CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
670
Solution 27
(a) Income statement of Robert Costello for the year ended 30 September 20X9
$ $
Sales (305,000 5,500 4,800) 315,300
Opening inventories 42,500
Purchases 180,300
222,800
Closing inventories (45,200)
Cost of sales (177,600)
Gross profi t 137,700
Loan interest 3,600
Rental of shop (24,000 6,000) 18,000
Local business tax (3,500 1,200) 2,300
General offi ce expenses 8,800
Heating and lighting (2,400 350) 2,750
Car insurance 400
Wages (18,500 15,000 3,760) 7,260
Depreciation of fi xtures and fi ttings 1,280
Depreciation of motor vehicle 3,000
Loss on disposal 1,000
Stationery 400
Petrol 1,200
Bad debts & allowance for receivables (3,000 2,845) 5,845
(55,835)
Net profi t 81,865
(b) Statement of fi nancial position of Robert Costello as at 30 September 20X9
Assets Cost Acc. Dep’n Carrying Amount
Non-current assets $ $ $
Fixtures and fi ttings 10,000 (4,880) 5,120
Motor vehicle 15,000 (3,000) 12,000
25,000 (7,880) 17,120
Current assets
Inventories 45,200
Receivables (62,900 5,845) 57,055
Prepayments (6,000 1,200) 7,200
Bank 18,500
127,955
145,075
Capital and liabilities
Balance on 1 October 20X8 26,600
P r o fi t for year 81,865
Drawings (15,000)
93,465
Non-current liabilities
Bank loan (40,000 9,000 12,000) 19,000
Current liabilities
Payables 15,200
Accrued expenses 350
Sales tax (4,500 840 7 0 210) 5,060
Bank loan 12,000
32,610
145,075
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
671
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Workings
(i) Closing inventories of $45,200 appears in the income statement as part of the cost
of goods sold calculation and in the statement of fi nancial position under current
assets.
(ii) Deduct $6,000 from shop rental and include as a prepayment.
(iii) Half the $2,400 represents a prepayment.
(iv) Add $350 to heating and lighting and include as an accrual.
(v) Deduct $15,000 from wages and treat as drawings.
(vi) Increase sales by $4,800
Increase sales tax a/c by $840
Increase stationery by $400
Reduce sales tax a/c by $70
Increase wages by $3,760
Increase petrol by $1,200
Reduce sales tax a/c by $210.
(vii) Motor vehicle at cost will now be (21,000 8,000 2,000), that is $15,000.
The trial balance depreciation fi gure is to be eliminated.
There is a loss on disposal of $3,000 $2,000, that is $1,000.
(viii) The depreciation charge re fi xtures and fi ttings is 20% ($10,000 $3,600)
$1,280.
The depreciation charge re the new motor vehicle is 20% of $15,000 $3,000.
(ix) Write off $3,000 as a bad debt plus an allowance for receivables 5% (62,900
6,000) $2,845.
(x) The $12,600 is $9,000 capital repayment, and $3,600 interest paid. Also, next year’s
capital repayments of $12,000 are to be treated as a current liability.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
672
Solution 28
(a)
Capital
$ $
1/10/9X9 Bank 20,000
Bank
$ $
1/10/X9 Capital 20,000 3/10/X9 Rent payable 1,200
28/10/X9 P Assad 500 5/10/X9 Offi ce equipment 5,000
25/10/X9 A Jones 3,000
Purchases
$ $
2/10/X9 A Jones 3,500
18/10/X9 A Jones 2,400
A Jones
$ $
15/10/X9 Returns outwards 500 2/10/X9 Purchases 3,500
25/10/X9 Bank 3,000 18/10/X9 Purchases 2,400
31/10/X9 Balance c/d 2,400
5,900 5,900
1/11/X9 Balance b/d 2,400
Rent payable
$ $
3/10/X9 Bank 1,200
Offi ce equipment
$ $
5/10/X9 Bank 5,000
Sales
$ $
10/10/X9 P Assad 1,750
P Assad
$ $
10/10/X9 Sales 1,750 28/10/X9 Bank 500
31/10/X9 Balance c/d 1,250
1,750 1,750
Returns outwards
$ $
15/10/X9 A Jones 500
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
673
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(b) Calculation of Tanwir’s closing capital
$
Initial bank deposit 20,000
Vehicle introduced 6,000
Petrol payments 650
P r o fi t for the year 17,500
Drawings
Cash (5,000)
Private telephone expenses (450)
38,700
(c) The accounting convention involved is the business entity convention.
