CIMA CO2 Official Learning System - Fundamentals of Financial Accounting

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

REVISION QUESTIONS C2

630

The following additional information at 31 October 20X1 is available:

(i) Closing inventories of goods for resale are valued at $106 m.

(ii) Distribution expenses include $1 m carriage inwards and $3 m carriage outwards.

(iii) Prepayments

$ m

Telephone rental 1

Insurance 2

(iv) Accruals

$ m

Wages and salaries 3

Telephone call charges 4

Directors ’ fees 2

Auditors ’ fees 1

(v) The ﬁ gure in the trial balance for the bank balance is the balance appearing in the

cash book prior to preparing a bank reconciliation. On receipt of the bank state-

ment, it is discovered that

●

unpresented cheques amount to $3 m;

●

bank charges not recorded in the cash book amount to $2 m;

●

a cheque for $1 m from a customer has been dishonoured and not recorded in the

ledgers.

(vi) Bad debts to be written off amount to $5 m (including the dishonoured cheque

referred to in note (v) above), and the allowance for receivables is to be amended to

2.5 per cent of receivables.

(vii) Depreciation on non-current assets is to be provided as follows:

●

plant and machinery, 10 per cent on cost;

●

o f ﬁ ce equipment, 33 1/3 per cent on the reducing balance.

(viii) An accrual of $2 m is to be made for income tax.

(ix) $20m is to be transferred to general reserves.

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

631

FUNDAMENTALS OF FINANCIAL ACCOUNTING

Requirements

(a) Insert the missing items in the income statement for the year ended 31 October

20X1

Income statement of EMP plc for the year ended 31 October 20X1

$m $m $m

Sales

Cost of sales

Gross proﬁ t

Operating proﬁ t

(9 marks)

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

REVISION QUESTIONS C2

632

(b) Insert the missing items in the statement of changes in equity for the year ended 31

October 20X1

Statement of changes in equity of EMP plc for the year ended 31 October 20X1

General reserves Retained earnings Total

$m $m $m

Balance at the start of the period

Balance at the end of the period

(3 marks)

(c) Insert the missing items in the statement of ﬁ nancial position at 31 October 20X1.

Statement of ﬁ nancial position of EMP plc at 31 October 20X1

Cost Acc. Depreciation Carrying

Amount

Assets $m $m $m $m

Non-current assets

Current assets

Equity and liabilities

Current liabilities

(8 marks)

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

633

FUNDAMENTALS OF FINANCIAL ACCOUNTING

(d) State the formulae for and calculate the following ratios by inserting the missing

items.

(i) Acid test or quick ratio

Formula :

Figures :  :

(ii) Inventories days

Formula



Figure





days

(4 marks)

(Total marks  24)

Question 32

Your organisation’s year end is 31 October. Prior to producing the trial balance at 31

October 20X0, your supervisor has passed you the following list of errors and omissions

(i) Purchase of raw materials on credit from J Brown had been completely omitted. The

list price was $9,000, less trade discount of 331/3 per cent, with cash discount of 2

per cent offered for payment before 31 October 20X0. The invoice is still outstanding

at the end of the month.

(ii) Ofﬁ ce equipment valued at $4,000 was received in part payment of a debt of $4,500

from Zhang. The balance of Zhang’s debt is to be written off. No entries have been

made for either of these transactions. No depreciation is to be charged on the ofﬁ ce

equipment.

(iii) Administration expenses paid, of $5,300, had been credited to administration

expenses and debited to the bank account.

(iv) Ofﬁ ce equipment had been disposed of during the year. The cost ($4,200) and accu-

mulated depreciation ($3,320) had been correctly transferred to the disposals account,

but no other entries had been made. The disposal proceeds of $720 have not yet been

received.

(v) Staff wages accrued of $3,000 gross had been omitted. Employees ’ income tax was

$450, employees ’ social security tax contributions were $120 and employer’s social

security tax contributions were $130. All payments will be made after 31 October

20X0.

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

REVISION QUESTIONS C2

634

Requirements

(a) Insert the missing items in the journal entries to correct the above errors and

omissions.

Journal entries

Debit Credit

$ $

(i)

(ii)

(iii)

(iv)

(v)

(7 marks)

(b) If the above errors had not been corrected, the net proﬁ t for the year ended 31

October 20X0 would have been $37,500. Recalculate the net proﬁ t after taking into

account the above corrections, by inserting the missing ﬁ gures in the schedule below.

Recalculated net proﬁ t

$

Net proﬁ t before adjustments 37,500

Amended net proﬁ t

(4 marks)

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

635

FUNDAMENTALS OF FINANCIAL ACCOUNTING

(c) A replacement engine had been purchased for a machine during the year. The whole

cost of $25,000 had been charged to the ‘ machinery cost account ’ , and depreciation

of 10 per cent on the full amount had been charged. You are now informed that only

$10,000 of the cost was deemed to be in respect of an improvement in the productive

capacity of the machine.

You are required to :

(i) complete the missing words in the following sentences:____ expenditure is the

acquisition, production or enhancement of ____ assets. ____ expenditure includes

the purchase of goods for resale, and expenditure on goods and services to be ____

during the reporting period.

(6 marks)

(ii) calculate the effect that the incorrect treatment of this expenditure will have had

on the proﬁ t for the year, by inserting the missing ﬁ gures in the schedule below.

