Mock Examination 1

Time allowed: 3 hours

Answer both questions in Section A and any three from four in Section B.

2
SECTION A answer both questions
1.

Patel and Shah are in partnership as retailers of vehicle tyres and batteries,
with an accounting year ending on 31 July.
Their partnership agreement provides for annual salaries of 16,000 for Patel
and 17,000 for Shah, interest on capital of 10% p.a. and interest on
drawings of 5% p.a. The residual profit or loss is shared equally.
The trial balance at 31 July 20X1 was as follows:
Debit

Capital accounts Patel

- Shah
Current accounts Patel
- Shah
Drawings Patel
- Shah
Bank loan repayable 20X4
Fixtures & fittings at cost
- depreciation
Listed investments
Inventories
Trade receivables/payables
Bank & cash
Purchases/sales revenue
Wages & salaries
Rent & rates
Light & heat
Printing & stationery
Investment income
Provision for bad debts
Bank interest & charges
Goodwill

Credit

28,000
25,000

6,300
2,700
5,600
4,400
10,000
38,800
13,500
8,000
9,850
6,400
4,100
56,320
7,450
4,630
2,170
920

3,900
97,640

750
200
1,350
20,000
178,990

______
178,990

The following additional information is available:

1.
The capital account of Patel includes capital introduced of 8,000 on 1
February 20X1. The capital account of Shah includes a five year loan
to the partnership of 5,000 received on 1 February 20X1.
2.
The drawings shown above took place on 1 November 20X0 by Patel
and 1 May 20X1 by Shah.
3.
The inventory at 31 July 20X1 cost 8,630. This includes goods that
cost 500 which have been damaged. It is estimated that these could
be sold for 380 after repairing them at a cost of 150.
4.
On the 1 April 20X1 some fittings were sold for 5,000. The proceeds
have been debited to the bank account and credited to the fixtures &
fittings account. These fittings cost 9,000 when they were acquired
on the 1 April 20W9.
5.
Fixtures & fittings are depreciated at 20 per cent per annum using the
reducing balance method.
6.
Trade receivables include irrecoverable debts amounting to 400.
7.
The provision for bad debts at 31 July 20X1 should be 3 per cent of
trade receivables.

3
8.

At the 31 July 20X1 there is rent prepaid of 450, electricity accrued of

350, and an inventory of stationery valued at 70.

You are required to prepare in vertical format an income statement and

appropriation account for the year ended 31 July 20X1 and a statement of
financial position at that date. Show clearly all the necessary entries in the
partners current accounts at 31 July 20X1.
(25 marks)
2.

The trial balance of Diana Ross, a trader, at the 31 October 20X0 failed to
agree, the debit side being 130 greater than the credit side. The difference
was entered in a suspense account.
The impersonal ledger and trial balance contains sales and purchases ledger
control accounts with balances of 8,090 and 7,620 respectively.
The total of the balances on the personal accounts in the sales ledger was
8,130, and the total of those in the purchases ledger was 9,400.
Subsequently the following errors were identified:
1.
The total of the purchases day book had been over-cast by 100.
2.
A credit balance of 200 on a credit suppliers account had been
included in the total of the purchases ledger personal accounts as
2,000.
3.
An invoice shown in the sales day book as 450 had been entered in
the credit customers personal account as 540 in error.
4.
A cheque for 3,000 received from a credit customer had been
entered in the cash book and ledgers as 300.
5.
The total of the memorandum discount received column shown in the
cash book as 1,200 has been entered correctly in the discount
received account but posted to the purchases ledger control account
as 1,280.
You are required to:
(a)

(b)

(c)

Show the entries needed to correct the above errors in the purchases
and sales ledger control accounts and the suspense account.
(7 marks)
Prepare a statement showing the amended totals of the balances on
the purchases and sales ledgers.
(5 marks)
State where in the books any remaining undetected error is likely to be
found.
(3 marks)
(Total 15 marks)

4
SECTION B answer three questions
3.

The following is the balance sheet of Buddy Holly, a builders merchants, as at

31 January 20X1:

15,000
35,000
2,500
4,830
6,570
1,320
480
(670)
(5,410)
59,620

Fixtures & fittings (cost 20,000)