Solution 29
(a) FIFO cost formula
Date Quantity
Receipts
price
$
Value
$ Quantity
Issues
price
$
Value
$
Balance
quantity
Value
$
1 Oct. 120 8 960 120 960
3 Oct. 180 9 1,620 300 2,580
4 Oct. 120 8 960
30 9 270
150 1,230 150 1,350
8 Oct. 80 9 720 70 630
12 Oct. 30 9 270 40 360
18 Oct. 300 10 3,000 340 3,360
22 Oct. 40 9 360
60 10 600
100 960 240 2,400
28 Oct. 20 10 200 260 2,600
(b) AVCO cost formula
Date Quantity
Repeipts
price
$
Value
$ Quantity
Issues
price
$
Value
$
Balance
quanity
Value
$
1 Oct. 120 8 960 120 960
3 Oct. 180 9 1,620 300 2,580
4 Oct. 150 8.6 1,290 150 1,290
8 Oct. 80 8.6 688 70 602
12 Oct. 30 9.0 270 40 332
18 Oct. 300 10 3,000 340 3,332
22 Oct. 100 9.8 980 240 2,352
28 Oct. 20 9.8 196 260 2,548
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
674
(c) Trading accounts of Jay Ltd
FIFO AVCO
$ $
Opening inventory 960 960
Purchases (1,620 3,000 270) 4,350 4,350
5,310 5,310
Closing inventory (2,600) (2,548)
Cost of sales 2,710 2,762
Sales (1,800 1,200 1,500 – 300) (4,200) (4,200)
Gross profi t 1,490 1,438
Solution 30
Statement of changes in equity of MMM Ltd
Year 1
Share
capital
Share
premium
General
reserve
Retained
earnings
$ $
Balance at the start of the period – – – –
Shares issued 360,000 144,000 – –
Total comprehensive income
for the period
(48,800 6,500)
(55,000 8,000)
42,300
Dividends (18,000)
Transfer to reserves 5,000 (5,000)
Balance at the end of the period 360,000 144,000 5,000 19,300
Year 2
Share
capital
$
Share
premium
General
reserve
$
Retained
earnings
$
Balance at the start of the period 360,000 144,000 5,000 19,300
Shares issued 30,000 15,000
Total comprehensive income
for the period
(48,800–6,500)
(55,000–8,000)
47,000
Dividends (31,200)
Transfer to reserves 5,000 (5,000)
Balance at the end of the period 390,000 159,000 10,000 30,100
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
675
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 31
(a)
Income statement of EMP plc for the year ended 31 October 20X1
$m $m $m
Sales 376
Less : returns inwards (16)
360
Cost of sales
Opening inventories 62
Purchases 230
Carriage inwards 1
Returns outwards (12)
219
281
Closing inventories (106)
(175)
Gross profi t 185
Administrative expenses
Wages and salaries (28 3) 31
Directors ’ fees (10 2) 12
Telephone costs (12 4 – 1) 15
Rent and insurance (8 – 2) 6
Heat and light 16
Printing and stationery 12
Audit fee 1
Bank charges 2
Distribution expenses (24 – 1) 23
Bad debts written off 5
Change in allowance for receivables (decrease)* (6)
Depreciation
Plant (10% of 250) 25
O f fi ce equipment 33.3% (90 – 30) 20
(162)
Operating profi t 23
Income tax (2)
P r o fi t for the period 21
*Calculation of the decrease in allowance for receivables:
$ m
2.5% of (84 1 5) 2
Brought forward fi gure (8)
Therefore, a decrease of (6)
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
676
(b)
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 14 62 76
Total comprehensive income
for the period
21 21
Dividends (4) (4)
Transfer to general reserves 20 (20)
Balance at the end of the period 34 59 93
(c) Statement of fi nancial position of EMP plc as at 31 October 20X1
Assets Cost Acc. Depreciation Carrying Amount
$m $m $m
Non-current assets
Plant and machinery 250 (81) 169
O f fi ce equipment 90 (50) 40
340 (131) 209
Current assets
Inventories 106
Receivables 80
Less : allowance (2)
7 8
Prepayments 3
Bank 5
192
401
Equity and liabilities
Share capital 200
Share premium 16
General reserves (14 20) 34
Retained earnings 59
9 3
309
Current liabilities
Trade payables 80
Accruals 10
Income tax 2
9 2
401
(d) (i) Acid test or quick ratio
