the published accounts
for the year ended 31 March 2016. [5]
(e) Advise the directors whether or not they should apply the International Accounting Standards when
preparing the published accounts. Justify your answer. [4]

QUESTION 3
Alpha plc and Beta plc both operate in the same industry. Both have the same annual sales revenue. Neither have
any preference shares in issue.
November 2016 348 Paper 31

The following additional information is provided:

Alpha plc Beta plc
Profit for the year $160 000 $100 000
Profit margin ? 10%
Finance charges $16 000 ?
Profit from operations ? ?
Income gearing ? 20%
Number of ordinary shares 400 000 ?
Earnings per share ? $0.20
Price earnings ratio ? 4.2
Market value of one share $1.20 $0.84
Dividend per share $0.07 ?
Dividend yield ? 7.14%
Total dividend paid ? ?
Dividend cover ? ?

REQUIRED
(a) Calculate for Alpha plc:
(i) Profit margin
(ii) Income gearing
(iii) Earnings per share
(iv) Price earnings ratio
(v) Dividend yield
(vi) Total dividend paid
(vii) Dividend cover
Clearly label each answer and show your workings. [14]
(b) Suggest one reason for the difference between the two companies for each of the following:
(i) Profit margin
(ii) Income gearing
(iii) Earnings per share
(iv) Price earnings ratio
(v) Dividend yield
(vi) Market value of one share [6]
Additional information
Amit is considering purchasing shares in either Alpha plc or Beta plc.
REQUIRED
(c) Suggest, with reasons, in which company Amit should invest. [5]

QUESTION 4
Scrumpton plc has been trading successfully for many years. The company required additional finance to renew its
plant.
The following selected balances are available at 1 October 2015:
$
Property, plant and equipment 400 000
Ordinary share capital 1 200 000
Share premium 300 000
Retained earnings 125 000
A draft profit of $167 500 was recorded for the year ended 30 September 2016 before making the following
adjustments:
 November 2016 349 Paper 31

1 Property, plant and equipment with a net book value of $200 000 was sold for $180 000 and replaced by
new items at a cost of $250 000.
Depreciation is charged at 15% using the reducing balance method. A full year’s depreciation is charged in
the year of acquisition and none in the year of disposal.
2 A trade receivable owing $15 000 was declared bankrupt.
3 Distribution costs of $7 500 were still owing at the year-end.
4 The nominal value of the ordinary share capital is $1 each. The final dividend of $0.02 per share for the year
ended 30 September 2015 was paid on shares held at that date.
5 During the year ended 30 September 2016 there was a rights issue of one share for every four held. The
shares were issued at $1.20 each and were fully taken up.
REQUIRED
(a) Explain what is meant by a ‘rights issue’. [3]
(b) Prepare the statement of changes in equity for the year ended 30 September 2016. [10]
(c) State how a proposed dividend would be treated in the financial statements. [2]
Additional information
Before the financial statements for 30 September 2016 were approved, the directors were made aware that another
trade receivable owing $10 000 at 30 September 2016 had been made bankrupt.
REQUIRED
(d) (i) Explain the difference between an adjusting event and a non-adjusting event. [4]
(ii) Explain, with reference to IAS 10, how this event should be dealt with in the financial
statements. [2]
Additional information
An impairment review was carried out and revealed that an item of plant with a carrying value of
$100 000 could be sold for $65 000. Its value in use was $70 000. The directors are uncertain how this should be
treated in the financial statements.
REQUIRED
(e) Calculate the effect on the profit for the year of the impairment review. [4]

QUESTION 5
Billyjo makes a single product. His business operates a standard costing system. All goods produced in the month
are sold and no inventories are held.
REQUIRED
(a) Explain what is meant by ‘standard costing’. [2]
Additional information
1 Budgeted monthly production and sales for April 2016 were 3 500 units.
2 The standard costs per unit were as follows:
Direct material 3 kilos at $1.40 per kilo
Direct labour 0.5 hours at $4.60 per hour
Overheads 1 hour at $2.80 per hour

3 The actual results for April were as follows:

Production and Sales 3 750 units
Materials used 10 950 kilo
Materials cost $15 768
Labour hours 1 930
Labour cost $8 492
REQUIRED
(b) Calculate the following variances:
November 2016 350 Paper 31

(i) Material price variance

(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance [8]

(c) Analyse possible reasons for the variances calculated in (b). [8]

Additional information
The standard selling price per unit is $12. A 2% discount was given to all customers in April.
Actual overhead rate was 10% above standard.
REQUIRED
(d) Calculate the actual profit made by Billyjo for April. [4]
(e) Recommend how Billyjo can improve the performance of his business. [3]

QUESTION 6
Alexander intends to start a new project producing either Product X or Product Y. Each product will require an
additional capital cost of $50 000. Both products are expected to last 4 years.
The following information is available on Product X:
1 Sales volume in year 1 would be 10 000 units with a selling price of $7.
2 The volume would rise by 5% in year 2 and by another 5% in year 3.
3 Popularity is then expected to fall in year 4 and there would be a 20% fall in volume.
4 The selling price would not change.
5 The variable costs will be $3 per unit in year 1, will rise to $4 in year 2 and will then remain unchanged.
6 Annual fixed costs payable will be $11 000 and will remain unchanged.
REQUIRED
(a) Calculate the net cash flows for each year and in total for Product X. [8]

Additional information
Alexander’s cost of capital is 10% and the discount factors are:

Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683
REQUIRED
(b) Calculate the net present value of Product X. [7]
Additional information
Alexander has carried out the same calculations for Product Y. He has calculated the net present value of Product Y
as $30 400.
REQUIRED
(c) Advise Alexander which product he should make based solely on the net present value.
Justify your answer. [2]
(d) State one advantage & one disadvantage of using net present value for investment appraisal. [2]
(e) Explain why Alexander may or may not use the payback method of investment appraisal. [3]
(f) State three non-financial factors Alexander should consider when choosing between Product X and Product
Y. [3]
November 2016 351 Paper 32

NOVEMBER 2016 - PAPER 32

QUESTION 1
Sunshine Social Club runs a gift shop. Goods are sold only to members at a discount. Selected balances relating to
the gift shop at 31 December are as follows:
2015 2014
$ $
Net book value of shop equipment ? 55 000
Shop inventory 18 600 24 000
Shop trade payables 64 300 54 500
Insurance prepaid 1 660 1 400
Shopkeeper wages prepaid 3 200 –
Accrued expenses – water and electricity 2 000 2 700
– shopkeeper wages – 3 450
Summarised receipts and payments account of the club for the year ended 31 December 2015 is as follows:
$ $
Balance b/d 124 000Shop suppliers 74 500
Annual subscriptions 345 000Purchases of shop equipment 4 000
Life membership subscriptions 60 000Shopkeeper wages 30 400
Annual ball tickets 68 000Insurance 9 460
Shop takings 124 200Water and electricity 14 800
Club administration 361 400
Hire of ballroom & band for annual ball 48 000
Food for annual ball 36 000
_______ Balance c/d 142 640
721 200 721 200
Additional information
1 Expenses are allocated to the shop as follows:
Water and electricity 40%
Insurance 25%
2 Shop equipment is depreciated at 20% per annum using the reducing balance method. Equipment is
depreciated in the year of purchase but not in the year of sale.

REQUIRED
(a) State three differences between a donation and a member subscription received by a not-for-profit
organisation. [3]
(b) Prepare the club’s shop trading account for the year ended 31 December 2015. [15]

Additional information
After reviewing the trading account of the gift shop, the chairman is not satisfied with the performance.
REQUIRED
(c) Discuss two ways to improve the performance of the gift shop. [4]
Additional information
The chairman of the club undertook to cover 50% of the deficit arising from the 2015 annual ball.
The demand for payment was issued to the chairman on 31 December 2015.
REQUIRED
(d) Calculate the amount the chairman had to contribute to the club to cover the deficit. [3]
November 2016 352 Paper 32

QUESTION 2
Alpha Limited is a manufacturing business making a single product. Each year it produces and sells 1 000 units and
the only inventory it keeps is that of raw materials.
It provides the following information for the year ended 30 April 2016:
$
Revenue 95 000
Inventory of raw materials at 1 May 2015 1 000
Inventory of raw materials at 30 April 2016 3 100
Purchases of raw materials 12 200
Carriage inwards 1 100
Factory workers’ wages 17 500
Factory supervisor’s salary 8 200
Office salaries 8 500
Rent 8 000
Factory overheads 9 700
General office expenses 10 000
Additional information
1 Rent is allocated 75% to the factory and 25% to the offices.
2 Production is transferred to finished goods at cost plus 25%.
REQUIRED
(a) Prepare, for the year ended 30 April 2016,
(i) the manufacturing account [8]
(ii) the income statement. [7]
Additional information
Management has discovered that general office expenses are 50% fixed and 50% variable with the level of sales.
At the start of May 2016 management expected that in the next year the business would only be able to sell 900
units. There are no expected changes to the selling price or costs per unit.
There were two options.
Option 1
To continue to produce 1000 units and have an inventory of finished goods at the next year end.
Option 2
To reduce production to 900 units and continue to have no inventory of finished goods.
REQUIRED
(b) Calculate the expected annual profit if option 1 is implemented. Start your calculation with your profit from
(a) and adjust as appropriate. [5]
Additional information
The annual profit expected from option 2 was known to be $15 100.
REQUIRED
(c) Advise the management which of the two options it should implement. Justify your answer. [5]

QUESTION 3
Husna had been a sole trader for many years and has decided to retire. Her statement of financial position at 30
June 2016 was as follows:
Statement of Financial Position at 30 June 2016
Assets $
Non-current assets
Premises 120 000
Equipment 14 600
134 600
November 2016 353 Paper 32

Current assets $
Inventory 29 500
Trade receivables 17 200
Cash & Cash equivalents 46 700
Total assets 181 300
Capital and liabilities
Opening capital 162 100
Profit for the year 41 600
203 700
Drawings 36 000
Closing capital 167 700
Current liabilities
Bank 2 000
Trade payables 11 600
13 600
Total capital and liabilities 181 300
On 30 June 2016 Husna sold her business to FLF Limited.
The statement of financial position of FLF Limited at 30 June 2016 before the sale was as follows:

Statement of Financial Position at 30 June 2016

Assets $
Non-current assets
Premises 815 100
Equipment 190 900
Vehicles 81 500
1 087 500
Current assets
Inventory 103 600
Trade and other receivables 99 400
Cash and cash equivalents 7 100
210 100
Total assets 1 297 600
Equity and liabilities $
Equity
800 000 ordinary shares of $1 each 800 000
Retained earnings 322 500
General reserve 80 000
Total equity 1 202 500
Current liabilities
Trade and other payables 95 100
Total equity and liabilities 1 297 600

For the sale of the business, Husna’s premises were revalued at $280 000 and trade receivables balances of $1 200
were written off.
FLF Limited took over all the assets and liabilities of Husna’s business except the bank account.
The total purchase consideration was $440 000. This was made up as follows:

Cash $70 000

8% debentures (2025) $120 000
$1 ordinary shares issued at a premium 100 000 shares
At the same time as the business purchase, the directors of FLF Limited decided to have their own premises revalued.
The premises were revalued at $1 000 000.
November 2016 354 Paper 32

REQUIRED
(a) Prepare the statement of financial position of FLF Limited on 1 July 2016 immediately after the purchase of
Husna’s business. [16]

Additional information
FLF Limited’s dividend yield is 3%. A bank deposit account pays interest of 4%.
Husna’s young nephew is disappointed with his aunt’s decision to sell the business. He says that if she wanted to
retire she could have appointed him to manage the business at an annual salary of $20 000.
REQUIRED
(b) Assess whether Husna made the right decision in selling the business. Support your answer with
calculations. [9]

QUESTION 4
The turnover of Soames Limited has been increasing and the directors have been advised that they must now
produce audited accounts. They are therefore required to appoint an auditor to provide the company with an audit
report.
REQUIRED
(a) List five duties which the auditor would carry out during an audit. [5]

Additional information
The first audit report was qualified. Included in current assets was inventory valued at cost of $1 million. This had
become damaged and now could only be sold for $750 000 after repairs costing $200 000.

