F3-FFA

ASSIGNMENT PACK
Accountancy Hub
Teacher: Sir Ahsan Zubair
Types of Business Entity:

Explain how companies differ from sole traders and partnerships.

Corporate Governance:

Briefly describe the role of corporate governance.

Accounting Equation:

Kanaka set up a new restaurant and entered into the following transactions for the week
commencing 1 June 20X2:

1. Paid a personal cheque for $30,000 into a newly opened business bank account
as opening equity/capital for the business.
2. Paid $2,000 rent by bank transfer.
3. Made a bank payment of $10,000 for the supply and installation of kitchen
equipment and fittings.
4. Made a bank payment of $1,000 for restaurant fixtures and fittings.
5. Purchased food and drink to sell in the restaurant at a cost of $500 and agreed to
pay the supplier in one month.
6. Received receipts from restaurant customers totalling $1,750.

Present the accounting equation after each of the transactions.

Recording credit transactions:

Nat noted the following transactions that occurred in June.

1. Sold goods for cash for $60.

2. Paid insurance premium by cheque – $400.
3. Sold goods for $250 – the customer will pay in a month.
4. Paid $50 petrol for the delivery van.
5. Bought $170 goods for resale on credit.
6. Bought $57 of goods for resale, paying by cheque.
7. Bought a further $40 goods for resale, paying cash.
8. Bought a new computer for the business for $800, paying cash.

Record these transactions using ledger accounts.

Settlement discounts:
Georgie owes a supplier, Razan, $2,000. Razan has offered Georgie a cash discount for
payment within ten days.

Georgie is owed $3,400 by a customer, Uli. Georgie offers a cash discount to customers
of 2.5% if Uli pays within 14 days.

Georgie took advantage of the early settlement discount offered by Razan and made
payment within ten days.

Uli was expected to take advantage of the early settlement discount offered, and
therefore the sales invoice raised by Georgie was prepared on that basis. However, Uli
did not pay within 14 days and paid the full amount due after 30 days.

a. What ledger entries are required to record the payment by Georgie to Razan,
along with calculation of the net cost of the goods purchased?
b. What accounting entries are required by Georgie to record the receipt from Uli?

Year – end Inventory Adjustments:

The trading position of Min’s cash-based business for its first week of trading was as
follows:

Capital introduced by the owner 1,000

Cash purchases 800

Cash sales 900

At the end of the week goods which had cost $300 remained in inventory.

Required:

Write up the ledger accounts for the first week and then prepare a vertical statement of
profit or loss (i.e. sales revenue, cost of sales and gross profit).

Clearly show the closing inventory asset that would be shown on the statement of
financial position at the end of the first week.

You will need to set up two inventory T-accounts: one for inventory assets and one for
inventory within cost of sales.

Cost vs NRV:

In what circumstances might the fair value less further costs to sell of inventory be
lower than its cost?
Accounting for depreciation:

Chris acquired two non­current assets on 1 August 20X5 for use in a recently started
hospitality business:

- a property with a 25­year useful life for $200,000 with no expected residual value
- a chocolate fountain for $4,000.

The fountain is to be depreciated at 25% pa using the reducing balance method.

A full year of depreciation is charged in the year of acquisition and none in the year of
disposal.

Show the ledger account entries for these assets for the years ending 31 October 20X5,
20X6 and 20X7.

Revaluation of non-current assets:

Vanguard owns land which originally cost $250,000. No depreciation has been charged
on the land in accordance with IAS 16. Vanguard wishes to revalue the land to reflect its
current market value, which it has been advised is $350,000.

How is this reflected in the financial statements?

Depreciation of a revalued asset:

Esoteric owns a retail unit in central Springfield. It bought the property 25 years ago for
$100,000, depreciating it over 50 years on a straight- line basis. At the start of 20X6 the
entity decides to revalue the unit to $800,000. The unit has a remaining useful life of 25
years at the date of the revaluation. It is the entity’s policy to make the annual transfer of
excess depreciation between revaluation surplus and retained earnings within equity.
What accounting entries should be made in the financial statements for 20X6?

Accounting for the allowance for receivables:

On 31 December 20X1 Azaria had trade receivables of $10,000. At that date, Azaria
estimated that there was evidence that amounts totalling $300 may not be recovered as
those receivables were already overdue. Therefore Azaria wanted to make a specific
allowance for this amount.

