7/29/2019 Soalan Teori ACCA

1/4

Soalan Teori ACCA

The directors of a company are considering the companys draft financial statements for the yearended 30 September 2002.The following material points are unresolved:

(a) One of the companys buildings was destroyed in a flood in October 2002. The estimatedvalue of the building was $4m, but it was insured for only $3m. The companys going concernstatus is not jeopardised. The directors are unsure what adjustment or disclosure, if any, should bemade. (2 marks)(b) The company gives warranties on its products at the time of sale, undertaking to repair orreplace any defective item free of charge. Some directors believe that an allowance should bemade for estimated warranty liabilities at 30 September 2002 based on sales to that date, andother directors argue that the expense of warranty work should be borne in the period in which itis incurred. (2 marks)(c) Some goods which had cost $120,000, and which were included in closing inventory at 30September 2002 at that figure, were subsequently sold for $80,000 after they were found to havedeteriorated while held in inventory. The directors are unsure whether to adjust the inventory

figure downwards by $40,000 or allow the loss to fall in the period when the deterioration wasdiscovered. (2 marks)(d) The company had supplied $100,000 worth of goods to a customer on a sale or return basis inSeptember 2002. The transaction was included as a credit sale in the accounting records, and as aresult a profit of $20,000 was taken. In October 2002 the customer returned all of the items ingood condition. (4 marks)

Required:

Advise the board of directors as to the correct treatment of each of these items, quoting the

authority for your

advice in each case and stating the effect, if any, on the income statement and balance sheet.(10 marks)

Suggested Answers

(a) IAS 10 Events after the Balance Sheet Date classifies this type of event as non-adjusting no change tothe figures in the financial statements is required but there should be a note to ensure that the financialstatements are not misleading. The note should state the amount of the loss and the extent of the insurancecover.(b) A provision should be made for the estimated amount of the liabilities under warranties, as required byIAS 37 Provisions, Contingent Liabilities and Contingent Assets. The provision will appear as a liability in thebalance sheet and the operating profit will be reduced by the amount of the allowance.(c) This is an adjusting event according to IAS 10 Events after the Balance Sheet Date. The closinginventory should be reduced by $40,000 in the balance sheet and in cost of sales, thus reducing operatingprofit by this amount, unless it could be shown that the deterioration had taken place after the balance sheetdate(d) The goods have to be treated as trading inventory at September 2002, applying generally acceptedaccounting principles.

The effect on the income statement and balance sheet will be:(i) Sales and trade receivables both reduced by $100,000.(ii) Closing inventory increased by $80,000.The combined effect of the two adjustments is to reduce current assets and profit by $20,000.

7/29/2019 Soalan Teori ACCA

2/4

Soalan Teori ACCA

The directors of Aluki, a fashion wholesaler, are reviewing the companys draft financialstatements for the year ended 30 September 2003, which show a profit of $900,000 before tax.

The following matters require consideration:

(a) The closing inventory includes:(i) 3,000 skirts at cost $40,000. Since the balance sheet date they have all been sold for$65,000, with selling expenses of $3,000.(ii) 2,000 jackets at cost $60,000. Since the balance sheet date half the jackets havebeen sold for $25,000 (selling expenses $1,800) and the remainder are expected to sellfor $20,000 with selling expenses of $2,000. (2 marks)

(b) An employee dismissed in August 2003 began an action for damages for wrongfuldismissal in October 2003. She is claiming $100,000 in damages. Aluki is resisting theclaim and the companys lawyers have advised that the employee has a 30% chance ofsuccess in her claim. The financial statements currently include a provision for the$100,000 claim. (4 marks)

(c) In October 2003 a fire destroyed part of the companys warehouse, with an uninsuredloss of inventory worth $180,000 and damage to the building, also uninsured, of

$228,000. The going concern status of the compan is not affected. The financialstatements currently make no mention of the fire losses. (3 marks)

Required:Explain to the directors how these matters should be treated in the financial statementsfor the year ended30 September 2003, stating the relevant accounting standards.(9 marks)

Suggested Answer

(a) The basic principle for the valuation of inventory according to IAS 2 Inventories is to take the lower ofcost and net realisable value.The 3,000 skirts should therefore be included at cost $40,000, and the jackets should be valued at netrealisable value:

$$25,000 less $1,800 23,200$20,000 less $2,000 18,000

41,200

(b) IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires contingent liabilities of this kindand degree of probability be disclosed by note, detailing the nature of the contingent liability and an estimateof the financial effect. The $100,000 should therefore be removed and the note substituted. Provision shouldbe made for legal expenses to be incurred.