REQUIRED
(b) Explain what is meant by a qualified audit report. [2]
(c) Explain, with reference to the relevant International Accounting Standard, the necessary adjustment that
must be made to the financial statements. [8]
(d) Analyse the importance to the shareholders of Soames Limited of the auditors providing a true and fair view
of the company’s accounts. [6]
Additional information
The audit report was signed by Aamir, the brother of the finance director of Soames Limited. Aamir was an
unqualified auditor.
(e) Evaluate the validity of this audit report. [4]

QUESTION 5
“The idea behind this method of costing is that it is the cause of a cost which is important and not whether it is fixed
or variable.”
REQUIRED
(a) Identify the costing method described in the quotation. [1]
Additional information
Haruka Limited produces a single product.
The factory is operational 5 days a week for 50 weeks a year. It produces one batch of 200 units each day.
Overheads amount to $79 000 a year.
REQUIRED
(b) Calculate the overhead cost per unit to two decimal places. [2]
Additional information
These overheads comprised:
$
Machine set-up costs 2 000
November 2016 355 Paper 32

Production quality inspections 5 000

Production stoppage costs 4 000
Machine maintenance 8 000
Machine running costs 60 000
The machines were set up at the start of each working day.
There was a quality inspection every week.
The machines were maintained each day.
Production was stopped on average once every 4 weeks for unexpected maintenance.
Samir, the finance director, asks Sara, the factory accountant, to analyse the overhead cost per unit across each of
the five overheads incurred.
REQUIRED
(c) Prepare an analysis showing how the total overhead cost per unit (from part b) is split between each of the
individual overheads. [12]
Additional information
Sara has complained to Samir that producing this analysis is not worthwhile.
REQUIRED
(d) Advise Samir whether or not he should continue to ask for this analysis in the future years. Justify your
answer by considering the benefits and drawbacks of this costing method. [10]

QUESTION 6
The directors of Slanting Stores Limited have prepared a cash budget.
REQUIRED
(a) (i) State one difference between a cash budget and a statement of cash flows. [1]
(ii) State two benefits of preparing a cash budget. [2]

Additional information
Slanting Stores Limited makes all its sales on credit. Half of all credit customers pay in the month of sale, receiving a
cash discount for early payment. The remainder pay in the following month. Purchases for resale are paid for in the
month after purchase.
The cash budget for the three months ending 31 March 2017 is as follows:
Cash budget for the three months ending 31 March 2017
January February March
$ $ $
Opening balance 17 800 17 300 (1 600)
Receipts – month of sale 28 500 26 125 30 875
Receipts – month following sale 40 000 30 000 27 500
Payments to suppliers (44 000) (33 000) (35 750)
Wages (10 000) (10 125) (8 575)
Other expenses (15 000) (14 800) (12 200)
Dividend paid – (8 000) –
Purchase of non-current asset – (9 100) –
Closing balance 17 300 (1 600) 250
REQUIRED
(b) Calculate
(i) the value of sales for each of the three months January to March 2017, [3]
(ii) the value of cash discount for each of the three months January to March 2017, [3]
(iii) the rate of cash discount given. [1]

(c) Prepare the trade receivables budget for each of the three months January to March 2017. Trade
receivables at 1 January 2017 are expected to be $40 000. [8]
November 2016 356 Paper 32

Additional information
The directors wish to eliminate the expected deficit in cash at the end of February. They are considering paying $15
000 in January for an advertising campaign which is expected to increase sales from February onwards.

REQUIRED
(d) Calculate the required increase in February’s sales, after the advertising campaign, needed to avoid the
negative cash balance. [5]
(e) Suggest two possible actions the directors could take, other than the advertising campaign, to improve the
cash flow. [2]
November 2016 357 Paper 33

NOVEMBER 2016 - PAPER 33

QUESTION 1
M Limited manufactures a single product. The following balances have been extracted from the ledgers for the year
ended 31 December 2015:
Debit Credit
$ $
Inventories at cost at 1 January 2015
Raw materials 10 400
Work-in-progress 12 600
Finished goods at transfer price 14 904
Purchases of raw materials 146 200
Carriage inwards 3 160
Carriage outwards 2 790
Direct wages 249 400
Indirect wages 54 650
Rent 49 000
Heat, light and power 28 600
General expenses 12 600
Office salaries 24 780
Revenue 742 490
Provision for unrealised profit at 1 January 2015 2 484
Plant and machinery at cost 200 000
Office equipment at cost 15 000
Motor vehicles used by salesmen 25 000
Provision for depreciation:$2 484
plant and machinery 60 000
office equipment 4 600
motor vehicles 5 740
Additional information
1 Inventories at 31 December 2015
$
Raw materials at cost 11 750
Work-in-progress at cost 14 670
Finished goods at transfer price 15 750

2 Expenses are to be apportioned to the production department as follows:

4
Rent /5
4
Heat, light and power /5
3
General expenses /4
3 Rent has been prepaid by $4 000 at 31 December 2015.
4 Heat, light and power is in arrears by $3 500 at 31 December 2015.
5 Completed goods are transferred at a mark-up on factory cost of 20%.
6 Depreciation is to be provided as follows:
Plant and machinery 10% per annum on cost
Motor vehicles 25% per annum on cost
Office equipment 15% on the net book value
REQUIRED
(a) Prepare the manufacturing account for the year ended 31 December 2015. [9]
November 2016 358 Paper 33

(b) Prepare the income statement for the year ended 31 December 2015. [10]
(c) Explain what is meant by the term transfer price. [2]
Additional information
10 000 units of the product were manufactured in the year, which is the maximum that can be produced. A supplier
has offered to supply the product to M Limited for $60 per unit in the future.
REQUIRED
(d) Advise the directors of M Limited whether or not they should accept this offer. Justify your answer on
financial grounds. [4]

QUESTION 2
AB Cricket Club is a not-for-profit organisation.
REQUIRED
(a) State two reasons why the members of a not profit organisation do not receive a dividend. [2]
Additional information
The treasurer of AB Cricket Club provided the following financial information:
1 At 1 September 2015 the assets and liabilities were:
$
Equipment at net book value 7 800
Subscriptions in advance 490
Subscriptions in arrears 270
Life membership fund 1 500
Trade payables for refreshments 265
Inventory of refreshments 420
Accumulated fund 7 825
2 The receipts and payments account for the year ended 31 August 2016 was as follows:
Receipts and payments account
$ $
Bank balance b/d 1 590 Groundsman’s wages 7 500
Subscriptions 11 200 Repairs to clubhouse 700
Sale of equipment 4 000 Purchase of equipment 2 500
Match ticket sales 6 400 Cost of refreshments 1 700
Refreshments 2 500 Awards to players 1 450
Life membership 800 Administration expenses 760
Donation 3 500 Bank balance c/d 11 880
_____ Savings account c/d 3 500
29 990 29 990
3 At 31 August 2016, the balances were:
$
Subscriptions in advance 295
Subscriptions in arrears 165
Trade payables for refreshments 315
Inventory of refreshments 390
4 The donation of $3 500 is to be used for the purchase of a new clubhouse. It had been invested in a new
savings account and is to be capitalised.
5 The club depreciates its equipment at 10% on the net book value. A full year’s depreciation is charged in
the year of purchase. No depreciation is charged in the year of sale.
6 Equipment sold had a net book value of $3 640.
7 The life membership fund is transferred to the income and expenditure account over 10 years in equal
instalments.
8 For the year ended 31 August 2016 the club made a profit of $720 on the sale of refreshments.
November 2016 359 Paper 33

REQUIRED
(b) Prepare the income and expenditure account for the year ended 31 August 2016. [11]
(c) Prepare the statement of financial position at 31 August 2016. [8]
(d) Explain why the club transfers life membership fund to the income and expenditure accounts over 10 years.
[4]

QUESTION 3
XY Limited has been trading for many years.
Before the end of year audit, the chairman made the following statement:
‘I am pleased to report that the profit for the year ended 31 March 2016 has increased from $86 000 to $174 000.
These results have been achieved through careful cost control and concentrating on those areas which offer the
greatest return.’

However during the end of year audit the auditors discovered the following:
1 Equipment with a net book value of $180 000 had become obsolete during the year but had not been
written off. The directors believed that the buildings have increased in value by $200 000, which cancelled
out any loss on the obsolete equipment. So no adjustment had been made.
2 The method of inventory valuation had been changed at the end of the year from AVCO to FIFO. The AVCO
valuation had been $142 000 whereas the FIFO valuation was $184 000.
3 At 31 March 2016 the trade receivables amounted to $675 000. During the year a debt for $81000 had been
written off. However, a cheque for 75% of this amount had been discovered during the audit. The cheque
had not been recorded in the books of account but is expected to clear the bank.
REQUIRED
(a) Explain the term stewardship. [2]
(b) Explain the purpose of an end of year audit. [2]
(c) State whether the published audit report will be qualified or not. [1]
(d) (i) Describe the correct accounting treatment of points 1, 2 and 3 with reference to the relevant
accounting standards. [9]
(ii) Analyse the effects of any correction on the profit for the year ended 31 March 2016. [6]
(e) Assess the implications of a qualified audit report. [5]
QUESTION 4
Hamid and Patel trade regularly with each other. Patel is based in India and Hamid is based in Scotland.
On 15 November 2014 Hamid sent 100 cases of goods to Patel costing $12 000. The commission on sales was agreed
at 5% of the gross sales.
On the same day Hamid paid delivery charges of $610 and insurance of $110.
Hamid’s financial year ended on 31 March 2015.
At that date Patel provided the following information:
1 70% of the goods had been sold for $10 600.
2 $7 475 had been sent to Hamid.
3 There was an irrecoverable debt of $120.
4 Storage charges of $350 and selling expenses of $245 had been paid by Patel.
Patel paid the balance due on 31 March 2015.
Hamid incurred bank charges of $12 for processing this payment.
REQUIRED
(a) Prepare in the books of Hamid the following accounts at 31 March 2015:
(i) the goods sent on consignment account [1]
(ii) the consignment to Patel account [11]
(iii) Patel account [7]
(b) Analyse the effect on profit of the irrecoverable debt incurred during the year. [2]

Additional information
Hamid and Patel are now considering forming a partnership rather than continuing to trade on a consignment basis.
November 2016 360 Paper 33

REQUIRED
(c) Advise whether or not Hamid and Patel should enter into a partnership with each other. Justify your answer.
[4]

QUESTION 5
N Limited is planning a new project, which has an initial cost of $225 000. If the project runs for four years the
marginal revenues and costs will be as follows:

Year Revenues Costs

$ $
1 100 000 31 000
2 110 000 40 000
3 125 000 59 000
4 90 000 48 000

The directors have two options.

Option 1 To stop the project at the end of year 2 when the scrap value of the project’s assets will amount
to $175 000.
Option 2 To continue with the project until the end of year 4 when the scrap value of the assets will be
$75 000.
The company’s cost of capital is 10%. Discount factors for this cost of capital are as follows:

Year Discount factor

1 0.909
2 0.826
3 0.751
4 0.683

REQUIRED
(a) Calculate the net present value (NPV) of each option. [10]
(b) Advise the directors which option they should choose. Justify your answer. [2]
Additional information
Before the directors make a decision, the finance director wishes to have further data on the project.
REQUIRED
(c) Calculate, to two decimal places, the sensitivity of the option selected in your answer to (b) to changes in
the initial cost of the project. [3]
(d) Calculate, to two decimal places, the accounting rate of return (ARR) of the option selected in your answer
to (b). (Add scrap value to cost when calculating average investment.) [6]
(e) Explain to the directors which is the more valid method of investment appraisal. Give reasons. [4]

QUESTION 6
Sunil is preparing the annual budgets for his manufacturing business.
REQUIRED
(a) Explain what is meant by a master budget. [2]

Additional information
The finished goods inventory held at 1 January 2017 is expected to be 200 units. This is expected to increase by 20
units each month until 31 March 2017.
Unit sales from December 2016 to April 2017 are expected to be:
November 2016 361 Paper 33

December January February March April

350 370 410 380 430
REQUIRED
(b) Prepare a production budget for each of the four months from January to April 2017. [4]

Additional information
1 Goods will be sold on credit with a selling price of $30 per unit. One third is expected to be received in the
month of sale with the balance being received in the following month.
2 Other income will arise from the interest received on an investment of $50 000 at 4% per annum. Interest
will be received quarterly starting 1 January 2017.
3 Unit product costs are expected to be as follows:
$
Direct materials 7
Direct labour 5
Overheads 6
18
4 Direct materials will be purchased to meet the current month’s production. Half the amount due will be
paid by cash in the month of production and the balance will be paid in the following month. The number
of units produced in December 2016 is expected to be 340.
5 Direct labour will be paid in the month that the cost is incurred.
6 Four-fifths of the overheads will be paid in the month in which they are incurred with the balance being
paid in the following month.
7 Some new equipment is expected to be acquired on 1 January 2017 at a cost of $12 000. A 50% deposit will
be paid on delivery, with the remainder being paid on 1 April 2017. This equipment will be depreciated at
10% using the straight-line method.
8 The bank account balance at 1 January 2017 is expected to be overdrawn by $10 450.

REQUIRED
(c) Prepare a cash budget for each of the three months from January to March 2017. [10]
(d) Analyse the options available to Sunil to avoid using a bank overdraft. [6]
(e) Advise Sunil whether or not he should apply for a loan rather than maintain an overdraft. Justify your
answer. [3]
2017 May 362 Paper 31 & Paper 33

MAY 2017 - PAPER 31 & 33

QUESTION 1
The following balances were extracted from the books of XY plc on 31 January 2017.
$
Land and buildings - at cost 700 000
Equipment - at cost 320 000
Motor vehicles - at cost 230 000
Accumulated depreciation
Land and buildings 100 000
Equipment 186 000
Motor vehicles 96 000
Ordinary shares of $5 each 500 000
Share premium 120 000
Retained earnings at 1 February 2016 125 000
Inventory at 1 February 2016 37 100
Trade receivables 102 000
8% Loan 150 000
Provision for doubtful debts 2 100
Revenue 985 000
Purchases 428 000
Administrative expenses 346 000
Distribution costs 144 000
Interim dividend paid 20 000
Additional information
1 Inventories at 31 January 2017 included 100 units of damaged items. These items, with a unit cost of $80,
were all sold on 2 February 2017 for $65 each.
At 31 January 2017 all other inventories were valued at cost, $36 000, and had a net realisable value of $85
400.
2 The administrative expenses include an amount of $30 000 for a machine purchased on 1 February 2016.
The machine has a useful life of three years and will then be scrapped with nil proceeds. Any costs related
to the machine should be charged to the cost of sales.
3 The figure for land and buildings (at cost) includes land which had cost $300 000.
4 During the year, XY plc purchased a motor vehicle which cost $60 000. This was settled by a payment of $40
000 from the bank and the part exchange of an old vehicle. This old vehicle had originally cost $75 000 and
had been depreciated by $27 000. Only the bank payment had been recorded in the books of account.
5 Depreciation is to be charged on the following basis:
Land not depreciated
Buildings straight-line method over 25 years, charged to cost of sales
Equipment straight-line method over 5 years, charged to administrative expenses
Motor vehicles reducing balance method at 20% per annum, charged to distribution costs
The company policy is to charge a full year’s depreciation in the year of purchase and none in the year of
sale.
6 Trade receivables included an irrecoverable debt of $8 800. A provision for doubtful debts of 4% is to be
maintained. These items need to be included in administrative expenses.
7 The loan was obtained on 1 September 2016.