Motor vehicles (cost 60,000)
Prepaid rent
Trade receivables
Inventories
Bank
Cash in hand
Accrued electricity
Trade payables

The only book kept by Buddy Holly is a cash book in which all the
transactions passed through the bank account are recorded. A summary of
this cash book for the year ended 31 January 20X2 is shown below:

Balance (1.2.X1)
Credit customers
Cash banked
Sale of vehicle
Balance (31.1.X2)

1,320
32,960
9,470
7,800
1,150
52,700

Credit suppliers
Rent
Electricity
Motor expenses
Wages & salaries

19,720
8,250
3,140
6,830
14,760
52,700

The following additional information has been obtained from the supporting
documentation and the proprietor:
1.

2.
3.
4.

5.
6.

7.

The cash banked is after certain cash payments were made from cash
sales that comprise drawings of 12,000, wages 4,270 and
purchases of stationery 1,980.
The proceeds of sale of vehicle relate to the proprietors private car.
The amount paid to credit suppliers is after deducting cash discount
received of 2,340.
The motor expenses include 3,500 which relates to the cost of
having a detachable moulded plastic body fitted to the rear carrying
platform of a pick-up truck already owned by the business.
During the year the proprietor has taken goods that cost 1,500 out of
inventories for his private use.
The business had assets and liabilities at the 31 January 20X2 that
included:
inventories 5,380, trade receivables 3,690, trade
payables 4,920, prepaid rent 2,800, accrued electricity 760, and
cash in hand of 360.
The depreciation policy of the business is to make a full years charge
in the year of acquisition and none in the year of disposal. Fixtures
and fittings are depreciated at 10% p.a. on a straight line basis, and
motor vehicles at 20% p.a. using the reducing balance method.

You are required to prepare an income statement for the year ended 31
January 20X2 and a statement of financial position at that date.
(20 marks)

5
4.

The following is the non-current liabilities and equity shareholders interests

section of the statement of financial position of Dudley Enterprises Ltd as at
30 June 20X1:
EQUITY AND LIABILITIES
Equity and reserves
Equity shares (10 pence each)
Revenue reserves
Total equity
Non-current liabilities
8% Preference shares of 1 each

000
1,000
750
1,750
500

The following relates to the year ended 30 June 20X2:

1.
2.
3.
4.

5.
6.
7.
8.

The final dividend from 20X1 of one pence per equity share was paid
on 30 September 20X1.
On the 1 January 20X2 the company issued a further four million
equity shares at a price of 50 pence each fully paid.
On the 31 January 20X2 the company paid interim dividends of 4% on
the preference shares and two pence per equity share.
On the 31 March 20X2 the company revalued its land and buildings at
700,000. These had been included in the financial statements at a
cost of 400,000 with no depreciation.
The profit before tax and finance charges for the year ended 30 June
20X2 was 350,000.
On the 30 June 20X2 the directors proposed final dividends on the
preference shares of 4%.
The directors have agreed to transfer 450,000 to a capital
redemption reserve at the 30 June 20X2.
The income tax on company profits for the year ended 30 June 20X2
is estimated to be 165,000.

You are required to prepare the statement of changes in equity for the year
ended 30 June 20X2, and the equity shareholders interests section of the
statement of financial position as at that date.
(20 marks)

6
5.

The following is the statement of financial position of T. Rex plc, a nationwide

vehicle sales main dealer, as at 30 April 20Y0:
ASSETS
000
Non-current assets
Property, plant and equipment
27,000
Current assets
Inventories
2,600
Trade receivables
1,320
Cash and cash equivalents
580
4,500
Total assets
31,500
EQUITY AND LIABILITIES
Equity and reserves
Equity shares (50p pence each)
Retained earnings
Non-current liabilities
8% debentures (20Y5)
5% preference shares of 1 each
Current liabilities
Trade payables
Income tax payable
Total liabilities
Total equity and liabilities

10,000
8,000
18,000
5,000
6,000
11,000
1,400
1,100
2,500
13,500
31,500

Further information:
1.
The property, plant and equipment is made up of cost - 39,000 and
accumulated depreciation - 12,000.
2.
The full amounts of debenture interest and preference dividends were
paid during the year.
3.
Dividends paid in the year amounted to 500,000
4.
The balance on the income statement at 30 April 20X9 was 7 million.
5.
The gross profit for the year ended 30 April 20Y0 was as follows:

Revenue
Cost of sales
Gross profit

000
10,500
(6,500)
4,000

You are required to:

(a)
Compute the following accounting ratios
Earnings per share
Return on equity
Gearing ratio
Return on capital employed
Profit margin
Asset turnover ratio
Liquidity/quick ratio or acid test
Trade payables ratio
Inventory turnover ratio.
(17 marks)

(b)

Briefly highlight any significant financial strengths and/or potential

weaknesses of the business revealed by the above ratios that would need
further investigation.
(3 marks)
(Total 20 marks)

6 (a)

According to the Framework for the Preparation and Presentation of Financial

Statements (IASC, 1989), what is the objective of financial statements?
(3 marks)

(b)

According to the Framework for the Preparation and Presentation of Financial

Statements (IASC, 1989), who are the users of financial statements and what
are their information needs?
(14 marks)

(c)

According to the Framework for the Preparation and Presentation of Financial

Statements (IASC, 1989), that objective (of financial statements) can usually
be met by focusing exclusively on the information needs of present and
potential investors, the defining class of user.
Briefly explain the justification for this given in the Framework for the
Preparation and Presentation of Financial Statements (IASC, 1989),.
(3 marks)
(Total 20 marks)

Mock Examination Answers

1.
Workings
Interest on capital
Patel 10% x 8,000 x 6/12
10% x (28,000 8,000)

400
2,000
2,400
2,000

Shah 10% x (25,000 5,000)

Interest on partners loan
Shah 5% x 5,000 x 6/12 = 125
Interest on drawings
Patel 5% x 5,600 x 9/12 = 210
Shah 5% x 4,400 x 3/12 = 55
Inventories (8,630 500 + [380 150]) = 8,360
Fixtures & fittings

20W8/W9 20% x 9,000 x 4/12

20W9/X0 20% x (9,000-600)
20X0/X1 20% x (9,000-2,280)x 8/12
Book value = (9,000 3,176) = 5,824
Loss on sale = (5,824 5,000) = 824
Cost of remaining
(38,800 + 5,000 9,000) = 34,800
Depreciation on remaining
20% x (34,800 - [13,500 2,280])

Depreciation on
sale

600
1,680
2,280
896
3,176

Depreciation
this year

896

4,716
5,612

Aggregate depreciation at 31 July 20X1

(13,500 + 5,612 3,176) = 15,936
Provision for bad debts
At 31 July 20X1 3% x (6,400 400)
At 31 July 20X0
Decrease

180
200
20

Patel & Shah

Income statement
For the year ended 31 July 20X1

Sales revenue
Less: cost of sales
Inventory at 1 Aug 20X0
Add: purchases
Less: inventory at 31 July 20X1

97,640

9,850
56,320
66,170
8,360
57,810
39,830

Gross profit
Add:
Investment income
Less: expenditure
Wages & salaries
Rent & rates (4,630 - 450)
Light & heat (2,170 + 350)
Printing & stationery (920 70)
Bank interest & charges
Bad debts
Reduction in provision for bad debts
Depreciation on fixtures & fittings
Loss on sale of fixtures & fittings

750
40,580
7,450
4,180
2,520
850
1,350
400
(20)
5,612
824
23,166
17,414

Profit for the year

Income statement appropriation account 31 July 20X1

Net profit
Add: interest on drawings
Patel
Shah
Less: Interest on loan Shah
Salaries Patel
Shah
Interest on capital Patel
Shah
Residual loss
Shares of residual loss Patel
Shah

17,414
210
55

265
17,679

125
16,000
17,000

33,000

2,400
2,000

4,400
37,525
19,846
9,923
9,923
19,846

10

Balances b/d
Drawings
Interest on drawings
Shares of residual
loss
Balance c/d

Current accounts
Shah
2,700 Interest on loan
4,400 Salaries
55 Interest on capital
Balance c/d
9,923
9,923
2,047
Patel
6,300
5,600
210

