REVISING ADJUSTMENTS FOR THE BALANCE SHEET (LIVE) Section B: Exam Questions Question 1 CONCEPTS GAAP PRINCIPLES 27 AUGUST 2015 REQUIRED: Choose an explanation from COLUMN B that matches a concept in COLUMN A. Write only the letter (A E) next to the question number (1.1 1.4) in the ANSWER BOOK. COLUMN A (CONCEPT) 1.1 Historical cost 1.2 Matching 1.3 Going concern 1.4 Materiality A B C D E COLUMN B (EXPLANATION) Figures used in financial statements should be realistic (conservative). All important items should be shown separately in financial statements. Income and expenses must be recorded in the correct financial year. Financial statements are prepared with the understanding that the company will continue operating in the future. All assets are recorded at their original cost price. (4 x 1) (4) Question 2 INCOME STATEMENT, NOTES TO BALANCE SHEET PRINCE LIMITED You are provided with information for the financial year ended 28 February 2015. REQUIRED: 2.1 Complete the Income Statement for the year ended 28 February 2015. (42) 2.2 Prepare the Ordinary Share Capital Note. (8) 2.3 Prepare the Retained Income Note. (11)
INFORMATION: EXTRACT FROM THE PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2015 Balance Sheet Accounts Section Dr Cr Ordinary share capital 6 800 000 Retained income (1 March 2014) 1 368 000 Loan: Y-Lend Bank 1 609 000 Trading stock 1 910 000 Bank 626 200 Petty cash 6 605 Debtors' control 792 000 Creditors' control 974 600 SARS (Income tax) 523 600 Provision for bad debts 43 600 Fixed deposit: Money Bank (8%) 990 000 Nominal Accounts Section Sales? Cost of sales 14 974 000 Rent income 374 950 Interest on fixed deposit 53 260 Bad debts recovered 4 150 Audit fees 147 600 Advertising 960 000 Salaries and wages 1 300 000 Directors' fees 1 130 000 Packing material 76 200 Sundry expenses? Bad debts 24 000 Ordinary share dividends? ADJUSTMENTS AND ADDITIONAL INFORMATION A. Selling prices are determined by using a mark-up of 40% on cost. However, trade discounts of R53 600 were allowed to special customers during the financial year. B. The physical stocktaking on 28 February 2015 reflected the following stock on hand: Trading stock R1 890 000 Packing material R8 500 C. An amount of R20 500 is still outstanding to a director for his fees. D. Total depreciation for the year is R299 200. E. A debtor, B Khozo, with an outstanding balance of R42 000, has left the country. His account must be written off as irrecoverable. F. The provision for bad debts must be adjusted to 5% of the outstanding debtors.
G. One of the employees was on sick leave and was omitted from the Salary Journal for February 2015. His salary details are as follows: Gross salary Deductions Net salary Employers' contribution? R5 000 R12 000 R3 000 All employers' contributions are debited to the Salaries and Wages Account. H. Make provision for the outstanding interest on fixed deposit. The fixed deposit has not changed during the financial year. Interest is not capitalised. I. The rent income includes rent received for March 2015. The rent income increased by R1 425 on 1 September 2014. J. The loan statement received from Y-Lend Bank on 28 February 2015 indicated the following: R Balance at beginning of financial year 2 509 000 Repayments during financial year 900 000 Interest capitalised? Balance at end of financial year 1 984 000 K. Income tax for the financial year was calculated as R540 000. This is 30% of the net profit before tax. L. The figure for sundry expenses is the balancing figure in the Income Statement. M. Shares and dividends: The authorised ordinary share capital consists of 1 000 000 ordinary shares of which 70% was issued before 1 March 2014. Interim dividends of 80 cents per share was declared and paid on 1 September 2014. During October 2014 a further 100 000 shares were issued at R12 each. This was properly recorded. Answer Book On 28 February 2015 a final dividend of 65 cents per share was declared. On 28 February 2015 it was decided to buy back 160 000 shares from a dissatisfied shareholder at R9,10 per share. This transaction has not been recorded yet. Question 1 Write only the letter (A E) next to the question number. 1.1 1.2 1.3 1.4
Question 2: 2.1 PRINCE LIMITED INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015 Sales Cost of sales (14 974 000) Gross profit Other income Gross operating income Operating expenses Auditors' fees 147 600 Advertising 960 000 Salaries and wages Directors' fees Packing material Sundry expenses Bad debts Operating profit Income tax (540 000)
2.2 Ordinary Share Capital Note Authorised 1 000 000 ordinary shares Issued Shares in issue on 1 Mar. 2014 Shares issued during the year at R12 each Shares bought back (average issued price of ) Shares in issue on 28 Feb. 2015 8 2.3 Retained Income Note Balance at beginning of financial year Dividends Balance at end of financial year 11 Section C: Solutions Question 1 1.1 1.2 1.3 1.4 E C D B
Question 2 2.1 PRINCE LIMITED INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015 Sales (14 974 000 x140/100 53 600 ) 20 910 000 Cost of sales (14 974 000) 5 Gross profit 5 936 000 Other income 355 700 Rent income (374 950 29 500 ) 345 450 Bad debts recovered 4 150 Provision for bad debt adjustment (43 600 37 500) 6 100 Gross operating income 6 291 700 9 Operating expenses (4 195 900) Auditors' fees 147 600 Advertising 960 000 Salaries and wages ( 1300 000 +17 000 + 3 000 ) 1 320 000 Directors' fees (1 130 000 + 20 500 ) 1 150 500 Packing material (76 200 8 500 ) 67 700 Sundry expenses 164 900 Bad debts (24 000 + 42 000 ) 66 000 Trading stock deficit (1 910 000 1 890 000) 20 000 Depreciation 299 200 19 Operating profit 2 095 800 Interest income (53 260 + 25 940 ) 79 200 2 175 000 Interest expense (375 000) Net profit before tax 1 800 000 Income tax (540 000) 9 Net profit after tax 1 260 000 42
2.2 Ordinary Share Capital Note Authorised 1 000 000 ordinary shares Issued 700 000 100 000 Shares in issue on 1 Mar. 2014 Shares issued during the year at R12 each (160 000) Shares bought back (average issued price of R8,50 ) 640 000 Shares in issue on 28 Feb. 2015 5 600 000 1 200 000 (1 360 000) 5 440 000 8 2.3 Retained Income Note Balance at beginning of financial year Net profit after tax see 2.1 Buy back of shares (160 000 x 60c ) operation one part correct Dividends operation one part correct Interim (700 000 x 80c) operation one part correct 1 368 000 1 260 000 (96 000) (1 080 000) 560 000 Final (800 000 x 65c) operation one part correct 520 000 Balance at end of financial year operation one part correct 1 452 000 11