REQUIRED
(a) State two objectives of financial statements of a limited company. [2]
(b) Prepare the income statement for the year ended 31 January 2017. [15]
2017 May 363 Paper 31 & Paper 33

Additional information
In October 2016 XY plc made a bonus issue of 1 ordinary share for every 10 ordinary shares held. No entry had
been made in the books of account.
REQUIRED
(c) Prepare the statement of changes in equity for the year ended 31 January 2017. (A total column is not
required.) [4]

Additional information
The directors are considering making a further issue of bonus shares rather than paying a cash dividend.

REQUIRED
(d) Advise the directors which course of action they should take. Justify your answer. [4]
[Total: 25]

QUESTION 2
The directors of G Limited prepared the following draft statement of financial position at 31 December 2016:
G Limited
Statement of Financial Position at 31 December 2016
$
Non-current assets 642 000
Current assets
Inventory 78 000
Trade receivables 189 000
Other receivables 3 000
Cash and cash equivalents 54 000
324 000
Total assets 966 000
Equity and liabilities
Equity
Ordinary shares of $1 each 550 000
Retained earnings 235 000
785 000
Current liabilities
Trade payables 171 000
Other payables 10 000
181 000
Total equity and liabilities 966 000
The auditor brings the following items to the attention of the directors:
1 G Limited entered into an 18-month rental agreement for a warehouse on 1 May 2016. The following
payments totalling $220 000 were made and charged as an expense in the draft income statement:
$20 000 rental deposit which is refundable at the end of the lease period; and $200 000 total rent covering
the period from 1 May 2016 to 28 February 2017.
2 After an inspection of G Limited’s office premises by the local authority in December 2016, it was found
that the fire exits did not meet the safety specifications. A penalty of $27 000 is probable and G Limited will
incur a cost of $47 000 to rebuild the fire exits. No accounting entries had been made for this.
3 A customer who owed $12 000 at 31 December 2016 was declared bankrupt on 12 January 2017. It is
probable that only 20% of the debt is recoverable. No accounting entries had been made for this.
REQUIRED
(a) Prepare the revised statement of financial position at 31 December 2016. [10]
(b) Explain how each of items 1 and 2 should be treated in the financial statements. [5]
(c) Explain the role of an external auditor. [4]
2017 May 364 Paper 31 & Paper 33

(d) Explain why the audit report of a limited company is addressed to the company’s shareholders and not its
directors. [2]

Additional information
G Limited adopted the Weighted Average Cost (AVCO) method to ascertain the value of inventories in 2016. The
purchase price has been increasing over recent years. The directors are now considering changing to First in, First
out (FIFO) method to value inventory in 2017.
REQUIRED
(e) Advise the directors whether or not the method of valuing inventory should be changed.
Justify your answer. [4]
[Total: 25]
QUESTION 3
Greaves and Hurst participated in a joint venture sharing profits and losses in the ratio 2 : 1.
Greaves provided goods valued at $15 000 and incurred costs of $900.
Hurst provided goods valued at $10 000 and incurred costs of $800.
Greaves sold all of the goods for $35 000.
It was agreed that a commission of 10% of the sales value would be paid to the person making the sale.
The joint venture was then dissolved.
REQUIRED
(a) Explain two benefits to Greaves and Hurst of forming a joint venture. [4]
(b) Calculate the share of profit made by Greaves and Hurst from the joint venture. [6]
Additional information
A separate set of books of account are maintained to record the transactions of the joint venture.
Greaves and Hurst kept their own transactions with the joint venture in their own books.
REQUIRED
(c) Prepare the following ledger accounts:
(i) Greaves account with the joint venture
(ii) Hurst account with the joint venture [9]
Additional information
Following the closure of the joint venture, Greaves and Hurst have received more orders and are considering forming
a partnership.

REQUIRED
(d) Advise Greaves and Hurst whether or not they should form a partnership. Justify your answer by discussing
advantages and disadvantages of forming the partnership. [6]
[Total: 25]

QUESTION 4
James has recently retired and received some cash which he wishes to invest in a company.
There are two options. He could invest in either LM plc or AB plc.
The summarised information for the two companies extracted from their financial statements at 31 March 2017 is
as follows:
LM plc AB plc
$ $
Ordinary share capital 300 000 500 000
4% non-redeemable preference shares of $1 each 100 000 150 000
Retained earnings 1 April 2016 50 000 125 000
10% debentures (2025) 150 000 50 000
Profit for the year 125 000 175 000
The nominal value of the ordinary shares of LM plc is $0.50 and of AB plc $1.
2017 May 365 Paper 31 & Paper 33

The market price of the ordinary shares at 31 March 2016 of both companies was $2.
At 31 March 2017, this had fallen by 10% for LM plc but increased by 10% for AB plc.
Both companies paid a dividend per share of $0.10 for the year ended 31 March 2017.
REQUIRED
(a) Calculate the following ratios for both companies. Give your answers to two decimal places.
(i) Earnings per share
(ii) Price earnings
(iii) Dividend yield
(iv) Dividend cover [4]
(b) Evaluate the performance of each company using each of the ratios calculated in part (a). [8]
Additional information
The industry average gearing ratio is 25%.
REQUIRED
(c) (i) Explain what you understand by gearing. [2]
(ii) Calculate the gearing ratio for both companies to two decimal places. [2]
(iii) Analyse the gearing ratios of LM plc and AB plc. [5]
(d) Advise James which company he should invest in. Give reasons for your answer. [4]
[Total: 25]

QUESTION 5
EF plc manufactures a single product. No inventories of materials or finished goods are maintained.
The following budgeted information is available for March:
Production and sales 1 000 units
Unit revenue and costs
Selling price $150
Direct material 4 kilos at $6 per kilo
Direct labour 6 hours at $10 per hour
Variable overhead $2 per direct labour hour
Fixed overhead $14 per unit
In March the company actually made and sold 800 units.
REQUIRED
(a) State two reasons why a business prepares a flexed budget. [2]
(b) Prepare a statement to show the budgeted profit for the month of March. [6]
Additional information
The actual cost of direct labour in March was $50 176. Staff had been paid at the rate of $9.80 per hour.
REQUIRED
(c) Calculate the following variances for March:
(i) direct labour rate [2]
(ii) direct labour efficiency [2]
(iii) total direct labour [1]
Additional information
In April the staff continued to be paid at $9.80 per hour. The variances for April were calculated as follows:
direct labour rate $1 620 favourable
direct labour efficiency $18 000 adverse
REQUIRED
(d) Calculate
(i) the number of hours actually worked in April [2]
(ii) the number of units actually made and sold in April. [5]
2017 May 366 Paper 31 & Paper 33

(e) Suggest two possible reasons why the efficiency variance was adverse in April. [2]

Additional information
The management of the company is evaluating a plan to retrain the existing workers to improve their efficiency.

REQUIRED
(f) Discuss the disadvantages to EF plc if they proceed with this plan. [3]
[Total: 25]

QUESTION 6
Ahmed manufactures two products. He has recently started using Activity Based Costing (ABC) for allocating the
overhead costs to these products. The budgeted data for one month is available as follows:
Product X Product Y
Demand (units) 10 000 14 000
Number of orders 20 60
Number of production runs 12 36
Product X Product Y
Per unit Per unit
Direct labour hours 0.75 1.5
Machine hours 2.5 0.5
Direct costs ($) 100 50

Total factory overhead costs $

Machine maintenance costs 264 000
Ordering costs 54 000
Production run costs 24 000
342 000
REQUIRED
(a) Calculate the full cost per unit for Product X and Product Y using ABC. [10]
Additional information
Ahmed previously used direct labour hours as a basis to charge overheads to each product.
REQUIRED
(b) Calculate the overhead charged to each product using the direct labour hour rate. [3]
(c) Explain the effect that changing the method has had on the overhead cost of each product. [4]
Additional information
A customer requires 50 units of Product X and has offered to pay Ahmed a total of $8 450 for them. Ahmed uses
40% mark-up on all his products.
REQUIRED
(d) Recommend whether or not Ahmed should accept the offer. Justify your decision sing appropriate
calculations and considering both financial and non-financial factors. [6]
(e) State two reasons why a business may use ABC for allocating overhead costs. [2]
May 2017 367 Paper 32

MAY 2017 - PAPER 32

QUESTION 1
Richard Ang is a sole proprietor manufacturing one type of sofa bed. The following balances are extracted from his
books of account at 31 July 2016.

$
Revenue 986 000
Purchases of direct materials 207 600
Carriage inwards 6 800
Carriage outwards 17 500
Returns inwards 12 000
Factory wages
Direct 168 000
Indirect 51 400
Overheads
Factory 155 000
Office 194 000

Additional information
1 Richard maintains a provision for unrealised profit account. Completed products are transferred from the
factory at a mark-up of 20%.
2 Inventories at 31 July 2015 were:

$
Raw materials 14 800
Work in progress 23 500
Finished goods (at cost) 32 000
3 Inventories at 31 July 2016 were:
$
Raw materials 16 400
Work in progress 20 200
Finished goods (at transfer price) 54 000
4 Unpaid direct wages at 31 July 2016 amounted to $3 500.
5 Rent had been allocated to factory overheads and office overheads at $24 000 and $16 000 respectively.
The allocation should have been in the ratio of 3 : 1 respectively.
REQUIRED
(a) Prepare the manufacturing account for the year ended 31 July 2016. [7]
(b) Prepare an income statement for the year ended 31 July 2016. [7]

Additional information
Richard Ang thought of taking some of the finished goods inventory at 31 July 2016 to help his sister set up a furniture
business on the same day.
REQUIRED
(c) Prepare an extract from the statement of financial position of Richard Ang’s business at 31 July 2016 to
show how inventories are recorded. [3]
(d) Explain why it is important for Richard to create a provision for unrealised profit. [4]
(e) State two advantages and two disadvantages to Richard Ang of helping his sister set up her
business. [4]
May 2017 368 Paper 32

QUESTION 2
The summarised statement of financial position of M plc at 31 December 2016 was as follows:

$000
Non-current assets 4 220
Net current assets 2 080
6 300
Share capital and reserves
Ordinary shares of $5 each 5 000
Share premium 500
Retained earnings 800
6 300

Retained earnings for the year ended 31 December 2016 were $160 000, after the payment of dividends which
represented 60% of the profit for the year.
The market price of one ordinary share was $6.40 on 31 December 2016.

REQUIRED
(a) Calculate to two decimal places the following ratios at 31 December 2016:
(i) Return on capital employed
(ii) Earnings per share
(iii) Price earnings ratio
(iv) Dividend cover
(v) Dividend yield [8]

Additional information
It is estimated that the profit for the year ending 31 December 2017 will be same as 2016. The capital employed will
also remain unchanged.
On 1 January 2017, M plc has the opportunity to invest $1 200 000 in a project which will bring an additional annual
profit of $185 000. The directors are considering an issue of ordinary shares at a premium of 20% to finance this
project. The rate of dividend paid is expected to remain at 60% of the profit for the year.

REQUIRED
(b) Prepare a statement to show the forecast share capital and reserves at 31 December 2017. [6]
(c) Calculate to two decimal places the following expected ratios for the year ending 31 December 2017:
(i) Return on capital employed
(ii) Earnings per share [6]
(d) Advise the directors whether or not M plc should invest in the project. Justify your answer. [5]

QUESTION 3
Lushan and Samson are the directors of Z Limited which was newly formed on 1 January 2016. They understand that
they are legally obliged to prepare financial statements in accordance with International Accounting Standards.

REQUIRED
(a) State four reasons why the business should comply with International Accounting Standards when financial
statements are being prepared. [4]
(b) Explain what is meant by stewardship with regard to the role of the directors. [2]

Additional information
The directors prepared the following draft statement of financial position at 31 December 2016:
Z Limited
Statement of financial position at 31 December 2016
May 2017 369 Paper 32

Non-current assets $
Property, plant and equipment 478 000
Current assets
Inventories 124 000
Trade receivables 217 000
Cash and cash equivalents 132 000
473 000
Total assets 951 000
Equity and liabilities
Equity
Ordinary shares of $1 each 500 000
Retained earnings 210 000
Total equity 710 000
Current liabilities
Trade payables 188 000
Taxation 53 000
241 000
Total equity and liabilities 951 000
Julia is the auditor of Z Limited. During the course of conducting her audit she was provided with the following
information.
1 On 31 December 2016, Z Limited had been sued for an amount of $29 000. Legal advice indicated that Z
Limited had a 90% chance of losing the case.
2 Included in the trade receivables was a debt of $30 000 owed by P Limited which was in financial difficulty.
The directors of Z Limited had accepted office equipment from P Limited on 31 December 2016 to settle
70% of P Limited’s debt. They were of the opinion that the recovery of the remaining debt was highly
improbable.
3 A piece of machinery had been purchased on 1 January 2016 for $50 000. The machinery had been
depreciated at an annual rate of 20% by using the straight-line method. At 31 December 2016, it had an
estimated fair value of $32 500 and the estimated value in use was $19 500.
REQUIRED
(c) Prepare a revised draft statement of financial position at 31 December 2016 after considering the
information provided to Julia. [8]
(d) Explain the adjustments you have made to the statement of financial position in (c). [6]
Additional information
Jack, Julia's brother, is the sole trader of a small business. He has asked his sister if his accounts should be audited.
REQUIRED
(e) Discuss the advantages and disadvantages to Jack of having his accounts audited. [5]

QUESTION 4
Alex and Brown were in partnership sharing profits and losses in the ratio of 3 : 2 respectively.
They provided the following information at 31 October 2016:
$ $ $
Land and buildings 320 000
Plant and machinery 135 000
Motor vehicles 110 000
Inventory 38 000
Trade receivables 54 000
Cash and cash equivalents 19 000
Trade payables (39 000)
637 000
May 2017 370 Paper 32

Alex Brown
Capital accounts 300 000 200 000 500 000
Current accounts
Balance at 1 November 2015 72 000 57 000
Partners’ salaries 30 000 45 000
Interest on capital 15 000 10 000
Share of residual profit 36 000 24 000
Drawings (77 000) (75 000)
Balance at 31 October 2016 76 000 61 000 137 000
637 000

C Limited purchased this partnership business on 1 November 2016. They took over all the assets and liabilities with
the exception of:
Cash and cash equivalents
One motor vehicle which was taken over by Alex at an agreed value of $28 000.
The remaining assets taken over by C Limited had the following values:

$
Land and buildings 450 000
Plant and machinery 120 000
Motor vehicles 60 000
Inventory 49 000
Trade receivables 52 000
The purchase consideration was five times the partnership profit for the year ended 31 October 2016.
This purchase consideration was settled by C Limited as follows:
1 $127 500 cash was paid into the partnership bank account.
2 Alex and Brown were issued an amount of 8% debentures. Both will continue to receive the same amount
of interest as they had received from the interest on capital.
3 The balance of the purchase consideration was settled by an issue of $1 ordinary shares at a price of $1.80
each. The shares were distributed between the partners in their profit and loss sharing ratios.