(c) IAS 10 Events after the Balance Sheet Date classifies this as a non-adjusting event but a note givingdetails of the event and its financial effect (a loss of $180,000 plus $228,000 = $408,000) is required as theitem is material enough to influence a reader of the financial statements.

Soalan Teori ACCAThe use of historical cost as a basis for accounting is widespread.Required:(a) Explain THREE ways in which the use of historical cost accounting may mislead usersof financial statements. (6 marks)(b) Briefly state THREE reasons why historical cost accounting remains in use in spite ofits limitations. (3 marks)

(9 marks)

7/29/2019 Soalan Teori ACCA

3/4

(a) (i) Profit on a sale is calculated by taking the difference between historical cost and sale proceeds.When prices are rising, as they usually are, the holding gain arising while the goods were held ininventory is included as part of the profit, ignoring the fact that it will cost more to replace the item.

(ii) Depreciation based on the historical cost of assets understates the real value of the benefitobtained from the use of these assets if prices have risen since the assets were acquired. Profit isthus overstated.

(iii) The retention of historical values for non-current assets in the balance sheet understates their

actual value. This can mislead shareholders when the balance sheet value of the business is usedwhen calculating return on capital employed.(b) (i) It is simple and cheap

(ii) Figures used are objective and verifiable.(iii) Lack of a sound and acceptable alternative.

Soalan ASET SEMASA ACCA

The accounting records of Riffon, a limited liability company included the following balances at 30June 2002:

$Office buildings cost 1,600,000Office buildings accumulated depreciationOffice buildings(10 years at 2% per year) 1, 320,000

Plant and machinery cost (all purchased in 2000 or later) 1 ,840,000Plant and machinery accumulated depreciationPlant and machinery(straight line basis at 25% per year) 1, 306,000

During the year ended 30 June 2003 the following events occurred:

20021 July It was decided to revalue the office building to $2,000,000, with no change to the

estimate of its remaining useful life.

1 October New plant costing $200,000 was purchased.

20031 April Plant which had cost $240,000 and with accumulated depreciation at 30 June2002 of $180,000 was sold for $70,000.It is the companys policy to charge a full years depreciation on plant in the yearof acquisition and none in the year of sale.

Required:Prepare the following ledger accounts to record the above balances and events:(a) Office building: cost/valuation(a) Office building: accumulated depreciation(a) Office building: revaluation reserve. (6 marks)(b) Plant and machinery: cost(b) Plant and machinery: accumulated depreciation(b) Plant and machinery: disposal. (6 marks) (12 marks)

7/29/2019 Soalan Teori ACCA

4/4

(a) Office building cost/valuation2002 $ $

1 July Balance 1,600,0001 July Revaluation 400,000

2,000,000

Office building accumulated depreciation

2002 $ 2002 $1 July Revaluation reserve 320,000 1 July Balance 320,0002003 200330 June Balance 50,000 30 June Income statement (W1) 50,000

370,000 370,000

Revaluation reserve$ 2002 $1 July Office building cost 400,0001 July Office building depreciation 320,000

720,000(b) Plant and machinery cost2002 $ 2003 $

1 July Balance 840,000 1 April Transfer disposal 240,0001 Oct Cash 200,000 30 June Balance 800,000

1,040,000 1,040,000

20031 July Balance 800,000FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

23Plant and machinery accumulated depreciation2003 $ 2002 $1 April Transfer disposal 180,000 1 July Balance 306,000200330 June Balance 326,000 30 June Income statement (W2) 200,000

506,000 506,000Plant and machinery disposal2003 $ 2003 $1 April Transfer cost 240,000 1 April Transfer depreciation 180,00030 June Income statement Cash 70,000profit 10,000

250,000 250,000

Workings1 Depreciation of office building$2m/40 (remaining useful life) = $50,0002 Depreciation of plant and machinery25% x ($840,000 $240,000 + $200,000) = $200,000