During 20X2, Azaria made sales on credit totalling $100,000 and received payments
from credit customers of $94,000. At 31 December 20X2, Azaria now considered that
there was doubt regarding the recoverability of amounts totalling $700 which were
overdue and which may not be recovered. The allowance for receivables should
therefore be increased from $300 to $700.

During 20X3 Azaria made sales of $95,000 and collected $96,000 from credit
customers. At 31 December 20X3 Azaria now considered that amounts totalling only
$600 required an allowance for being overdue at that date. The allowance for
receivables should therefore be adjusted from $700 to $600.

Calculate the allowance for receivables and the irrecoverable debt expense as well as
the closing balance of trade receivables for each of the years ended 31 December 20X1,
20X2 and 20X3.

Contingent Liabilities:

The draft financial statements of Madras Co, for the year ended 31 December 20X6 are
currently under review. The following points have been raised:

(i) An ex-employee has started a legal action against Madras Co for wrongful dismissal.
Madras Co’s legal team have stated that the ex-employee is not likely to succeed. The
following estimates have been given by the lawyers relating to the case:

a. Legal costs (to be incurred whether the claim is successful or not) $5,000
b. Settlement of claim if successful $15,000

Currently no provision has been made by Madras in the financial statements.

(ii) Madras Co has a policy of refunding the cost of any goods returned by dissatisfied
customers, even though it is under no legal obligation to do so. This policy of making
refunds is generally known. At the year end, Madras Co reliably estimated that returns
totalling $4,800 will be made after the year-end.

(iii) A customer has made a claim against Madras Co for injury suffered following the
purchase and use of a defective product. Legal advisers have confirmed that Madras Co
will probably have to pay financial compensation of $100,000 to the customer. In turn,
Madras Co has made a counter-claim against the supplier of the defective product for
$100,000 and believes it is probable that its claim against the supplier will be
successful.

State with reasons what adjustments, if any, should be made by Madras Co in its
financial statements.

Bank reconciliation statement:

The following is a summary from the cash ledger account of Spanners for the month of
October:

On investigation you discover that:

(1) Bank charges of $35 shown on the bank statement have not been entered in the day
books.

(2) A cheque drawn for $47 has been entered in error as a receipt.

(3) A cheque for $18 has been returned by the bank marked 'Refer to drawer', but it has
not been written back in the day books.

(4) The balance brought forward should have been $1,470.

(5) Three cheques paid to suppliers for $214, $370 and $30 have not yet been presented
to the bank.

(6) Takings of $1,542 were placed in a night safe deposit on 31 October but were not
credited by the bank until 3 November.

(7) The bank charged a cheque for $72 in error to the company's account.

(8) The bank statement shows an overdraft of $124.

Required:

(a) Show what adjustments you would make in the cash ledger account.

(b) Prepare a bank reconciliation statement as at 31 October.

Adjustments to profit:

The following journal adjustments have been posted by BOR Co:

1. Dr Suspense $4,000 ; Cr Insurance $4,000

2. Dr Payables $2,500 ; Cr Suspense $2,500
3. Dr Loan interest $1,000 ; Cr Loan $1,000
4. Dr Suspense $650 ; Cr Sundry income $650
5. Dr Suspense $6,000 Cr Cash at bank $6,000

BOR Co’s draft profit figure prior to the posting of these journals was $355,000.

What is the revised profit figure?

A $354,000

B $358,650

C $356,150

D $358,000

What affect will these correction journals have on the statement of financial position?

Trial balance and Correction of Errors:

Grimault, a sole trader, has extracted the following list of balances as at 30 June 20X6
from his accounts prior to the preparation of the annual accounts and statement of
financial position.

The following errors have been discovered:

- Goods costing $900 withdrawn by Grimault for his own use have not been
recorded in the accounts. This should be treated as a reduction in the figure for
purchases.
- An entry in the cheque payments day book for the purchase of fixtures and
fittings on 1 April 20X6 costing $6,750 has not been posted to the general ledger.
- A credit sale of $7,500 in May 20X6 was included correctly in the posting to the
sales account, but recorded as $7,050 in the receivables account.

(a) Prepare Grimault’s uncorrected trial balance as at 30 June 20X6, including a

suspense account as the balancing figure.

(b) Prepare journal entries for the errors discovered.

(c) Prepare a new trial balance showing the corrected amounts.

