FOUNDATIONS IN ACCOUNTANCY

Financial Accounting
Pilot Paper

Time allowed: 2 hours This paper is divided into two sections: Section A ALL 35 questions are compulsory and MUST be attempted Section B BOTH questions are compulsory and MUST be attempted

Do NOT open this paper until instructed by the supervisor. This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

Paper FFA

Section A ALL 35 questions are compulsory and MUST be attempted Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to each multiple choice question. Each question is worth 2 marks. 1 Which of the following calculates a sole traders net profit for a period? A B C D Closing Closing Closing Closing net net net net assets assets assets assets + drawings capital introduced opening net assets drawings + capital introduced opening net assets drawings capital introduced opening net assets + drawings + capital introduced opening net assets

Which of the following explains the imprest system of operating petty cash? A B C D Weekly expenditure cannot exceed a set amount The exact amount of expenditure is reimbursed at intervals to maintain a fixed float All expenditure out of the petty cash must be properly authorised Regular equal amounts of cash are transferred into petty cash at intervals

Which of the following statements are TRUE of limited liability companies? (1) The companys exposure to debts and liability is limited (2) Financial statements must be produced (3) A company continues to exist regardless of the identity of its owners A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3

Annie is a sole trader who does not keep full accounting records. The following details relate to her transactions with credit customers and suppliers for the year ended 30 June 20X6: Trade receivables, 1 July 20X5 Trade payables, 1 July 20X5 Cash received from customers Cash paid to suppliers Discounts allowed Discounts received Contra between payables and receivables ledgers Trade receivables, 30 June 20X6 Trade payables, 30 June 20X6 $ 130,000 60,000 686,400 302,800 1,400 2,960 2,000 181,000 84,000

What figure should appear for purchases in Annies income statement for the year ended 30 June 20X6? A B C D $325,840 $330,200 $331,760 $327,760

Which TWO of the following errors would cause the total of the debit column and the total of the credit column of a trial balance not to agree? (1) (2) (3) (4) A B C D A transposition error was made when entering a sales invoice into the sales day book A cheque received from a customer was credited to cash and correctly recognised in receivables A purchase of non-current assets was omitted from the accounting records Rent received was included in the trial balance as a debit balance 1 1 2 2 and and and and 2 3 3 4

At 31 December 20X5 the following require inclusion in a companys financial statements: (1) On 1 January 20X5 the company made a loan of $12,000 to an employee, repayable on 1 January 20X6, charging interest at 2% per year. On the due date she repaid the loan and paid the whole of the interest due on the loan to that date. (2) The company paid an annual insurance premium of $9,000 in 20X5, covering the year ending 31 August 20X6. (3) In January 20X6 the company received rent from a tenant of $4,000 covering the six months to 31 December 20X5. For these items, what total figures should be included in the companys statement of financial position as at 31 December 20X5? A B C D Current Current Current Current assets assets assets assets $10,000 $22,240 $10,240 $16,240 Current Current Current Current liabilities liabilities liabilities liabilities $12,240 $nil $nil $6,000

A companys income statement for the year ended 31 December 20X5 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the companys policy to depreciate motor vans at 25% per year on the straight line basis, with a full years charge in the year of acquisition. What would the net profit be after adjusting for this error? A B C D $106,100 $70,100 $97,100 $101,600

Xena has the following working capital ratios: Current ratio Receivables days Payables days Inventory turnover 20X9 12:1 75 days 30 days 42 days 20X8 15:1 50 days 45 days 35 days

Which of the following statements is correct? A B C D Xenas liquidity and working capital has improved in 20X9 Xena is receiving cash from customers more quickly in 20X9 than in 20X8 Xena is suffering from a worsening liquidity position in 20X9 Xena is taking longer to pay suppliers in 20X9 than in 20X8

[P.T.O.

