Paper T6 (INT)

Certified Accounting Technician Examination

Advanced Level

Drafting Financial
Statements
(International Stream)
Monday 7 June 2010

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
This paper is divided into two sections:
Section A – ALL TEN questions are compulsory and MUST
be attempted
Section B – ALL THREE questions are compulsory and MUST
be attempted
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

 This is a blank page.
The question paper begins on page 3.

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Section A – ALL TEN questions are compulsory and MUST be attempted
Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to
each multiple choice question.
Each question in this section is worth 2 marks.

1 Which of the following will reduce a company’s gross profit ratio, when sales are increasing?
(i) A change in the product sales mix resulting in fewer sales of the more profitable products.
(ii) Increasing costs of purchases not passed on to customers.
(iii) An increase in the amount of inventory held.
A (i) and (ii) only
B (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)

2 At 1 June 2009, Jevan Co’s capital structure was as follows:

$
Ordinary share capital (1,000,000 shares of 50c each) 500,000
Share premium account 400,000
In July 2009 Jevan Co made a rights issue of 1 share for every 4 held at $1 per share. This was fully taken up.
In October 2009 Jevan Co made a bonus issue of 1 share for every 5 held, using the share premium account to finance
the issue. All shares in issue qualified for the bonus issue.

What is the company’s capital structure at 31 May 2010?

Ordinary share capital Share premium account
$ $
A 625,000 525,000
B 750,000 650,000
C 750,000 400,000
D 1,000,000 400,000

3 Which of the following statements about accounting concepts are correct?

(i) The historical cost concept requires that non-current assets be initially recognised at their purchase cost.
(ii) The accruals concept means that transactions are recognised when the cash is received or paid, not when they
actually occur.
(iii) The substance over form convention is that the economic reality of a transaction should be reflected in the financial
statements rather than the legal form.
(iv) The prudence concept means it is desirable to understate liabilities in financial statements.
A (i) and (ii)
B (iii) and (iv)
C (i) and (iii)
D (ii) and (iv)

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4 Which of the following events after the reporting period would be non-adjusting events as defined by IAS 10 Events
after the reporting period?
(i) The destruction of a major plant by fire.
(ii) The resolution of a court case giving rise to a liability at the year end.
(iii) The discovery of a fraud showing that the financial statements are incorrect.
(iv) The announcement of a major restructuring.
None of the above affect the going concern assumption.
A (i) and (ii)
B (iii) and (iv)
C (ii) and (iii)
D (i) and (iv)

5 The statement of financial position for EJW Co, a limited liability company, includes the following:
Current assets $000 Current Liabilities $000
Inventory 485 Trade payables 289
Trade receivables 286 Accrued expense 55
Prepayments 14 Taxation 116
Cash and cash equivalents 25

What is EJW Co’s current ratio?

A 1·76
B 70·7%
C 0·56
D 0·71

6 At 1 July 2009 Conga Group acquired 25% of the ordinary share capital of Eel Co for $960,000 when the reserves of
Eel Co were $1,080,000. Eel Co appointed two of Conga Group’s directors to the board of Eel Co.
Both companies prepare accounts to 31 May each year. The summarised statement of financial position for Eel Co at
31 May 2010 is as follows:
$000
Called up share capital 1,200
Share premium account 675
Retained earnings 1,710
––––––
3,585
––––––
Eel Co has not issued any new shares since Conga Group acquired its holding.

What amount of investment in Eel Co will appear in the consolidated statement of financial position of Conga
Group at 31 May 2010?
A $960,000
B $1,117,500
C $896,250
D $1,387,500

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7 Kinder Co has 5 million $1 issued ordinary shares. At 1 May 2010 Peak Co purchased 60% of Kinder Co’s $1 ordinary
shares for $4,000,000. At that date Kinder Co had net assets with a fair value of $4,750,000 and a share price of
$1·10. Peak Co valued the non-controlling interest in Kinder Co at acquisition as $2,200,000.