REQUIRED
(a) State what is meant by ‘goodwill’. [1]
(b) Calculate the value of goodwill paid for by C Limited. [4]
(c) Calculate the total profit on realisation due to the partners. [4]
(d) Prepare the partners’ capital accounts to close their business. [11]

Additional information
The capital employed of C Limited at 31 October 2016 before purchasing the partnership business was as follows:

$
Ordinary shares of $1 each 3 400 000
Share premium 300 000
Retained earnings 816 000
4 516 000

The company made a profit for the year ended 31 October 2016 of $352 000.
The directors of C Limited estimate that the profit for the coming year after purchasing the partnership business will
be increased to $540 000.

REQUIRED
(e) Discuss the advantages to C Limited, other than increase in the profit, of purchasing Alex and Brown’s
business. [5]
May 2017 371 Paper 32

QUESTION 5
SM Limited makes a single product. In a normal month 1 000 units are made and sold for $150 each. Standard costs
are as follows:
$
Direct labour (4 000 hours at $10.50) 42 000
Direct materials (3 000 kilos at $12.20) 36 600
Variable overheads 10 000
Fixed overheads 19 300

In April the company received an order for the supply of 800 units in addition to the usual production and sales.
REQUIRED
(a) Prepare the flexed budget for April showing total budgeted profit. [6]
Additional information
During April the employees were required to work extra hours to meet increased production. The inclusion of
overtime rates caused the average wage to rise to $13.10 per hour.
Staff worked 7 300 hours in total and used 5 500 kilos of raw material which had been purchased for $11.50 per kilo.
The raw materials were of the usual quality.

REQUIRED
(b) Calculate the following variances for the month of April.
(i) labour efficiency [2]
(ii) labour rate [2]
(iii) materials usage [2]
(iv) materials price [2]
(c) Suggest one cause for each of the materials usage and materials price variances. [2]

Additional information
One of the directors stated that new staff should have been employed. This would have resulted in fewer overtime
payments although extra training costs would have been incurred.
The director believed that 7 800 hours would have been worked at a cost of $10.80 per hour.

REQUIRED
(d) Advise the directors whether or not they should have taken this action. Support your answer with
calculations where appropriate. [6]
(e) State three advantages to the company of operating a standard costing system. [3]
[Total: 25]

QUESTION 6
Tisha is considering buying a new machine for her factory. The machine will cost $125 000. At the end of Year 5 the
machine will be sold for $65 000. The machine will be used to manufacture one of Tisha’s existing products.
The following information is available:
1 The current annual sales volume of the existing product is 10 000 units. This will remain constant over the
5-year period.
2 The selling price per unit is currently $12. Tisha plans to increase this to $13 per unit to help cover her costs
of the new machine.
3 The variable cost is currently $5 per unit. This is expected to fall to $3 per unit by using the new machine.
4 The maintenance cost for the new machine will increase the annual fixed costs by $5 000.
5 At the end of Year 1, Tisha will have to pay a one-off service fee of $1 000.

REQUIRED
(a) Prepare one table which shows the change in cash flows for each of the Years 0 to 5 that arise as a result
of the purchase of the machine. [5]
May 2017 372 Paper 32

(b) Calculate the payback period for the machine. [2]

(c) State three reasons why payback may be a useful investment appraisal technique. [3]

Additional information
Tisha’s cost of capital is 10%. Discount factors are as follows:

Year Discount factor

0 1.000
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621

REQUIRED
(d) Calculate the Net Present Value (NPV) of buying the machine. [3]

Additional information
When using a discount factor of 20%, the machine had a negative NPV of $24 953.

REQUIRED
(e) Calculate the Internal Rate of Return (IRR) of the machine to three decimal places. [4]

Additional information
Tisha has recently discovered an alternative machine that would also be suitable for producing the same product.
This also has an expected life of 5 years. Tisha has a limited amount of capital available and only needs one machine.
The following information has been calculated for the alternative machine:

Capital outlay NPV IRR Payback period

$ $ %
135 000 10 350 9.597 4 years 6 months

REQUIRED
(f) Recommend, with reasons, which machine Tisha should buy. [4]
(g) Discuss which factors, other than those you have considered in (f), Tisha should consider when making her
decision. [4]
November 2017 373 Paper 31

NOVEMBER 2017 - PAPER 31

QUESTION 1
Ted is the owner of a manufacturing business.
The following information is available for the year ended 31 December 2016:
$
Factory machinery – at cost 330 000
Office equipment – at cost 142 000
Provision for depreciation at 1 January 2016
Factory machinery 276 000
Office equipment 67 000
Inventory at 1 January 2016
Raw materials 52 000
Work in progress 97 000
Finished goods (at cost) 122 000
Revenue 4 268 000
Purchases of raw materials 484 000
Factory direct wages 626 000
Factory indirect wages 132 000
Office salaries 548 000
Carriage inwards 21 000
Carriage outwards 87 600
Direct expenses 120 000
Factory overheads 510 900
General office expenses 276 000
Insurance and rates 92 000
Rent 440 000
Heat and light 178 000
Additional information
1 Goods are transferred from the factory at a mark-up of 20%. Increase in provision for unrealised profit at
31 December 2016 amounted to $15 840.
2 Inventory at 31 December 2016:
$
Raw materials 67 000
Work in progress 102 000
Finished goods ?
3 Non-current assets are depreciated at 15% per annum using the reducing balance method.
4 At 31 December 2016:
$
Rent owing 40 000
Insurance and rates prepaid 6 000
Insurance and rates, rent and heat and light are apportioned 3/4 factory and 1/4 general office.
5 Production for the year ended 31 December 2016 was 80 000 units.
REQUIRED
(a) Explain why a mark-up is added to the factory cost of production. [3]
(b) Prepare the manufacturing account for the year ended 31 December 2016. [10]
(c) Prepare the trading section of the income statement to show the gross profit for the year ended 31
December 2016. [6]
(d) Prepare an extract from the statement of financial position to show the value of finished goods inventory
at 31 December 2016. [2]
November 2017 374 Paper 31

Additional information
In February 2017, Ted was approached by an existing customer for an extra order of 5000 units.
The budgeted production for 2017 was already set at the maximum production capacity. Ted considered whether
or not to source the extra 5000 units from an external supplier at a cost of $28 per unit.

REQUIRED
(e) Advise Ted whether or not he should have accepted the extra order. Justify your answer. [4]

QUESTION 2
The EF Tennis Club generates revenue from member subscriptions by selling tickets for matches and operating a
club shop. It also receives income from renting out their catering facility.
The treasurer has provided the following figures for the year ended 31 December 2016:
Receipts and Payments Account
2016 $ 2016 $
Jan 01 Balance b/d 1 546 Dec 31 New equipment 1 400
Dec 31 Shop sales 8 960 Dec 31 Shop purchases 5 720
Match tickets 2 740 Dec 31 Printing & advertising for matches 3 765
Sale of old equipment 1 760 Dec 31 Ground staff wages 4 210
Rent of catering facilities 2 600 Dec 31 Shop staff wages 2 200
Subscriptions 3 600 Dec 31 Balance c/d 8 911
Donation 5 000 _____
26 206 26 206
2017
Jan 1 Balance b/d 8 911

Other balances are:

1 January 2016 31 December 2016
$ $
Shop inventory 975 826
Equipment at net book value 14 760 ?
Shop trade payables 1 210 1 450

REQUIRED
(a) Distinguish between the capital of a sole trader and the accumulated fund of a non-profit-making club or
society. [2]
(b) Prepare the shop income statement for the year ended 31 December 2016. [4]

Additional information
1 Equipment is depreciated at 10% of net book value at the year end. Equipment which was sold had a net
book value of $1 900.
2 The rent received for the catering facility is $200 per month and commenced on 1 January 2016.
3 The annual subscription for the year ended 31 December 2016 was $9 per member. On 1 January 2017 it
was increased to $10 per member.
At 1 January 2016:
20 members had paid their subscription in advance for 2016.
There were 6 members in arrears for 2015. Their membership has been withdrawn and the amount
they owed is to be written off as a bad debt.
At 31 December 2016:
26 members paid their subscription in advance for 2017.
10 members were in arrears for 2016 and they had until 30 June 2017 to pay.
4 The donation of $5 000 was received specifically to start a new fund for a club-house. The treasurer would
like to invest this in a separate long-term savings account.
November 2017 375 Paper 31

REQUIRED
(c) Prepare the income and expenditure account for the year ended 31 December 2016. [10]
(d) Prepare an extract from statement of financial position at 31 December 2016 to show the current assets
and current liabilities of the club. [4]
(e) Discuss whether or not the treasurer should invest the fund for the club-house in a separate long-term
savings account. Justify your answer. [5]

QUESTION 3
The following information has been extracted from the books of account of M plc at 31 December 2016:
$
Profit for the year 550 000
Ordinary shares ($1) 900 000
6% Preference shares (non-redeemable) 200 000
5% Debentures (2025) 100 000

The market price of one ordinary share at 31 December 2016 was $1.75.
Dividends of $0.08 per ordinary share have been paid during the year ended 31 December 2016.

REQUIRED
(a) State two advantages of ratio analysis to a user of the financial statements. [2]
(b) Calculate the following ratios at 31 December 2016 to two decimal places:
(i) earnings per share
(ii) price earnings ratio
(iii) dividend yield
(iv) dividend cover. [5]

Additional information
For the year ended 31 December 2016:
1 The profit for the year was 10% greater than the previous year.
2 There had been a share issue of 300 000 ordinary shares.
3 The dividend per share had fallen by 20%.
REQUIRED
(c) Calculate the same four ratios as in part (b) at 31 December 2015 to two decimal places.
The market price of one ordinary share at 31 December 2015 was $1.50. [4]
Additional information
An investor, Bevin, is considering acquiring ordinary shares in M plc. He has been advised that the directors intend
to raise extra funds by issuing a further 5% debenture (repayable 2027).
REQUIRED
(d) (i) Analyse the performance of M plc over the two years 2015 and 2016 using the ratios calculated in
parts (b) and (c). [8]
(ii) Advise Bevin whether or not he should make the intended investment. Justify your answer. [6]

QUESTION 4
Armfield and Bonetti are sole traders. Their statements of financial position at 31 December 2016 are shown below:
Armfield Bonetti
Assets $ $
Non-current assets 85 000 135 000
Current assets
Inventories 8 000 12 000
Trade receivables 6 000 9 000
Cash and cash equivalents 4 000 5 000
18 000 26 000
Total assets 103 000 161 000
November 2017 376 Paper 31

Capital and liabilities Armfield Bonetti

Capital accounts 100 000 150 000
Current liabilities
Trade payables 3 000 11 000
103 000 161 000
They have decided to merge their two businesses into a partnership on 1 January 2017. All assets and liabilities, with
the exception of cash and cash equivalents, were transferred to the new partnership at the following agreed values:
Armfield ($) Bonetti ($)
Non-current assets 80 000 145 000
Inventories 7 000 11 000
Trade receivables 5 000 8 000
Trade payables 3 000 11 000
REQUIRED
(a) State the meaning of the term ‘capital account’. [2]
(b) Prepare the capital accounts of Armfield and Bonetti to close their existing businesses.
Transfer the balances on their capital accounts to new partnership capital accounts. [6]
Additional information
Each partner will either invest or withdraw cash to achieve a balance of $125 000 to carry forward on their
partnership capital account.
REQUIRED
(c) Prepare the partnership capital accounts clearly showing each partner’s adjustment for cash. [3]
(d) Prepare the opening statement of financial position for the partnership at 1 January 2017. [5]
Additional information
Profit for the year ended 31 December 2016 of Armfield was $80 000 and Bonetti was $120 000.
The profit for the year of the partnership for the year ending 31 December 2017 is expected to be $200 000. The
partners agreed to share the profits and losses equally.
REQUIRED
(e) Discuss whether or not the merger of the two businesses has been beneficial to each partner. [5]
Additional information
After the first year’s successful trading as a partnership the partners were advised to consider incorporating their
business. Both partners are close to retirement age and have family.
(f) Discuss two advantages to the partners of incorporating their business. [4]
QUESTION 5
WT Limited manufactures a single product. The following information is available from its master budget for the
month of December:
Monthly sales 1000 units
Selling price per unit $90
Direct materials per unit 4 kilos costing $5.10 per kilo
Direct labour per unit 3 hours costing $10 per hour
Total monthly fixed costs $33 000
Competing businesses charge a selling price between $85 and $90 for the same product.
The directors are proposing to reduce the selling price to $80 per unit. They believe that monthly sales would
increase to 1 500 units. The change in demand would cause material costs to fall to $5.02 per kilo and labour costs
to rise to $12 per hour. Total monthly fixed costs would remain unchanged.
REQUIRED
(a) Suggest reasons why the cost per unit could change with the increase in sales for:
(i) direct material
(ii) direct labour. [4]
November 2017 377 Paper 31

