F3 - Questions & Examples FINAL

FUNDAMENTAL FINANCIAL ACCOUNTING –F3
EXAMPLES & QUESTION& REVISION BOOKLET
Contents
A. LEDGER ACCOUNTS AND DOUBLE ENTRY.................................................................5
EXAMPLE 01 – Accounting Equation......................................................................................5
EXAMPLE 02 – Double entry for cash transactions.............................................................6
EXAMPLE 03 – Double entry for credit transactions...........................................................6
QUESTION 01 – Debit & Credit..................................................................................................7
QUESTION 2 – Ledger entries...................................................................................................7
B. FROM TRIAL BALANCE TO FINANCIAL STATEMENTS..............................................7
EXAMPLE 01 – TRIAL BALANCE..............................................................................................7
QUESTION 01 – Financial statements.....................................................................................8
C. CORRECTION OF ERRORS................................................................................................8
EXAMPLE 01 – Journal Entries.................................................................................................8
QUESTION 01 – Errors................................................................................................................9
QUESTION 02 – Effect on financial statements I..................................................................9
QUESTION 03 – Effect on financial statements II.................................................................9
QUESTION 04 – Effect on financial statements III................................................................9
D. REVISION 01.........................................................................................................................10
E. PROPERTY, PLANTS & EQUIPMENT (IAS 16).................................................................13
REVALUATION OF ASSETS.....................................................................................................13
DISPOSAL OF ASSETS.............................................................................................................14
PRACTICE: NON-CURRENT ASSET LEDGER ACCOUNT.................................................14
F. ACCRUALS & PREPAYMENTS...........................................................................................15
EXAMPLE 01: ACCRUALS........................................................................................................15
EXAMPLES 02: ACCRUALS.....................................................................................................15
EXAMPLE 03: PREPAYMENTS................................................................................................15
EXAMPLE 04: REVERSAL OF ACCRUALS & PREPAYMENTS........................................15
QUESTION 1: ACCRUALS........................................................................................................16
EXAMPLE 05: PREPAYMENTS................................................................................................16
QUESTION 2: ACCRUALS & PREPAYMENTS.....................................................................16
EXAMPLE 6: ACCRUALS..........................................................................................................17
QUESTION 3.................................................................................................................................18
G. IRRECOVERABLE DEBTS & ALLOWANCE..................................................................19
QUESTION 1 (Irrecoverable debts).........................................................................................19
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QUESTION 2 (Irrecoverable debts).........................................................................................19

EXAMPLE 01 (Irrecoverable debts written off and subsequently paid)........................19
EXAMPLE 02 (Accounting entries for allowance for receivables)..................................19
QUESTION 3 (Receivables allowance)...................................................................................19
QUESTION 4 (Receivables allowance)...................................................................................20
EXAMPLE 03 (Irrecoverable debts & allowance for receivables combined)................21
QUESTION 5.................................................................................................................................21
H. PROVISIONS & CONTINGENCIES...................................................................................22
EXAMPLE 1 (Provisions)...........................................................................................................22
EXAMPLE 2 (Warranty provisions).........................................................................................22
QUESTION 1 (Provisions & Contigencies)...........................................................................22
EXAMPLE 3 (Disclosure in the F/S of a warranty provision)...........................................23
I. BANK RECONCILIATION......................................................................................................23
EXAMPLE 1 – Bank reconciliation..........................................................................................23
QUESTION 1 – Reconciliation..................................................................................................23
QUESTION 2 – Bank statement...............................................................................................24
EXAMPLE 2 – Complicated bank reconciliation..................................................................24
QUESTION 3 – Bank reconciliation........................................................................................24
J. CONTROL ACCOUNTS..........................................................................................................26
EXAMPLE – ACCOUNTING FOR RECEIVABLES................................................................26
QUESTION 1 – Receivables & payables control account.................................................29
QUESTION 2– Receivables control account........................................................................29
QUESTION 3– Payables control account..............................................................................30
K. REVISION 02.........................................................................................................................30
SALES TAX...................................................................................................................................30
INVENTORY (IAS 02)..................................................................................................................31
TANGIBLE NON-CURRENT ASSETS.....................................................................................32
INTANGIBLE NON-CURRENT ASSETS.................................................................................32
ACCRUALS & PREPAYMENT..................................................................................................33
IRRECOVERABLE DEBTS AND ALLOWANCES.................................................................33
PROVISIONS & CONTINGENCIES..........................................................................................34
RECEIVABLES & PAYABLES CONTROL ACCOUNT.........................................................34
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BANK RECONCILIATION..........................................................................................................36
L. INCOMPLETE RECORD.........................................................................................................36
EXAMPLE 1 – Cost of goods stolen.......................................................................................36
EXAMPLE 2 – TWO COLUMN CASH BOOK.........................................................................37
QUESTION – INCOMPLETE RECORD....................................................................................38
M. PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS..................39
QUESTION 1 – Adjustments to accounts..............................................................................39
QUESTION 2 – Accounts preparation from a trial balance...............................................40
QUESTION 3 – Final accounts.................................................................................................41
N. INTRODUCTION TO COMPANY ACCOUNTING...........................................................42
Example 1 – Dividends on ordinary shares and preference shares...............................42
QUESTION 01 – Bonus issues.................................................................................................42
QUESTION 02 – Right issues...................................................................................................42
QUESTION 03 – Bonus & Right issues..................................................................................42
O. PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES.........................43
QUESTION 01 – Internal accounts..........................................................................................43
QUESTION 02: IFRS 15 – Revenue recognition...................................................................44
QUESTION 3: Revenue..............................................................................................................44
QUESTION 04...............................................................................................................................45
P. PREPARATION OF STATEMENT OF CASH FLOW.........................................................46
QUESTION 01...............................................................................................................................46
Q. CONSOLIDATED STATEMENT OF FINACIAL POSITION..........................................48
Example 1: Cancelation with intra group trading...............................................................48
Example 2: Goodwill & Pre-acquisition profits...................................................................48
Question 1: Fair value of assets on acquisition..................................................................49
Example 3: Consideration in form of shares.......................................................................50
Example 4: NCI............................................................................................................................50
Question 2: Goodwill.................................................................................................................51
Question 3: Consolidated financial statements..................................................................51
Example 5: NCI and intra group trading................................................................................52
Question 4: Acquisition during the year...............................................................................52
R. CONSOLIDATED STATEMENT OF PROFIT & LOSS..................................................53
Example 1: Consolidated statement of profit and loss.....................................................53
Question 1: Consolidated statement of profit and loss....................................................54
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Example 2: Intra group trading................................................................................................54

Question 2: Intra group trading...............................................................................................54
Question 3: Intra group trading...............................................................................................55
Question 4: Acquisition part way through the year...........................................................55
S. REVISION (FINAL)...................................................................................................................55
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A. LEDGER ACCOUNTS AND DOUBLE ENTRY

EXAMPLE 01 – Accounting Equation
Liza Doolittle starts a business. The business begins by owning the cash that Liza has put into it, $2,500. The
business is a separate entity in accounting terms and so it owes the money to Liza as capital.
State the accounting equation?
(Cont)
Liza Doolittle purchases a market stall from Len Turnip, who is retiring from his fruit and vegetables business.
The cost of the stall is $1,800. She also purchases some flowers and potted plants from a trader in the wholesale
market, at a cost of $650. This leaves $50 in cash, after paying for the stall and goods for resale, out of the
original $2,500.
The assets and liabilities of the business have now altered and, at 3 July before trading begins, the state of her
business is as follows?
(Cont) – Profits introduced into accounting equation
On 3 July Liza has a very successful day. She sells all of her flowers and plants for $900 cash. Since Liza has
sold goods costing $650 to earn revenue of $900.
State the accounting equation at the end of the day?
(Cont) – Drawings
Since Liza Doolittle has made a profit of $250 from her first day's work, she might want to withdraw some money
from the business. After all, business owners, like everyone else, need income for living expenses. Liza decides
to pay herself $180 in 'wages'.
State the accounting equation?
(Cont)
The next market day is on 10 July and Liza purchases more flowers and plants for cash, at a cost of $740. She is
not feeling well because of a heavy cold, and so she decides to accept help for the day from her cousin Ethel.
Ethel is to be paid a wage of $40 at the end of the day.
Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for $1,100 cash. Liza paid Ethel
her wage of $40 and drew out $200 for herself.
Required
(a) State the accounting equation before trading began on 10 July.
(b) State the accounting equation at the end of 10 July, after paying Ethel:
(i) But before drawings are made
(ii) After drawings have been made
(Cont) Trade receivables & trade payables
The example of Liza Doolittle's market stall is continued, by looking at the consequences of the following
transactions in the week to 17 July 20X6. (See Section 3.5 for the situation as at the end of 10 July.)
(a) Liza Doolittle realises that she is going to need more money in the business and so she makes the following
arrangements.
(i) She immediately invests a further $250 of her own capital.
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(ii) She persuades her Uncle Henry to lend her $500 immediately. Uncle Henry tells her that she can repay
the loan whenever she likes but, in the meantime, she must pay him interest of $5 each week at the end of
the market day. They agree that it will probably be quite a long time before the loan is eventually repaid.
(b) She decides to buy a secondhand van to pick up flowers and plants from her supplier and bring them to her
stall in the market. She finds a car dealer, Laurie Loader, who agrees to sell her a van on credit for $700. Liza
agrees to pay for the van after 30 days' trial use.
(c) During the week, Liza's Uncle George telephones her to ask whether she would sell him some garden
gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After some investigations, she
buys what Uncle George has asked for, paying $300 in cash to the supplier. Uncle George accepts delivery of
the goods and agrees to pay $350, but he asks if she can wait until the end of the month for payment. Liza
agrees.
(d) Liza buys flowers and plants costing $800. Of these purchases, $750 are paid in cash, with the remaining $50
on 7 days' credit. Liza decides to use Ethel's services again as an assistant on market day, at an agreed wage of
$40.
(e) On 17 July, Liza succeeds in selling all her goods earning revenue of $1,250 (all in cash). She decides to
withdraw $240 for her week's work. She also pays Ethel $40 in cash. She decides to make the interest payment
to her Uncle Henry the next time she sees him.
(f) We shall ignore any van expenses for the week, for the sake of relative simplicity.
Required
State the accounting equation:
(i) After Liza and Uncle Henry have put more money into the business and after the purchase of the van
(ii) After the sale of goods to Uncle George
(iii) After the purchase of goods for the weekly market
(iv) At the end of the day's market trading on 17 July, and after withdrawals have been appropriated out of profit
EXAMPLE 02 – Double entry for cash transactions

In the cash book of a business, the following transactions have been recorded.
(a) A cash sale (ie a receipt) of $250
(b) Payment of a rent bill totalling $150
(c) Buying some goods for cash at $100
(d) Buying some shelves for cash at $200
How would these four transactions be posted to the ledger accounts and to which ledger accounts should they
be posted?
EXAMPLE 03 – Double entry for credit transactions

Recorded in the sales day book and the purchase day book are the following transactions.
(a) The business sells goods on credit to a customer Mr A for $2,000;
(b) The business buys goods on credit from a supplier B Inc for $100;
(c) The business paid $100 to B Inc one month after the goods were acquired;
(d) Mr A pays his debt of $2,000;
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QUESTION 01 – Debit & Credit

Identify the debit and credit entries in the following transactions.
A Bought a machine on credit from A, cost $8,000
B Bought goods on credit from B, cost $500
C Sold goods on credit to C, value $1,200
D Paid D (a credit supplier) $300
E Collected $180 from E, a credit customer
F Paid wages $4,000
G Received rent bill of $700 from landlord G
H Paid rent of $700 to landlord G
I Paid insurance premium $90
J Received a credit note for $450 from supplier H
K Sent out a credit note for $200 to customer I
QUESTION 2 – Ledger entries