Preparing basic financial statements:

The trial balance of Penguin Co as at 31 December 20X5 was as follows:

The following is to be taken into account:

1. A building whose carrying amount is currently $5,000 is to be revalued to

$11,000.
2. A final ordinary dividend of 10c per share is to be proposed.
3. The balance on the income tax account represents an overprovision of tax for the
previous year. Tax for the current year is estimated at $3,000.
4. Closing inventory is $12,000.
5. The balance on the suspense account represents the proceeds from the issue of
4,000 ordinary shares.

Prepare the following financial statements of Penguin Co for the year ended 31
December 20X5:

1. statement of profit or loss and other comprehensive income

2. statement of financial position
3. statement of changes in equity.

Statement of cash flows:

You are given below, in summarised form, the accounts of Algernon, an entity, for 20X7
and 20X6.
Note: A $20,000 dividend has been paid in the year.

Prepare a statement of cash flows for Algernon for the year ended 31 December 20X7,
to explain as far as possible the movement in the bank balance.

The statement of cash flows should be prepared using the direct method.

Interpretation of financial statements:

Neville Co is an entity that manufactures and retails office products. Its summarised
financial statements for the years ended 30 June 20X4 and 20X5 are given below:
Statements of profit or loss for the year ended 30 June:

Statements of financial position as at 30 June:

The directors concluded that the revenue for the year ended 30 June 20X4 fell below
budget and introduced measures during the year ended 30 June 20X5 to improve the
situation. These included:

- cutting selling prices

- extending credit facilities to customers
- leasing additional machinery in order to be able to manufacture more products.

The directors’ are now reviewing the results for the year ended 30 June 20X5.

Calculate the ratios for and comment upon the profitability, liquidity/efficiency and
financial position of Neville Co for 20X4 and 20X5.

Consolidated statement of financial position:

D acquired an 80% holding in J on 1 January 20X8. At this date J's retained earnings
stood at $20,000. On this date, the fair value of the 20% non­controlling shareholding in
J was $12,500.

The statements of financial position of D and J as at 31 December 20X8:

Prepare the consolidated statement of financial position of D Group as at 31 December

20X8.

Consolidated statement of financial position with mid-year acquisition and URP:

On 1 May 20X7 K acquired 60% of S, paying $76,000 cash. The summarised statements
of financial position of the two entities at 30 November 20X7 were:
The following information is relevant:

1. At 30 November 20X7, the inventory of S included goods purchased at a cost of

$8,000 from K at cost plus 25%. None of the goods had been sold on by S by the
reporting date.
2. The K Group values the non­controlling interest using the fair value method. At
the date of acquisition the fair value of the 40% non- controlling interest was
$50,000.
3. S earned a profit after tax for the year of $9,000 in the year ended 30 November
20X7.

Prepare the consolidated statement of financial position of K Group as at 30 November

20X7.

Consolidated statement of profit or loss:

Set out below are the draft statements of profit or loss of P and its subsidiary S for the
year ended 31 December 20X7.

On 1 January 20X6 P purchased 75% of the equity shares in S.

During the year S sold goods to P for $20,000, making a mark­up of one third. Only 20%
of these goods had been sold before the end of the year, the remainder is still in
inventory.

Prepare the consolidated statement of profit or loss for the year ended 31 December
20X7.
ANSWERS:

Types of Business Entity:

The fact that a company is a separate legal entity means that it is very different from a
sole trader or partnership in a number of ways.

Property holding - The property of a limited liability company belongs to the company. A
change in the ownership of shares in the company will have no effect on the ownership
of the company's property. (In a partnership the firm's property belongs directly to the
partners.

Transferable shares - Shares in a limited company can usually be transferred without

the consent of the other shareholders. In the absence of agreement to the contrary, a
new partner cannot be introduced into a firm without the consent of all existing
partners.

Suing and being sued - As a separate legal entity, a limited company can sue and be
sued in its own name. Judgements relating to companies do not affect the members
personally.

Security for loans - A company has greater scope for raising loans and may secure them
with floating charges. A floating charge is a mortgage over the constantly fluctuating
assets of a company providing security for the lender. It does not prevent the company
using the assets in the ordinary course of business. Generally, the law does not permit
partnerships or individuals to secure loans with a floating charge.

Taxation - Because a company is legally separated from its shareholders, it is taxed

separately from its shareholders. Partners and sole traders are personally liable for
income tax on their share of the profits made by their business.

Corporate Governance:

The role of corporate governance is to protect shareholder rights, enhance disclosure

and transparency, facilitate effective functioning of the board and provide an efficient
legal and regulatory enforcement framework.

