Series 4 Examination 2010

CERTIFICATE IN ACCOUNTING (IAS)

Level 3

Monday 22 November

Subject code: 3902

Time allowed: 3 hours

INSTRUCTIONS FOR CANDIDATES

 Answer any 4 questions. There are no compulsory questions.

 All questions carry equal marks.

 Study the “REQUIRED” section of each question carefully and extract the data required for your
answers from the information supplied.

 Write your answers in blue or black ink/ballpoint. You can only use pencil for graphs, charts,
diagrams etc.

 Begin your answer to each question on a new page.

 All answers must be correctly numbered, but need not be in numerical order.

 Workings must be shown.

 You may use a calculator, provided the calculator gives no printout, has no word display facilities,
is silent and cordless. The provision of batteries and their condition is your responsibility.

 Marks may be lost through lack of neatness and poor presentation.

3902/4/10 Page 1 of 9 ASE 3902 4 10 1

QUESTION 1

Forth, a private company, maintains a Sales Ledger Control Account. The balance on this account is
reconciled each month with the net total of the balances in the Sales Ledger. The balance on the Sales
Ledger Control Account appears in the company’s Trial Balance drawn up at the end of the company’s
financial year.

REQUIRED

(a) State (yes or no) whether or not each of the following is part of Forth’s double entry
book-keeping system:

(i) Sales Ledger Control Account

(ii) Sales Ledger
(iii) Sales Day Book.
(3 marks)

For each of the above (a) (i) (ii) (iii):

(b) state whether individual sales figures, total sales figures or both individual and
total sales figures will be included

(c) explain their purpose and how they are linked together in accounting for sales.
(9 marks)

On 31 March 2010 Forth’s Sales Ledger Control Account had a debit balance of $46,438 and the
balances extracted from the Sales Ledger gave a net total of $41,634 debit.

The accountant discovered the following errors:

(1) a cheque for $3,500, received from a customer, had been entered in the customer’s account
as $5,300
(2) a page in the Sales Day Book had been over-added by $237
(3) a sales invoice for $1,200 had been completely omitted from the books
(4) a sales invoice for $2,100 had been entered twice in the Sales Day Book
(5) a credit balance of $40, in the list of Sales Ledger balances, had been incorrectly listed as a
debit balance
(6) contras of $60 had been entered twice in both the Purchases Ledger and the Sales Ledger
accounts, but not entered in either the Purchases Ledger Control Account or the Sales
Ledger Control Account.

The balance on the Sales Ledger Control Account still did not agree with the net total of the balances
extracted from the Sales Ledger, after correcting the above errors.

REQUIRED

(d) Calculate:

(i) the amended Sales Ledger Control Account balance

(ii) the amended net total of the balances extracted from the Sales Ledger
(iii) the difference remaining between (i) and (ii) above.
(11 marks)

Forth’s accountant suggests that the difference be ignored as another reconciliation will be attempted at
the end of April and the figures may then agree.

REQUIRED

(e) State whether or not the accountant’s suggestion is acceptable and briefly discuss whether
or not the figures are likely to reconcile at the end of April 2010.
(2 marks)

(Total 25 marks)

3902/4/10 Page 2 of 9
QUESTION 2

Tweed is a private company which has performed poorly in recent years. The holders of 20,000 of the
shares are very unhappy with the directors.

An extract from the Balance Sheet of Tweed at 31 December 2009 is as follows:

$
Ordinary share capital ($1 each) 80,000
Share premium 5,000
Accumulated profits 30,000

The Managing Director of Tweed, being aware of the unhappy shareholders, has made the following
proposals, to take place in the order given:

(1) increase the value of the buildings by $10,000, thereby incorporating a recent professional
revaluation in the Balance Sheet

(2) make a 1 for 10 capitalisation (bonus) issue out of non-distributable reserves

(3) issue for cash 20,000 shares at a premium of $0.05 and then purchase all the shares of the
unhappy shareholders at par.