22,033

19,125

Patel & Shah

Statement of financial position as at 31 July 20X1
ASSETS
000
Non-current assets
Property, plant and equipment
34,800
Goodwill
20,000
54,800
Current assets
Inventories (8,360 + 70)
Trade receivables (6,400 400)
Less: provision for bad debts
Prepayments
Listed investments
Cash and cash equivalents

Patel
16,000
2,400
3,633

Shah
125
17,000
2,000
-

22,033

19,125

000

000

15,936
15,936

18,864
20,000
38,864
8,430

6,000
180

Total assets
EQUITY AND LIABILITIES
Capital
Capital accounts
Current accounts
Non-current liabilities
Bank loan
Loan Shah
Current liabilities
Trade payables
Accrued expenses
Total liabilities
Total equity and liabilities

Patel
28,000
(3,633)
24,367

Shah
20,000
2,047
22,047

5,820
450
8,000
4,100
26,800
65,664

48,000
(1,586)
46,414
10,000
5,000
15,000
3,900
350
4,250
19,250
64,664

Notes
I have assumed that the listed investments are to be held for less than one
accounting year.

11
2.
(a)
Purchases
Balance c/d

Purchases ledger control

100 Balance b/d
7,600 Suspense
7,700

Balance b/d

Sales ledger control

8,090 Cash book
Balance c/d
8,090

Purchases ledger control

Balance c/d

Suspense
80 Per TB
50
130

7,620
80
7,700

2,700
5,390
8,090

130

130

(b)
Purchases ledger
Original total
Error in computing total (2,000 200)
Amended total

9,400
(1,800)
7,600

Sales ledger
Original total
Invoice posting error (540 450)
Cash book error (3,000 300)
Amended total

8,130
(90)
(2,700)
5,340

(c)

Since the amended total of the balances in the purchases ledger of 7,600 is
the same as the revised balance on the purchases ledger control account, there
is unlikely to be any errors in these. However, the amended total of the
balances in the sales ledger of 5,340 is different from the revised balance on
the sales ledger control of 5,390. The difference of 50 is the same as the
new balance on the suspense account, which suggests that the remaining
error(s) are likely to be found in the sales ledger control account. This is further
reinforced by the new balance on the suspense account being a credit balance,
which if set against the revised balance on the sales ledger control account,
would be the same as the total of the balances in the sales ledger (ie. 5,390 50 = 5,340).

12
3.
Workings
Bank
Discount
c/d

b/d
Sales

Trade payables
19,720
b/d
2,340
Purchases
4,920

5,410
21,570

26,980

26,980

Trade receivables
4,830
Bank
31,820
c/d

32,960
3,690

36,650

36,650

Cash sales
(9,470 + 12,000 + 4,270 + 1,980 + 360 480) = 27,600
Total sales = (31,820 + 27,600) = 59,420
Motor vehicles
Cost at 31 Jan. 19X2 = (60,000 + 3,500) = 63,500
Accumulated depreciation at 31 Jan. 19X1 = (60,000 35,000) = 25,000
WDV = (63,500 - 25,000) = 38,500
Depreciation expense = 20% x 38,500 = 7,700
Accumulated depreciation at 31 Jan. 19X2 = (25,000 + 7,700) = 32,700
Buddy Holly
Income statement
For the year ended 31 January 20X2

Revenue
Less: cost of sales
Inventory at 1 Feb. 20X1
Add: purchases (21,570 1,500)
Less: inventory at 31 Jan.20X2

6,570
20,070
26,640
5,380
21,260
38,160
2,340
40,500

Gross profit
Discount received
Less: expenditure
Rent (8,250 + 2,500 2,800)
Light & heat (3,140 + 760 670)
Motor expenses (6,830 3,500)
Wages & salaries (14,760 + 4,270)
Stationery
Depreciation fixtures & fittings (10% x 20,000)
motor vehicles
Loss for the period

59,420

7,950
3,230
3,330
19,030
1,980
2,000
7,700
45,220
4,720

13
Buddy Holly
Statement of financial position as at 31 January 20X2
ASSETS

Non-current assets
Cost
Acc.depn.
Fixtures & fittings
20,000
7,000
Motor vehicles
63,500
32,700
83,500
39,700
Current assets
Inventories
Trade receivables
Prepaid rent
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity capital
Balance at 1 Feb. 20X1
Capital introduced