Ron Knuckle set up a business selling keep fit equipment, trading under the name of Buy Your Biceps Shop. He
put $7,000 of his own money into a business bank account (transaction A) and in his first period of trading, the
following transactions occurred:
Record the ledger entries for the above transactions?
B. FROM TRIAL BALANCE TO FINANCIAL STATEMENTS

EXAMPLE 01 – TRIAL BALANCE
As at 30.3.20X7, your business has the following balances on its ledger accounts
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During 31.3.20X7, the business made the following transactions.
(a) Bought materials for $1,000, half for cash and half on credit;
(b) Made $1,040 sales, $800 of which was for credit;
(c) Paid wages to shop assistants of $260 in cash;
You are required to draw up a trial balance showing the balances as at the end of 31.3.20X7.
QUESTION 01 – Financial statements

A business is established with capital of $2,000, and this amount is paid into a business bank account by the
proprietor. During the first year's trading, the following transactions occurred.
Purchases of goods for resale, on credit 4,300
Payments to trade accounts payable 3,600
Sales, all on credit 5,800
Payments from trade accounts receivable 3,200
Non-current assets purchased for cash 1,500
Other expenses, all paid in cash 900
The bank has provided an overdraft facility of up to $3,000.
Required
Prepare the ledger accounts, a statement of profit or loss for the year and a statement of financial
position as at the end of the year.
C. CORRECTION OF ERRORS
EXAMPLE 01 – Journal Entries
Listed below are five errors which were used as examples earlier in this chapter. Write out the journal entries
which would correct these errors.
(a) A business receives an invoice for $250 from a supplier which was omitted from the books entirely.
(b) Repairs worth $150 were incorrectly debited to the non-current asset (machinery) account instead of the
repairs account.
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(c) The bookkeeper of a business reduces cash sales by $280 because they were not sure what the $280
represented. In fact, it was a withdrawal on account of profit.
(d) Telephone expenses of $540 were incorrectly debited to the electricity account.
(e) A page in the sales day book has been added up to $28,425 instead of $28,825.
QUESTION 01 – Errors
At the year end of T Down & Co, an imbalance in the trial balance was revealed which resulted in the creation of
a suspense account with a credit balance of $1,040.
Investigations revealed the following errors.
(i) A sale of goods on credit for $1,000 had been omitted from the sales account.
(ii) Delivery and installation costs of $240 on a new item of plant had been recorded as a revenue expense.
(iii) Cash discount of $150 on paying a supplier, JW, had been taken, even though the payment was made
outside the time limit.
(iv) Inventory of stationery at the end of the period of $240 had been ignored.
(v) A purchase of raw materials of $350 had been recorded in the purchases account as $850.
(vi) The purchase returns day book included a sales credit note for $230 which had been entered correctly in the
account of the customer concerned, but included with purchase returns in the nominal ledger.
Required
(a) Prepare journal entries to correct each of the above errors. Narratives are not required.
(b) Open a suspense account and show the corrections to be made.
(c) Prior to the discovery of the errors, T Down & Co's gross profit was calculated at $35,750 and the profit for the
year at $18,500.
Calculate the revised gross profit and profit for the year figures after the correction of the errors
QUESTION 02 – Effect on financial statements I

A company's statement of profit or loss for the year ended 31 December 20X5 showed a profit for the year of
$65,000. It was later found that $18,000 paid for maintenance to motor vehicles had been debited to the motor
vehicles at cost account and had been depreciated as if it was a new motor vehicle. It is the company's policy to
depreciate motor vehicles at 25% per year on the straight line basis, with a full year's charge in the year of
acquisition.
What would the profit for the year be after adjusting for this error?
QUESTION 03 – Effect on financial statements II

Beta Co has total assets of $555,000 and profit for the year of $160,000 recorded in the financial statements for
the year ended 31 December 20X3. Inventory costing $45,000, which was received into the warehouse on 2
January 20X4, was included in the financial statements at 31 December 20X3 in error.
What would be the profit for the year and total assets after adjusting for this error?
QUESTION 04 – Effect on financial statements III

Rogitts Co purchased goods on credit with a list price of $75,000 from Bodean Co and received a trade discount
of 10%. Rogitts Co paid the full amount due to Bodean Co within 25 days and received a settlement discount of
5% for prompt payment. The trainee accountant at Rogitts Co recorded the purchase of goods in the purchases
account net of both discounts. At the year end all these goods had been sold.
What is the effect on gross profit and profit for the year of correcting the trainee accountant's mistake?
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D. REVISION 01
1. Which one of the following can the accounting equation can be rewritten as?
2. A trader's net profit for the year may be computed by using which of the following formulae?
3. The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of $8,000
during the year and withdrew goods for his private use which had cost $2,200. If net assets at the
beginning of 20X7 were $101,700, what were the closing net assets?
4. The profit made by a business in 20X7 was $35,400. The proprietor injected new capital of $10,200
during the year and withdrew a monthly salary of $500. If net assets at the end of 20X7 were $95,100,
what was the proprietor's capital at the beginning of the year?
5. Jones Co has the following transactions:

a. Payment of $400 to J Bloggs for a cash purchase
b. Payment of $250 to J Doe in respect of an invoice for goods purchased last month
What are the correct ledger entries to record these transactions?
6. T Tallon had the following transactions:

a. Sale of goods on credit for $150 to F Rogit
b. Return of goods from B Blendigg originally sold for $300 in cash to B Blendigg
What are the correct ledger entries to record these transactions?
7. Which documents should accompany a return of goods to a supplier?

8. State the books of prime entry?
9. In which book of prime entry will a business record debit notes in respect of goods which have been
sent back to suppliers?
10. A company’s motor vehicles at cost account at 30 June 20X6 is as follows:
What opening balance should be included in the following period’s trial balance for motor
vehicles – cost at 1 July 20X6?
11. A company’s trade payables account at 30 September 20X1 is as follows:
What was the balance for trade payables in the trial balance at 1 October 20X0?
12. Mew Ling has the following transactions:

1 Receipt of cash from R Singh in respect of an invoice for goods sold three weeks ago
2 Receipt of cash from S Kalu for cash sales
What are the ledger entries required to record the above transactions?
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13. You are given the following information:

 Receivables at 1 January 20X3: $10,000
 Receivables at 31 December 20X3: $9,000
 Total receipts during 20X3 (including cash sales of $5,000): $85,000
What are sales on credit during 20X3?
14. The following totals appear in the day books for March 20X8.
Sales day book $40,000
Purchases day book $20,000
Returns inwards day book $2,000
Returns outward day book $4,000
Opening and closing inventories are both $3,000. What is the gross profit for March 20X8?
15. Bert has extracted the following list of balances from his general ledger at 31 October 20X5:
What is the total of the debit balances in Bert's trial balance at 31 October 20X5?
16. At 31 October 20X6 Roger's trial balance included the following balances:
What is the value of Roger's current assets at 31 October 20X6?
17. A business statement of profit or loss and other comprehensive income for the year ended 31
December
20X4 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a
motorvan had been debited to motor expenses account. It is the company's policy to depreciate motor
vans at
25 per cent per year, with a full year's charge in the year of acquisition.
What would the net profit be after adjusting for this error?
18. An organisation restores its petty cash balance to $250 at the end of each month. During October, the
total expenditure column in the petty cash book was calculated as being $210, and the imprest was
restored by this amount. The analysis columns posted to the nominal ledger totalled only $200. Which
one of the following would this error cause?
A. The trial balance being $10 higher on the debit side
B. The trial balance being $10 higher on the credit side
C. No imbalance in the trial balance
D. The petty cash balance being $10 lower than it should be
19. Net profit was calculated as being $10,200. It was later discovered that capital expenditure of x,000had
been treated as revenue expenditure, and revenue receipts of $1,400 had been treated as capital
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receipts.What is the net profit after correcting this error?
20. The accountant at Investotech discovered the following errors after calculating the company's profit for
20X3:
(a) A non-current asset costing $50,000 has been included in the purchases account
(b) Stationery costing $10,000 has been included as closing inventory of raw materials, instead of
stationery expenses
What is the effect of these errors on gross profit and net profit? GP understated by 40k
21. Beta Co has total assets of $650,000 and profit for the year of $150,000 recorded in the financial
statements for the year ended 31 December 20X3. Inventory costing $50,000, with a resale value of
$75,000, was received into the warehouse on 2 January 20X4 and included in the inventory value that
was recorded in the financial statements at 31 December 20X3.
What would the total assets figure in the Statement of Financial Position, and the adjusted profit
for theyear figure, be after adjusting for this error?
22. A purchase return of $48 has been wrongly posted to the debit of the sales returns account, but has
been correctly entered in the supplier's account.
Which of the following statements about the trial balance would be correct?
23. A company's trial balance totals were:

Debit $387,642
Credit $379,511
A suspense account was opened for the difference.
Which one of the following errors would have the effect of reducing the difference when
corrected?
24. A suspense account was opened when a trial balance failed to agree. The following errors were
laterdiscovered.
 A gas bill of $420 had been recorded in the gas account as $240.
 A discount of $50 given to a customer had been credited to discounts received.
 Interest received of $70 had been entered in the bank account only.
What was the original balance on the suspense account?
25. A company's trial balance failed to agree, the out of balance difference of $25,000 being posted to
asuspense account.Subsequent investigation revealed the difference was due to one side of an entry to
record the purchaseof machinery for $25,000, by cheque, failing to post to the plant and machinery
account.Which of the following journal entries would correct the error?
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26. The trial balance of Z failed to agree, the totals being: debit $836,200; credit $819,700
A suspense account was opened for the amount of the difference and the following errors were found
and corrected:
 The totals of the cash discount columns in the cash book had not been posted to the
discountaccounts. The figures were discount allowed $3,900 and discount received $5,100.
 A cheque for $19,000 received from a customer was correctly entered in the cash book but
wasposted to the control account as $9,100.
What will be the remaining balance on the suspense be after the correction of these errors?
27. The trial balance of C, a limited liability company, did not agree, and a suspense account was openedfor
the difference. Checking in the bookkeeping system revealed a number of errors.
1. $4,600 paid for motor van repairs was correctly treated in the cash book but was credited to
motor vehicles asset account.
2. $360 received from B, a customer, was credited in error to the account of BB.
3. $9,500 paid for rent was debited to the rent account as $5,900.
4. The total of the discount allowed column in the cash book had been debited in error to thediscounts
received account.
5. No entries have been made to record a cash sale of $100.
Which of the errors above would require an entry to the suspense account as part of the process
of correcting them?
28. The suspense account shows a debit balance of $100. What could this balance be due to?
29. A suspense account shows a credit balance of $130. Which of the following could be due to?
A. Omitting a sale of $130 from the sales ledger
B. Recording a purchase of $130 twice in the purchases account
C. Failing to write off a bad debt of $130
D. Recording an electricity bill paid of $65 by debiting the bank account and crediting the
electricityaccount
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E. PROPERTY, PLANTS & EQUIPMENT (IAS 16)