Effect of incorrect treatment

$

(3 marks)

(Total marks  20)

Question 33

You are given the following information relating to PB’s business for the month of October

20X0:

$

Owing by customers at 1 October 20X0 95,760

Owing to customers at 1 October 20X0 3,400

Owing to customers at 31 October 20X0 5,750

Sales during the month

Cash sales (including sales tax at 17.5%) 9,400

Credit sales (including sales tax at 17.5%) 757,875

Receipts from customers (including cash sales) 739,000

Discounts allowed to credit customers 2,450

Refunds made to credit customers 4,385

Returns inwards (excluding sales tax at 17.5%), all on credit 25,800

Bad debts written off 2,875

Dishonoured cheques from credit customers 15,215

The allowance for receivables is 2 per cent of net balance at 31 October 20X0.

In addition, PB was notiﬁ ed on 30 October 20X0 that she would be receiving a divi-

dend of 20¢ in the pound from a previously written-off bad debt of $6,000. The amount

was received in November 20X0.

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

REVISION QUESTIONS C2

636

She also has a customer owing $5,400, who is also a supplier of hers. The balance in the

purchase ledger is $8,200, and she agreed to offset the balances.

You are required to prepare a sales ledger control account for PB for the month of

October 20X0, using the information above, by inserting the missing items below.

Sales ledger control account

$ $

Balance b/f Balance b/f

Balance c/f

(7 marks)

Question 34

Your organisation maintains a single ledger account for rent, local business tax and

insurance.

On 1 November 20X0, the following balances were to be brought forward on the

account:

$

Rent accrued for October 20X0 700

Local business tax prepaid to 31 March 20X1 550

Insurance prepaid to 31 December 20X0 400

During the next year, the following payments were made:

●

Rent . $2,100 per quarter, payable on 1 November, 1 February, 1 May and 1 August. The

May payment was made with the August payment.

●

Local business tax . $1,200, for the year ending 31 March 20X2, paid on 8 April 20X1.

●

Insurance . $3,000, for the year ending 31 December 20X1, paid on 28 December 20X0.

In addition, a refund of insurance for the year ended 31 December 20X0, of $80, was

received on 3 January 20X1.

Requirements

(a) Insert the missing items in the ledger account for rent, local business tax and insur-

ance for the year ended 31 October 20X1, showing clearly the amount to be trans-

ferred to the income statement for the year, and the amounts accrued and/or prepaid

at the end of the year.

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

637

FUNDAMENTALS OF FINANCIAL ACCOUNTING

Rent, local business tax and insurance

Date Account $ Date Account $

(8 marks)

(b) Insert the missing words in these sentences relating to the conventions of prudence

and accruals.

The ____ convention stipulates that ____ and ____ should not be anticipated.

However, ____, ____ and ____ should be provided for as soon as it is known that an

____ has been incurred that relates to the accounting period, or the possibility of a

____ or ____ exists.

The ____ ( or ____) convention stipulates that ____ and ____ are matched with each

other in accordance with the period to which they relate, regardless of the period in

which the ____ or ____ occurs.

(5 marks)

(c) Your organisation made a net proﬁ t of $47,500 for the year ended 31 October 20X1.

This was after charging depreciation of $8,200 and a loss on disposal of non-current

assets of $1,200. The proceeds of sale of the non-current asset were $5,400.

During the year, the carrying amount of non-current assets rose by $18,000; receiv-

ables increased by $2,500; inventories decreased by $5,200 and payables increased by

$1,800. The proprietor withdrew $7,000 of the proﬁ ts for his own use, and paid off a

long-term loan of $8,000.

Insert the missing items in the schedule for the change in the bank balance as a

result of the above transactions.

PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)

REVISION QUESTIONS C2

638

Change in bank balance

$

P r o ﬁ t for the year 47,500

Increase in bank balance

(7 marks)

(Total marks  20)

639

Solutions to

Revision Questions

Solution 1

1.1 Answer: (C)

There are several ways a candidate could identify the correct answer here, including

the process of elimination. Answers (A) and (D) cannot be right as they both include

a debit to the cash account, and as the company is making a payment a credit to the

cash account is required. The difference between answers (B) and (C) is the amount of

cash discount given. This should be calculated as 2 per cent of the net goods value, that

is, the value after deducting the trade discount. The net goods value is $400 less $100

trade discount  $300, therefore the cash discount is $6 and answer (C) is correct.

Taking the question in order of action, the initial purchase should be recorded

ignoring the cash discount, as it is not known at the time of purchase whether pay-

ment will be made in time to become entitled to the cash discount. Trade discount

is always deducted at once, and thus the initial entries are Debit purchases, Credit

ABC Ltd with $300. On payment, ABC Ltd is debited with $300, the amount paid

out (and credited to the bank) is $300 – $6 cash discount, and the discount is cred-

ited to Discount received (being an item of revenue).

1.2 Answer: (B)

A spreadsheet is ideal for preparing budgets and forecasts, using a columnar format

with the accounting periods across the top and the items of revenue/expense and

so on, down the columns. It is also ideal for use as a daybook, again with a colum-

nar format with the invoice numbers and, listed vertically and the columns headed

‘ Gross ’ , ‘ sales tax ’ and ‘ Net ’ (perhaps with further analysis columns). An extended

trial balance could also be prepared using a spreadsheet, with the accounts listed ver-

tically and the columns used for the trial balance ﬁ gures, adjustments, income state-

ment items and, ﬁ nally, statement of ﬁ nancial position items. Double-entry records

would require several spreadsheets, one for each account, and recording the dual

aspect would mean locating the two relevant spreadsheets and the appropriate cells,

making this application much more difﬁ cult.

1.3 Answer: (D)

The suspense account is debited or credited as a result of an imbalance in the trial

balance. A debit balance would arise if the credit side of the trial balance were greater

than the debit side. Option (A) would result in the debit side being greater than the

CIMA CO2 Official Learning System - Fundamentals of Financial Accounting

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