WDV
13,000
30,800
43,800
5,380
3,690
2,800
360
12,230
56,030

59,620
7,800
67,420
(4,720)
(13,500)
49,200

Net loss
Drawings (12,000 + 1,500)
Balance at 31 Jan. 20X2
Current liabilities
Trade creditors
Accrued electricity
Bank overdraft
Total liabilities
Total equity and liabilities

4,920
760
1,150
6,830
56,030

4.
Workings
Dividends
Preference 8% x 500k = 40k
Equity:
final10m x 1p
=
interim (10+4)m x 2p =

100k
280k
380k

Share premium
4m x (50p 10p)

1,600k

Revaluation reserve
700k - 400k

300k

14

Dudley Enterprises Ltd

Statement of changes in equity
For the year ended 30 June 20X2

Balance at 1 July 20X1

Changes in equity for 20X2
Issue of share capital
Revaluation
Transfer to CRR
Dividends
Total income for the period
Balance at 30 June 20X2

Share
capital

Share
premium

000
1,000

000

400

Revaluation
Capital
Retained
reserve
redemption earnings
reserve
000
000
000
750

1,600
300
450

1,400

1,600

300

Extract from the income statement

Profit on ordinary activities
Finance costs (preference dividends)
Profit before tax
Income tax expense
Profit for the year

450

(450)
(380)
145
65

Total

000
1,750
2,000
300
(380)
145
3,815

000
350
(40)
310
(165)
145

Dudley Enterprises Ltd

Statement of financial position as at 30 June 20X2
000
Equity and reserves
Equity share capital (10 pence each)
Share premium account
Revaluation reserve
Capital redemption reserve
Revenue reserves

5.
(a) Workings
Computation of profit
Increase in balance on Income statement (8m 7m)
Equity dividends
Profit for the year
Income tax expense
Profit before taxation
Interest on debentures (8% x 5m)
Preference dividends (5% x 6m)
Profit before interest
Earnings per share = 1,500k 20m = 7.5 pence
Return on equity = (1,500k [10m + 8m]) x 100 = 8.3%

1,400
1,600
300
450
65
3,815

000
1,000
500
1,500
600
2,100
400
300
2,800

15
Gearing ratio = ([5m + 6m] 29m) x 100 = 38%
ROCE = (2,800k 29k) x 100 = 9.7%
Profit margin = (2,800k 10,500k) x 100 = 27%
Asset turnover = (10,500k 29m) = 0.36
Liquidity ratio = ([1,320k + 580k] 2,500k) = 0.76
Trade payables ratio = (1,400k 6,500k) x 365 = 79 days
Inventory turnover = (6,500k 2,600k) = 2.5
(b) The following may be mentioned but are not really significant:
1.
The return on equity and ROCE are a little low.
2.
The gearing is a little high which increases the financial risk attaching to the
equity.
The following are more significant:
3.
The profit margin is quite high but the asset turnover is low. The inventory
turnover is also slow. These suggest a high profit on each sale but a low
level of activity and a build up of stocks.
4.
The liquidity ratio is less than one indicating that the company may be unable
to pay its debts without additional capital. Further evidence of this is the high
creditors ratio.
6.
The following has been reproduced from the Framework for the Preparation and
Presentation of Financial Statements (IASC, 1989), but it is usually acceptable for
students to paraphrase, provided they include certain key words and phrases
(identified in the marking scheme).
(a)

The objective of financial statements is to provide information about the

financial position, performance and changes in financial position of an entity
that is useful to a wide range of users for making economic decisions.