(b) Calculate:
(i) the total budgeted profit and budgeted profit per unit for December [3]
(ii) the total profit and profit per unit if the directors’ proposal is adopted for December [3]
(iii) the increase or decrease in profit which would arise if the directors’ proposal is adopted. [1]
(c) Calculate the following variances which would arise if the directors’ proposal is adopted:
(i) sales price
(ii) sales volume
(iii) materials price
(iv) labour rate. [8]
(d) Explain why total of variances calculated in part (c) does not equal the change in profit in part (b)(iii). [3]
(e) Advise the directors whether or not they should go ahead with the proposal. Justify your answer. [3]

QUESTION 6
PMW Limited produces and sells two products, A and B. It provided the following information for a year:
Product A Product B
Sales 20 000 units 18 000 units
Selling price per unit $12 $20
Direct material per unit $3.20 $4.90
Direct labour per unit $1.80 $2.10
Total overheads amounted to $300 000. These are currently apportioned to the two products on the basis of total
sales value.
REQUIRED
(a) Calculate the value of overheads apportioned to each product. [3]
(b) Calculate the profit or loss per unit for each product. [5]

Additional information
Beryl, the accountant, has analysed the overheads. She discovered that the total of $300 000 included costs for
delivery to customers and order processing costs. The following information was available.
1 Analysis of orders received
Product A Product B Total
Orders received for more than 100 units 17 23 40
Orders received for 100 units or fewer 664 446 1 110
Total orders received 681 469 1 150
2 Costs of delivery amounted to $30 per order for orders received for more than 100 units, and $20 per order
for orders of 100 units or fewer.
3 Order processing costs amounted to $25 per order irrespective of size.
4 Remaining overheads should now be apportioned to sales units.
REQUIRED
(c) Calculate total overheads apportioned to each product in accordance with the accountant’s analysis. [5]
(d) Calculate the revised profit or loss per unit for each product. [5]
Additional information
Beryl believes that her method of apportioning overheads is more realistic than the current method. She has
recommended to the directors that the method be changed in the future.
REQUIRED
(e) Discuss whether or not the directors should change the method of apportioning overheads.
Justify your answer using both financial and non-financial factors. [5]
(f) State what is meant by the terms ‘cost driver’ and ‘cost pool’. [2]
November 2017 378 Paper 32

NOVEMBER 2017 - PAPER 32

QUESTION 1
The GT Boating Club is a not-for-profit organisation which collects funds by subscriptions paid annually.
At 1 January 2016 the following assets and liabilities were held by the club:
$
Boathouse 240 000
Fixtures and fittings
Cost 15 000
Accumulated depreciation 10 000
Trade payables 1 750
Total inventory 1 100
Bank 6 150 debit
Insurance paid in advance 1 100
Electricity owing 450
Subscriptions in arrears 600
Subscriptions in advance 400

Additional information
1 The club runs a restaurant for the exclusive use of members and their guests. During the year ended 31
December 2016 the revenue of the restaurant was $45 000.
2 The opening restaurant inventory was 75% of the total club inventory. The closing restaurant inventory had
doubled at 31 December 2016.
3 During the year ended 31 December 2016 the club paid $28 350 for restaurant purchases.
All the club’s trade payables at 1 January 2016 related to the restaurant suppliers. This had risen by 20% at
31 December 2016.
4 The club paid insurance for the year of $4 800 and electricity of $2 000. Half of these costs are charged to
the restaurant.
At 31 December 2016 the club still owed $950 for insurance.

REQUIRED
(a) Prepare a statement to calculate the restaurant profit for the year ended 31 December 2016.
The statement should also clearly show the gross profit. [10]

Additional information
Another local boating club runs a similar restaurant. Its latest accounts showed that the restaurant had achieved a
gross margin of 45%.

REQUIRED
(b) (i) Calculate the difference between the gross margins of both restaurants. [2]
(ii) Discuss three actions which the club could take to improve the gross margin. [6]

Additional information
The club is now considering the introduction of a life membership subscription.
The annual subscription is $100 and the proposed life subscription would be $1 000.
Gurmukh, a retired gentleman, is considering joining the club and seeks your advice on whether or not he should
pay an annual subscription or the life membership.

REQUIRED
(c) Explain the accounting treatment of the life subscriptions. [2]
(d) Advise Gurmukh whether or not he should become a life member. Justify your advice. [5]
[Total: 25]
November 2017 379 Paper 32

QUESTION 2
FS plc’s statement of financial position on 1 January 2016 showed the following:
$000
Ordinary share capital (shares of $1 each) 1000
Share premium 300
General reserve 100
Retained earnings 220
During the year ended 31 December 2016 the following took place:
1 On 30 June 2016, an interim dividend of $55 000 was paid.
2 On 1 October 2016, an issue of 700 000 ordinary shares was made at $1.80 per share. All the funds raised
from this share issue were used to buy a second factory on 7 January 2017.
3 On 1 November 2016, a bonus issue of shares was made with 3 new shares being issued for every 10 held.
Reserves were maintained in their most flexible form.
4 For the year ended 31 December 2016, the company made a profit from operations of $288 000. Finance
charges of $52 000 had been paid. The directors provided $41 000 for the tax liability for the year.
5 At 31 December 2016, $40 000 was transferred to general reserve and a final dividend of $75 000 was
proposed.

REQUIRED
(a) Prepare the statement of changes in equity for the year ended 31 December 2016 (a total column is not
required). [12]
(b) Explain how the proposed final dividend should be treated in the financial statements for the year ended
31 December 2016. [2]
(c) Explain the treatment in the financial statements for the year ended 31 December 2016 of the purchase of
the second factory on 7 January 2017. [3]

Additional information
A shareholder at the Annual General Meeting said that the purchase of the new factory would cause non-current
asset turnover to fall, with an adverse effect on shareholder confidence.

REQUIRED
(d) Advise the directors whether or not they should be concerned about the shareholder’s comment. Justify
your answer. [5]
(e) State how an upward revaluation of an existing non-current asset is recorded in the financial statements of
a company. [3]

QUESTION 3
LS Limited has completed its first year of trading. The company has four directors, of whom two are not shareholders.
The auditors are currently carrying out the end of year audit.
REQUIRED
(a) (i) Explain the term ‘stewardship’. [2]
(ii) Explain how directors carry out their role of stewardship within a limited company. [2]
(iii) Explain the purpose of an end of year audit. [2]
Additional information
The draft financial statements for the year showed the following:
$
Sales 182 000
Sales returns 8 000
Purchases 154 000
Purchases returns 12 000
All sales were at a mark-up of 150%.
November 2017 380 Paper 32

During the audit the auditors discovered that included in the sales records was a sales invoice for $6 000 which had
been prepared for a customer but not yet been sent. The customer had received the inventory on a sale or return
basis, but had yet to decide whether or not to keep the inventory.

REQUIRED
(b) (i) Calculate what should have been the value of the closing inventory. [5]
(ii) Calculate the gross profit for the year. [1]

Additional information
During the year the warehouse manager had been absent from work for a long period of time.
There had been little control over the movement of inventory. Staff had valued the inventory actually in the
warehouse at the end of the year at $24 000.

REQUIRED
(c) Calculate the percentage change in gross profit if the inventory valuation from the warehouse had been
used. [3]
(d) Discuss three possible reasons for the difference between the warehouse inventory valuation and the
calculated value of inventory. [6]
(e) Discuss whether the directors should use the warehouse inventory valuation or the amount from the
accounting records as the inventory figure in the financial statements. Justify your answer. [4]
[Total: 25]

QUESTION 4
Summarised financial information for E Limited for the year ended 31 August 2016 is as follows:
Summarised Income Statement
$000
Revenue 8 800
Cost of sales 5 045
Gross profit 3 755
Expenses 2 175
Profit from operations 1 580
Finance costs 235
Profit for the year 1 345

Summarised Statement of Financial Position

Assets $000
Non-current assets 4 815
Current assets 3 210
Total assets 8 025

3 000 000 ordinary shares of $0.50 each 1 500

Share premium 500
Retained earnings 2 540
4 540

Non-current liabilities – 8% debentures repayable 2020 2 935

Current liabilities – trade payables 550
8 025

Additional information
1 The market value of one ordinary share at 31 August 2016 was $1.55.
2 Dividends paid for the year ended 31 August 2016 were $325 000.
November 2017 381 Paper 32

REQUIRED
(a) Calculate the following ratios to two decimal places:
(i) income gearing
(ii) gearing
(iii) dividend cover
(iv) price earnings [5]

Additional information
The directors of E Limited had expansion plans and on 1 September 2016 raised $2 000 000 by issuing 10%
debentures repayable in 2026. The profit from operations for the year ended 31 August 2017 was $1 600 000 and
the market price of one ordinary share on that date was $1.30. Dividends paid for the year were $275 000.
REQUIRED
(b) (i) Prepare an extract from the income statement for the year ended 31 August 2017, starting with
the profit from operations. [2]
(ii) Prepare the equity and non-current liabilities section of statement of financial position at 31
August 2017. [2]
(c) (i) Calculate the same ratios as in part (a) at 31 August 2017 to two decimal places. [4]
(ii) Assess the effect of the new debenture issue on these ratios. [8]
(d) Discuss two disadvantages to the company of the issue of the debentures. [4]
[Total: 25]

QUESTION 5
Wong Ho owns a small factory. A machine has started to break down regularly and needs to be replaced.
A replacement machine is expected to cost $55 000. It is expected to last 5 years and will be depreciated using the
straight-line method of depreciation. At the end of the period the machine will be scrapped with no residual value.
The following information is available for the replacement machine:
1 The selling price for each unit produced by the machine is expected to be $40 for years 1 and 2.
This is expected to increase by 25% for year 3.
There is no expected change for year 4.
However, the selling price is expected to increase by a further 10% for year 5.
2 The cost of production for each unit produced is expected to be $20 for years 1 and 2. This will increase by
25% for year 3 and then remain unchanged.
3 The present value for the net cash flows for the years 1 to 5 have been calculated as follows:

Year Discount factor 14% Present value $

1 0.877 3 683.40
2 0.769 6 536.50
3 0.675 9 483.75
4 0.592 14 977.60
5 0.519 21 019.50

REQUIRED
(a) Distinguish between the payback method of investment appraisal and the net present value method. [4]
(b) Calculate the expected net present value for the replacement machine. [1]
(c) (i) Calculate the annual net cash flows for years 1 to 5 for the replacement machine. [5]
(ii) Calculate the payback period for the replacement machine. [2]
(iii) Calculate the number of units for each year that Wong Ho expects to produce with the
replacement machine. [8]
(d) Recommend whether or not Wong Ho should purchase replacement machine. Justify your answer. [5]

QUESTION 6
J Limited sells a single product at a mark-up of 25%. The following information is available:
November 2017 382 Paper 32

1 Sales revenue:
$
2017
November 150 000
December 180 000

2018
January 200 000
February 210 000
March 225 000
April 240 000

2 All sales are on credit and customers have a credit period of 2 months.
3 All purchases are on credit and suppliers are paid in the month following purchases.
4 Inventory level at the end of each month will be maintained at 25% of the sales volume in the following
month.
5 Monthly operating costs are expected to be $18 000, which includes $3 000 depreciation.
6 Balance at bank at 1 January 2018 is expected to be $4 500.

REQUIRED
(a) Prepare the cash budget for each of the three months from January to March 2018. [9]
(b) Prepare a budgeted income statement for the three-month period ending 31 March 2018. [3]
(c) Prepare a reconciliation of the profit from operations for the three-month period ending 31 March 2018 to
the net cash at 31 March 2018. [8]

Additional information
The directors are considering investing $60 000 in a new computer system to improve inventory control. According
to the payment terms, 50% is payable in March 2018 and the remaining 50% in the following month.

REQUIRED
(d) Advise the directors whether or not they should purchase the new computer. Justify your answer. [5]
[Total: 25]
November 2017 383 Paper 33

NOVEMBER 2017 - PAPER 33

QUESTION 1
The RS Rowing Club is a not-for-profit organisation.
A summary of the club’s receipts and payments account for the year ended 31 March 2017 is as follows:
Receipts and payments account
$ $
Balance b/d 4 370 Purchases of sports equipment 1 624
Members’ subscriptions 10 300 Rent of boathouse 2 800
Sales of sports equipment 1 850 General expenses 1 379
Entry fees for annual boat race 4 200 Wages 3 500
Prizes for annual boat race 325
Expenses of annual boat race 2 456
_____ Balance c/d 8 636
20 720 20 720

Additional information
1 The club owns boats which had originally cost $24 000. Accumulated depreciation at 1 April 2016 was $11
200. The depreciation policy is to charge 10% per annum using the reducing balance method.
2 The club also sells sports equipment to its members. Inventory of sports equipment was as follows:
$
1 April 2016 364
31 March 2017 429
3 Members’ subscriptions in arrears and paid in advance were as follows:
1 April 2016 31 March 2017
$ $
Members’ subscriptions in arrears 700 650
Members’ subscriptions in advance 350 450
4 The balance on the accumulated fund on 1 April 2016 was $40 614.