Which of the following statements is/are correct? (1) A statement of cash flows prepared using the direct method produces a different figure to net cash from operating activities from that produced if the indirect method is used (2) Rights issues of shares do not feature in a statement of cash flows (3) A surplus on revaluation of a non-current asset will not appear as an item in a statement of cash flows (4) A profit on the sale of a non-current asset will appear as an item under cash flows from investing activities in the statement of cash flows A B C D 1 3 2 3 and 3 only and 4 only and 4 only only

10 A company receives rent from a large number of properties. The total received in the year ended 30 April 20X6 was $481,200. The following were the amounts of rent in advance and in arrears at 30 April 20X5 and 20X6: 30 April 20X5 $ 28,700 21,200 30 April 20X6 $ 31,200 18,400

Rent received in advance Rent in arrears (all subsequently received)

What amount of rental income should appear in the companys income statement for the year ended 30 April 20X6? A B C D $486,500 $460,900 $501,500 $475,900

11 Which of the following are differences between sole traders and limited liability companies? (1) A sole traders financial statements are private and never made available to third parties; a companys financial statements are sent to shareholders and may be publicly filed (2) Only companies have share capital (3) A sole trader is fully and personally liable for any losses that the business might make (4) Only drawings would appear in a sole traders financial statements A B C D 1 and 4 only 2, 3 and 4 2 and 3 only 1, 3 and 4

12 Which of the following statements is true? A B C D The interpretation of an entitys financial statements using ratios is only useful for potential investors Ratios based on historical data can predict the future performance of an entity The analysis of financial statements using ratios provides useful information when compared with previous performance or industry averages An entitys management will not assess an entitys performance using financial ratios

13 A companys motor vehicles cost account at 30 June 20X6 is as follows: Motor vehicles cost Balance b/f Additions $ 35,800 12,950 48,750 Disposal Balance c/f $ 12,000 36,750 48,750

What opening balance should be included in the following periods trial balance for Motor vehicles cost at 1 July 20X6? A B C D $36,750 $48,750 $36,750 $48,750 Dr Dr Cr Cr

14 Which TWO of the following items must be disclosed in the note to the financial statements for intangible assets? (1) (2) (3) (4) A B C D The useful lives of intangible assets capitalised in the financial statements A description of the development projects that have been undertaken during the period A list of all intangible assets purchased or developed in the period Impairment losses written off intangible assets during the period 1 2 3 1 and and and and 4 3 4 2

15 Which of the following statements are correct? (1) Capitalised development expenditure must be amortised over a period not exceeding five years. (2) Capitalised development costs are shown in the statement of financial position under the heading of non-current assets (3) If certain criteria are met, research expenditure must be recognised as an intangible asset. A B C D 2 2 1 1 only and 3 only and 3

16 The following transactions relate to Rashids electricity expense ledger account for the year ended 30 June 20X9: Prepayment brought forward Cash paid Accrual carried forward $ 550 5,400 650

What amount should be charged to the income statement in the year ended 30 June 20X9 for electricity? A B C D $6,600 $5,400 $5,500 $5,300

[P.T.O.

17 At 30 June 20X5 a companys allowance for receivables was $39,000. At 30 June 20X6 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the equivalent of 5% of the trade receivables based on past events. What figure should appear in the income statement for the year ended 30 June 20X6 for receivables expense? A B C D $61,000 $52,000 $22,000 $37,000

18 The total of the list of balances in Valleys payables ledger was $438,900 at 30 June 20X6. This balance did not agree with Valleys payables ledger control account balance. The following errors were discovered: (1) A contra entry of $980 was recorded in the payables ledger control account, but not in the payables ledger. (2) The total of the purchase returns daybook was undercast by $1,000. (3) An invoice for $4,344 was posted to the suppliers account as $4,434. What amount should Valley report in its statement of financial position for accounts payable at 30 June 20X6? A B C D $436,830 $438,010 $439,790 $437,830

19 According to IAS 2 Inventories, which TWO of the following costs should be included in valuing the inventories of a manufacturing company? (1) (2) (3) (4) A B C D Carriage inwards Carriage outwards Depreciation of factory plant General administrative overheads 1 1 3 2 and and and and 4 3 4 3

20 Prisha has not kept accurate accounting records during the financial year. She had opening inventory of $6,700 and purchased goods costing $84,000 during the year. At the year end she had $5,400 left in inventory. All sales are made at a mark up on cost of 20%. What is Prishas gross profit for the year? A B C D $13,750 $17,060 $16,540 $20,675