REQUIRED

(a) Assuming that the above proposals are accepted by all parties concerned, prepare
Journal entries (with narratives) to record them.
(17 marks)

In order to justify his proposals the Managing Director made the following comments:

(1) revaluing the buildings makes the Balance Sheet stronger and will have no effect on profit in
future years

(2) the capitalisation issue would not cost the company anything

(3) the unhappy shareholders are likely to accept the $22,000 offered for their shares and
redeeming them at par is a good deal for the company

(4) buying out the unhappy shareholders should mean a more united company in future.

REQUIRED

(b) Briefly discuss the truth or otherwise of each of the Managing Director’s comments.

(8 marks)

(Total 25 marks)

3902/4/10 Page 3 of 9
QUESTION 3

On 1 January 2009, Wear, a public company, acquired 75% of the ordinary share capital of Tyne, a
private company. Wear Plc financed the acquisition by issuing 40,000 $1 ordinary shares at a premium
of $0.50, and paying $30,000 in cash.

REQUIRED

(a) Prepare a Journal entry, in the books of Wear Plc, recording the acquisition of the shares
in Tyne. No narrative is required.
(4 marks)

Wear wrote off 20% of the goodwill arising on the acquisition of Tyne non-current and depreciate tangible
assets at 30% per year on a straight line basis. The draft Consolidated Balance Sheet of the Wear and
Tyne Group at 31 December 2009 was as follows:

$ $
Non current assets
Goodwill on consolidation 16,000
Tangible non current assets 315,000
331,000
Current assets
Inventory 90,000
Receivables 54,000
Bank 19,000
163,000
Payables: amounts falling due within one year 494,000
Payables 58,000
Accruals 9,000 67,000
Net current assets
427,000
Capital and reserves
Ordinary share capital ($1 shares) 200,000
Share premium 40,000
Accumulated profits 157,000
397,000
Minority interest 30,000
427,000

Adjustments to the above Balance Sheet are required in respect of the following matters:

(1) On 1 January 2009 the fair value of Tyne’s tangible non-current assets was $10,000
higher than their book value. This had not been taken into consideration in the
original consolidation. Wear depreciates tangible non-current assets at 30% per year on a
straight line basis.
(2) Wear sold goods costing $30,000 to Tyne during 2009 for $50,000. On
31 December 2009 half the value of these goods remained unsold.
(3) Tyne sold goods costing $20,000 to Wear during 2009 for $30,000. On
31 December 2009 a quarter of the value of these goods remained unsold.
(4) Inter company balances of $7,000 were included in the consolidated receivables and
payables.
(5) A bank overdraft of $10,000 in Wear had been offset against the bank balance
in hand of Tyne.

3902/4/10 Page 4 of 9
QUESTION 3 CONTINUED

(6) A provision for obsolete inventory ($4,000) in Wear and a provision for bad debts
($5,000) in Tyne have yet to be made.

REQUIRED

(b) Calculate the goodwill on consolidation at 1 January 2009, before the fair value adjustment.
(2 marks)

(c) Calculate the goodwill on consolidation at 31 December 2009, after the fair value
adjustment and after the 20% write off.
(2 marks)

(d) Prepare the amended Consolidated Balance Sheet of the Wear and Tyne Group at
31 December 2009, after adjusting for items (1) to (6) above.
(17 marks)

(Total 25 marks)

3902/4/10 Page 5 of 9
QUESTION 4

Tay is a sole trader and retailer with only a limited understanding of accounting. He has provided his
accountant with the following estimates for the purpose of preparing a budget for the three months
ending 31 March 2011:

(1) Sales and Receivables

Cash sales will be 5% of credit sales and will be as follows:

$
January 5,000
February 6,000
March 6,500

Receivables at 31 December 2010 will be $100,000 of which $28,000 will relate to October sales,
$40,000 to November sales and the rest to December sales. 50% of credit sales revenue is received in
the month following sale, 25% in the second month following sale, and 25% in the third month following
sale.

(2) Disposal of Non-current Assets

$3,200 will be received, in February 2011, from the sale of non-current assets on 1 January 2011.
These cost $12,000 and have a net book value of $4,000.
Depreciation is to be changed at $3,000 per month in 2011.