REQUIRED
(a) Identify four terms used only in the financial statements of a not-for-profit organisation with the
corresponding terms used in the financial statements of a profit-making business. [4]
(b) Prepare the income and expenditure account for the year ended 31 March 2017. [8]
(c) Prepare an extract from the statement of financial position at 31 March 2017 showing the accumulated
fund of the club at that date. [2]
Additional information
The club has decided to introduce a scheme offering life membership for payment of $400. Annual subscription fees
are currently $50. The club members think that the life membership fees should be credited in full to the income
and expenditure account when received. The treasurer has suggested that the life membership payments should be
credited to income and expenditure account over a number of years.

REQUIRED
(d) Discuss the correct accounting treatment for the life membership. [4]
Additional information
A former member has donated $35 000 to the club. The funds are to be invested and the investment income used
to encourage young people to train for national competitions. The club is considering two investment options.
1 Invest for 3 years at an annual fixed interest rate of 7.5%.
2 Use the funds to build its own boathouse. Part of the new boathouse could be rented to another local group
at an annual rent of $1250.
November 2017 384 Paper 33

REQUIRED
(e) Recommend which option the club should select. Support your answer with reasons and relevant
calculations. [7]

QUESTION 2
Wembo and Bob are in partnership. They share profits and losses in the ratio 3 : 2.
Another business, C Limited, has been trading for many years.
At 31 March 2017 the summarised statements of financial position of both businesses were as follows:
Wembo C Limited
and Bob
$ $
Premises 80 000 282 000
Machinery 45 000 112 000
Vehicles 28 000 –
Inventory 15 000 49 000
Trade receivables 6 000 36 000
174 000 479 000

Capital accounts
Wembo 100 000
Bob 60 000

Equity and reserves

Ordinary shares of $1 each 300 000
Share premium 75 000
Revaluation reserve 25 000
Retained earnings 40 000
440 000
Trade payables 9 000 26 000
Bank overdraft 5 000 13 000
174 000 479 000

REQUIRED
(a) State what is meant by the term ‘revaluation reserve’. [1]
Additional information
The directors of C Limited have decided to purchase Wembo and Bob’s partnership on 31 March 2017.
The following information relates to the purchase of Wembo and Bob’s partnership.
1 Two vehicles were taken over by the partners at the following agreed values:
$
Wembo 11 000
Bob 12 500
2 The following partnership assets, excluding the partnership overdraft, were transferred to C Limited at the
following agreed values:
$
Premises 90 000
Machinery 36 000
Other vehicles 3 500
Inventory 13 000
3 Cash collected from trade receivables was $4 900.
4 Trade payables accepted $8 100 in full settlement of amounts due to them.
5 Costs involved in dissolving the partnership were $3 800.
November 2017 385 Paper 33

6 The purchase consideration for the partnership was $155 000. This was made up as follows:
$60 000 was from the issue of 7% cumulative preference shares of $1 each distributed in profit-sharing
ratio.
The balance was by the issue of ordinary shares of $1 at a premium of $0.25 per share. These shares were
distributed to the partners in proportion to their capital account balances at 31 March 2017.

REQUIRED
(b) Prepare the partners’ capital accounts at 31 March 2017 to show the closing entries for the
partnership. [16]
(c) Prepare the equity and reserves section of the statement of financial position for C Limited at 31 March
2017 immediately after the purchase of the partnership. [4]
(d) Explain one benefit to Wembo and Bob of receiving:
(i) ordinary shares
(ii) cumulative preference shares. [4]

QUESTION 3
Aleksander is a trader with a financial year end of 30 June. He buys containers of sunflower seeds for $100 each.
Some of these he ships to his agent Benji in northern Europe. He pays Benji a commission of 10% of sales value.
The following information is available:
1 On 2 April 2017 Aleksander sent 200 containers to Benji. Aleksander paid packing costs of $120 and freight
costs of $6 080.
2 Benji paid additional freight costs of $1 600 for transport from the port to his warehouse.
3 In the period to 30 June 2017 Benji sold 160 containers for $170 each. He remitted $21 000 to Aleksander
on 14 June.

REQUIRED
(a) Prepare the following ledger accounts in the books of Aleksander for the 3 months ended 30 June 2017.
(i) goods on consignment account [2]
(ii) consignment account [12]
(iii) Benji account [5]

Additional information
The government in Benji’s country decided to introduce import duties from 1 July 2017 which amount to $20 per
container.

REQUIRED
(b) Explain how Aleksander might have dealt with this increase in cost. Support your answer by considering the
effect on the profit per container. [4]
(c) State why an advertising campaign paid for by an agent would not be included in the valuation of inventory.
[2]

QUESTION 4
W Limited has been trading for several years. The company is now in a position to expand operations and trade
abroad. A new warehouse is required for this expansion, which will cost $550 000.
An extract from the statement of financial position at 31 March 2016 showed the following:
$
Ordinary shares of $1 each 400 000
Revaluation reserve 150 000
Share premium 50 000
Retained earnings 350 000
REQUIRED
(a) Explain how share premium arises. [2]
November 2017 386 Paper 33

Additional information
The directors believe that the purchase of the new warehouse can be financed by:
A rights issue of ordinary shares on the basis of one share for every share currently held and any remaining balance
by an issue of a 5% debenture.
The directors expect that 60% of the ordinary shareholders will take up the rights issue of ordinary shares at $1.75
per share.
REQUIRED
(b) Calculate the amount of finance that will need to be raised by the issue of the debenture. [3]

Additional information
The following information is available for the year ended 31 March 2017:
On 1 October 2016
An interim dividend of $0.02 was paid on the ordinary shares held at that date.
On 1 January 2017
The company made the planned rights issue on the ordinary shares. These were taken up as expected. A
5% debenture was also issued.
On 31 March 2017
The profit from operations for the year was $245 000.
Finance charges were $70 000 excluding any debenture interest.
A taxation charge of 20% was to be provided.
A final dividend of $0.04 was proposed on all the ordinary shares held at that date.

REQUIRED
(c) (i) Prepare the statement of changes in equity for the year ended 31 March 2017 (total column is not
required) [9]
(ii) Prepare any supporting note to the financial statements in respect of the proposed dividend. [2]
Additional information
Profits have been constant for a number of years.
At the Annual General Meeting, the directors were confident that following the expansion next year the ordinary
shareholders will see an increase in dividends as profits for the year were expected to increase by 20%.
However, one of the ordinary shareholders expressed concerns that the Earnings Per Share would fall following the
rights issue on 1 January 2017. He proposed that a further expansion planned for two years’ time should be financed
by a long-term loan instead.
REQUIRED
(d) Recommend whether the directors should finance the future expansion with loans or rights issues. Justify
your choice using relevant calculations. [9]

QUESTION 5
S Limited makes perfume. Budgeted data for the month of July is as follows:
Units produced and sold 15 000 bottles
Standard direct materials (liquids) 0.25 litres at $15 per litre
Standard direct materials (packaging) 1 bottle at $0.80 per bottle
Standard direct labour 6 minutes at $9 per hour
Fixed production overheads for July were budgeted to be $26 250 and are absorbed on a direct labour hour basis.
In July 16 000 bottles were produced and sold. Actual costs were as follows:
Direct materials (liquids) 3 725 litres costing $62 875
Direct materials (packaging) 16 000 bottles costing $12 800
Direct labour 1 700 hours costing $16 320
Fixed production overheads $31 375
November 2017 387 Paper 33

REQUIRED
(a) Calculate the total standard cost of the actual production for July. [6]
(b) Calculate the total actual cost of production for July. [3]
(c) Calculate the following variances.
(i) Direct labour rate
(ii) Direct labour efficiency
(iii) Fixed overhead expenditure
(iv) Fixed overhead volume [8]
Additional information
The direct materials (liquids) price variance for the month has been calculated as $7 000 adverse.
The direct materials (liquids) usage variance was $4 125 favourable.
There was no direct materials (packaging) price or usage variance.
REQUIRED
(d) Prepare a statement to reconcile the total standard cost of actual production for July with the total actual
cost of production. (Your statement should start with the total standard cost of actual production.) [4]
Additional information
The directors of S Limited are considering using production units rather than direct labour hours as the basis of
absorbing fixed overheads.
REQUIRED
(e) Advise the directors whether or not they are correct to absorb fixed overheads on the basis of direct labour
hours. Justify your answer. [4]

QUESTION 6
Luke’s business is due to start on 1 April 2018, selling a single product obtained from a sole supplier.
The purchase price is $40 per unit and Luke will sell each unit at a mark-up of 60%.
He also wants to maintain inventory at a level sufficient to cover 50% of the next month’s sales.
Budgeted unit sales for the first four months of trading are as follows:

April May June July

5 000 8 000 4 000 3 000

The following information is also available:

1 Luke will introduce $150 000 capital into the business bank account on 1 April 2018. On the same day,
equipment costing $48 000 will be purchased by cheque.
2 Equipment will be depreciated over a period of 60 months with no residual value.
3 All purchases are expected to be paid one month after the purchases are made.
4 All sales will be on credit.
20% of customers are expected to take a cash discount of 11/2% and pay in the month of sale.
30% of customers are expected to pay one month after the sales are made.
The remaining customers are expected to pay two months after the sales are made.
5 Monthly operating expenses will be paid in the month they are incurred. They are expected to be $43 000
including depreciation.
REQUIRED
(a) State two benefits of preparing a cash budget. [2]
(b) Prepare the cash budget for each of the three months April, May and June 2018. [11]
(c) Comment on Luke’s working capital management. [6]
(d) Prepare a budgeted income statement for the three-month period ending 30 June 2018. [6]
May 2018 388 Paper 31 & 33

MAY 2018 - PAPER 31 & 33

QUESTION 1
JH Limited is a manufacturing business producing a single product. The transfer price of finished goods to the income
statement is cost plus a fixed percentage for factory profit. This percentage has remained unchanged for many years.
The following information is available for the year ended 31 October 2017.
$
Prime cost 252 000
Work in progress
at 1 November 2016 28 000
at 31 October 2017 32 000
Inventory of finished goods at transfer price
at 1 November 2016 108 000
at 31 October 2017 96 000
Revenue 1 860 000
Factory overheads 461 000
Distribution costs 216 000
Administrative expenses 412 000
Finance charges 28 000
Provision for unrealised profit
at 1 November 2016 18 000
The following information is also available.

1 Included in the distribution costs are:

$
Carriage inwards 18 000
Carriage outwards 34 000
2 Administrative expenses include an amount for buildings insurance of $60 000.
The following items relating to building insurance have not been adjusted:
an outstanding unpaid invoice of $3 000 for the year ended 31 October 2017
a payment in advance of $1 000 brought forward from the year ended 31 October 2016
the allocation of 75% of the total amount to the factory.

REQUIRED
(a) Explain why a manufacturing business might prepare a manufacturing account as part of its financial
statements. [4]
(b) Prepare the manufacturing account for the year ended 31 October 2017 in as much detail as possible. [5]
(c) Prepare the income statement for the year ended 31 October 2017. [9]
Additional information
The selling price of one unit is based on the transfer price from the factory plus a mark-up.
Bob, the financial director of JH Limited, has been notified that their main competitor has increased prices. He wishes
to increase the fixed percentage of the transfer price by 5%. The other directors are concerned that this will affect
profit.
(d) Advise the directors whether or not they should increase the transfer price. Justify your answer using any
relevant calculations. [7]

QUESTION 2
The directors of D plc are preparing the end of year financial statements including the notes to the accounts.
The following information is available at 1 January 2017:
$
Ordinary share capital (shares of $2 each) 2 000 000
Share premium 300 000
May 2018 389 Paper 31 & 33

Revaluation reserve 400 000

General reserve 100 000
Retained earnings 1 500 000
During the year ended 31 December 2017 the following took place:
1 On 1 June an interim dividend of $0.20 per ordinary share was paid.
2 On 1 October an issue of 500 000 ordinary shares was made at $2.40 per share to raise money to
purchase an additional factory.
3 On 1 November there was a rights issue of 2 shares for every 5 currently held at $2.25.
The rights issue was necessary to fund the unexpected costs on the purchase of the factory. The issue was
fully subscribed.
4 On 1 December there was a bonus issue of 4 shares for every 10 held on that date. The reserves were
maintained in their most flexible form.
On 31 December 2017 the finance director informed the other directors that:
1 The profit from operations for the year was $520 000.
2 Finance charges of $64 000 had been paid during the year.
3 The end of year tax liability on profits had been calculated as $93 000.
4 There had been a transfer to the general reserve of $47 000.
5 A final dividend of $0.10 per ordinary share had been proposed.
REQUIRED
(a) State three uses of the notes to the accounts within the financial statements. [3]
(b) Prepare the statement of changes in equity for the year ended 31 December 2017. A total column is not
required. [15]
Additional information
After the share issues there was a decrease in the market price of one ordinary share to $2.10. One of the
shareholders at the Annual General Meeting (AGM) stated that instead of the share issues the directors should have
carried out the following:
1 Financed the purchase of the new factory through a loan of $2 200 000 repayable over 5 years with total
interest payable of $68 000.
2 Paid the shareholders an extra $0.50 per share in their final dividend rather than a bonus issue of shares.

