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Problem Set 1

General Knowledge:(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)

II
(1)

What are IFRSs (200 words)?


Who regulates financial reporting internationally (200 words)?
Is it mandatory for all companies to follow IFRS (100 words)?
Who regulates the listed companies financial statements in Europe and in
the US (50 words)?
What does the abbreviation IASB stand for? What are Big 4s? What is SEC? What is FASB? What is
GAAP? (Not in lectures but common sense)
Who are the various stakeholders of Financial Reporting? In what ways do they use FR?
What is depreciation, or amortization?
How are fixed assets valued originally? How are they now under IFRS? (Come back in Lec 3)

Numerical Questions:Required: Complete I/S and B/S for 01/01/2008-31/12/2008 (This is the second business year). ().
<B/S at 31/12/2007>
Building 290 (Original 300)
Cash 650
Trade Debtors 100
Closing Stocks 120

Tax payable (i.e., to be paid during 2008) 20


Trade Creditors 100
SE (Capital) 1,000
Retained Profit 38
Bad Debt Provision 2

<Daily transactions during 2008 (summary)>


1. Paid tax for the business 2007
2. Paid Trade Creditors 100 in cash
3. Received 50 in cash from a customer (Trade Debtors)
4. Purchased goods for sale for 200, and paid 100 in cash and 100 on credit (due next year)
5. Sold goods for 100 and received cash
6. Sold goods for 200 on credit (due next year)
7. Paid 50 in cash to a part-time worker (for this year and next year)
<Information for yearend adjustments>
1.
Closing stock 100
2. Depreciation of the building. (The building will be used for 30 years. The residual value at 30 years after
is zero. Straight-line method.)
3. Any bad debts did not occur. Provision for bad trade debts is estimated at 2%.
4. Accrual of electricity 20. Adjustment for the Daily transaction No. 7 - Prepayment of salaries 23.
5. Tax for the year should be calculated at 20% of Profit Before Tax, which was not paid yet.
6. Dividends for the year are 10 but the cash was not paid at the end of the year.

<Use Internet version for the colour presentation which helps a lot.>
In the next page, everything is dealt with in the left-right hand system for your help.

Problem Set 1, Page 1

<Opening Balance>
Building 290 (Original 300)
Cash 650
Trade Debtors 100
Opening Stock 120

Tax payable (i.e., to be paid during 2002) 20


Trade Creditors 100
SE 1,000
Retained Profit 38
Bad Debt Provision 2

<Journal entries for daily transactions>


Tax payable
20
/
Cash
Trade Creditors
100
/
Cash
Cash
50
/
Trade Debt
Purchases*
200
/
Cash
Trade Creditor
Cash
100
/
Sales
Trade Debtors
200
/
Sales
Salaries
50
/
Cash

20
100
50
100
100
100
200
50

*Alternatively, you can use


Inventories here, but
then you should recognise Purchases
in the yearend adjustment below.
Or, you can use other names as well.

<Journal entries for yearend adjustments>


Closing stock
100
/
Purchases
100
Depreciation
10
/
Building
10
Bad Debt Provision
2
/
Reversal of Provision*2 *Revenue (Reward) See 2nd Lecture
Provision Expense
5
/
Bad Debt Provision
5
250*2%=5
Electricity
20
/
Accrual (Creditor)
20
Prepayment (Debts)
23
/
Salaries
23
8Tax
4
/
Tax payable (Creditor) 4 20*20%=4 (20 is Prof before Tax)
Dividends (p/l)
10
/
Divi. payable (Credr.) 10
<IS>
Opening Stock 120
Purchases 100
Depreciation 10
Salaries 27
Electricity 20
Provision Exp 5
Tax 4
Dividends 10
(Profit 6)

Sales / Turnover
Reversal of Prov.

300
2

Terminologies
Terminologies
Trade
Debtors
or
Trade Debtors or Accounts
Accounts Receivables
Receivables
Trade
Creditors
or
Accounts
Trade Creditors or Accounts Payables
Payables
Stock
Stock or
or Inventory
Inventory
Accruals
Accruals (Generally,
(Generally, these
these refer
refer to
to payables
payables in
in
respect
respect of
of any
any expense
expense item(s);
item(s); however
however in
in
respect
respect of
of income
income item(s)
item(s) such
such as
as interest
interest or
or rent
rent
etc,
etc, they
they are
are termed
termed as
as Receivables
Receivables e.g. Rent
receivable,
receivable, interest
interest receivable
receivable etc.
etc.