(b)

Present and potential investors (hereafter generally referred to simply as

investors). In its stewardship role, management is accountable for the
safekeeping of the entitys resources and for their proper, efficient and
profitable use. Providers of risk capital are interested in information that helps
them to assess how effectively management has fulfilled this role. They are
also interested in information that is useful in taking decisions about their
investment or potential investment in the entity. They are, as a result,
concerned with the risk inherent in, and return provided by, their investments,
and need information on the entitys financial performance and financial
position that helps them to assess its cash-generation abilities and its
financial adaptability.
Lenders. Lenders are interested in information that helps them to assess
whether their loans will be repaid, and related interest will be paid, when due.
Similarly, potential lenders are interested in information that helps them to
decide whether to lend to the entity and on what terms.
Suppliers and other trade creditors. Suppliers and other trade creditors are
interested in information that helps them to decide whether to sell to the entity
and to assess the likelihood that amounts owing to them will be paid when
due.
Employees. Employees are interested in information on their employers
stability and profitability, with particular reference to that part (for example, the
subsidiary or branch) of the entity in which they work. They are also
interested in information that enables them to assess their employers ability

16
to provide remuneration, employment opportunities and retirement and other
benefits.
Customers. Customers are interested in information about the entitys
continued existence. That is especially so when they have a long-term
involvement with, or are dependent on, the entity, as will generally be the
case if product warranties are involved or if specialised replacement parts
may be needed.
Governments and their agencies. Governments and their agencies are
interested in the allocation of resources and, therefore, the activities of
entities. They also require information that assists them in regulating the
activities of entities, assessing taxation and providing a basis for national
statistics. Although much of this information is obtained through special
purpose financial reports, its consistency with published general purpose
financial reports such as financial statements often needs to be
demonstrated.
The public. Entities affect members of the public in a variety of ways. For
example, they may make a substantial contribution to a local economy by
providing employment and using local suppliers. The public, including the
local community, may therefore be interested in information that is useful in
assessing the trends and recent developments in the entitys prosperity and
the range of its activities.
(c)

The main points required to answer this part of the question are contained in
the Framework for the Preparation and Presentation of Financial Statements
(IASC, 1989), reproduced below.
All potential users are interested, to varying degrees, in the financial
performance and financial position of the entity as a whole. Therefore, in
preparing financial statements, the rebuttable assumption is made that
financial statements that focus on the interest that investors have in the
reporting entitys financial performance and financial position will, in effect,
also be focusing on the common interest that all users have in that entitys
financial performance and financial position.

17

Mock Examination Marking Scheme

1.
Mark out of 50 and divide result by 2
Workings
Inventories
Fixtures & fittings
Provision for bad debts
Income statement
Gross profit
One mark each for investment income, wages, bank interest and
bad debts
Two marks each for rent, light and stationery
Income statement appropriation account
One mark each for correct amounts of salaries, interest on drawings,
loan and capital
Current accounts
One mark for each item (except balances c/d) being shown on
correct side irrespective of amounts
Statement of financial position
Goodwill
One mark for correct amount of each current asset
Current liabilities
Non-current liabilities
Capital Shah
2.
(a)
(b)
(c)

Marks

3
7
3
2
4
6

7
1
6
1
2
1
50

One mark for each correction and revised balance c/d.

One mark for each correction and amended total.
One mark for each of following comparison of balances in purchases ledger
with control account, comparison of balances in sales ledger with control
account, comparison of balance on suspense account with difference
between personal ledger and control account.

3.
Mark out of 40 and divide result by 2.
Workings
Trade payables one mark per item given in question
Trade receivables one mark per item given in question
Cash sales
Trading account
One mark each for drawings and inventories
Income statement
One mark each for discount, wages and stationery
Two marks each for all other items (5 @ 2)
Statement of financial position
Fixtures & fittings
Motor vehicles
Current assets one mark each
Current liabilities one mark each
Capital introduced
- drawings

Marks

4
3
2
2
3
10
2
4
4
3
1
2
40

18

4.
Income statement
One mark each for tax, profit after tax and transfer to reserve

Marks
3

Statement of changes in equity (divide marks equally for each entry)

Statement of financial position
Revenue reserve
Two marks each for 14m equity shares and revaluation reserve
Share premium

5.
(a)
(b)

1
4
3
20

Two marks for each ratio except liquidity ratio which is allocated one mark.
One mark for each of the significant points 3 and 4, plus one mark for either
of the less significant points 1 and 2.

6.
(a) Financial performance and financial position
Stewardship
Economic decisions
(b) One mark for name of each user group
One mark for describing information needs of each user group
(c) Rebuttable assumption
Common interest of all users
Financial performance and financial position

Marks
1
1
1
7
7
1
1
1
20