REVALUATION OF ASSETS
DISPOSAL OF ASSETS
1.1. A business purchased a machine on 1 July 20X1 at a cost of $35,000. The machine had an estimated
residual value of $3,000 and a life of 8 years. The machine was sold for $18,600 on 31 December 20X4,
the last day of the accounting year of the business. To make the sale, the business had to incur
dismantling costs and costs of transporting the machine to the buyer's premises. These amounted to
$1,200. The business uses the straight-line method of depreciation. What was the profit or loss on
disposal of the machine?
1.2. A business includes $110,000 worth of machinery at cost in its accounts. Its policy is to make a
provision for depreciation at 20% per annum straight line. The total provision now stands at $70,000.
The business sells for $19,000 a machine which it purchased exactly 2 years ago for $30,000. Show
the relevant ledger entries.
1.3. Taking the example above assume that, instead of the machine being sold for $19,000, it was
exchanged for a new machine costing $60,000, a credit of $19,000 being received upon exchange. In
other words, $19,000 is the trade-in price of the old machine. Now what are the relevant ledger
account entries?
1.4. Taking the example of Ira Vann above assume that, suppose that two years after the revaluation to
$150,000 the land and building are sold for $200,000. (Assume that the entity does not transfer the
excess depreciation from the revaluation surplus to retained earnings.) What is the profit on disposal?
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PRACTICE: NON-CURRENT ASSET LEDGER ACCOUNT

The following list of account balances was extracted from the ledger of Roger Jones, a sole trader, as at 31 May
20X1, the end of his financial year.
F. ACCRUALS & PREPAYMENTS

EXAMPLE 01: ACCRUALS
Horace Goodrunning, trading as Goodrunning Motor Spares, ends his financial year on 28 February each year.
His telephone was installed on 1 April 20X6 and he receives his telephone account quarterly at the end of each
quarter. On the basis of the following data, you are required to calculate the telephone expense to be charged to
the statement of profit or loss for The year ended 28 February 20X7. Goodrunning Motor Spares – telephone
expense for the three months ended:
30.6.20X6 $23.50
30.9.20X6 $27.20
31.12.20X6 $33.40
31.3.20X7 $36.00
EXAMPLES 02: ACCRUALS

Cleverley started in business as a paper plate and cup manufacturer on 1 January 20X2, making up accounts to
31 December 20X2. Electricity bills received were as follows:
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EXAMPLE 03: PREPAYMENTS

A business opens on 1 January 20X4 in a shop which is on a 20 year lease. The rent is $20,000 per year and is
payable quarterly in advance. Payments were made on what are known as the 'quarter-days' (except the first
payment) as follows
EXAMPLE 04: REVERSAL OF ACCRUALS & PREPAYMENTS

Reversal of Accruals & Prepayments in subsequent period
Consider example 2 above => Draw up T-account.
QUESTION 1: ACCRUALS
1. Ratsnuffer is a business dealing in pest control. Its owner, Roy Dent, employs a team of 8 who were paid
$12,000 per annum each in the year to 31 December 20X5. At the start of 20X6 he raised salaries by 10% to
$13,200 per annum each.
On 1 July 20X6, he hired a trainee at a salary of $8,400 per annum.
He pays his workforce on the first working day of every month, one month in arrears, so that his
employees receive their salary for January on the first working day in February, etc.
Required
(a) Calculate the cost of salaries which would be charged in the statement of profit or loss of
Ratsnuffer for the year ended 31 December 20X6.
(b) Calculate the amount actually paid in salaries during the year (ie the amount of cash received by the
workforce).
(c) State the amount of accrued charges for salaries which would appear in the statement of financial
position of Ratsnuffer as at 31 December 20X6.
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EXAMPLE 05: PREPAYMENTS
QUESTION 2: ACCRUALS & PREPAYMENTS

The Batley Print Shop rents a photocopying machine from a supplier for which it makes a quarterly payment as
follows.
(a) Three months' rental in advance

(b) A further charge of 2p per copy made during the quarter just ended
The rental agreement began on 1 August 20X4 and the first 6 quarterly bills were as follows
The bills are paid promptly, as soon as they are received.
(a) Calculate the charge for photocopying expenses for the year to 31 August 20X4 and the amount
of prepayments and/or accrued charges as at that date
(b) Calculate the charge for photocopying expenses for the following year to 31 August 20X5, and
the amount of prepayments and/or accrued charges as at that date.
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EXAMPLE 6: ACCRUALS
Willie Woggle opens a shop on 1 May 20X6 to sell hiking and camping equipment. The rent of the shop is
$12,000 per annum, payable quarterly in arrears (with the first payment on 31 July 20X6). Willie decides that his
accounting period should end on 31 December each year.
The rent account as at 31 December 20X6 will record only two rental payments (on 31 July and 31 October).
There will be two months' accrued rental expenses for November and December 20X6 ($2,000), since the next
rental payment is not due until 31 January 20X7.
The charge to the statement of profit or loss for the period to 31 December 20X6 will be for eight months' rent
(May-December inclusive) and so it follows that the total rental cost should be $8,000.
So far, the rent account appears as follows.
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QUESTION 3
The Umbrella Shop has the following trial balance as at 30 September 20X8
The following information is available.
(a) Closing inventory at 30.9.X8 is $13,000, after writing off damaged goods of $2,000.
(b) Included in administration expenses is machinery rental of $6,000 covering the year to 31 December 20X8.
(c) A late invoice for $12,000 covering rent for the year ended 30 June 20X9 has not been included in the trial
balance.
Prepare a statement of profit or loss and statement of financial position for the year ended 30 September
20X8.
G. IRRECOVERABLE DEBTS & ALLOWANCE

QUESTION 1 (Irrecoverable debts)
Design Co has a total balance for trade receivables of $25,000 at the year end. A review of the receivables
balances highlights that one of its customers, Mann Co, has gone bankrupt. Design Co is owed $4,000 by Mann
Co for design work done during the year. This debt is now considered irrecoverable.
Required
(a) What is the balance for trade receivables to be shown in the statement of financial position at the year end?
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(b) What is the irrecoverable debts expense to be shown in the statement of profit or loss at the year end?
QUESTION 2 (Irrecoverable debts)

Design Co has a total balance for trade receivables of $25,000 at the year end. A review of the receivables
balances highlights that one of its customers, Mann Co, has gone bankrupt. Design Co is owed $4,000 by Mann
Co for design work done during the year. This debt is now considered irrecoverable.
Required
(a) What is the balance for trade receivables to be shown in the statement of financial position at the year end?
(b) What is the irrecoverable debts expense to be shown in the statement of profit or loss at the year end?
EXAMPLE 01 (Irrecoverable debts written off and subsequently paid)

A statement of profit or loss for the Blacksmith's Forge for the year to 31 December 20X5 could be prepared as
shown below from the following information.
Preparing the SOPL & SOFP (extract) for year ended 31 Dec X5?
EXAMPLE 02 (Accounting entries for allowance for receivables)

Alex Gullible has total receivables outstanding at 31 December 20X2 of $28,000. He has calculated that the
equivalent of 1% of the these balances might not be collected and wishes to make an appropriate allowance.
Before now, he has not made any allowance for receivables at all.
On 31 December 20X3 his trade accounts receivable amounted to $40,000. Upon reviewing the balances, he
calculated that an allowance should be made equivalent to 5% of the total balance.
What accounting entries should Alex make on 31 December 20X2 and 31 December 20X3, and what figures for
trade receivables will appear in his statements of financial position as at those dates?
QUESTION 3 (Receivables allowance)

Corin Flake owns and runs the Aerobic Health Foods Shop in Dundee. He commenced trading on 1 January
20X1, selling health foods to customers, most of whom make use of a credit facility that Corin offers. (Customers
are allowed to purchase up to $200 of goods on credit but must repay a certain proportion of their outstanding
debt every month.)
This credit system gives rise to a large number of irrecoverable debts, and Corin Flake's results for his first three
years of operations are as follows
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Required
For each of these three years, prepare the statement of profit or loss of the business, and state the value of trade
receivables appearing in the statement of financial position as at 31 December.
QUESTION 4 (Receivables allowance)

Horace Goodrunning fears that his business will suffer an increase in defaulting receivables in the future and so
he needs to make an allowance for receivables equivalent to 2% of outstanding trade receivables at the reporting
date from 28 February 20X6. On 28 February 20X8, Horace determines that the allowance has been
overestimated and he recalculates it to be the equivalent of 1% of outstanding trade receivables. Outstanding
receivables balances at the various reporting dates are as follows.
28.2.20X6 15,200
28.2.20X7 17,100
28.2.20X8 21,400
Required
Show extracts from the following ledger accounts for each of the three years above.
(a) Trade receivables
(b) Allowance for receivables
(c) Profit or loss account
Show how receivables would appear in the statement of financial position at the end of each year.
EXAMPLE 03 (Irrecoverable debts & allowance for receivables combined)

Fatima's receivables at 31 May 20X7 were $723,800. The balance on the allowance for receivables account at 1
June 20X6 was $15,250. Fatima needs to adjust the allowance for receivables to be the equivalent of 1.5% of
receivables at 31 May 20X7.
On 14 May 20X7 Fatima received $540 in final settlement of an amount written off during the year ended 31 May
20X6.
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Required
What total amount should be recognised for receivables in the statement of profit or loss for the year ended 31
May 20X7?
QUESTION 5
The financial affairs of Newbegin Tools prior to the commencement of trading were as follows.
At the end of six months the business had made the following transactions.
(a) Goods were purchased on credit for $10,000.
(b) Closing inventories were valued at $5,450.
(c) Cash sales and credit sales together totalled $27,250.
(d) Outstanding trade accounts receivable balances at 31 January 20X6 amounted to $3,250, of
which $250 were to be written off.
(e) An allowance for receivables is to be made equivalent to 2% of the remaining outstanding
receivables.
(f) Cash payments were made in respect of the following expenses:
(i) Stationery, postage and wrapping 500
(ii) Telephone charges 200
(iii) Electricity 600
(iv) Cleaning and refreshments 150
(v) Suppliers 8,000
(g) Cash drawings by the proprietor, Alf Newbegin, amounted to $6,000.
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(h) The outstanding overdraft balance as at 1 August 20X5 was paid off. Interest charges and bank charges on
the overdraft amounted to $40.
Alf Newbegin knew the balance of cash in hand at 31 January 20X6 but he wanted to know if the business had
made a profit for the six months that it had been trading, and so he asked his friend, Harry Oldhand, if he could
tell him.
Required
Prepare the statement of profit or loss of Newbegin Tools for the six months to 31 January 20X6 and a statement
of financial position as at that date.
H. PROVISIONS & CONTINGENCIES

EXAMPLE 1 (Provisions)
A business has been told by its lawyers that it is likely to have to pay $10,000 damages for a product that failed.
The business duly set up a provision at 31 December 20X7. However, the following year, the lawyers found that
damages were more likely to be $50,000.
Required
How is the provision treated in the accounts at:
(a) 31 December 20X7?
(b) 31 December 20X8?
EXAMPLE 2 (Warranty provisions)

Parker Co sells goods with a warranty under which customers are covered for the cost of repairs of any
manufacturing defect that becomes apparent within the first six months of purchase. The company's past
experience and future expectations indicate the following pattern of likely repairs.
What should the warranty provision in Parker Co's financial statements be?
QUESTION 1 (Provisions & Contigencies)

During 20X9 Smack Co gives a guarantee of certain borrowings of Pony Co, whose financial condition at that
time is sound. During 20Y0, the financial condition of Pony Co deteriorates and at 30 June 20Y0 Pony Co files for
protection from its creditors.
What accounting treatment is required:
(a) At 31 December 20X9?
(b) At 31 December 20Y0?

After a wedding in 20X0 ten people became seriously ill, possibly as a result of food poisoning from products sold
by Callow Co. Legal proceedings are started seeking damages from Callow but it disputes liability. Up to the date
of approval of the financial statements for the year to 31 December 20X0, Callow's lawyers advise that it is
probable that it will not be found liable. However, when Callow prepares the financial statements for the year to
31 December 20X1 its lawyers advise that, owing to developments in the case, it is probable that it will be found
liable.
What is the required accounting treatment:
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(a) At 31 December 20X0?
(b) At 31 December 20X1?