Rev of Prov and Prov Exp can be netted..


<BS>

Closing Stock 100


Trade Debt 250
Prepayment (Salaries) 23
Building 280
Cash 530

Trade Creditor 100


Accrual (Electricity) 20
Tax payable 4
Divi payable 10
Bad Debt Provision 5
SE 1000
(Retained Prof 38 + 6 = 44)
This is Cost of Sales (CoS) which is calculated as:
(Opening stock + Purchases minus closing stock.
Remember, Stock means Inventory. See accounting
terminologies
Problem Set 1, Page 2

If you still cannot do the


double-entries and IS
and BS after doing
Preliminary Exercise
five times, seek for
help from your tutor /
lecturer now.

Now, you can posit all entries, with some adjustments for presentation, to the publication format of IS
and BS. Ideally, you can fill in the presentation formats without going through all the double-entries
above. But this may take a bit of training. Do your best.
This process from double-entry bookkeeping to Financial Statement is very important, because this will
allow you to understand the impact of one transaction on the IS and BS through which stakeholders
come to know your organizations performance and financial positions. That is why we are doing this
training.
<Having done this, now you need to make the IS and BS in the publication forms>
Income Statement ()

Balance Sheet ()

(Turnover / Sales

Opening stock
(Purchases
Total
(
(
)
(
) Profit

(120
(
(
(

)
)

(Salaries
)
(Depreciation
)
(Provision for bad debts)
(Electricity)
(
) Profit
Interest payable/receivable
Profit (
)
(
)
Profit (
)
Dividends
(
) Profit
This is the publication form.
CoS = OS + Purchases - CS

)
)
)
)
(
(
(
(
(
(
(20
Ignore - zero
(
(
(16
(
(6

)
)

Non Current Assets


(
)
(
)
(Current Assets)
(Cash
)
(
)
(Other Debtors )
(
)

)
)
)
)
)

(Current Liabilities)
(
)
(Other Creditors )

)
)
)
)
)

(Net Assets

(
(
(
(245
(
(100

)
)
(280

)
)
)
)
(898

)
)
(134 )
Net Current Assets
(764 )
Non-Current Liabilities ignore - zero
)

Capital
(Retained Profit )
Shareholders funds

(
(34

(1,044 )
(
(
(

)
)
)

Note 1: It must have been difficult for you to construct the whole IS and BS. But once you have completed this
exercise, you really know how Double-Entry and Financial Reporting work overall.
Note 2: In the exam, you may or may not be asked to construct the whole IS and BS, but it is important to
understand the structure of the IS and BS.

Problem Set 1, Page 3

(2)

Using following data, complete the blanks A-F of the Income Statement information for the year ending
31/12/2007 (Unit: 1,000,000).
<Balance Sheet at 31/12/2006>
Building
(Original cost 300)
Cash
Trade Debtors
Closing Stocks

290 Payables (Tax)


Trade Creditors
650 Bad Debt Provision
100 Share Capital
120 Retained Profits
1160

20
100
2
1,000
38
1160

<Daily transactions during 2007 (summary)>


(i) Paid tax in cash for the business 2006
(ii) Paid Trade Creditors 100 in cash
(iii) Received 50 cash from for Trade Debtors
(iv) Purchased goods for sale for 200, and paid in cash 100 and on credit 100
(v) Sold goods for 100 for cash, and 200 on credit
(vi) Paid 50 in cash to a part-time worker (for this year and next year)
<Information for the yearend adjustments>
(i) Closing stocks 100
(ii) Depreciation of the building. (The building will be used for 30 years. The residual value at 30
years after is zero. Straight-line method.)
(iii) Any bad debts did not occur. The provision for bad trade debts should be calculated at 2% of the
balance of Trade Debtors.
(iv) Accrual of electricity 20. Adjustment for the Daily transaction No. (vi)- Prepayment of salaries 23.
(v) Tax for the year should be calculated at 20% of Profit Before Tax, which was not paid yet.
(vi) Dividends of 10 are proposed but the cash was not paid at the end of the year.
Income Statement 2007 (m)
Sales
Opening stocks
Purchases
Less: closing stocks
Cost of sales
(
C
)
Salaries
Depreciation
Electricity
(
D
)
Operating Profit
Interest Payments
Tax
Profits after interest and tax
(
E
)
Retained Profit for the year

Problem Set 1, Page 4

(A)
(B)
(?)
(?)
(?)
80
?
10
20
3
20
0
4
16
(? )
( F )

(3)