21 At 31 December 20X4 a companys capital structure was as follows: Ordinary share capital (500,000 shares of 25c each) Share premium account $ 125,000 100,000

In the year ended 31 December 20X5 the company made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the share premium account for the purpose. What was the companys capital structure at 31 December 20X5? A B C D Ordinary share capital $450,000 $225,000 $225,000 $212,500 Share premium account $25,000 $250,000 $325,000 $262,500

22 Which of the following should appear in a companys statement of changes in equity? (1) Total comprehensive income for the year (2) Amortisation of capitalised development costs (3) Surplus on revaluation of non-current assets A B C D 1, 2 and 3 2 and 3 only 1 and 3 only 1 and 2 only

23 The plant and machinery account (at cost) of a business for the year ended 31 December 20X5 was as follows: Plant and machinery cost 20X5 1 Jan Balance b/f 30 Jun Cash purchase of plant $ 240,000 160,000 400,000 20X5 31 Mar 31 Dec Transfer to disposal account Balance c/f $ 60,000 340,000 400,000

The companys policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal. What should be the depreciation charge for the year ended 31 December 20X5? A B C D $68,000 $64,000 $61,000 $55,000

[P.T.O.

24 The following extracts are from Hassans financial statements: Profit before interest and tax Interest Tax Profit after tax Share capital Reserves Loan liability $ 10,200 (1,600) (3,300) 5,300 20,000 15,600 35,600 6,900 42,500

What is Hassans return on capital employed? A B C D 15% 29% 24% 12%

25 Which of the following statements about sales tax is/are true? (1) Sales tax is an expense to the ultimate consumer of the goods purchased (2) Sales tax is recorded as income in the accounts of the entity selling the goods A B C D 1 only 2 only Both 1 and 2 Neither 1 nor 2

26 Qs trial balance failed to agree and a suspense account was opened for the difference. Q does not keep receivables and payables control accounts. The following errors were found in Qs accounting records: (1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share capital account as $330,000 (2) Cash of $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant asset account (3) The petty cash book balance of $500 had been omitted from the trial balance (4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account as $87,400. Which of the errors will require an entry to the suspense account to correct them? A B C D 1, 2 and 4 only 1, 2, 3 and 4 1 and 4 only 2 and 3 only

27 Prior to the financial year end of 31 July 20X9, Cannon Co has received a claim of $100,000 from a supplier for providing poor quality goods which have damaged the suppliers plant and equipment. Cannon Cos lawyers have stated that there is a 20% chance that Cannon will successfully defend the claim. Which of the following is the correct accounting treatment for the claim in the financial statements for the year ended 31 July 20X9? A B C D Cannon Cannon Cannon Cannon should should should should neither provide for nor disclose the claim disclose a contingent liability of $100,000 provide for the expected cost of the claim of $100,000 provide for an expected cost of $20,000

28 Gareth, a sales tax registered trader purchased a computer for use in his business. The invoice for the computer showed the following costs related to the purchase: Computer Additional memory Delivery Installation Maintenance (1 year) Sales tax (175%) Total $ 890 95 10 20 25 1,040 182 1,222

How much should Gareth capitalise as a non-current asset in relation to the purchase? A B C D $1,193 $1,040 $1,222 $1,015

29 The following bank reconciliation statement has been prepared by a trainee accountant: Overdraft per bank statement Less: Unpresented cheques Add: Outstanding lodgements Cash at bank $ 3,860 9,160 5,300 16,690 21,990

What should be the correct balance per the cash book? A B C D $21,990 balance at bank as stated $3,670 balance at bank $11,390 balance at bank $3,670 overdrawn

[P.T.O.