It is the system by which entities are directed and controlled so that, not only do they
‘do the right thing’ they are ‘seen to be doing the right thing’.
Accounting Equation:

Recording credit transactions:

Settlement discounts:

a. Payment to Razan: As payment was made within 10 days, settlement discount of $60
(3% × $2,000) can be deducted from the gross amount, leaving a payment due of
$1,940. The accounting entries required to record the payment are as follows:

Debit: Trade payables $2,000 ;

Credit: Cash at bank $1,940 ;

Credit: Discount received $60

b. Receipt from Uli: As Uli was expected to settle the amount due promptly, the
settlement discount of $85 (2.5% × $3,400) was deducted when the invoice was
prepared for $3,315. This is the amount of revenue regarded as probably receivable at
the date revenue is recorded.

The initial transaction would therefore be recorded as follows:

Debit: Trade receivables $3,315 ; Credit: Revenue $3,315

Uli did not make payment within 14 days to be eligible for early settlement discount,
and therefore the full amount of $3,400 is due to Georgie. The 'excess receipt' of $85 is
therefore accounted for as a cash sale as follows:

Debit: Cash at bank $3,400 ; Credit: Trade receivables $3,315 ; Credit: Revenue $85

Year – end Inventory Adjustments

First, the transactions are entered into the general ledger accounts, and the accounts
are balanced. Revenue and purchases are then transferred to the statement of profit or
loss.
Next, the closing inventory must be accounted for in the inventory asset account and
the profit or loss account, specifically as part of the cost of sales calculation. There is
no opening inventory as this is the first week of trading for the business.
Statement of profit or loss for Week 1

Sales revenue 900

Cost of sales:

Purchases 800

Less: Closing inventory (300)

(500)

Gross profit 400

The closing inventory asset in the statement of financial position is $300.

Cost vs NRV:

Fair value less further costs to sell may be relevant in special cases, such as where
goods are slow-moving, damaged or obsolete. However, items of inventory will normally
be stated at cost if they can be sold at a price greater than their cost of purchase.

Accounting for depreciation:

Annual depreciation workings:

20X5: Property: $200,000/25 years = $8,000

Fountain: $4,000 × 25% = $1,000

Total: 9,000

20X6: Property: $200,000/25 years = $8,000

Fountain: $3,000 × 25% = $750

Total: 8,750

20X7 : Property: $200,000/25 years = $8,000

Fountain: $2,250 × 25% = $563

Total: $8,563
Revaluation of non-current assets:

The land is currently held at cost of $250,000. This needs to be increased by $100,000 to
reflect the new valuation of $350,000. Therefore the following is required:

Other comprehensive income – Revaluation surplus in the year $100,000

Statement of financial position:

Dr Non-current asset – land $100,000

Cr Revaluation surplus (within equity) $100,000

Depreciation of a revalued asset:

Other comprehensive income - Revaluation surplus on property in the year $750,000

Statement of financial position:

On revaluation at start of 20X6

Dr Non-current asset – retail unit $700,000 ; Dr Accumulated depreciation $50,000 ;

Cr Revaluation surplus $750,000

Depreciation for 20X6:

Dr Depreciation expense ($800,000/25) $32,000 ; Cr Accumulated depreciation $32,000

Transfer of excess depreciation within equity for 20X6:

Dr Revaluation surplus ($32,000 – $2,000) $30,000 ; Cr Retained earnings $30,000

Accounting for the allowance for receivables:

20x1:
20X2:
20X3:

Contingent Liabilities:

(i) According to IAS 37, a provision should be recognised if:

a. there is an obligation.
b. a transfer of economic benefits is probable.
c. a reliable estimate can be made.

The legal costs of $5,000 should be provided for since they will have to be paid whatever
the outcome of the legal case. However, the claim is not likely to succeed and so no
provision should be made. A disclosure note should be made for the contingent liability
of $15,000.

(ii) The policy of refunds has created a constructive obligation and it has been reliably
measured. A provision for $4,800 should therefore be made in the financial statements.
(iii) As it is probable that Madras will pay compensation of $100,000 to the injured
customer, it constitutes a present obligation as a result of a past obligating event, and
should therefore be accounted for as a provision. The success of the counterclaim for
$100,000 is also probable and would need to be disclosed in the notes to the financial
statements as a contingent asset.