Current assets minus inventories : current liabilities (192 – 106) : 98 0 .88 : 1
(ii) Inventories days
Average inventories
Cost of sales
inventories days
(
×365
62 1
006 2
175
365 175
)/
days×
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
677
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 32
(a) Journal entries
Debit Credit
$ $
(i) Purchases 6,000
J Brown (payable) 6,000
(ii) Offi ce equipment 4,000
Bad debts 500
Zhang (receivable) 4,500
(iii) Administration expenses 10,600
Bank 10,600
(iv) Receivables 720
Disposal account 720
( v ) Wages account 3,000
Wages account (employer’s social security tax) 130
Employees ’ income tax payable 450
Social security tax payable 250
Wages payable 2,430
(b) Recalculated net profi t
$
Net profi t before adjustments 37,500
Less :
Purchases (6,000)
Bad debts (500)
Administration expenses (10,600)
Loss on disposal (160)
Wages accrual (3,130)
Amended net profi t 17,110
(c) (i) Capital expenditure is the acquisition, production or enhancement of non-current
assets. Revenue expenditure includes the purchase of goods for resale, and expend-
iture on goods and services to be consumed during the reporting period.
(ii)
Effect of incorrect treatment
$
Amount now deemed to be revenue expenditure 15,000
Adjustment to depreciation charge* (1,500)
13,500
that is, the profi t will be $13,500 less than the original amount.
$
*Original depreciation charge 10% of 25,000 2,500
Revised amount 10% of 10,000 (1,000)
1,500
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
678
Solution 33
Sales ledger control account
$ $
Balance b/f 95,760 Balance b/f 3,400
Credit sales 757,875 Receipts 729,600
Refunds 4,385 Discounts allowed 2,450
Dishonoured cheques 15,215 Returns inwards 30,315
Bad debt written back 1,200 Bad debts written off 2,875
Contra 5,400
Balance c/f
5,750 Balance c/f 106,145
880,185 880,185
Solution 34
(a)
Rent, local business tax and insurance
Date Account $ Date Account $
1/11 Local business tax 550 1/11 Rent accrued b/f 700
prepaid b/f 3/1 Bank – insurance 80
1/11 Insurance prepaid b/f 400 31/10 Local business tax 500
1/11 Bank – rent 2,100 prepaid c/f *
28/12 Bank insurance 3,000 Insurance prepaid c/f * 500
1/2 Bank rent 2,100 Income statement 12,470
8/4 Bank local business tax 1,200
1/8 Bank rent 4,200
31/10 Rent accrued c/f 700
14,250 14,250
* Calculations:
Rates prepaid / $
Insurance
prepaid /
1 200 12 5 500
3 000 12
,
,22 500 $
(b)
The
prudence convention stipulates that revenue and profi ts should not be anticipated.
However, expenses, liabilities and losses should be provided for as soon as it is known
that an expense has been incurred that relates to the accounting period, or the possibil-
ity of a liability or loss exists.
The accruals (or matching) convention stipulates that costs and revenues are matched
with each other in accordance with the period to which they relate, regardless of the
period in which the receipt or payment occurs.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
679
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(c) Change in bank balance
$
P r o fi t for the year 47,500
Add : depreciation charge 8,200
Add : loss on disposal 1,200
Less : purchase of non-current assets* (32,800)
Sale of non-current assets 5,400
Increase in receivables (2,500)
Decrease in inventories 5,200
Increase in payables 1,800
Less: drawings (7,000)
Long-term loan paid off (8,000)
Increase in bank balance 19,000
*Increase in non-current assets 18,000
Add: depreciation 8,200
Add: carrying amount of disposed assets 6,600
Therefore, purchases must be 32,800