30 The IASBs Framework for the Preparation and Presentation of Financial Statements gives qualitative characteristics that make financial information reliable. Which of the following are examples of those qualitative characteristics? (1) (2) (3) (4) A B C D Accruals Faithful representation Going concern Neutrality 1 2 2 1 and and and and 2 4 3 4

31 The following control account has been prepared by a trainee accountant: Receivables ledger control account Opening balance Credit sales Cash sales Contras $ 308,600 154,200 88,100 4,600 $ Cash 147,200 Discounts allowed 1,400 Interest charged on overdue accounts 2,400 Irrecoverable debts 4,900 Allowance for receivables 2,800 Closing balance 396,800 555,500

555,500

What should the closing balance be when all the errors made in preparing the receivables ledger control account have been corrected? A B C D $395,200 $304,300 $309,500 $307,100

32 Which of the following material events after the reporting date and before the financial statements are approved are adjusting events? (1) (2) (3) (4) A B C D A valuation of property providing evidence of impairment in value at the reporting date. Sale of inventory held at the reporting date for less than cost. Discovery of fraud or error affecting the financial statements. The insolvency of a customer with a debt owing at the reporting date which is still outstanding. 1, 2 and 4 only 1, 2, 3 and 4 1 and 4 only 2 and 3 only

10

33 A company values its inventory using the FIFO method. At 1 May 20X5 the company had 700 engines in inventory, valued at $190 each. During the year ended 30 April 20X6 the following transactions took place: 20X5 1 July 1 November 20X6 1 February 15 April Purchased 500 engines at $220 each Sold 400 engines for $160,000 Purchased 300 engines at $230 each Sold 250 engines for $125,000

What is the value of the companys closing inventory of engines at 30 April 20X6? A B C D $188,500 $195,500 $166,000 $106,000

34 Amy is a sole trader and had assets of $569,400 and liabilities of $412,840 on 1 January 20X8. During the year ended 31 December 20X8 she paid $65,000 capital into the business and she paid herself wages of $800 per month. At 31 December 20X8, Amy had assets of $614,130 and liabilities of $369,770. What is Amys profit for the year ended 31 December 20X8? A B C D $32,400 $23,600 $22,800 $87,800

35 Bumbly Co extracted the trial balance for the year ended 31 December 20X7. The total of the debits exceeded the credits by $300. Which of the following could explain the imbalance? A B C D Sales of $300 were omitted from the sales day book Returns inward of $150 were extracted to the debit column of the trial balance Discounts received of $150 were extracted to the debit column of the trial balance The bank ledger account did not agree with the bank statement by a debit of $300 (70 marks)

11

[P.T.O.

Section B BOTH questions are compulsory and MUST be attempted Please write your answer within the answer booklet in accordance with the detailed instructions provided within each of the questions in this section of the exam paper. 1 Keswick Co acquired 80% of the share capital of Derwent Co on 1 June 20X5. The summarised draft income statements for Keswick Co and Derwent Co for the year end of 31 May 20X6 are shown below: Keswick Co $000 8,400 (4,600) 3,800 (1,500) (700) 1,600 (600) 1,000 Derwent Co $000 3,200 (1,700) 1,500 (510) (450) 540 (140) 400

Revenue Cost of sales Gross profit Distribution costs Administrative costs Profit before tax Tax Profit for the year

During the year Keswick Co sold goods costing $1,000,000 to Derwent Co for $1,500,000. At 31 May 20X6, 30% of these goods remained in Derwent Cos inventory. Required: (a) Use the information above to answer the questions below. Write your answers in the answer book provided. (i) Which of the formulas below shows the correct consolidated revenue? A B C D E F 8,400 8,400 8,400 8,400 8,400 8,400 + + + + + + 3,200 1,500 (80% x 3,200) 1,500 3,200 (80% x 3,200) 3,200 + 1,500 3,200 1,000

(2 marks)

(ii) Which of the formulas below shows the correct consolidated cost of sales? A B C D E F 4,600 4,600 4,600 4,600 4,600 4,600 + + + + + + 1,700 1,500 + (30% x 500) (80% x 1,700) 1,500 1,700 (80% x 1,700) 1,700 1,500 (30% x 500) 1,700 1,000

(2 marks) (1 mark) (1 mark) (1 mark)

(iii) What are consolidated distribution costs? (iv) What are consolidated administrative expenses? (v) What is the consolidated tax expense?