The following are the draft final accounts for Quicken ltd. You are required to complete the
Income statement and the Balance Sheet for the year ended 31 st December 2007

Income Statement
Sales
Less Cost of Sales:
Opening Stock
75,000
Purchases
150,525
(
?
)
( ? )
Cost of Sales
Gross Profit
Less:
Expenses
Administration
35,550
Selling & Distribution
41,250
(
?
)
Less:Interest
(
)
Less:Taxation
6,000
(
? )
Dividends
Retained Profit for this year

264,750

145,500
119,250
76,800
42,450
(

)
?
13,500
21,450

Balance Sheet
Land & Buildings
Plant & Machinery
Stock
Cash and Bank
Trade Debtors

120,000
45,000
( ? )
( ? )
14,448

Creditors
Proposed Dividend
Tax Payables *
Long Term Loan
Share capital
Share Premium
Profit and Loss account

288,720

16,800
13,500
( ?
)
45,000
112,500
44,250
50,670
.
( ? )

* The company paid all the Tax bills for the previous year, but none for this year.
(4)

Some data (ie., not all data) from Company XXXs Income Statement (000) and Balance Sheet (000) are
listed below at random for this question:
Cash
Net Profit
Trade receivables
Shareholders' Equity
Gross Profit
Opening inventory
Purchases
Long-term liabilities
PBIT
Problem Set 1, Page 5

1,500
17,000
40,000
165,000
36,000
3,000
19,000
148,000
23,000

Tax
Fixed assets
Share capital
Closing inventory
Short-term liabilities

5,000
250,000
12,000
5,000
65,000

Calculate the following figures:


i) The value of Total Liabilities plus Shareholders Equity.
ii) The value of its Total Assets
iii) The Cost of Goods Sold
iv) The value of Sales for the year
v) The value of SGA (Sales and General Administration expenses)
(5)

The trial balance of S. Ltd on 31 December 2008 is given below:


Debit
m
Share Capital
Retained Earnings
10% Debentures (Same as Bond)
Net Buildings (Original cost 200m),
Inventory at 01/01/2008
Sales
Purchases
Salaries and wages
Heat and Light expenses
Trade receivables
Trade creditors
Cash at Bank
Total

Credit
m
200
350
60

160
120
1,500
580
175
30
750
200
495
2,310

2,310

The following information is for making year-end adjustments:


(i) Closing inventory is valued at 130m
(ii) Unpaid electricity charges should be accrued (i.e., not paid but should be calculated) at 5m
(iii) Among Salaries and wages, Advance salaries are 5m
(iv) Depreciation on building is 10m per annum
(v) No Debenture interest has been accrued. (So, you calculate the interest expense & payables.)
(vi) Provide for bad and doubtful debts @ 4% on trade receivables
(vii) Taxation for the year is estimated at 79
(viii) No dividends are proposed for the year
You are required to complete the Blanks A-F of the companys Balance Sheet as at 31/12/2008
Assets
Net Building
Inventory
Cash at Bank
Trade Receivables
Prepayments (Salaries)

S Ltd: Balance Sheet as at 31/12/2008


m Liabilities
(A) Share Capital
130 Retained Earnings
495 10% Debenture
750 Trade Creditors
(B) Provision for Bad Debts
Problem Set 1, Page 6

m
200
(C)
60
200
(D)

Payables (Expenses)
Debenture Interest payable
Provision for tax
? Total

Total

(E)
(F)
79
?

(Cf. If you are comfortable, try making IS as well as BS. But if you are not still strong in doing this, just finish
off the BS only.)
(6)

Utopian plcs trial balance as at 31 December is given below:


Debit 000
450

Accounts receivable
Accounts payable
Sales
Light and heat expenses
Wages
Rent
Office expenses
Capital as on 1 January
Inventory as at 1 January
Purchases
Furniture and fixtures
Cash in hand
Short term loan
Total

Credit 000
623
5,750

570
1,200
800
320
1,350
250
2,160
285
2,188
8,223

500
8,223

From the stock records, the inventory as at 31 December is 380,000. You are required to prepare the
income statement for the year ended 31. Here, the format is not provided for you so that you try to come up
with the form from your memory. Can you do this by now?
(Cf. If you are comfortable, try to make BS as well as IS. But if you are not still strong in doing this, just
finish off the IS only. In the solution, the publication form of BS is shown, but Tomos box form is good
enough, if it is too hard for you.)
III

Critical / Explanatory Questions:None for today.

Problem Set 1, Page 7