What is the total goodwill on acquisition at 1 May 2010?

A $1,150,000
B $1,750,000
C $750,000
D $1,450,000

8 Which of the following statements is true regarding the share premium account?
(i) It constitutes part of the equity of the company.
(ii) It can be paid out as dividend.
(iii) It will increase if and when new shares are issued at a price above nominal value.
(iv) It can be used to finance the issue of bonus shares.
A (i) and (ii) only
B (iii) and (iv) only
C (i), (iii) and (iv) only
D (i), (ii), (iii) and (iv)

9 Tomsett Co, a limited liability company, owns 65% of the shares in Frew Co. Frew Co owes Tomsett Co $5,000.
Tomsett Co has receivables of $300,000 and Frew Co has receivables of $130,000.

What are the consolidated receivables for Tomsett Co?

A $425,000
B $381,250
C $379,500
D $435,000

10 Four companies JME Co, CB Co, JN Co and SOB Co have the same trading practices and accounting policies. The
following information has been extracted from their financial accounts:
Company Equity shares in issue EPS
JME Co 5 million ordinary shares of $1 each 20 cents
CB Co 15 million ordinary shares 50 cents each 10 cents
JN Co 100 million ordinary shares of 25 cents each 5 cents
SOB Co 500 million ordinary shares of 10 cents each 3 cents

Which company makes the most total profit for its equity shareholders?
A JME Co
B CB Co
C JN Co
D SOB Co

(20 marks)

5 [P.T.O.
Section B – ALL THREE questions are compulsory and MUST be attempted

1 The following information has been taken from the books of Jonkirst Co, a limited liability company, as at 31 May
2010.
Dr Cr
$000 $000
Discounts received 65
Share premium account 260
Property expenses 130
Trade payables 375
Loan note interest 43
$1 Ordinary shares 2,340
Retained earnings at 1 June 2009 410
Allowance for receivables at 1 June 2009 50
Sales revenue 7,515
Cash 20
Inventory at 1 June 2009 455
Other operating expenses 366
Marketing expenses 65
Wages and salaries 878
Bank 124
Returns inward 124
Trade receivables 1,180
Purchases 4,641
7% Loan notes 614
Receivables expense 195
Land at cost 962
Buildings at cost 1,940
Motor vehicles at cost 312
Furniture and equipment at cost 1,560
Accumulated depreciation at 1 June 2009
Buildings 468
Motor vehicles 104
Furniture and equipment 546
––––––– –––––––
12,871 12,871
–––––––
––––––– –––––––
–––––––
You have also been provided with the following information:
1 Inventory at 31 May 2010 was valued at $357,000 based on its original cost. However, $35,000 of this
inventory is now obsolete and the directors have agreed to sell it in June 2010 for a cash price of $25,000.
2 The marketing expenses include $10,000 which relates to June 2010.
3 Based on past experience the allowance for receivables is to be increased to 5% of trade receivables.
4 There are wages and salaries outstanding of $55,000 for the year ended 31 May 2010.
5 Buildings are depreciated at 5% of cost. At 31 May 2010 the buildings were professionally valued at $2,300,000
and the directors wish this valuation to be incorporated into the accounts.
6 Other depreciation is to be charged for as follows:
(i) Motor vehicles at 25% of written down value.
(ii) Furniture and equipment at 20% of cost.
7 Tax of $200,000 is to be provided for the year.
8 No dividends have been paid or declared.