(vi) Which of the following formulas shows the correct formula for the amount to be entered in the consolidated income statement as Profit attributable to: Equity owners of Keswick Co? A B C D Group profit after tax non controlling interest Group profit after tax + non controlling interest Keswick Cos profit after tax Group profit after tax

(2 marks)

(vii) What amount is shown in the consolidated income statement for the non-controlling interest? (2 marks)

12

(b) The following table shows factors (A to H) to be considered when determining whether a parentsubsidiary relationship exists. Required: In your answer book list letters A to H to represent each of the factors, and write Yes if the factor illustrates the existence of a parentsubsidiary relationship and No if it does not. A B C D E F G H Factor Significant influence Control Non controlling interest Greater than 50% of the equity shares being held by an investor 100% of the equity shares being held by an investor Greater than 50% of the preference shares being held by an investor 50% of all shares and all debt being held by an investor Greater than 50% of preference shares and debt being held by an investor

(4 marks) (15 marks)

13

[P.T.O.

Malright, a limited liability company, has an accounting year end of 31 October. The accountant is preparing the financial statements as at 31 October 20X7 and requires your assistance. The trial balance below contains items which belong on either the statement of financial position as at 31 October 20X7 or statement of comprehensive income for the year ended 20X7. The bookkeeper is uncertain as to which statement the balances belong. Required: (a) For each of the items listed below (A to P), determine whether they belong in the statement of financial position as at 31 October 20X7. In your answer book list the letters A to P to represent each of the ledger account balances and write Yes if the ledger account belongs on the statement of financial position as at 31 October 20X7 and No if it does not. Item ref A B C D E F G H I J K L M N O P Account Buildings at cost Buildings accumulated depreciation, 1 November 20X6 Plant at cost Plant accumulated depreciation, 1 November 20X6 Bank balance Revenue Net Purchases Inventory at 1 November 20X6 Cash Trade payables Trade receivables Administrative expenses Allowance for receivables at 1 November 20X6 Retained earnings at 1 November 20X6 Equity shares, $1 Share premium account Dr $000 740 220 110 70 1,800 1,140 160 20 250 320 325 10 130 415 80 2,925 (4 marks) Cr $000 60

2,925

14

(b) The bookkeeper has been given information relating to depreciation and allowance for receivables and is uncertain about the double entry: The allowance for receivables is to be increased to 5% of trade receivables. The allowance for receivables is treated as an administrative expense. Plant is depreciated at 20% per annum using the reducing balance method and buildings are depreciated at 5% per annum on their original cost. Depreciation is treated as a cost of sales expense.

Required: (i) What is the double entry to record the increase in the allowance for receivables? In your answer book, list A, B, C and D and write Debit if the corresponding ledger account is debited, Credit if the item is to be credited and None if the ledger account does not require an entry. Item ref A B C D Ledger account Trade receivables Administrative expenses Allowance for receivables Revenue Debit Credit No Debit or Credit

(2 marks) (ii) What is the allowance for receivables expense for the year? (iii) What is the double entry to record the buildings and plant depreciation for the year? In your answer book, list A to F and write Debit if the ledger account is debited, Credit if the item is to be credited and None if the ledger account does not require an entry. Item ref A B C D E F Ledger account Administrative expenses Cost of sales Buildings cost Plant cost Buildings accumulated depreciation Plant accumulated depreciation Debit Credit No Debit or Credit (1 mark)

(3 marks) (iv) What is the depreciation charge for buildings for the year? (v) What is the depreciation charge for plant for the year? (c) Here is some additional information: Closing inventory has been counted and is valued at $75,000 An invoice of $15,000 for energy costs relating to the quarter ended 30 November 20X7 was received on 2 December 20X7. Energy costs are included in administrative expenses. (1 mark) (1 mark)

Required: (i) Ignoring the depreciation charge in part (b) what is the cost of sales for the year? (15 marks)

The energy costs need to be adjusted for the year ended 31 October 20X7. (ii) Which account is debited to account for the year-end adjustment for energy costs? (iii) Which account is credited to account for the year-end adjustment for energy costs? (iv) What is the amount to be posted within the year-end adjustment double entry above? (05 marks) (05 marks) (05 marks) (15 marks) End of Question Paper