An oil company causes environmental contamination in the course of its operations, but cleans up only when
required to do so under the laws of the country in which it is operating. One country in which it has been
operating for several years has up to now had no legislation requiring cleaning up. However, there is now an
environmental lobby in this country. At the date of the company's year end, it is virtually certain that a draft law
requiring clean-up of contaminated land will be enacted very shortly. The oil company will then be obliged to deal
with the contamination it has caused over the past several years.
What accounting treatment is required at the year end?
EXAMPLE 3 (Disclosure in the F/S of a warranty provision)

Warren Tees Ltd. is a manufacturer of golf tees. Tees purchased are covered by a three year warranty, whereby
the company will replace any defective tees. At the end of last year on 31 March 20X6, a provision of $150,000
was made. During this year, $75,000 was paid for the cost of replacing tees under warranty. At the end of this
year, the company estimated that a provision of $135,000 was needed.
Preparing accounting entries(also T-account) & disclosure?
I. BANK RECONCILIATION
EXAMPLE 1 – Bank reconciliation
At 30 September 20X6, the balance in the cash book of Wordsworth Co was $805.15 debit. A bank statement on
30 September 20X6 showed Wordsworth Co to be in credit by $1,112.30. On investigation of the difference
between the two sums, it was established that:
(a) The cash book had been undercast by $90.00 on the debit side*
(b) Cheques paid in not yet credited by the bank amounted to $208.20, called outstanding lodgements
(c) Cheques drawn not yet presented to the bank amounted to $425.35 called unpresented cheques
* Note. 'Casting' is an accountant's term for adding up.
Required
(a) Show the correction to the cash book.
(b) Prepare a statement reconciling the balance per bank statement to the balance per cash book.
QUESTION 1 – Reconciliation
On 31 January 20X8 a company's cash book showed a credit balance of $150 on its current account which did
not agree with the bank statement balance. In performing the reconciliation the following points came to light.
Not recorded in the cash book:
Bank charges 36
Transfer from deposit account to current account 500
Not recorded on the bank statement:
Unpresented cheques 116
Outstanding lodgements 630
It was also discovered that the bank had debited the company's account with a cheque for $400 in error.
Page 24 of 64
What was the original balance on the bank statement?
QUESTION 2 – Bank statement

A company's bank statement shows $715 direct debits and $353 investment income not recorded in the cash
book. The bank statement does not show a customer's cheque for $875 entered in the cash book on the last day
of the accounting period. If the cash book shows a credit balance of $610, what balance appears on the bank
statement?
Given the facts in the question above, what is the figure for the bank balance to be reported in the final accounts?
EXAMPLE 2 – Complicated bank reconciliation

On 30 June 20X0, Cook's cash book showed that he had an overdraft of $300 on his current account at the bank.
A bank statement as at the end of June 20X0 showed that Cook was in credit with the bank by $65.
On checking the cash book with the bank statement you find the following.
(a) Cheques drawn, amounting to $500, had been entered in the cash book but had not been presented.
(b) Cheques received, amounting to $400, had been entered in the cash book, but had not been credited by the
bank.
(c) On instructions from Cook the bank had transferred interest received on his deposit account amounting to $60
to his current account, recording the transfer on 5 July 20X0. However, this amount had been credited in the
cash book as on 30 June 20X0.
(d) Bank charges of $35 shown in the bank statement had not been entered in the cash book.
(e) The payments side of the cash book had been undercast by $10.
(f) Dividends received amounting to $200 had been paid direct to the bank and not entered in the cash book.
(g) A cheque for $50 drawn on deposit account had been shown in the cash book as drawn on current account.
(h) A cheque issued to Jones for $25 was replaced when out of date. It was entered again in the cash book, no
other entry being made. Both cheques were included in the total of unpresented cheques shown above.
Required
(a) Indicate the appropriate adjustments in the cash book.
(b) Prepare a statement reconciling the corrected cash book balance with that shown in the bank statement.
QUESTION 3 – Bank reconciliation

From the information given below relating to PWW Co you are required to:
(a) Make such additional entries in the cash at bank account of PWW Co as you consider necessary to show the
correct balance at 31 October 20X2.
(b) Prepare a statement reconciling the correct balance in the cash at bank account as shown in (a) above with
the balance at 31 October 20X2 that is shown on the bank statement from Z Bank Co.
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J. CONTROL ACCOUNTS
EXAMPLE – ACCOUNTING FOR RECEIVABLES
Reference numbers are shown in the accounts to illustrate the cross referencing that is needed, and in the
example:
(a) Reference numbers beginning SDB refer to a page in the sales day book
(b) Reference numbers beginning RL refer to a particular account in the receivables ledger
(c) Reference numbers beginning NL refer to a particular account in the nominal ledger
(d) Reference numbers beginning CB refer to a page in the cash book
At 1 July 20X2, the Outer Business Company had no trade accounts receivable. During July, the following
transactions affecting credit sales and customers occurred.
(a) 3 July: invoiced A Arnold for the sale on credit of hardware goods: $100
(b) 11 July: invoiced B Bagshaw for the sale on credit of electrical goods: $150
(c) 15 July: invoiced C Cloning for the sale on credit of hardware goods: $250
(d) 10 July: received payment from A Arnold of $90, in settlement of their debt in full, having taken a permitted
discount of $10 for payment within seven days
(e) 18 July: received a payment of $72 from B Bagshaw in part settlement of $80 of their debt; a discount of $8
was allowed for payment within seven days of invoice
(f) 28 July: received a payment of $120 from C Cloning, who was unable to claim any discount
Account numbers are as follows.
RL 4 Personal account: A Arnold
RL 9 Personal account: B Bagshaw
RL 13 Personal account: C Cloning
NL 6 Receivables control account
NL 7 Discounts allowed
NL 21 Sales: hardware
NL 22 Sales: electrical
NL 1 Cash at bank
The accounting entries would be as follows.
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In the nominal ledger, the accounting entries are made from the books of prime entry to the ledger accounts, in
this example at the end of the month.
Note. At 31 July the closing balance on the receivables control account ($200) is the same as the total of the
individual balances on the personal accounts in the receivables ledger ($0 + $70 + $130)
If we take the balance on the accounts shown in this example as at 31 July 20X2, the trial balance is as follows
Page 29 of 64
QUESTION 1 – Receivables & payables control account

On examining the books of Exports Co, you ascertain that on 1 October 20X8 the receivables ledger balances
were $8,024 debit and $57 credit, and the payables ledger balances on the same date $6,235 credit and $105
debit. For the year ended 30 September 20X9 the following particulars are available.
Sales 63,728
Purchases 39,974
Cash from trade accounts receivable 55,212
Cash to trade accounts payable 37,307
Discount received 1,475
Discount allowed 2,328
Returns inwards 1,002
Returns outwards 535
Irrecoverable debts written off 326
Cash received in respect of debit balances in payables ledger 105
Amount due from customer as shown by receivables ledger, offset against amount due to the same firm as
shown by payables ledger (settlement by contra) 434
Allowances to customers on goods damaged in transit 212
On 30 September 20X9 there were no credit balances in the receivables ledger except those outstanding on 1
October 20X8, and no debit balances in the payables ledger.
Required
Write up the following accounts recording the above transactions bringing down the balances as on 30
September 20X9.
(a) Receivables control account
(b) Payables control account
QUESTION 2– Receivables control account

April Showers sells goods on credit to most of its customers. In order to control its receivables collection system,
the company maintains a receivables control account. In preparing the accounts for the year to 30 October 20X3
the accountant discovers that the total of all the personal accounts in the receivables ledger amounts to $12,802,
whereas the balance on the receivables control account is $12,550. Upon investigating the matter, the following
errors were discovered.
(a) Sales for the week ending 27 March 20X3 amounting to $850 had been omitted from the control account.
(b) A customer's account balance of $300 had not been included in the list of balances.
(c) Cash received of $750 had been entered in a personal account as $570.
(d) Discounts allowed totalling $100 had not been entered in the control account.
(e) A personal account balance had been undercast by $200.
(f) A contra item of $400 with the payables ledger had not been entered in the control account.
Page 30 of 64
(g) An irrecoverable debt of $500 had not been entered in the control account.
(h) Cash received of $250 had been debited to a personal account.
(i) Discounts received of $50 had been debited to Bell's receivables ledger account.
(j) Returns inwards valued at $200 had not been included in the control account.
(k) Cash received of $80 had been credited to a personal account as $8.
(l) A cheque for $300 received from a customer had been dishonoured by the bank, but no adjustment had been
made in the control account.
Required
(a) Prepare a corrected receivables control account, bringing down the amended balance as at 1 November
20X3.
(b) Prepare a statement showing the adjustments that are necessary to the list of personal account balances so
that it reconciles with the amended receivables control account balance.
QUESTION 3– Payables control account

XYZ has a payables control account balance of $17,250 at 31 December 20X9. However, the extract of balances
from the payables ledger totals $14,500. Investigation finds the following errors: a contra entry of $750 had been
omitted from the control account; an account with a balance of $500 debit had been included as $500 credit in
the list of balances; and payments totalling $3,000 had been posted to the individual accounts but the double
entry postings had not yet been made.
Required
(a) Prepare a corrected payables control account, bringing down the amended balance as at 31 December 20X9.
(b) Prepare a statement showing the adjustments that are necessary to the list of personal account balances so
that it reconciles with the amended payables control account balance.
K. REVISION 02
SALES TAX
1. Output sales tax > Input sales tax => Difference is ________ to tax authority.
2. Output sales tax < Input sales tax => Difference is ____________ to the business.
3. Gross value = amount ___________ sales tax.
4. Net value = amount _____________ sales tax.
5. Net value =__________________________.
6. Sales tax = __________________________.
7. What is accounting entry for input sales tax?
8. What is accounting entry for output sales tax?
9. The following information relates to Eva Co's sales tax for the month of March 20X3:
 Sales (including sales tax) 109,250
 Purchases (net of sales tax) 64,000
Sales tax is charged at a flat rate of 15%. Eva Co's sales tax account showed an opening credit balance
of $4,540 at the beginning of the month and a closing debit balance of $2,720 at the end of the month.
What was the total sales tax paid to regulatory authorities during the month of March 20X3?
10. Alana is not registered for sales tax purposes. She has recently received an invoice for goods for resale
which cost $500 before sales tax, which is levied at 15%. The total value was therefore $575.What is
the correct entry to be made in Alana’s general ledger in respect of the invoice?
11. Information relating to Lauren Co's transactions for the month of May 20X4 is shown below:
Sales (including sales tax) 140,000*
Purchases (net of sales tax) 65,000
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Sales tax is charged at a flat rate of 20%. Lauren Co's sales tax account had a zero balance at the
beginning of the month and at the end of the month.
* Lauren Co's sales for the month of $140,000 included $20,000 of sales exempt from sales tax.
What was the total sales tax paid to regulatory authorities at the end of May 20X4 (to the nearest
$)
12. Sales (including sales tax) amounted to $27,612.50, and purchases (excluding sales tax) amounted to
$18,000. What is the balance on the sales tax account, assuming all items are subject to sales
tax at 17.5%?
INVENTORY (IAS 02)

1. How to value inventories?
2. Formula of cost of goods sold?
3. Treatment of carriage inwards & carriage outwards?
4. Methods to determine the cost of inventory issued/ sold and closing inventory?
5. The inventory value for the financial statements of Global Co for the year ended 30 June 20X3 was
based on a inventory count on 7 July 20X3, which gave a total inventory value of $950,000. Between 30
June and 7 July 20X6, the following transactions took place:
Purchase of goods 11,750
Sale of goods (mark up on cost at 15%) 14,950
Goods returned by Global Co to supplier 1,500
What figure should be included in the financial statements for inventories at 30 June 20X3?
6. Which of the following costs may be included when arriving at the cost of finished goods
inventory for inclusion in the financial statements of a manufacturing company?
1 Carriage inwards
2 Carriage outwards
3 Depreciation of factory plant
4 Finished goods storage costs
5 Factory supervisors' wages
7. The closing inventory at cost of a company at 31 January 20X3 amounted to $284,700. The following
items were included at cost in the total:
 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in
manufacture, they were all sold after the reporting date at 50% of their normal price. Selling
expenses amounted to 5% of the proceeds.
 800 skirts, which had cost $20 each. These too were found to be defective. Remedial work in
February 20X3 cost $5 per skirt, and selling expenses for the batch totalled $800. They were
sold for $28 each.
What should the inventory value be according to IAS 2 Inventories after considering the above
items?
8. A company with an accounting date of 31 October carried out a physical check of inventory on 4
November 20X3, leading to an inventory value at cost at this date of $483,700.
Between 1 November 20X3 and 4 November 20X3 the following transactions took place:
 Goods costing $38,400 were received from suppliers.
 Goods that had cost $14,800 were sold for $20,000.
 A customer returned, in good condition, some goods which had been sold to him in October for
 $600 and which had cost $400.
 The company returned goods that had cost $1,800 in October to the supplier, and received a
credit note for them.
What figure should appear in the company's financial statements at 31 October 20X3 for closing
inventory, based on this information?
9. A firm has the following transactions with its product R.

1 January 20X1 Opening inventory: nil
1 February 20X1 Buys 10 units at $300 per unit
11 February 20X1 Buys 12 units at $250 per unit
1 April 20X1 Sells 8 units at $400 per unit
1 August 20X1 Buys 6 units at $200 per unit
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1 December 20X1 Sells 12 units at $400 per unit

The firm uses periodic weighted average cost (AVCO) to value its inventory. What is the
inventory value at the end of the year?
TANGIBLE NON-CURRENT ASSETS

1. Definition & accounting treatments of capital expenditure & revenue expenditure?
2. How to calculate the initial cost of PPE?
3. Accounting entry for depreciation?
4. Formula to calculate depreciation under straight-line method?
5. Draw up T-account (accounting entries) for disposal of assets?
6. Revaluation model & accounting treatments?
7. Calculation of new depreciation on revalued assets?
8. Accounting treatment for revaluation downwards?
9. A company bought a property four years ago on 1 January for $ 170,000. Since then property prices
have risen substantially and the property has been revalued at $210,000. The property was estimated
as having a useful life of 20 years when it was purchased.
What is the balance on the revaluation surplus reported in the statement of financial position?
10. A business purchased a motor car on 1 July 20X3 for $20,000. It is to be depreciated at 20 per cent per
year on the straight line basis, assuming a residual value at the end of five years of $4,000, with a
proportionate depreciation charge in the years of purchase and disposal.
The $20,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles
repairs account.
How will the business profit for the year ended 31 December 20X3 be affected by the error?
11. A manufacturing company receives an invoice on 29 February 20X2 for work done on one of its
machines. $25,500 of the cost is actually for a machine upgrade, which will improve efficiency. The
accounts department do not notice and charge the whole amount to maintenance costs. Machinery is
depreciated at 25% per annum on a straight-line basis, with a proportional charge in the years of
acquisition and disposal. By what amount will the profit for the year to 30 June 20X2 be
understated?
12. W bought a new printing machine. The cost of the machine was $80,000. The installation costs were
$5,000 and the employees received training on how to use the machine, at a cost of $2,000. Before
using the machine to print customers' orders, a test was undertaken and the paper and ink cost $1,000.
What should be the cost of the machine in the company's statement of financial position?
13. Alpha sells machine B for $50,000 cash on 30 April 20X4. Machine B cost $100,000 when it was
purchased and has a carrying amount of $65,000 at the date of disposal. What are the journal entries
to record the disposal of machine B?
14. Banjo Co purchased a building on 30 June 20X8 for $1,250,000. At acquisition, the useful life of the
building was 50 years. Depreciation is calculated on the straight-line basis. 10 years later, on 30 June
20Y8 when the carrying amount of the building was $1,000,000, the building was revalued to
$1,600,000. Banjo Co has a policy of transferring the excess depreciation on revaluation from the
revaluation surplus to retained earnings.
Assuming no further revaluations take place, what is the balance on the revaluation surplus at
30 June 20Y9?
15. Banter Co purchased an office building on 1 January 20X1. The building cost was $1,600,000 and this
was depreciated by the straight line method at 2% per year, assuming a 50-year life and nil residual
value. The building was re-valued to $2,250,000 on 1 January 20X6. The useful life was not revised.
The company’s financial year ends on 31 December.
What is the balance on the revaluation surplus at 31 December 20X6?
INTANGIBLE NON-CURRENT ASSETS

1. Criterias for capitalization of development costs?
2. Accounting treatment for intangible assets with finite life?
3. Accounting treatment for intangible assets with indefinite life?
Page 33 of 64
ACCRUALS & PREPAYMENT

1. Accounting treatments for accruals?
2. Accounting treatments for prepayments?
3. A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The
rent was increased from $90,000 per year to $120,000 per year as from 1 October 20X2.
What rent expense and accrual should be included in the company's financial statements for the
year ended 31 January 20X3?
4. A business compiling its financial statements for the year to 31 July each year pays rent quarterly in
advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from
$60,000 per year to $72,000 per year as from 1 October 20X3.
What figure should appear for rent expense in the business’s statement of profit or loss and
other comprehensive income for the year ended 31 July 20X4?
5. Diesel fuel in inventory at 1 November 20X7 was $12,500, and there were invoices awaited for $1,700.
During the year to 31 October 20X8, diesel fuel bills of $85,400 were paid, and a delivery worth $1,300
had yet to be invoiced. At 31 October 20X8, the inventory of diesel fuel was valued at $9,800. What is
the value of diesel fuel to be charged to the statement of profit or loss and other comprehensive
income for the year to 31 October 20X8?
6. A business compiling its financial statements for the year to 31 January each year pays rent quarterly in
advance on 1 January, 1 April, 1 July and 1 October each year. After remaining unchanged for some
years, the rent was increased from $24,000 per year to $30,000 per year as from 1 July 20X0. What
rent expense should appear in the statement of profit or loss for year ended 31 January 20X1?
7. The trainee accountant at Judd Co has forgotten to make an accrual for rent for December in the
financial statements for the year ended 31 December 20X2. Rent is charged in arrears at the end of
February, May, August and November each year. The bill payable in February is expected to be
$30,000. Judd Co’s draft statement of profit or loss shows a profit of $25,000 and draft statement of
financial position shows net assets of $275,000.
What is the profit or loss for the year and what is the net asset position after the accrual has
been included in the financial statements?
8. Bookz Co pays royalties to writers annually, in February, the payment covering the previous calendar
year.
As at the end of December 20X2, Bookz Co had accrued $100,000 in royalties due to writers. However,
a check of the royalty calculation performed in January 20X3 established that the actual figure due to be
paid by Bookz Co to writers was $150,000.
Before this under-accrual was discovered, Bookz Co's draft statement of profit or loss for the accounting
year ended 31 December 20X2 showed a profit of $125,000 and their draft statement of financial
position showed net assets of $375,000.
What will Bookz Co's profit and net asset position be after an entry to correct the under-accrual
has been processed?
IRRECOVERABLE DEBTS AND ALLOWANCES

1. Accounting treatment for writing off an irrecoverable debts?
2. Difference between irrecoverable debts & doubtful debts?
3. Accounting treatment for allowance for receivables?
4. At 31 December 20X2 a company's receivables totalled $400,000 and an allowance for receivables of
$50,000 had been brought forward from the year ended 31 December 20X1.
It was decided to write off debts totalling $38,000. The allowance for receivables was to be adjusted to
the equivalent of 10% of the receivables.
What charge for receivables expense should appear in the company's statement of profit or loss
for the year ended 31 December 20X2?
5. At 1 July 20X2 the receivables allowance of Q was $18,000.

During the year ended 30 June 20X3 debts totalling $14,600 were written off. The receivables allowance
required was to be $16,000 as at 30 June 20X3.
What amount should appear in Q's statement of profit or loss for receivables expense for the
year ended 30 June 20X3?
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6. At 30 September 20X2 a company's allowance for receivables amounted to $38,000, which was
equivalent to five per cent of the receivables at that date.
At 30 September 20X3 receivables totalled $868,500. It was decided to write off $28,500 of debts as
irrecoverable. The allowance for receivables required was to be the equivalent of five per cent of
receivables.
What should be the charge in the statement of profit or loss for the year ended 30 September
20X3 for receivables expense?
7. At 31 December 20X4 a company's trade receivables totalled $864,000 and the allowance for
receivables was $48,000.
It was decided that debts totalling $13,000 were to be written off. The allowance for receivables was to
be adjusted to the equivalent of five per cent of the receivables.
What figures should appear in the statement of financial position for trade receivables (after
deducting the allowance) and in the statement of profit or loss for receivables expense?
PROVISIONS & CONTINGENCIES

1. Criterias for recognition of a provision?
2. Accounting treatment?
3. What is contingent assets?
4. What is contingent liabilities?
5. Montague’s paint shop has suffered some bad publicity as a result of a customer claiming to be
suffering from skin rashes as a result of using a new brand of paint sold by Montague’s shop. The
customer launched a court action against Montague in November 20X3, claiming damages of $5,000.
Montague’s lawyer has advised him that the most probable outcome is that he will have to pay the
customer $3,000.
What amount should Montague include as a provision in his financial statements for the year
ended 31 December 20X3?
6. Mobiles Co sells goods with a one year warranty under which customers are covered for any defect that
becomes apparent within a year of purchase. In calendar year 20X4, Mobiles Co sold 100,000 units.
The company expects warranty claims for 5% of units sold. Half of these claims will be for a major
defect, with an average claim value of $50. The other half of these claims will be for a minor defect, with
an average claim value of $10.
What amount should Mobiles Co include as a provision in the statement of financial position for
the year ended 31 December 20X4?
RECEIVABLES & PAYABLES CONTROL ACCOUNT

1. Draw up T-account of receivables control a/c showing relevant entries which should be appeared on?
2. Draw up T-account of payables control a/c showing relevant entries which should be appeared on?
3. Accounting treatments for trade discounts & cash discounts?
4. You are given the following information:
Receivables at 1 January 20X3 $10,000
Receivables at 31 December 20X3 $9,000
Total receipts during 20X3 (including cash sales of $5,000) $85,000
What is the figure for sales on credit during 20X3?
5. Your payables control account has a balance at 1 October 20X8 of $34,500 credit. During October,
credit purchases were $78,400, cash purchases were $2,400 and payments made to suppliers,
excluding cash purchases, and after deducting settlement discounts of $1,200, were $68,900. Purchase
returns were $4,700.
What was the closing balance?
6. A receivables ledger control account had a closing balance of $8,500. It contained a contra to the
payables ledger of $400, but this had been entered on the wrong side of the control account.
What should be the correct balance on the control account?
7.
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What should the closing balance be after correcting the errors made in preparing the account?
8. The payables ledger control account below contains a number of errors:
All items relate to credit purchases.

What should the closing balance be when all the errors are corrected?
9. The following control account has been prepared by a trainee accountant:
What should the closing balance be when all the errors made in preparing the receivables ledger
control account have been corrected?
10. The balance on Jude Co’s payables ledger control account is $31,554. The accountant at Jude Co has
discovered that she has not recorded:
A settlement discount of $53 received from a supplier; and
A supplier’s invoice for $622.
What amount should be reported for payables on Jude Co’s statement of financial position?
11. The accountant at Borris Co has prepared the following reconciliation between the balance on the trade
payables ledger control account in the general ledger and the list of balances from the suppliers ledger:
What balance should be reported on Borris Co’s statement of financial position for trade
payables?
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BANK RECONCILIATION
1. Your cash book at 31 December 20X3 shows a bank balance of $565 overdrawn. On comparing this
with your bank statement at the same date, you discover the following.
 A cheque for $57 drawn by you on 29 December 20X3 has not yet been presented for
payment.
 A cheque for $92 from a customer, which was paid into the bank on 24 December 20X3, has
been dishonoured on 31 December 20X3.
What is the correct bank balance to be shown in the statement of financial position at 31
December
20X3?
2. The cash book shows a bank balance of $5,675 overdrawn at 31 August 20X5. It is subsequently
discovered that a standing order for $125 has been entered twice, and that a dishonoured cheque for
$450 has been debited in the cash book instead of credited.
What is the correct bank balance?
3. A business had a balance at the bank of $2,500 at the start of the month. During the following month, it
paid for materials invoiced at $1,000 less trade discount of 20% and cash discount of 10%. It received a
cheque from a customer in respect of an invoice for $200, subject to cash discount of 5%.
What was the balance at the bank at the end of the month?
4. The bank statement on 31 October 20X7 showed an overdraft of $800. On reconciling the bank
statement, it was discovered that a cheque drawn by your company for $80 had not been presented for
payment, and that a cheque for $130 from a customer had been dishonoured on 30 October 20X7, but
that this had not yet been notified to you by the bank.
What is the correct bank balance to be shown in the statement of financial position at 31
October 20X7?
5. The following information relates to a bank reconciliation.

(i) The bank balance in the cashbook before taking the items below into account was $8,970 overdrawn.
(ii) Bank charges of $550 on the bank statement have not been entered in the cashbook.
(iii) The bank has credited the account in error with $425 which belongs to another customer.
(iv) Cheque payments totalling $3,275 have been entered in the cashbook but have not been presented
for payment.
(v) Cheques totalling $5,380 have been correctly entered on the debit side of the cashbook but have
not been paid in at the bank.
What was the balance as shown by the bank statement before taking the above items into
account?
6. The following information relates to a bank reconciliation.

(i) The bank balance in the cashbook before taking the items below into account was $8,970 overdrawn.
(ii) Bank charges of $550 on the bank statement have not been entered in the cashbook.
(iii) The bank has credited the account in error with $425 which belongs to another customer.
(iv) Cheque payments totalling $3,275 have been entered in the cashbook but have not been presented
for payment.
(v) Cheques totalling $5,380 have been correctly entered on the debit side of the cashbook but have not
been paid in at the bank.
What was the balance as shown by the bank statement before taking the items above into
account?
L. INCOMPLETE RECORD
EXAMPLE 1 – Cost of goods stolen
Beau Gullard runs a jewellery shop on the high street. On 1 January 20X9, his trade inventory, at cost, amounted
to $4,700 and his trade payables were $3,950.
During the six months to 30 June 20X9, sales were $42,000. Beau Gullard makes a gross profit of 331/3% on the
sales value of everything he sells.
On 30 June, there was a burglary at the shop, and all the inventory was stolen.
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In trying to establish how much inventory had been taken, Beau Gullard was only able to say that:
(a) He knew from his bank statements that he had paid $28,400 to trade account payables in the six-month
period to 30 June 20X9.
(b) He currently had payables due of $5,550.
Required
(a) Calculate the amount of inventory stolen.
(b) Calculate gross profit for the 6 months to 30 June 20X9.
EXAMPLE 2 – TWO COLUMN CASH BOOK

Jonathan Slugg owns and runs a shop selling fishing tackle, making a gross profit of 25% on the cost of
everything he sells. He does not keep a cash book
On 1 January 20X7 the statement of financial position of his business was as follows.
In the year to 31 December 20X7:
(a) There were no sales on credit.
(b) $41,750 in receipts were banked.
(c) The bank statements of the period show the payments:
(i) To trade payables 36,000
(ii) For sundry expenses 5,600
(iii) To drawings 4,400
(d) Payments were also made in cash out of the till:
(i) To trade payables 800
(ii) For sundry expenses 1,500
(iii) To drawings 3,700
At 31 December 20X7, the business had cash in the till of $450 and trade payables of $1,400. The cash balance
in the bank was not known and the value of closing inventory has not yet been calculated.
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There were no accruals or prepayments. No further long-term assets were purchased during the year. The
depreciation charge for the year is $900.
Required
(a) Prepare a two column cash book for the period.
(b) Prepare the statement of profit or loss for the year to 31 December 20X7 and the statement of financial
position as at 31 December 20X7.
QUESTION – INCOMPLETE RECORD

Mary Grimes, wholesale fruit and vegetable merchant, does not keep a full set of accounting records.
However, the following information has been produced from the business's records.
(a) Summary of the bank account for the year ended 31 August 20X8
(b) Assets and liabilities, other than balance at bank
(c) All receipts are banked and all payments are made from the business bank account.
(d) A trade debt of $300 owing by John Blunt and included in the trade receivables at 31 August 20X8 (see (b)
above) is to be written off as an irrecoverable debt.
(e) Mary Grimes provides depreciation at the rate of 20% on the cost of motor vans held at the end of each
financial year. No depreciation is provided in the year of sale or disposal of a motor van.
(f) Discounts received during the year ended 31 August 20X8 from trade payables amounted to $1,100.
Required
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(a) Prepare Mary Grimes' statement of profit or loss for the year ended 31 August 20X8.
(b) Prepare Mary Grimes' statement of financial position as at 31 August 20X8.
M. PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS

QUESTION 1 – Adjustments to accounts
The financial affairs of Newbegin Tools prior to the commencement of trading were as follows.
At the end of six months the business had made the following transactions.
(a) Goods were purchased on credit at a list price of $10,000.
(b) Trade discount received was 2% on list price and there was a settlement discount received of 5% on settling
debts to suppliers of $8,000. These were the only payments to suppliers in the period.
(c) Closing inventories of goods were valued at $5,450.
(d) All sales
on credit and amounted to $27,250.
(e) Outstanding receivables balances at 31 January 20X6 amounted to $3,250, of which $250 were to be written
off. An allowance for receivables is to be made amounting to 2% of the remaining outstanding receivables.
(f) Cash payments were made in respect of the following expenses.
(i) Stationery, postage and wrapping 500
(ii) Telephone charges 200
(iii) Electricity 600
(iv) Cleaning and refreshments 150
(g) Cash drawings by the proprietor, Alf Newbegin, amounted to $6,000.
(h) The outstanding overdraft balance as at 1 August 20X5 was paid off. Interest charges and bank charges on
the overdraft amounted to $40.
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Prepare the statement of profit or loss of Newbegin Tools for the 6 months to 31 January 20X6 and a
statement of financial position as at that date. Ignore depreciation.
QUESTION 2 – Accounts preparation from a trial balance

The following trial balance was extracted from the ledger of Stephen Chee, a sole trader, as at 31 May 20X1 –
the end of his financial year.
STEPHEN CHEE
TRIAL BALANCE AS AT 31 MAY 20X1
The following additional information as at 31 May 20X1 is available.
(a) Inventory as at the close of business has been valued at cost at $42,000.
(b) Wages and salaries need to be accrued by $800.
(c) Other operating expenses are prepaid by $300.
(d) The allowance for receivables is to be adjusted so that it is 2% of trade receivables.
(e) Depreciation for the year ended 31 May 20X1 has still to be provided for as follows.
(i) Property: 1.5% per annum using the straight line method
(ii) Equipment: 25% per annum using the reducing balance method
Required
Prepare Stephen Chee's statement of profit or loss for the year ended 31 May 20X1 and his statement of
financial position as at that date.
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QUESTION 3 – Final accounts

Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.
TRIAL BALANCE AS AT 31 DECEMBER 20X0
The following information as at 31 December is also available.
(a) $218 is owing for motor expenses.
(b) $680 has been prepaid for rent.
(c) Depreciation is to be provided for the year as follows.
 Motor vehicles: 20% on cost

 Fixtures and fittings: 10% reducing balance method
(d) Inventory at the close of business was valued at $19,926.
Required
(a) Prepare Donald Brown's statement of profit or loss for the year ended 31 December 20X0. (7 marks)
(b) Which of the following formulas correctly describes the figure to be entered as capital in Donald Brown's
statement of financial position? (2 marks)
A Balance b/f + gross profit for the year – drawings
B Balance b/f – gross profit for the year + drawings
C Balance b/f + profit for the year – drawings
D Balance b/f – profit for the year + drawings
(c) What is the net effect on profit of the adjustments in notes (a) to (c) above? (6 marks)
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N. INTRODUCTION TO COMPANY ACCOUNTING

Example 1 – Dividends on ordinary shares and preference shares
Garden Gloves Co has issued 50,000 ordinary shares of 50 cents each and 20,000 7% preference shares of $1
each. Its profits after taxation for the year to 30 September 20X5 were $8,400. The management board has
decided to pay an ordinary dividend (ie a dividend on ordinary shares) which is 50% of profits after tax and
preference dividend.
Required
Show the amount in total of dividends and of retained profits, and calculate the dividend per share on ordinary
shares
QUESTION 01 – Bonus issues

CLARKE FRINGLAND CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X3 (EXTRACT)
Share capital (50c) 10,000
Share premium 7,000
Retained earnings 8,000
Total 25,000
Clarke Fringland Co has decided on a bonus issue of shares of 1 for 4 and will use the share premium account
for this purpose.
Required
What is the double entry to record the bonus issue of shares and what is the adjusted financial position extract
after the bonus issue?
QUESTION 02 – Right issues

CLARKE FRINGLAND CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X3 (EXTRACT)
Share capital (50c) 10,000
Share premium 7,000
Total 25,000
Clarke Fringland Co decides on a rights issue of 1 for 4 at $1.20.
Required
What is the double entry to record the issue of shares and what is the adjusted financial position extract after the
issue?
QUESTION 03 – Bonus & Right issues

X Co has the following capital structure.
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400,000 ordinary shares of 50c 200,000
Share premium account 70,000
Shareholders' equity 500,000
Show its capital structure following:
(a) A '1 for 2' bonus issue
(b) A rights issue of '1 for 3' at 75c following the bonus issue, assuming all rights taken up
O. PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES

QUESTION 01 – Internal accounts
The accountant of Zabit Co has prepared the following trial balance as at 31 December 20X7.
Notes:
1. Sundry expenses include $9,000 paid in respect of insurance for the year ending 1 September 20X8. Light and
heat does not include an invoice of $3,000 for electricity for the 3 months ending 2 January 20X8, which was paid
in February 20X8. Light and heat also includes $20,000 relating to salespeople's commission.
2. The suspense account is in respect of the following items.
$'000
Proceeds from the issue of 100,000 ordinary shares 120
Proceeds from the sale of plant 300
420
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Less consideration for the acquisition of Mary & Co 285

135
3. The net assets of Mary & Co were purchased on 3 March 20X7. Assets were valued as follows.
$'000
Investments 231
Inventory 34
265
All the inventory acquired was sold during 20X7. The investments were still held by Zabit at 31.12.X7.
4. The property was acquired some years ago. The buildings element of the cost was estimated at $100,000 and
the estimated useful life of the assets was 50 years at the time of purchase. As at 31 December 20X7 the
property is to be revalued at $800,000.
5. The plant which was sold had cost $350,000 and had a carrying amount of $274,000 as at 1.1.X7. $36,000
depreciation is to be charged on plant and machinery for 20X7.
6. The loan stock has been in issue for some years. The 50c ordinary shares all rank for dividends at the end of
the year.
7 The management wish to provide for:
(i) Loan stock interest due
(ii) A transfer to general reserve of $16,000
(iii) Audit fees of $4,000
8 Inventory as at 31 December 20X7 was valued at $220,000 (cost).
9 Taxation is to be ignored.
Required
Prepare the financial statements of Zabit Co as at 31 December 20X7, including the statement of changes
in equity. No other notes are required.
QUESTION 02: IFRS 15 – Revenue recognition

TDF is a company that manufactures office furniture. A customer placed an order on 22 December 20X4 for an
office desk at a price of $300 plus sales tax at 20% of $60. The desk was delivered to the customer on 25
January 20X5, who accepted the goods as satisfactory by signing a delivery note. TDF then invoiced the
customer for the goods on 1 February 20X5. The customer paid $360 to TDF on 1 March 20X5.
Required
How should TDF account for revenue?
QUESTION 3: Revenue
Discuss under what circumstances, if any, revenue might be recognised at the following stages of a sale.
(a) Goods are acquired by the business which it confidently expects to resell very quickly
(b) A customer places a firm order for the goods
(c) The goods are delivered to the customer
(d) The customer is invoiced for the goods
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(e) The customer pays for the goods
(f) The customer's cheque in payment for the goods is cleared by the bank
QUESTION 04
USB, a limited liability company, has the following trial balance at 31 December 20X9.
The following additional information is relevant.
(a) Inventory at 31 December 20X9 was valued at $1,600,000. While doing the inventory count, errors in the
previous year's inventory count were discovered. The inventory brought forward at the beginning of the year
should have been $2.2m, not $2.4m as above.
(b) Depreciation is to be provided as follows.
(i) Buildings at 5% straight line, charged to administrative expenses
(ii) Plant and equipment at 20% on the reducing balance basis, charged to cost of sales
(iii) Motor vehicles at 25% on the reducing balance basis, charged to distribution costs
(c) No final dividend is being proposed.
(d) A customer has gone bankrupt owing $76,000. This debt is not expected to be recovered and an adjustment
should be made. An allowance for receivables of 5% is to be set up.
(e) 1m new ordinary shares were issued at $1.50 on 1 December 20X9. The proceeds have been left in a
suspense account.
Page 46 of 64
Required
Prepare the following.All statements are to be prepared in accordance with the requirements of IFRSs. Ignore
taxation.
(a) Statement of profit or loss for the year ended 31 December 20X9 (3 marks)
(b) Statement of changes in equity for the year ended 31 December 20X9 (4 marks)
(c) Statement of financial position as at 31 December 20X9 (8 marks)
P. PREPARATION OF STATEMENT OF CASH FLOW

QUESTION 01
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The following information is available.
(a) The proceeds of the sale of non-current asset investments amounted to $30,000.
(b) Fixtures and fittings, with an original cost of $85,000 and a carrying amount of $45,000, were sold for $32,000
during the year.
(c) The following information relates to property, plant and equipment.
31/12/X2 31/12/X1
$’000 $’000
COST 720 595
ACCUMULATED
340 290
DEPRECIATION
CARRYING AMOUNT 380 305
(d) 50,000 $1 ordinary shares were issued during the year at a premium of 20c per share.
(e) Dividends totalling $80,000 were paid during the year.
Required
(a) Prepare the net cash flows from operating activities for the year to 31 December 20X2 using the format laid
out in IAS 7. (6 marks)
(b) Prepare the net cash flows from investing activities for the year to 31 December 20X2 using the format laid
out in IAS 7. (4 marks)
(c) Which one of the following options gives the net cash flows from financing activities for the year?
A $180k inflow
B $189k outflow
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C $350k outflow
D $360k inflow
(2marks)
(d) Prepare the note to the statement of cash flows for the year to 31 December 20X2 using the format laid out in
IAS 7. (3 marks)
Q. CONSOLIDATED STATEMENT OF FINACIAL POSITION

Example 1: Cancelation with intra group trading
P Co regularly sells goods to its one subsidiary company, S Co. The statements of financial position
of the two companies on 31 December 20X6 are given below.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X6
Required
Prepare the consolidated statement of financial position of P Co.
Example 2: Goodwill & Pre-acquisition profits

Sing Co acquired the ordinary shares of Wing Co on 31 March 20X1 when the draft statements
offinancial position of each company were as follows.
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Prepare the consolidated statement of financial position as at 31 March 20X1.
Question 1: Fair value of assets on acquisition

P Co acquired 100% of the ordinary shares of S Co on 1 September 20X5. At that date the fair value
ofS Co's land and buildings was $23,000 greater than their carrying value and retained earnings
were$21,000. The statements of financial position of both companies at 31 August 20X6 are given
below.
Page 50 of 64
Required
Prepare P Co's consolidated statement of financial position as at 31 August 20X6.
Example 3: Consideration in form of shares

P Co has acquired all of the share capital of S Co (12,000 $1 shares) by issuing 5 of its own $1
sharesfor every 4 shares in S Co. The market value of P Co's shares was $6 at the date of
acquisition. The fairvalue of the net assets of S Co at the date of acquisition was $75,000.Calculate
goodwill?
Example 4: NCI
P Co purchased 75% of the share capital of S Co on 1 January 20X1 for $60,000 when the
retainedearnings of S Co were $5,000. The fair value of the NCI in S Co at that date was $15,000.
Thestatements of financial position of P Co and S Co as at 31 December 20X1 are given below.
Page 51 of 64
Required
Prepare the consolidated statement of financial position at 31 December 20X1.
Question 2: Goodwill
On 31 December 20X8 Pandora Co acquired 4m of the 5m $1 ordinary shares of Sylvester Co,
paying$10m cash. On that date the fair value of Sylvester's net assets was $7.5m.The market price of
the shares held by the non-controlling shareholders just before the acquisition was$2.00.
What is goodwill in the consolidated statement of financial position?
Question 3: Consolidated financial statements

P Co acquired all the shares in S Co one year ago when the retained earnings of S Co stood at
$10,000.Draft statements of financial position for each company are as follows.
During the year S Co sold goods to P Co for $50,000, the profit to S Co being 20% of selling price. At
the period end, 25% of these goods remained unsold in the inventories of P Co. At the same date, P
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Co owed S Co $12,000 for goods bought and this debt is included in the trade payables of P Co and
the trade receivables of S Co.
Required
Prepare a draft consolidated statement of financial position for P Co
Example 5: NCI and intra group trading

P Co acquired 75% of the shares in S Co on 1 January 20X2 when the retained earnings of S Co
stoodat $10,000. The fair value of the NCI at the date of acquisition was $15,000. During the year
to31 December 20X2, S Co sold goods to P Co for $20,000 at a mark-up of 25%. 50% of these
goodswere still unsold by P Co at the end of the year. At the same date, P Co owed S Co $12,000 for
goodsbought and this debt is included in the trade payables of P Co and the trade receivables of S
Co.
Required
Prepare a draft consolidated statement of financial position for P Co.
Question 4: Acquisition during the year

Hinge Co acquired 80% of the ordinary shares of Singe Co on 1 April 20X5. On 31 December
20X4Singe Co's accounts showed a revaluation surplus of $4,000 and retained earnings of $15,000.
The fairvalue of the NCI at acquisition was $7,000. The statements of financial position of the two
companies at31 December 20X5 are set out below.
HINGE CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
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Required
Prepare the consolidated statement of financial position of Hinge Co at 31 December 20X5. You
should assume that profits have accrued evenly over the year to 31 December 20X5.
R. CONSOLIDATED STATEMENT OF PROFIT & LOSS

Example 1: Consolidated statement of profit and loss
P Co acquired 75% of the ordinary shares of S Co on that company's incorporation in 20X3. The
summarised statements of profit or loss of the two companies for the year ending 31 December 20X6
are set out below.
Page 54 of 64
Required
Prepare the consolidated statement of profit or loss and movement on retained earnings for the group.
Question 1: Consolidated statement of profit and loss

The following information relates to the Wheeler group for the year to 30 April 20X7:
Additional information
(a) The issued share capital of the group was as follows.
Wheeler Co: 5,000,000 ordinary shares of $1 each
Brookes Co: 1,000,000 ordinary shares of $1 each
(b) Wheeler Co purchased 80% of the issued share capital of Brookes Co in 20X0. At that time, the
retained earnings of Brookes amounted to $56,000.
Required
Prepare the consolidated statement of profit or loss and the movement on retained earnings for the
Wheeler group for the year to 30 April 20X7.
Example 2: Intra group trading

Suppose in our earlier example 1 above that S Co had recorded sales of $5,000 at a gross margin of
40% to P Co during 20X1. 50 per cent of the goods remained in P Co's inventories at 31 December
20X1. Prepare the revised consolidated statement of profit or loss.
Question 2: Intra group trading

Pumpkin has held 90% of the equity share capital of Squash for many years. Cost of sales for each
entityfor the year ended 31 December 20X3 was as follows.
Pumpkin: $100,000
Squash: $80,000
During the year, Squash sold goods costing $5,000 to Pumpkin for $8,000. At the year end, all
thesegoods remained in inventory.
(a) What figure should be shown as cost of sales in the consolidated statement of profit or loss of
thePumpkin group for the year ended 31 December 20X3?
(b) If Squash's profit for the year was $16,000, what is the profit attributable to the NCI?
Page 55 of 64
Question 3: Intra group trading

Percy has held 75% of the equity share capital of Mercy for many years.
Draft summarised statements of profit or loss for Percy and Mercy for the year ended 31 December
20X3are below.
STATEMENTS OF PROFIT OR LOSS AT 31 DECEMBER 20X3
During the year, Percy sold goods which cost $20,000 to Mercy at a margin of 20%. At the year end,
allof these goods remained in inventory.
Required
Prepare the consolidated statement of profit or loss for the Percy group as at 31 December 20X3.
Question 4: Acquisition part way through the year

P Co acquired 60% of the equity of S Co on 1 April 20X5. The statements of profit or loss of the
twocompanies for the year ended 31 December 20X5 are set out below:
Required
Prepare the consolidated statement of profit or loss and movements on retained earnings.
S. REVISION (FINAL)
SECTION A
1. Xena has the following working capital ratios:

20X9 20X8
Current ratio 1·2:1 1·5:1
Receivables days 75 days 50 days
Payables days 30 days 45 days
Page 56 of 64
Inventory turnover 42 days 35 days

Which of the following statements is correct?
A. Xena’s liquidity and working capital has improved in 20X9
B. Xena is receiving cash from customers more quickly in 20X9 than in 20X8
C. Xena is suffering from a worsening liquidity position in 20X9
D. Xena is taking longer to pay suppliers in 20X9 than in 20X8
2. 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 supplier’s plant
and equipment. Cannon Co’s 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. Cannon should neither provide for nor disclose the claim
B. Cannon should disclose a contingent liability of $100,000
C. Cannon should provide for the expected cost of the claim of $100,000
D. Cannon should provide for an expected cost of $20,000
3. The draft financial statements of a limited liability company are under consideration. The
accounting treatment of the following material events after the reporting period needs to be
determined.
(1) The bankruptcy of a major customer, with a substantial debt outstanding at the end of
the
reporting period.
(2) A fire destroying some of the company's inventory (the company's going concern status
is not affected).
(3) An issue of shares to finance expansion.
(4) Sale for less than cost of some inventory held at the end of the reporting period.
According to IAS 10 Events after the reporting period, which of the above events require
an adjustment to the figures in the draft financial statements?
A. 1 and 4 only
B. 1, 2 and 3 only
C. 2 and 3 only
D. 2 and 4 only
4. An increase in selling prices may lead to which of the following effects?
A. Asset turnover will increase
B. Profit margins will fall
C. Profit margins may increase subject to a fall in asset turnover
D. Return on capital employed will increase
5. The figures shown in the table below are an extract from the accounts of Ridgeway (capital
employed is $1.5m).
$
Revenue 1,000,000
Cost of sales 400,000
Page 57 of 64
Gross profit 600,000

Distribution expenses and administration cost 300,000
Profit before interest and tax 300,000
Finance cost 50,000
Profit before tax 250,000
Income tax expense 100,000
Profit after tax 150,000
What is the return on capital employed (ROCE)?
A. 7%
B. 10%
C. 40%
D. 20%
6. Which of the following statements are correct?
(1) A company might make a rights issue if it wished to raise more equity capital.
(2) A rights issue might increase the share premium account whereas a bonus issue is likely
to
reduce it.
(3) A bonus issue will generate cash for a company.
(4) A rights issue will always increase the number of shareholders in a company whereas a
bonus issue will not.
A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 2 and 4
7. Which of the following characteristics of financial information contribute to reliability,
according to the IASB's Framework for the Preparation and Presentation of Financial
Statements?
(1) Completeness
(2) Prudence
(3) Neutrality
(4) Faithful representation
A. All four items
B. 1, 2 and 3 only
C. 1, 2 and 4 only
D. 2, 3 and 4 only
8. The trial balance of a company did not balance, and a suspense account was opened for the
difference.
Which of the following errors would require an entry to the suspense account in correcting
them?
(1) A cash payment to purchase a motor van had been correctly entered in the cash book but
had been debited to the motor expenses account.
(2) The debit side of the wages account had been under cast.
(3) The total of the discounts allowed column in the cash book had been credited to the
discounts received account.
Page 58 of 64
(4) A cash refund to a customer had been recorded by debiting the cash book and crediting
the customer's account.
A. 1 and 2
B. 2 and 3
C. 3 and 4
D. 2 and 4
9. When is the reducing balance method of depreciating non-current assets more appropriate
than the straight-line method?
A. When the expected life of the asset is short
B. When the asset is expected to decrease in value by a fixed percentage of cost each year
C. When the expected life of the asset is not capable of being estimated accurately
D. When the asset is expected to decrease in value less in later years than in the early years
of its life
10. XYX Co’s non-current assets had written down values of $368,400 and $485,000 at the
beginning and end of the year respectively. Depreciation for the year was $48,600. Assets
originally costing $35,000, with a carrying amount of $18,100 were sold in the year for
$15,000.
What were the additions to non-current assets in the year?
A. $183,300
B. $200,200
C. $49,900
D. $180,200
11. Your firm's cash book at 30 April 20X8 shows a balance at the bank of $2,490. Comparison
with the bank statement at the same date reveals the following differences:
Unpresented cheques 840
Bank charges not in cash book 50
Receipts not yet credited by the bank 470
Dishonoured cheque not in cash book 140
What is the adjusted bank balance per the cash book at 30 April 20X8?
A $1,460
B $2,300
C $2,580
D $3,140
12. At 1 January 20X3, Attila Co had an allowance for receivables of $35,000. At 31 December
20X3, the trade receivables of the company were $620,000. It was decided to:
1 Write off (as uncollectable) receivables totalling $30,000, and
2 Adjust the allowance for receivables to an amount equivalent to 5% of receivables.
What is the combined expense that should appear in the company’s statement of profit or
loss for the year, for irrecoverable debts and the allowance for receivables?
A $24,500
B $26,000
C $34,000
D $35,500
Page 59 of 64
13. The annual sales of a company are $235,000 including sales tax at 17.5%. Half of the sales
are on credit terms, half are cash sales. The receivables in the statement of financial position
are $23,500.
What is the output tax?
A $17,500
B $20,562.5
C $35,000
D $41,125
14. Beta purchased some plant and equipment on 1 July 20X1 for $40,000. The scrap value of
the plant in ten years' time is estimated to be $4,000. Beta's policy is to charge depreciation
on the straight line basis, with a proportionate charge in the period of acquisition.
What is the depreciation charge on the plant in Beta's financial statements for the year
ended 30 September 20X1?
A $900
B $1,000
C $3,600
D $4,000
15. Tong Co acquired 100% of the $100,000 ordinary share capital of Cheek Co for $1,200,000
on 1 January 20X5 when the retained earnings of Cheek Co were $550,000 and the balance
on the revaluation surplus was $150,000. At the date of acquisition the fair value of plant
held by Cheek Co was $80,000 higher than its carrying value.
What is the goodwill arising on the acquisition of Cheek Co?
A $320,000
B $400,000
C $470,000
D $550,000
16. During the year ended 31 December 20X1, Alpha Rescue had the following transactions on
the receivables ledger.
$
Receivables at 1 January 20X1 100,000
Receivables at 31 December 20X1 107,250
Goods returned 12,750
Amounts paid into the bank from receivables 225,000
Discount received 75,000
Discounts allowed 5,000
What were the sales for the year?
A $107,250
B $240,000
C $250,000
D $320,000
17. A machine was purchased for $100,000 on 1 January 20X1 and was expected to have a
useful life of 10 years. After 3 years, management revised their expectation of the remaining
useful life to 20 years. The business depreciates machines using the straight line method.
What is the carrying value of the machine at 31 December 20X5?
Page 60 of 64
A $50,000
B $63,000
C $72,000
D $75,000
18. A company is preparing its statement of cash flows for the year ended 31 December 20X2.
Relevant extracts from the accounts are as follows.
Statement of profit or loss $
Depreciation 15,000
Profit on sale of non-current assets 40,000
Statement of financial position 20X2 20X1
$ $
Plant and machinery – cost 185,000 250,000
Plant and machinery – depreciation 45,000 50,000
Plant and machinery additions during the year were $35,000. What is the cash flow arising
from the sale of non-current assets?
A $40,000
B $100,000
C $120,000
D $135,000
19. Teo Co acquired 95% of the ordinary share capital of Mat Co 31 December 20X0. The
following
information relates to Mat Co:
20X0 20X1
$’000 $’000
Retained earnings 700 800
Revaluation surplus – 100
700 900
The fair value of the non-controlling interest in Mat Co at the date of acquisition was
$45,000.
What is the amount reported for non-controlling interest in the statement of financial
position of the Teo Group as at 31 December 20X1?
A $45,000
B $55,000
C $85,000
D $90,000
20. Jay Co values inventories on the first in first out (FIFO) basis. Jay Co has 120 items of product
A valued at $8 each in inventory at 1 October 20X9. During October 20X9, the following
transactions in product A took place.
3 October Purchases 180 items at $9 each
4 October Sales 150 items at $12 each
18 October Purchases 300 items at $10 each
What is the closing balance on the inventory account at 31 October 20X9?
Page 61 of 64
A $1,500
B $2,560
C $2,628
D $2,700
SECTION B
1. You have been given the following information relating to a limited liability company called
Nobrie. This company is preparing financial statements for the year ended 31 May 20X4.
NOBRIE
STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 MAY 20X4
NOBRIE
STATEMENTS OF FINANCIAL POSITION AS AT 31 MAY
Page 62 of 64
Additional information
(a) During the year ended 31 May 20X4, the company sold a piece of equipment for $3,053,000,
realising a profit of $1,540,000. There were no other disposals of non-current assets during the year.
(b) Depreciation of $5,862,000 has been charged.
(c) There were no amounts outstanding in respect of interest payable or receivable as at 31 May
20X3 or 20X4.
(d) There were no dividends paid or declared during the year.
Required
Prepare a statement of cash flows for Nobrie for the year ended 31 May 20X4 in accordance with IAS
7 Statement of cash flows.
2. The draft statements of financial position of Spyder and its subsidiary company Phly at 31 October
20X5 are as follows.
Page 63 of 64
The following information is also available.
(a) Spyder purchased 480 million shares in Phly some years ago, when Phly had a credit balance of
$95 million in reserves. The fair value of the non-controlling interest at the date of acquisition was
$165 million.
(b) At the date of acquisition the freehold land of Phly was valued at $70 million in excess of its book
value. The revaluation was not recorded in the accounts of Phly.
(c) Phly's inventory includes goods purchased from Spyder at a price that includes a profit to Spyder
of $12 million.
(d) At 31 October 20X5 Phly owes Spyder $25 million for goods purchased during the year.
Required
(a) Calculate the total goodwill on acquisition.
(b) Prepare the consolidated statement of financial position for Spyder as at 31 October 20X5.
Page 64 of 64

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FUNDAMENTAL FINANCIAL ACCOUNTING –F3

EXAMPLES & QUESTION& REVISION BOOKLET

QUESTION 2 (Irrecoverable debts).........................................................................................19

Example 2: Intra group trading................................................................................................54

A. LEDGER ACCOUNTS AND DOUBLE ENTRY

State the accounting equation?

(Cont) – Profits introduced into accounting equation

State the accounting equation at the end of the day?

State the accounting equation?

(a) State the accounting equation before trading began on 10 July.

(i) But before drawings are made

(ii) After drawings have been made

(Cont) Trade receivables & trade payables

(i) She immediately invests a further $250 of her own capital.

State the accounting equation:

(ii) After the sale of goods to Uncle George

(iii) After the purchase of goods for the weekly market

EXAMPLE 02 – Double entry for cash transactions

(a) A cash sale (ie a receipt) of $250

(b) Payment of a rent bill totalling $150

(c) Buying some goods for cash at $100

(d) Buying some shelves for cash at $200

EXAMPLE 03 – Double entry for credit transactions

(a) The business sells goods on credit to a customer Mr A for $2,000;

(d) Mr A pays his debt of $2,000;

QUESTION 01 – Debit & Credit

A Bought a machine on credit from A, cost $8,000

B Bought goods on credit from B, cost $500

C Sold goods on credit to C, value $1,200

D Paid D (a credit supplier) $300

E Collected $180 from E, a credit customer

F Paid wages $4,000

G Received rent bill of $700 from landlord G

H Paid rent of $700 to landlord G

I Paid insurance premium $90

J Received a credit note for $450 from supplier H

K Sent out a credit note for $200 to customer I

QUESTION 2 – Ledger entries

Record the ledger entries for the above transactions?

B. FROM TRIAL BALANCE TO FINANCIAL STATEMENTS

During 31.3.20X7, the business made the following transactions.

(b) Made $1,040 sales, $800 of which was for credit;

(c) Paid wages to shop assistants of $260 in cash;

QUESTION 01 – Financial statements

Purchases of goods for resale, on credit 4,300

Payments to trade accounts payable 3,600

Sales, all on credit 5,800

Payments from trade accounts receivable 3,200

Non-current assets purchased for cash 1,500

Other expenses, all paid in cash 900

The bank has provided an overdraft facility of up to $3,000.

Investigations revealed the following errors.

(b) Open a suspense account and show the corrections to be made.

QUESTION 02 – Effect on financial statements I

QUESTION 03 – Effect on financial statements II

QUESTION 04 – Effect on financial statements III

5. Jones Co has the following transactions:

6. T Tallon had the following transactions:

7. Which documents should accompany a return of goods to a supplier?