REQUIRED
(c) Advise whether or not the directors acted in the best interests of the shareholders. Justify your answer with
relevant calculations. [7]

QUESTION 3
The directors of K Limited provided information on the following balances at 31 December 2017:
$
Plant and machinery at net book value 654 000
Human asset (see note 1) 116 000
Inventory 146 000
Trade receivables 182 000
Cash and cash equivalents 56 000
$1 Ordinary shares 600 000
Retained earnings at 1 January 2017 215 000
Profit for the year 98 000
Trade payables 166 000
Other payables 75 000
During the course of the year-end audit, the external auditor obtained the following information from the directors
(notes 1 to 3).
1 During the year, K Limited paid a deposit of $70 000 for a 6-month training programme commencing on 1
November 2017. The balance of $50 000 will be paid on completion of the programme. This had been
included in ‘other payables’.
May 2018 390 Paper 31 & 33

The directors believed that the training would benefit the company for 5 years. The total payments were
regarded as an intangible asset and recorded as a ‘human asset’. Amortisation of $4 000 had been provided.
2 Inventory at 31 December 2017 included some obsolete goods. These had been included in the inventory
at their original cost of $12 000. They could only be sold at half of the normal selling price which was 25%
above cost.
3 On 1 July 2017, K Limited paid $60 000 for acquiring the right to use computer software for three years. The
full amount had been charged as an expense in the income statement.

REQUIRED
(a) Explain the role of an external auditor. [2]
(b) Explain the correct accounting treatment of the items in notes 1 and 2. [5]
(c) Calculate the revised profit for the year ended 31 December 2017 after taking into account notes 1, 2 and
3. [8]
(d) State the values at which the following should be included in the statement of financial position at 31
December 2017.
(i) Software licence [2]
(ii) Inventory [1]
(iii) Retained earnings [1]
(iv) Other payables [1]
Additional information
K Limited needs additional computer software. The directors are considering whether to buy the computer software
or acquire the right to use the new software for three years.
(e) Evaluate whether the directors should buy the computer software or acquire the right to use it for three
years. Justify your answer. [5]

QUESTION 4
A Social Club provides activities for the elderly. It also provides them with meals and organises coach trips.
The ledger accounts of the club for the year ended 31 December 2017 included the following:
Subscription account
Details $ Details $
Balance b/d 400 Balance b/d 100
Income and expenditure account 26 300 Bank 25 800
Balance c/d 50 Irrecoverable debts 250
_____ Balance c/d 600
26 750 26 750

Fixtures and fittings account

Details $ Details $
Balance b/d 12 000 Balance c/d 15 300
Bank 3 300 _____
15 300 15 300

Provision for depreciation of fixtures and fittings account

Details $ Details $
Balance c/d 3 930 Balance b/d 2 400
____ Income and expenditure 1 530
3 930 3 930

The following information was also available.

1 The club owned its own premises which had an original cost of $100 000. These were not depreciated.
2 On 1 January 2017 the bank account had a debit balance of $4 700 and the accumulated fund amounted to
$114 850.
May 2018 391 Paper 31 & 33

3 The sale of meals to members during the year amounted to $21 500 and made a profit of $2 600. Inventory
of food remained constant at $250. No purchases of food were made on a credit basis. All receipts and
payments for meals were made through the bank account.
4 The club organised two coach trips every month. For each trip it hired a 50-seater coach (with driver) at a
cost of $1 000. During 2017 the club sold 620 coach trip tickets for $25 each.
All receipts and payments for trips were made through the bank account.
5 Other running costs paid during the year totalled $18 100. These included staff costs.
6 Staff costs of $200 were accrued at the end of the year.

REQUIRED
(a) State two differences between a club and a limited company. [4]
(b) Prepare the income and expenditure account for the year ended 31 December 2017. [7]
(c) Prepare the statement of financial position at 31 December 2017. [10]

Additional information
The management committee of the club is considering increasing the price of the coach trip tickets to members.
(d) Advise the management committee whether or not it should increase the price of the coach trip tickets.
Justify your answer. [4]

QUESTION 5
C Limited is a small manufacturing company which operates a budgetary control system.
The following information is available:
1 The budgeted sales in units for the first five months of 2019 are expected to be:
Jan Feb Mar Apr May
3 500 4 000 4 750 3 750 4 250
2 The inventory of finished goods at 1 January 2019 is expected to be 10% of the budgeted January sales.
The monthly closing inventory of finished goods is to be maintained at the same percentage of the following
month’s budgeted sales.
3 There is a maximum inventory holding of 450 units.

REQUIRED
(a) State three advantages and two disadvantages of operating a budgetary control system. [5]
(b) Prepare the production budget in units for each of the four months from January to April 2019. [6]

Additional information
Each unit produced requires 3 kilos of raw material which is expected to cost $2 per kilo.
The opening inventory of raw material at 1 January 2019 is expected to be 200 kilos. The closing inventory of raw
material is expected to remain the same for January. It is then expected to increase by 10% for February and a further
10% for March. After that it will remain unchanged.
(c) Prepare the purchases budget in both kilos and dollars for each of the four months from January to April
2019. [6]

Additional information
The directors are expecting an increase in demand later in the year and are considering a proposal to increase the
storage capacity of the warehouse. The proposal will be beneficial to the company as it will allow an increase in the
maximum inventory of finished goods holding to 500 units. The cost associated with the storage of each unit (holding
cost) is $10.
(d) Calculate for the month of February the difference between the current holding cost for the closing
inventory of finished goods and the holding cost if the proposal is accepted. [4]
Additional information
The cost of increasing the storage capacity is expected to be $20 000. A cash budget which includes this proposed
cost has been prepared. This shows an overdrawn bank balance of $18 000 at the end of February.
May 2018 392 Paper 31 & 33

However, the bank has refused to give the business an overdraft. The directors are now considering investing their
own money as a loan to the business to finance the proposal.
(e) Discuss the advantages and disadvantages to the directors of investing their own funds into the
business. [4]

QUESTION 6
B Limited manufactures two products Alpha and Omega. The following budgeted figures are available.
Alpha Omega
Budgeted production and sales units 20 000 8 000
Direct materials used per unit 5 kilo 11 kilo
Direct materials cost per kilo $20 $11
Labour hours per unit 2 1
Direct labour cost per hour $12 $6
The fixed overheads are forecast as $396 000 and are allocated on the basis of labour hours.
(a) Calculate for each product:
(i) the total production costs [3]
(ii) the production cost per unit [1]
Additional information
The sales price per unit is calculated by adding 50% to the cost.
(b) Calculate the selling price per unit for each product. [2]

Additional information
The directors of the company have been advised that they should adopt activity based costing to allocate the
production overheads. They have identified the four major activities involved in the production cycle as machine
set-up, materials handling, maintenance of machinery and production inspection and packing. The costs of each
activity have been established and the overheads apportioned between the activities as follows:

Production Overheads Alpha Omega

$
Machine set-up 90 000 15 times 10 times
Materials handling 80 000 6 receipts 14 receipts
Machine maintenance 46 000 130 hours 100 hours
Inspection and packing 180 000 40 hours 20 hours
396 000
(c) State two disadvantages to a business of adopting activity based costing. [2]
(d) Calculate the total production overhead to be allocated to each product using activity based costing. [4]
(e) Recalculate the cost per unit and selling price of each product maintaining the 50% mark-up. [3]
(f) Explain three reasons why B Limited should change the method of allocating overheads to using activity
based costing. [6]
Additional information
It has been suggested that customers will not accept the increase in price of Omega. The directors are therefore
considering changing the profit margins to 60% on Alpha and 30% on Omega.
(g) (i) Calculate the new total profit for each product if this change is adopted. [2]
(ii) Give two reasons why B Limited should adopt this change. [2]
May 2018 393 Paper 32

MAY 2018 - PAPER 32

QUESTION 1
YGP Traders Limited has been trading for several years and has a year end of 31 December. It buys and sells a single
product and makes all its transactions on a credit basis. It has a large bank overdraft and the directors are concerned
about the working capital position of the business.
The following information is available for 2017:
1 Every month 1 000 units were sold at a selling price of $80 each.
2 Payment for half of all credit sales was received in the month following sale. The other half was
received two months after sale.
3 The company purchased 14 000 units during the year.
4 The purchase price has been $50 per unit for some years.
5 At 31 December, 3 500 units were in inventory.
6 Trade payables at the end of the year amounted to $62 000.
REQUIRED
(a) Calculate for 2017:
(i) revenue for the year [1]
(ii) cost of sales for the year [1]
(iii) trade receivables at the year end [1]
(iv) average inventory at cost price [3]
(b) State what is measured by the working capital cycle. [2]
(c) Calculate the working capital cycle for the year. [7]
Additional information
The directors of the business are considering a new strategy of increasing the selling price to $90 per unit and offering
10% cash discount for payment in the month following sale. The directors believe that demand will be unchanged
and that all customers will take the discount offered.
(d) Calculate a revised working capital cycle for 2017 if this strategy had been implemented from the start of
the year. [5]
(e) Advise the directors whether or not they should proceed with this strategy. Justify your answer. [5]

QUESTION 2
The trial balance of N plc at 31 December 2017 was as follows:
$ $
Land and buildings: cost 600 000
provision for depreciation 1 January 2017 72 000
Equipment: cost 278 000
provision for depreciation 1 January 2017 112 000
Revenue 2 354 000
Purchases 1 322 000
Administrative expenses 674 000
Distribution costs 296 000
Finance charges 9 000
Inventory 1 January 2017 241 000
Trade receivables 456 000
Trade payables 394 000
Cash and cash equivalent 62 000
Ordinary share capital 600 000
Share premium 140 000
6% debentures (2021) 200 000
Retained earnings ________ 66 000
3 938 000 3 938 000
May 2018 394 Paper 32

The following information is also available.

1 Revenue included a deposit of $6 000 from a customer for the goods to be delivered in March 2018.
2 Total inventory at 31 December 2017 cost $265 000. Of this the goods costing $24 600 had a net realisable
value of $18 800.
3 Land and buildings were acquired in 2008. On 1 January 2017 they were revalued at $720 000 of which two-
thirds was allocated to land and one-third to buildings. N plc had not recorded this revaluation.
4 During the year, a new photocopier was purchased for $80 000. The purchase consideration was settled by
an exchange for a fully depreciated old photocopier with a trade-in value of $10 000. The old photocopier
had been purchased in 2011 for $40 000. The balance of the purchase had been paid by cheque. N plc had
recorded only the bank payment transaction. There was no other purchase or sale of non-current asset
during the year.
5 Depreciation is to be charged as follows:
Land Nil
Buildings over the useful life of 25 years
Equipment 25% per annum on cost
A full year’s depreciation is charged in the year of purchase and none in the year of disposal.
All depreciation charged is to be included in administrative expenses.
6 An interim dividend of $30 000 was paid on 1 October 2017 and included in administrative expenses.
7 Interest for 3 months on the debentures had not been recorded.

REQUIRED
(a) Prepare the income statement for the year ended 31 December 2017. [15]
(b) Calculate the balance on the revaluation reserve account at 1 January 2017 following the revaluation. [5]

Additional information
There was a water leak in the company’s printing room in January 2018. This destroyed the new photocopier which
was not insured.
(c) State how this should be treated in both 2017 financial statements and 2018 financial statements. [3]
(d) State what is meant by impairment loss in respect of non-current assets. [2]

QUESTION 3
Y Limited is based in Mauritius and has recently sent a consignment of goods to Mahood who lives in Egypt. They
agreed the following terms:
1 Mahood has to make an advance payment before the goods are delivered to him.
2 Mahood is entitled to a commission of 5% on all sales made by him. The commission is calculated on the
sales value after the deductions of the commission.
The following transactions took place during the year ended 31 December 2017.
Y Limited:
sent 1000 units to Mahood and invoiced him at $175 each
paid freight of $15 400 and insurance of $3 200.
Mahood:
made an advance payment of $55 000 to Y Limited
made cash sales of 480 units at $257.50 each
made credit sales of 320 units at $270 each
paid the following:

$
import duty 1 600
Advertising 9 700
carriage inwards 2 800
carriage outwards 3 300
All customers who bought on credit from Mahood settled their accounts in full at 31 December 2017 except a
customer who bought 16 units. It was confirmed that nothing will be recovered from this customer.
May 2018 395 Paper 32

At the year-end 60 units with minor faults were discovered by Mahood. Their net realisable value was $150 each.
Mahood paid the balance owing to Y Limited by cheque.

Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the cost per unit to be used when valuing inventory. [2]
(b) Prepare the consignment account in the books of Y Limited for the year ended 31 December 2017. [13]
(c) Prepare Mahood’s account in the books of Y Limited for the year ended 31 December 2017. [5]

Additional information
The directors of Y Limited are thinking of opening a branch overseas to sell its goods rather than having a
consignment agreement with Mahood.
(d) Suggest whether Y Limited should continue consigning goods to Mahood or open a branch overseas. Justify
your answer. [5]

QUESTION 4
Ephraim and Fikriyah are sole traders. They agreed to merge their two businesses into a partnership on 1 October
2017 sharing profits and losses equally.
Ephraim and Fikriyah’s statements of financial position at 30 September 2017 were as follows:

Ephraim Fikriyah
$ $
Non-current assets 45 000 110 000
Current assets
Inventories 7 500 11 500
Trade receivables 9 000 15 500
Cash and cash equivalents 6 500 1 000
23 000 28 000
Total assets 68 000 138 000

Capital 60 000 120 000

Current liabilities
Trade payables 8 000 18 000
68 000 138 000
The agreed valuations for the merger were:
Ephraim Fikriyah
$ $
Non-current assets 55 000 115 000
Inventories 8 000 10 500
Goodwill 10 000 6 000

All other assets and liabilities were transferred at their book value.
Goodwill was not to be retained in the books of account.
REQUIRED
(a) Prepare the opening statement of financial position for the partnership at 1 October 2017. [13]
Additional information
The average annual profit earned by Ephraim for the past three years was $60 000.
The average annual profit earned by Fikriyah for the past three years was $40 000.
The budgeted profit for the partnership for its first year’s trading is expected to be $100 000. In each of the
following three years it is expected to be 10% less than the previous year. This is as a result of the increasing
competition.
(b) Discuss the benefits and limitations of the merger to each partner. Justify your answer using both financial
and non-financial factors. [12]
May 2018 396 Paper 32

QUESTION 5
Jason is considering investing in building a property in order to receive rental income.
He could buy the land now (year 0) for $100 000. Construction costs of $180 000 would be paid in year 1.
The building would have ten flats and each would have an annual rental of $5 000. Jason thinks that he could rent
out flats as follows:
Year Number of flats rented out
1 Nil
2 7
3 8
4 10
Total annual maintenance and management charges for the flats would cost $12 000 plus 10% of the rent received.
At the end of the year 4 he would sell the building. Jason has consulted two different property dealers, Alan and
Bob. Alan estimates the building could be sold for $290 000. Bob estimates it could be sold for $315 000.
Jason’s cost of capital is 10%. The discount factors to be used to account for this are as follows.
Year 1 0.909
2 0.826
3 0.751
4 0.683
All cash flows are assumed to take place on the last day of the year.