15

Answers

FOUNDATIONS IN ACCOUNTANCY Paper FFA Financial Accounting Section A 1 A

Pilot Paper Answers and Marking Scheme

C Payables: Balance b/f Cash paid to suppliers Discounts received Contra Balance c/f Purchases

$ 60,000 (302,800) (2,960) (2,000) (84,000) 331,760

B Current assets Loan asset Interest (12,000 x 12%) Prepayment (8/12 x 9,000) Accrued rent

$ 12,000 240 6,000 4,000 22,240

C Profit Purchase of van Depreciation 18,000 x 25% $ 83,600 18,000 (4,500) 97,100

10 D Balance b/f (advance) Balance b/f (arrears) Cash received Balance c/f (advance) Balance c/f (arrears) $ 28,700 (21,200) 481,200 (31,200) 18,400 475,900

11 B

19

12 C

13 A

14 A

15 A

16 A Balance b/f Expense incurred (cash) Accrual c/f $ 550 5,400 650 6,600

17 C $ Debts written off Movement in allowance: (517 37) x 5% Less opening allowance Receivables expense $ 37,000

24,000 39,000 (15,000) 22,000

18 D Balance per ledger Less contra Posting error Corrected balance $ 438,900 (980) (90) 437,830

19 B

20 B (6,700 + 84,000 5,400) x 20% = $17,060

21 B Share capital $ 125,000 62,500 37,500 225,000 Share premium $ 100,000 187,500 (37,500) 250,000

Balance b/f Rights issue Bonus issue Balance c/f

22 C

20

23 D $ Depreciation: JanMar 240,000 x 20% x 3/12 AprJun (240,000 60,000) x 20% x 3/12 JulDec (180,000 + 160,000) x 20% x 6/12 12,000 9,000 34,000 55,000

24 C 10,200/42,500

25 A

26 B

27 C

28 D 1,040 25 = $1,015

29 B Overdraft per bank statement Less: Unpresented cheques Add: Outstanding lodgements Cash at bank $ (3,860) (9,160) 16,690 3,670

30 B

31 D Receivables ledger control account Opening balance Credit sales Interest charged on overdue accounts $ 308,600 154,200 2,400 465,200 Cash Discounts allowed Contras Irrecoverable debts Closing balance $ 147,200 1,400 4,600 4,900 307,100 465,200

32 B

33 A Closing inventory: 50 x $190 500 x $220 300 x $230 $ 9,500 110,000 69,000 188,500

21

34 A Opening assets Opening liabilities Capital introduced Drawings (800 x 12) Profit (bal fig) Closing net assets (614,130 369,770) $ 569,400 (412,840) 65,000 (9,600) 211,960 32,400 244,360

35 C Section B 1 (a) (i) (ii) A A Marks 2 2 1 1 1 2 2

(iii) $1,500 + $510 = $2,010 (iv) $700 + $450 = $1,150 (v) $600 + $140 = $740

(vi) A (vii) $400 x 20% = $80 (b) A B C D E F G H No Yes Yes Yes Yes No No No

4 15

(a)

A B C D E F G H I J K L M N O P

Yes No Yes No Yes No No No Yes Yes Yes No No No Yes Yes

025 025 025 025 025 025 025 025 025 025 025 025 025 025 025 025 4 None Debit Credit None 05 05 05 05 2

(b)

(i)

A B C D

22

(ii)

$6,000 Closing allowance: 320,000 x 5% = Opening allowance per TB Receivables expense $ 16,000 (10,000) 6,000

Marks 1

(iii) A B C D E F

None Debit None None Credit Credit

05 05 05 05 05 05 3 1

(iv) $37,000 $740,000 x 5% = $37,000 (v) $22,000 ($220,000 $110,000) x 20% = $22,000 (c) (i) $1,225,000 $160,000 + $1,140,000 $75,000 = $1,225,000 (ii) Administrative expenses

15

05 05 05 15

(iii) Accrual (iv) $10,000 $15,000 x 2/3 = $10,000

23