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Required:
(a) Prepare the following statements, for internal use:
(i) the income statement for the year ended 31 May 2010; and
(ii) the statement of financial position as at 31 May 2010
The following mark allocation is provided as guidance for this requirement:
(i) 17 marks
(ii) 15 marks
(32 marks)

(b) Calculate the following accounting ratios for Jonkirst Co:

(i) Gearing ratio;
(ii) Interest cover
Note: show ratio formulas and workings. (3 marks)

(35 marks)

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2 JKM is a partnership owned by Jean, Kathryn and Meryl. It has been successfully trading for several years. Jean retired
from the partnership at 31 May 2010.
You have been provided with the following information:
(i) JKM’s profit for the year ended 31 May 2010 was $345,490.
(ii) Jean, Kathryn and Meryl shared profits in the ratio 2:3:1.
(iii) The partnership agreement allows for the following salaries per annum: Jean $40,000; Kathryn $35,000 and
Meryl $30,000.
(iv) During the year cash drawings were as follows: Jean $25,000, Kathryn $22,000 and Meryl $20,000. No
interest is charged on drawings.
(v) At 1 June 2009 Jean and Kathryn had credit balances on their current accounts of $2,400 and $1,600
respectively, Meryl had a debit balance of $1,800.
(vi) Interest on capital is to be paid at a rate of 8% on the balance at 1 June 2009 on capital accounts. At 1 June
2009, the partners had credit capital account balances as follows: Jean: $35,000, Kathryn $50,000 and Meryl
$40,000.
(vii) Jean has agreed that if there was a credit balance on her capital account at 31 May 2010, it can be transferred
into a loan to the partnership.
(viii) The assets of the partnership were revalued at 31 May 2010.
The book value and the revaluations are as follows:
Book Value Revaluation
$ $
Property 130,000 156,000
Equipment and machinery 50,000 40,000
Inventory 25,000 22,000
Receivables 20,000 19,000
The revaluations are to be recorded in the books of the new partnership.
(ix) On the retirement of Jean, Kathryn agreed to invest a further $20,000 and Meryl a further $25,000 into the
partnership and the following new profit-sharing ratio was agreed:
Kathryn 3/5
Meryl 2/5
(x) Goodwill is not carried in the statement of financial position. However, at 31 May 2010 the goodwill in the
partnership was valued at $90,000. Any adjustments for goodwill are to be made through the partners’ capital
accounts.

Required:
(a) Prepare the appropriation account for the partnership for the year ended 31 May 2010. (4 marks)

(b) Prepare the following partnership accounts incorporating the adjustments that need to be made on the
retirement of Jean from the partnership:
(i) current accounts for the year ended 31 May 2010;
(ii) capital accounts as at 31 May 2010.
The following mark allocation is provided as guidance for this requirement:
(i) 8 marks
(ii) 10 marks
(18 marks)

(c) Identify three advantages of operating as a limited liability company rather than a partnership. (3 marks)

(25 marks)
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3 The statement of financial position for AGD Co, a limited liability company, as at 31 May 2010 is provided below
together with comparative figures for the previous year.
AGD Co
Statements of financial position as at 31 May
2010 2009
$000 $000 $000 $000
Assets
Non-current assets 625 470
Current assets
Inventory 106 72
Trade receivables 85 47
Bank 2 193 22 141
–––– –––– –––– ––––
Total assets 818 611
––––
–––– ––––
––––
Equity and liabilities
Capital and reserves
Ordinary share capital (shares of $1) 625 469
Share premium 32 16
Retained earnings 98 40
–––– ––––
755 525
Non-current liabilities
10% Loan note 0 20
Current liabilities
Trade payables 38 47
Taxation 25 63 19 66
–––– –––– –––– ––––
Total equity and liabilities 818 611
––––
–––– ––––
––––
Additional information for the year ended 31 May 2010
(i) Interest paid was $2,000.
(ii) There was no over or under provision of tax.
(iii) Dividends of $31,000 were paid.
(iv) Depreciation was $94,000.
(v) Non-current assets with a carrying amount of $25,000 were sold at a profit of $6,000.

Required:
(a) Calculate the profit before tax of AGD Co for the year ended 31 May 2010. (4 marks)

(b) Prepare a statement of cash flows for AGD Co for the year ended 31 May 2010 in accordance with IAS 7 –
Statement of cash flows, using the indirect method. (16 marks)

(20 marks)

End of Question Paper