REQUIRED
(a) (i) Calculate the net present value (NPV) of investing in the building, using Alan’s estimation of the
sale proceeds. [12]
(ii) Calculate the net present value (NPV) of investing in the building, using Bob’s estimation of the
sale proceeds. [3]
(b) Calculate the sales proceeds at the end of year 4 which would result in a net present value (NPV) of
zero. [3]
(c) Advise Jason whether or not he should proceed with investing in the building. Justify your answer. [5]
(d) State two reasons why the calculation of the payback period is a less useful investment appraisal technique
than the calculation of net present value (NPV). [2]

QUESTION 6
C Limited produces tables. Each table requires the following:

raw materials 3 metres of wood at $80 per metre

direct labour 12 hours at $30 per hour
fixed production overhead $10 per direct labour hour
Budgeted production is 5 000 tables.
Actual production was 4 800.
Actual production costs were:
$
direct materials 15 360 metres 1 190 400
direct labour 55 200 hours 1 766 400
fixed production overhead 579 600
All tables produced were sold.

REQUIRED
(a) State two limitations of a standard costing system. [2]
(b) Calculate the following variances:
(i) direct materials price
(ii) direct materials usage
(iii) direct labour rate
May 2018 397 Paper 32

(iv) direct labour efficiency

(v) fixed overhead expenditure
(vi) fixed overhead volume [12]
(c) Prepare a statement reconciling the budgeted cost of producing 4800 tables with the actual cost. [8]

Additional information
The directors are considering using higher quality wood and increasing the selling price.
(d) Advise the directors whether or not they should make these changes. Justify your answer. [3]
Appendix 398 Index (Yearly)

INDEX (Yearly)
2011 May P21 Q3 .............................................................................. 276
Q2 ........................................................................... 14, 27 2012 Nov P43
2011 May P41 Q1 ...................................................................... 198, 213
Q3 ....................................................................... 230, 245 Q2 (a &.b)........................................................... 180, 190
Q2(c) .................................................................. 147, 164
2011 May P42
Q2(d) .................................................................. 111, 115
Q1 (a & b) ........................................................... 177, 188 Q3 ...................................................................... 227, 228
Q1 (c) .................................................................. 111, 115
2013 May P21
Q2 (a to c) ............................................................... 14, 28
Q2 (d)...................................................................... 83, 96 Q1 .......................................................................... 16, 30
2011 May P43 2013 May P23
Q1 ........................................................................... 83, 96 Q1 ...................................................................... 199, 215
Q3 ....................................................................... 231, 245 2013 May P41
2011 Nov P23 Q1(d) .................................................................. 111, 115
Q2(B) ...................................................................... 15, 29 Q2 .......................................................................... 84, 98
Q3 ...................................................................... 233, 248
2011 Nov P41
2013 May P42
Q2 ....................................................................... 143, 159
Q1 ...................................................................... 266, 277
2011 Nov P42
Q3 ...................................................................... 233, 249
Q2 ........................................................................... 83, 97
2013 May P43
Q3 ....................................................................... 231, 246
Q1(a & f) ............................................................ 111, 115
2011 Nov P43
Q2 (d & e) ........................................................... 148, 164
Q1 (a) ...................................................................... 67, 75 Q2(a to c) ........................................................... 181, 191
Q1(b & c) ............................................................ 144, 160 Q3 (a to d) .......................................................... 267, 278
Q2 (a & b) ........................................................... 177, 189 Q3(e) .................................................................. 121, 128
Q2 (c & d) ........................................................... 144, 161
2013 Nov P41
Q3 ....................................................................... 295, 304
Q1 (a &.b)........................................................... 182, 192
2012 May P22
Q1 (a to d) .............................................................. 53, 60
Q1 ....................................................................... 196, 211 Q1 (c) ................................................................... 85, 100
2012 May P41 2013 Nov P42
Q1 (a & b) ........................................................... 179, 189 Q1 .......................................................................... 53, 60
Q1 (c & d) ............................................................... 84, 98 Q2(a & b)............................................................ 184, 192
Q3 (a to d) .......................................................... 265, 275 Q2(c) .................................................................. 121, 128
2012 May P42 Q3(e) .................................................................... 86, 100
Q1 (a & b) ........................................................... 197, 211 2013 Nov P43
Q1 (c & d) ........................................................... 120, 127 Q3(a & b)............................................................ 234, 250
Q3 (a, b, c , e & f) ................................................ 232, 247 Q3(c & d) ............................................................ 148, 164
2012 May P43 2014 May P21
Q1 (a & b) ........................................................... 180, 190 Q1(b & c) ............................................................ 200, 216
Q2 (a & b) ............................................................... 68, 75
2014 May P23
Q2 (c) .................................................................. 111, 115
Q3 ....................................................................... 295, 305 Q1 .......................................................................... 17, 31
2012 Nov P21 2014 May P41
Q2 ........................................................................... 16, 29 Q2(a to c) ............................................................. 86, 101
Q2(d) .................................................................. 111, 116
2012 Nov P23
Q3 ...................................................................... 295, 305
Q1 ....................................................................... 197, 212
2014 May P42
2012 Nov P41
Q2(a to c) ............................................................. 86, 101
Q1(c to g) ............................................................ 120, 127 Q2(d) .................................................................. 111, 116
Q2 ....................................................................... 145, 161 Q3 ...................................................................... 295, 305
2012 Nov P42 2014 May P43
Q1 ....................................................................... 146, 162 Q1 .......................................................................... 69, 76
Appendix 399 Index (Yearly)

Q1(d to f) ................................................................ 71, 78 Q4 ...................................................................... 152, 168

Q1(f) ................................................................... 121, 128 Q5 ...................................................................... 316, 321
Q3 ....................................................................... 235, 252 Q6 ...................................................................... 299, 310
2014 Nov P22 2016 May P32
Q1 ....................................................................... 201, 216 Q1 (a to d) .............................................................. 19, 34
2014 Nov P41 Q1 (e) ................................................................. 141, 142
Q1 (a to c) ............................................................... 54, 61 Q2 ...................................................................... 204, 220
Q1(d & e) ............................................................ 121, 128 Q3 .......................................................................... 56, 63
Q2 ....................................................................... 149, 165 Q4 ...................................................................... 153, 169
Q5 ...................................................................... 316, 322
2014 Nov P42
Q6 ...................................................................... 270, 285
Q1(a to d) ........................................................... 112, 116
2016 May P33
Q1(e)................................................................... 121, 128
Q1(g) ................................................................... 122, 129 Q1 .......................................................................... 18, 33
Q2(a to f) ............................................................ 296, 306 Q2 .......................................................................... 49, 51
Q3 ....................................................................... 236, 253 Q3 (a to c) ............................................................ 91, 106
Q3 (d) ................................................................. 151, 168
2014 Nov P43
Q4 ...................................................................... 152, 168
Q1(a & b) .............................................................. 87, 102 Q5 ...................................................................... 316, 321
Q2 ....................................................................... 237, 254 Q6 ...................................................................... 299, 310
Q3(c & d) ............................................................ 185, 193
2016 Nov P31
Q3(c to f) ............................................................ 297, 307
Q3(e)................................................................... 122, 129 Q1 .......................................................................... 20, 34
Q2 (a to d) .......................................................... 186, 194
2015 May P23
Q2 (e) ................................................................. 123, 130
Q1 ....................................................................... 202, 217 Q3 ...................................................................... 154, 170
2015 May P41 Q4 (a to c) ............................................................ 91, 107
Q1 ....................................................................... 238, 256 Q4 (d & e) ........................................................... 123, 130
Q3(a to d) ........................................................... 298, 308 Q5 ...................................................................... 270, 286
Q3(e & f) ............................................................... 87, 102 Q6 ...................................................................... 300, 311
2015 May P42 2016 Nov P32
Q1 ....................................................................... 238, 256 Q1 .......................................................................... 21, 36
Q3(a to d) ........................................................... 298, 308 Q2 ...................................................................... 205, 221
Q3(e & f) ............................................................... 87, 102 Q3 .......................................................................... 71, 78
2015 May P43 Q4 ...................................................................... 134, 137
Q5 ...................................................................... 317, 323
Q1(a to c) .............................................................. 88, 102
Q6 ...................................................................... 240, 258
Q1(d) .................................................................. 122, 129
Q2(c) ................................................................... 112, 117 2016 Nov P33
Q2(d & e) ............................................................ 149, 166 Q1 ...................................................................... 206, 222
2015 Nov P41 Q2 .......................................................................... 22, 36
Q3 (a to c & e) .................................................... 134, 138
Q1 (a & b) ............................................................ 89, 103
Q3 (d) ................................................................. 123, 130
Q1 (c) .................................................................. 122, 129
Q4 .......................................................................... 42, 45
Q3 ....................................................................... 267, 280
Q5 ...................................................................... 301, 312
2015 Nov P42 Q6 ...................................................................... 241, 259
Q1 ....................................................................... 203, 218 2016 Specimen P3
Q2 (a) .................................................................. 240, 258
Q1 .......................................................................... 55, 62
Q2 (b & c) ........................................................... 122, 129
Q2 .......................................................................... 42, 45
Q3 ....................................................................... 268, 281
Q3 (a to c) .......................................................... 112, 117
2015 Nov P43 Q3 (d & e) ........................................................... 134, 137
Q1 (a & b) ............................................................. 90, 105 Q4 ...................................................................... 150, 167
Q1 (c to e) ........................................................... 123, 129 Q5 ...................................................................... 299, 309
Q3 ....................................................................... 269, 283 Q6 ...................................................................... 269, 284
2016 May P31 2017 May P31
Q1 ........................................................................... 18, 33 Q1 ........................................................................ 92, 108
Q2 ........................................................................... 49, 51 Q2 (a, b & e) ....................................................... 124, 131
Q3 (a to c) ............................................................. 91, 106 Q2 (c & d) ........................................................... 135, 138
Q3 (d).................................................................. 151, 168 Q3 .......................................................................... 49, 52
Appendix 400 Index (Yearly)

Q4 ....................................................................... 155, 171 2017 Nov P33

Q5 ....................................................................... 271, 287 Q1 .......................................................................... 25, 39
Q6 ....................................................................... 318, 324 Q2 .......................................................................... 57, 64
2017 May P32 Q3 .......................................................................... 43, 46
Q1 ....................................................................... 207, 223 Q4 ...................................................................... 114, 118
Q2 ....................................................................... 156, 172 Q5 (a to d) .......................................................... 273, 291
Q3 (a, c & d) ........................................................ 125, 131 Q5 (e) ................................................................. 319, 326
Q3 (b & e) ........................................................... 135, 139 Q6 ...................................................................... 242, 261
Q4 ........................................................................... 72, 79 2018 May P31
Q6 ....................................................................... 301, 312 Q1 ...................................................................... 209, 225
2017 May P33 Q2 ........................................................................ 93, 109
Q1 ......................................................................... 92, 108 Q3 (a) ................................................................. 136, 140
Q2 (a, b & e) ....................................................... 124, 131 Q3 (b to d) .......................................................... 125, 133
Q2 (c & d) ........................................................... 135, 138 Q3 (e) ................................................................. 141, 142
Q3 ........................................................................... 49, 52 Q4 .......................................................................... 26, 40
Q4 ........................................................................... 26, 40 Q5 ...................................................................... 243, 263
Q5 ....................................................................... 271, 287 Q6 ...................................................................... 319, 326
Q6 ....................................................................... 318, 324 2018 May P32
2017 Nov P31 Q1 ...................................................................... 158, 175
Q1 ....................................................................... 208, 224 Q2 (a & b) ............................................................ 94, 110
Q2 ........................................................................... 23, 37 Q2 (c & d) ........................................................... 126, 133
Q3 ....................................................................... 156, 173 Q3 .......................................................................... 43, 47
Q4(a to d) ............................................................... 58, 65 Q4 .......................................................................... 74, 81
Q4(e & f) ................................................................. 74, 80 Q5 ...................................................................... 303, 314
Q5 ....................................................................... 273, 290 Q6 ...................................................................... 274, 292
Q6 ....................................................................... 319, 325 2018 May P33
2017 Nov P32 Q1 ...................................................................... 209, 225
Q1 ........................................................................... 24, 38 Q2 ........................................................................ 93, 109
Q2 ....................................................................... 113, 118 Q3 (a) ................................................................. 136, 140
Q3 ....................................................................... 135, 139 Q3 (b to d) .......................................................... 125, 133
Q4 ....................................................................... 157, 174 Q3 (e) ................................................................. 141, 142
Q5 ....................................................................... 302, 313 Q4 ...................................................................... 155, 171
Q6 (a to c) ........................................................... 242, 260 Q5 ...................................................................... 243, 263
Q6 (d).................................................................. 141, 142 Q6 ...................................................................... 319, 326