(3) Other Receipts

Tay has recently had a substantial gambling win and will be paying £1,000 into the business bank
account in February 2011.

(4) Purchases and Payables

Cash purchases will be equal to 10% of total purchases and will be as follows:

$
January 2,700
February 3,600
March 4,500

Payables at 31 December 2010 will be $75,200 of which $32,000 will relate to November purchases and
the rest to December purchases. Two thirds of credit purchases are paid in the month after purchase.
One third of credit purchases are paid in the second month after purchase.

(5) Wages and Drawings

Tay takes $25,000 per month out of the business bank account and uses $20,000 of this to pay
wages.

(6) General Cash Expenses

These will be incurred as follows:
$
December (2010) 1,000
January 1,100
February 1,200
March 1,100

Half the general expenses are paid in the month incurred and half in the following month.

(7) Miscellaneous
The bank balance at 31 December 2010 is expected to be an overdraft of $4,250. Inventory at 31
December 2010 is expected to of have a cost of $27,500. This figure is expected to have risen by
25% by 31 March 2011.

3902/4/10 Page 6 of 9
QUESTION 4 CONTINUED

REQUIRED

Prepare for Tay:

(a) a monthly cash budget, in columnar form, showing the bank balance at the end of each
Month, for January, February and March 2011.
(14 marks)

(b) a budgeted Income Statement for the three month period ending
31 March 2011.
(7 marks)

Tay is due to have talks with his bank manager and intends to claim the following:

(i) paying his gambling winnings into the business bank account shows him to be a prudent
and responsible businessman
(ii) the extended credit period recently offered to customers, will improve sales,
improve cash flow and reduce bad debts.

REQUIRED

(c) Briefly discuss whether or not the bank manager will be impressed by the above claims.
(4 marks)

(Total 25 marks)

3902/4/10 Page 7 of 9
QUESTION 5

Taff, a private company, was formed on 31 December 2009 to take over the partnership of Usk and Wye.
On that date the Balance Sheet of the partnership was as follows:

$ $
Non-current assets
Land and buildings 110,000
Plant and machinery 40,000
Motor vehicles 25,000
175,000
Current assets
Inventory 11,200
Receivables 12,400
23,600
198,600

$ $
Payables: amounts falling due within one year

Payables 7,100
Bank overdraft 14,300
21,400
Capital accounts
Usk 117,300
Wye 59,900

198,600

The purchase consideration consisted of $20,000 in cash and 2,000,000 shares of $0.25 each at a
premium of $0.05. Usk and Wye agreed to divide the shares between them in their profit sharing ratio
of 2:1 respectively.

Taff took over all the assets of the partnership and assumed responsibility for the payables of the
partnership, subject to the following:

(1) the land and buildings were revalued at $500,000 and the plant and machinery was
revalued at $36,000

(2) the partnership sold a vehicle for $800 cash to a third party and the remaining vehicles were
revalued at $3,000

(3) a provision for bad debts was created, equal to 5% of receivables

(4) $200 of inventory was written off and a provision of 10% for obsolete inventory was provided
against the remaining inventory.

Before the purchase of the partnership, Taff had issued to the public, 2,500,000 ordinary shares
of $0.25 each at a premium of $0.10.

REQUIRED

(a) Close the books of the Usk and Wye Partnership by preparing the following:

(i) Realisation Account

(ii) Partners’ Capital Accounts (in columnar form)
(iii) Bank Account.
(11 marks)

3902/4/10 Page 8 of 9
QUESTION 5 CONTINUED

(b) Calculate the balances on the following accounts of Taff immediately after the acquisition of
the partnership:

(i) Ordinary share capital

(ii) Share premium
(iii) Goodwill.
(9 marks)

The agreement between Taff and the partnership also states that the partners:

(i) will be employed by Taff for five years from the date of the agreement
(ii) must not work for any competitor during that period.

REQUIRED

(c) (i) Explain why these conditions would have been included in the agreement.

(ii) Discuss briefly whether these conditions treat Usk and Wye fairly.
(5 marks)

(Total 25 marks)

3902/4/10 Page 9 of 9 © Education Development International Plc 2010