Bank reconciliation statement:

a).

b) Balance as per bank statement (124) o/d

Add: Unpresented cheques (5) (214 + 370 + 30) (614)

(738) o/d

Less: Outstanding lodgements (6) 1,542

Cheque changed in error (7) 72

1,614

Balance as per cash at bank ledger account 876

Adjustments to profit:

Draft profit 355,000

1. Insurance 4,000
2. No impact
3. Loan interest (1,000)
4. Sundry income 650
5. No impact

4,650

Revised profit 358,650

Impact on statement of financial position

Journal 1 – The Dr entry would go towards clearing any Suspense a/c balance.

Journal 2 – The Dr Payables would decrease the current liabilities. The Cr Suspense a/c
would go towards clearing the account balance.

Journal 3 – The Cr Loan would increase the loan liability balance. The information does
not state whether it is a current or non-current liability.

Journal 4 – The Dr Suspense a/c would work towards clearing any remaining balance.

Journal 5 – Dr Suspense a/c would completely clear the balance in this account. The Cr
Cash at bank would decrease the bank balance, which is a current asset.

Trial balance and Correction of Errors:

a)

b) Dr Drawings 900 ; Cr Purchases 900

Dr Fixtures and fittings 6,750 ; Cr Suspense 6,750

Dr Receivables 450 ; Cr Suspense 450

c)
Preparing basic financial statements:

Statement of profit or loss and other comprehensive income for the year 31 Dec, 20X5:

Statement of financial position at 31 December 20X5:

Statement of cash flows:
Workings: W1 – receipts from sales:

W2 - Payables and wages:

W3 - Cost of sales:

Interpretation of financial statements:

The revenue has increased by 20% on last year. It would appear that the strategy of
cutting prices and extending credit facilities has attracted customers. Despite this
increase, the operating profit margin has declined from 20.3% to 12.9%.
There are several reasons behind this deterioration including the decrease in sales
prices, increased leasing costs, increased depreciation due to revaluation and
purchases of NCA’s, and increased irrecoverable debt due to the extended credit
facilities.

The ROCE has dropped significantly from 48% to 29.5%. The possible reasons for this
decline include the reduction in operating profit margins and the revaluation of non-
current assets, which would increase capital employed.

The results show a deteriorating liquidity position; both the current and quick ratios
have deteriorated. The main reasons for this appear to be:

- the reduction in cash and consequent increase in overdrafts

- the increase in trade payables.

The overall cause could be the extension of credit facilities to customers. Credit
customers are taking an extra 45 days to pay on average. As a result, Neville Co appears
to have less cash to pay its suppliers and it is using its cash resources and overdraft
facilities.

Receivables days have increased from an appropriate level of 65 days to 110 days.
Although the benefits of this strategy have been shown by the increase in revenue, it
would seem that Neville Co has now allowed customers too much credit. It would be
recommended that receivables days should be reduced to closer to 90 days.

The large increase in payables days could lead to problems, unless suppliers have
specifically agreed to offer Neville Co extended repayment deadlines.
Gearing has fallen, whilst interest cover has increased. The key reason for this appears
to be the reduction in loans (along with the consequent reduction in finance costs)
during the year.

It appears as though Neville Co has used cash to repay its loan finance. This does not
appear to be a sensible decision because the reduction in cash within the business has
led to an increase in expensive overdrafts and an increase in payables days, which may
upset suppliers.

Both gearing and interest cover were strong in 20X4 (i.e. the interest cover was more
than adequate and the gearing level appeared to be low). This indicated that Neville Co
could afford to sustain its loans without significant penalty. It is now using an overdraft
facility which is likely to carry a much higher interest charge than long-term loans.

To improve its position Neville Co could seek further long terms loans. It is not a risky
business from a gearing perspective and it has plenty of assets to use as security for any
lenders.

Consolidated statement of financial position:

W1: Group structure:

W2: Net assets of J:

W3: Goodwill:

W4: NCI:
W5: Group retained earnings:

Consolidated statement of financial position with mid-year acquisition and URP:

W1: Group structure:

W2: Net assets:

W3: Goodwill:

W4: NCI:

W5: Group retained earnings

W6: PURP – Inventory:

Profit in inventory (25/125 × $8,000) = $1,600

Consolidated statement of profit or loss:

P consolidated statement of profit or loss for the year ended 31 December 20X9.
(W1) Unrealised profit in inventory:

(W2) Profit for the year – non-controlling interest: