Institute of Chartered Accountants Ghana (ICAG) Paper 1.1 Financial Accounting

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1 Institute of Chartered Accountants Ghana (ICAG) Paper 1.1 Financial Accounting Final Mock Exam 1 Question paper Time allowed 3 hours Instructions: Answer any FIVE of the seven questions provided. DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS

2 ii Final Mock Exam: Questions Financial Accounting The Institute of Chartered Accountants Ghana First edition 2015 ISBN All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd. Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA The Institute of Chartered Accountants Ghana 2015

3 Answer any FIVE of the seven questions provided Question 1 Final Mock Exam 1: Questions 1 NF, OR and PN decide to dissolve their partnership on 1 December 20X6 after being in business for many years. The statement of financial position of the partnership as at 30 November 20X6 was as follows: NF, OR AND PN STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20X6 Assets Non-current assets GHS GHS Furniture and fittings 100,000 Motor vehicles 70, ,000 Current assets Inventory 50,000 Receivables 84,000 Bank 12, , ,000 Capital and liabilities Partners' capital accounts NF 90,000 OR 60,000 PN 30, ,000 Partners' current accounts NF 19,500 OR 14,900 PN 12,600 47,000 Loan 36,000 Current liabilities Payables 53,000 Total capital and liabilities 316,000 Additional Information (i) The partnership agreement states that NF, OR and PN share profits and losses in the ratio 3:2:1. (ii) The furniture and fittings were sold for GHS97,600. (iii) Only GHS79,800 of outstanding receivables was recovered. (iv) The payables were settled for GHS50,880. (v) It was agreed between the partners that PN could take a motor vehicle at a valuation of GHS18,000 in addition to his share of the profit. The motor vehicle had a carrying amount of GHS16,000. The other motor vehicles were sold for GHS59,000. (vi) The inventory was sold for GHS55,500. (vii) The loan was repaid in full on 1 December 20X6. (viii) There were no outstanding interest payments on the loan. (ix) Expenses incurred in dissolving the partnership were GHS2,000. Prepare the following accounts on dissolution: (a) Partners' accounts (4 marks) (b) Realisation account (10 marks) (c) Cash and bank account (6 marks) (Total = 20 marks)

4 2 Final Mock Exam 1: Questions Question 2 You are presented with the following summarised accounts for FR, a limited liability company. FR Statement of comprehensive income for the year ended 31 May 20X5 GHS'000 Revenue 320 Cost of sales (200) Gross profit 120 Distribution & administrative expenses (70) Profit from operations 50 Finance cost (10) Profit before tax 40 Tax expense (20) Net profit for the period 20 FR Statement of financial position as at 31 May 20X5 GHS'000 GHS'000 Assets Non-current assets 300 Current assets Inventory 90 Trade receivables 50 Cash and bank Total assets 450 Equity and liabilities Stated capital 200 Income surplus Non-current liabilities 10% loan notes 100 Current liabilities Trade payables 70 Taxation Total equity and liabilities 450 The ratio values for FR for 20X3 and 20X4, as well as the current average ratio values for the industry sector in which FR operates, are as follows: Ratio Historical data Industry average 20X3 20X4 20X5 Return on capital employed (%) Gross profit percentage (%) Net profit percentage (%) Quick/acid test ratio 1.5:1 1.1:1 1.5:1 Receivables collection period (days) (a) Calculate the following ratios for FR for the year ended 31 May 20X5. State clearly the formulae used for each ratio. (i) Return on capital employed (ii) Gross profit percentage (iii) Net profit percentage (iv) Quick/acid test ratio (v) Receivables collection period (9 marks)

5 Final Mock Exam 1: Questions 3 (b) Using the additional information given and the ratios you calculated in part (a), write a brief report on the financial performance of FR. Indicate in your report what additional information might be useful to help interpret the ratios. (11 marks) (Total = 20 marks) Question 3 The following information has been extracted from the draft financial statements of SD, a limited liability company. SD Statement of financial position as at 31 May 20X5 20X4 GHS'000 GHS'000 GHS'000 GHS'000 Assets Non-current assets 9,200 5,400 Current assets Inventory 1,160 1,000 Trade receivables Bank 0 1, ,800 Total assets 11,080 7,200 Equity and liabilities Stated capital 7,600 5,040 Income surplus 2, ,704 5,980 Non-current liabilities 10% Loan note (redeemable 31 May 20X5) Current liabilities Trade payables Taxation Bank overdraft 116 1, ,020 Total equity and liabilities 11,080 7,200 Additional Information (i) The statement of profit or loss for the year ended 31 May 20X5 shows the following: GHS,000 Operating profit 2,084 Interest payable (20) Profit before taxation 2,064 Taxation (360) Profit for year 1,704 (ii) During the year dividends paid were GHS540,000. (iii) Profit before taxation had been arrived at after charging GHS1,400,000 for depreciation on noncurrent assets. (iv) During the year non-current assets with a carrying amount of GHS400,000 were sold for GHS360,000. Prepare a statement of cash flows for SD for the year ended 31 May 20X5 in accordance with IAS 7, using the indirect method. (20 marks)

6 4 Final Mock Exam 1: Questions Question 4 (a) (b) Explain two reasons for carrying out a bank reconciliation, and identify two items which may appear in the reconciliation statement. (4 marks) WL is preparing his bank reconciliation at 31 May 20X5. His bank statement shows a balance of GHS456 cash at the bank. The balance on the bank account in his general ledger is GHS226 (credit). He has noted the following reasons for the difference. (1) Cheque number was incorrectly recorded in WL's cash book as GHS760. The cheque was correctly debited on the bank statement on 2 May as GHS670. (2) Bank charges of GHS766 were debited by the bank on 4 May. (3) A customer's cheque for GHS640 was returned by WL's bank in May as the customer had insufficient funds in his account. WL has not recorded the return of the cheque in his records. (4) The bank has incorrectly credited WL's account with interest of GHS440. This is interest on a deposit account held by WL personally. The bank had not corrected the error by 31 May. (5) A lodgement of GHS1,700 entered in WL's cash book on 31 May was credited on the bank statement on 3 June. (6) Five cheques have not yet been presented at the bank. These are: Cheque No. GHS ,250 see note (7) ,258 (7) Cheque number was lost in the post and was cancelled. WL has not recorded the cancellation of the cheque. (i) Show WL's general ledger bank account including the necessary correcting entries. (NB You MUST present your answer in a format which clearly indicates whether each entry is a debit or credit.) (7 marks) (ii) Prepare a reconciliation of the bank statement balance to the corrected general ledger balance. (7 marks) (c) Indicate how the bank balance will be reported in WL's final accounts. (2 marks) (Total = 20 marks)

7 Question 5 Final Mock Exam 1: Questions 5 (a) Explain the advantages and disadvantages of being a sole proprietor. (5 marks) (b) You have been asked to advise JB, a sole proprietor, on the accounting treatment of certain transactions which he feels might affect his financial statements for the year ended 31 December 20X5. The matters on which he would like your advice are set out below. (i) (ii) (iii) (iv) The business paid for an advertising campaign during the year at a cost of GHS5,600. It is estimated by JB that this will lead to an overall increase in sales of 15%. Half of this increase was achieved in 20X5 and the other half is expected to be achieved in 20X6. (4 marks) JB took inventory costing GHS1,000 from the business at the end of the year for his own use. He removed the inventory on 31 December 20X5 after the year-end inventory count had taken place. No adjustment was made to the inventory balance to take account of this action. (4 marks) During the year an item of office equipment, which had a written down value of GHS1,700, was accidentally dropped out of the window during an office party and destroyed. The asset has been written out of the books of the business. The insurance company has refused to meet the cost of the loss. The solicitors of the business are currently pursuing the matter through the courts and say that the company has a reasonable chance of success. (4 marks) JB has put his own house up as security for a loan made by the bank to his business. The loan was made specifically for the business and not for the personal use of JB. (3 marks) Advise JB on the accounting treatment of these transactions in his financial statements for the year ended 31 December 20X5. Explain your treatment, where relevant, by reference to accounting concepts and International Financial Reporting Standards. (Total = 20 marks) Question 6 (a) (b) (c) Identify, and briefly explain, the basic accounting principle which requires prepayments to be included in final accounts. (3 marks) Briefly explain the purpose of the depreciation charge in the statement of profit or loss. (2 marks) A trainee in your office has prepared draft accounts for a client for the year to 31 March 20X5, but has not dealt with the adjustments for accrued expenses, prepaid expenses, irrecoverable debts, allowance for receivables and depreciation. Following the preparation of the statement of profit or loss, the trainee prepared the statement of financial position shown below. You have been asked to complete the final accounts. Draft statement of financial position as at 31 March 20X5 (before adjustments) GHS GHS Non-current assets Equipment at cost 350,000 Accumulated depreciation (at 1 April 20X4) (170,800) 179,200 Current assets Inventory 84,678 Trade receivables 298,822 Bank account 12, , ,260 Proprietor's capital 402,140 Current liabilities Trade payables 173, ,260

8 6 Final Mock Exam 1: Questions The trainee has given you the following information about the remaining adjustments: (1) The last invoice received for electricity covered the three month period to 31 January 20X5. The invoice was for GHS13,740. (2) Rent of GHS57,000 for the six months to 30 June 20X5 was paid in January. (3) The trade receivables figure of GHS298,822 is stated after deducting the existing allowance for receivables of GHS15,800 from the total trade receivables balance of GHS314,622. (4) The total trade receivables balance of GHS314,622 includes a balance of GHS1,320 which has been outstanding for eight months. The client has decided to write off this balance. (5) The client's policy is to allow for receivables on the basis of the length of time the debt has been outstanding. The aged analysis of trade receivables at 31 March 20X5 and the required allowance is shown below: Age of debt Balance Allowance required GHS 0 30 days 250,550 Nil days 54,400 20% of balances Over 60 days 9,672 75% of balances 314,622 (6) Depreciation is to be provided at a rate of 20% per annum on the diminishing balance basis. Calculate the correct balance at 31 March 20X5 for each of the following: (i) Accrued expenses; (2 marks) (ii) Prepaid expenses; (2 marks) (iii) Allowance for receivables; and (3 marks) (iv) Accumulated depreciation (2 marks) (d) Prepare the corrected statement of financial position as at 31 March 20X5. (6 marks) (Total = 20 marks) Question 7 AT Co compiles its financial statements to 30 June annually. At 30 June 20X9, the company's trial balance was as follows: GHS'000 GHS'000 Sales revenue 14,800 Purchases 8,280 Inventory at 1 July 20X8 1,390 Distribution costs 1,080 Administration expenses 1,460 Land at valuation 10,500 Building: Cost 8,000 Accumulated depreciation at 1 July 20X8 2,130 Plant and equipment: Cost 12,800 Accumulated depreciation at 1 July 20X8 2,480 Trade receivables and payables 4,120 2,240 Cash at bank 160 Stated capital: Ordinary shares as at 1 July 20X8 12,000 issued during year 6,000 Capital surplus as at 1 July 20X8 3,000 Income surplus 3,140 10% loan notes (redeemable 20X8) (issued 1 April 20X9 with interest payable 31 March and 30 2,000 September each year) 47,790 47,790

9 Final Mock Exam 1: Questions 7 The following matters remain to be adjusted for in preparing the financial statements for the year ended 30 June 20X9: (a) Inventory at 30 June 20X9 amounted to GHS1,560,000 at cost. A review of inventory items revealed the need for some adjustments for two inventory lines. (i) Items which had cost GHS80,000 and which would normally sell for GHS120,000 were found to have deteriorated. Remedial work costing GHS20,000 would be needed to enable the items to be sold for GHS90,000. (ii) Some items sent to customers on sale or return terms had been omitted from inventory and included as sales in June 20X9. The cost of these items was GHS16,000 and they were included in sales at GHS24,000. In July 20X9 the items were returned in good condition by the customers. (b) (c) (d) Depreciation is to be provided as follows: Buildings 2% per year on cost Plant and equipment 20% per year on cost Eighty per cent of the depreciation is to be charged in cost of sales, and 10% each in distribution costs and administrative expenses. The land is to be revalued to GHS12,000,000. No change was required to the value of the buildings. Accruals and prepayments were: Accruals Prepayments GHS'000 GHS'000 Distribution costs Administrative expenses (a) Prepare the company's statement of profit or loss and comprehensive income for the year ended 30 June 20X9 and statement of financial position as at that date for publication, complying with the provisions of International Financial Reporting Standards. (20 marks)

10 8 Final Mock Exam 1: Questions

11 Notes

12 Notes