PRINCIPLES OF ACCOUNTING

WINTER EXAM

25 DECEMBER 2019

INSTRUCTIONS :

1. Time allowed: 2 hours

2. Candidates must answer all questions from Section A, B and C. Use separate answer sheet for
the Section A and separate answer books for the Section B and C

3. You should submit workings for all questions requiring calculations. Any necessary
assumptions that you introduce when answering a question are to be stated.

4. You may use an electronic calculator when answering questions on this paper. The make and
type of machine used must be stated clearly on the cover of your answer book. Any devices like
smart watches or mobile phones are strictly prohibited.

5. Any cheating will lead to zero mark for the exam.

GOOD LUCK!
Section A (21 marks) Use separate answer sheet for the Section A
Note: Section A consists of 14 multiple choice questions covering the entire syllabus in financial accounting. In
Section A you will need to answer ALL the questions for which the maximum mark will be 21 (each question is 1.5
marks). Workings will not be marked for MCQs, the answers must be entered on a pre-printed sheet. There will not
be negative marking – you will get marks for all correct answers without deduction for wrong answers.

THE FOLLOWING TRIAL BALANCE AND ADDITIONAL INFORMATION REFERS TO QUESTIONS

1-11
The following balances have been extracted from the books of Santa plc for the year ended 31st December 2018,
before any adjustments have been made.
Dr Cr
£000 £000
Land 120
Buildings at cost 280
Buildings, accumulated depreciation at 1 January 2018 80
Delivery vans at cost 65
Delivery vans, accumulated depreciation at 1 January 2018 23
Inventory at 1 January 2018 74
Trade receivables 92
Provision for bad debts at 1 January 2018 5.6
Prepayments at 1 January 2018 3
Bank balance 7
Trade payables 23
10% debenture loan repayable in 2030 50
Ordinary share capital of £0.5 each 70
Share premium 10
Retained profits at 1 January 2018 101.4
Disposal proceeds 25
Sales revenue 1095
Purchases 621
Administrative expenses 96
Carriage-in 3
Distribution costs 109
Rent 21
Interim dividend paid 6
1490 1490

The following additional information is available:

Q1. The figure for prepayments in the trial balance is in respect of two months’ rent paid in advance at 1.1.18. As
from 1.9.18, rent had been increased to £24,000 per year, payable quarterly (on 1st March, 1st June, 1st September and
1st December), in advance. What amount of prepayments should be in Current Assets in Statement of Financial
Position as at 31.12.18 and what amount of rent expense should be in Income Statement for the year ended 31.12.18
(in £000)?
A. Prepayments: 4; Rent: 17
B. Prepayments: 4; Rent:20
C. Prepayments: 7; Rent: 17
D. Prepayments: 7; Rent: 20
Q2. Full year debenture interest, which was due on 31.12.18, was paid on 9.1.2019. What figures should appear in the
financial statements of the company for the year ended 31 December 2018 (in £000)?
A. interest due 5; interest expenses 5
B. interest due 5; interest expenses 0
C. interest due 2,5; interest expenses 2,5
D. interest due 0; interest expenses 5

Information for questions 3, 4 and 5

In 2018 the company sold a delivery van for £25,000 in cash. The vehicle was purchased in 2017 for £30,000. The
cash received from the sale was paid into the business bank account and credited to disposal proceeds.
Depreciation is to be provided on the non-current assets using the following annual rates:
Land nil
Buildings 1% per year on a straight line basis
Delivery vans 20% per year on a reducing balance basis
A full year’s depreciation is provided in the year of acquisition and no depreciation is provided in the year of disposal.
Depreciation charges and profits or losses on asset disposals are allocated 50% to distribution costs and 50% to
administrative expenses.

Q3. Santa’s financial result on disposal of equipment for the year ended 31st December 2018 (in £000):
A. loss 1
B. profit 1
C. loss 5,8
D. profit 5,8

Q4. What will be the net book value of delivery vans as at 31st December 2018 (in £000)?
A. 33.6
B. 18
C. 14.4
D. 9.6

Q5. What amount of Administrative expenses should appear in Income Statement for the year ended 31st December
2018 (in £000)?
A. 98.1
B. 98.7
C. 99.1
D. 99.7

Information for questions 6 and 7

(i) The inventory was counted on 31.12.18 and valued, at cost, at £72,000. Included in this were some damaged goods
which had cost £3,000 and which would normally be sold for £5,500. However, they were sold in a clearance sale in
January 2019 for £1,000.
(ii) A customer notified the company on 28.12.18 that he was returning goods with the wrong specification for which
he had been invoiced the sum of £16,000. The returned goods were received into the shop on 30.12.18 on which date
the accountant was notified and the return was recorded in the accounting records. The goods had cost Santa plc
£2,500 and were returned in good condition.

Q6. What is the cost of sales of the company for the year ended 31st December 2018 (in £000)?
A. 625
B. 628
C. 630.5
D. 631

Q7. Which of the following are the company’s sales for the year?
A. 1079
B. 1081.5
C. 1095
D. 1111
Information for questions 8 and 9
Subsequent to drawing up the trial balance, the company has been informed that a major customer owing £40,000 has
gone into administration, and Santa plc will receive only 25% of the amount owing. Santa plc has also decided to
change its provision for doubtful debts to 5% of the remainder of receivables balances.

Q8. What amount of Trade receivables and Bad debts written-off should appear in the financial statements of the
company for the year ended 31 December 2018 (in £000)?
A. Trade receivables 52; Bad debts written-off 30
B. Trade receivables 52; Bad debts written-off 10
C. Trade receivables 62; Bad debts written-off 30
D. Trade receivables 62; Bad debts written-off 10

Q9. What are the correct figures for a provision for doubtful debts and for a change in provision for doubtful debts for
the year ended 31st December 2018 (in £000)?
A. Provision for doubtful debts 2.6; Increase in provision for doubtful debts 3
B. Provision for doubtful debts 2.6; Decrease in provision for doubtful debts 3
C. Provision for doubtful debts 3.1; Decrease in provision for doubtful debts 2.5
D. Provision for doubtful debts 3.1; Increase in provision for doubtful debts 2.5

Information for questions 10 and 11

Q10. On 25.12.18, the company issued 20,000 shares for £35,000. The issue has not been included in the accounting
records. The figure for Share premium as at 31st December 2018 (in £000) should be:
A. 15
B. 25
C. 35
D. 55

Q11. Corporation tax for the year ended 31.12.18 is estimated to be £40,000 and is to be paid on 1.10.19. The directors
plan to pay a dividend on shares in circulation as at 24.12.18 in respect of the current year of 12p per share, payment
to be made in January 2019. The figures appearing in the Statement of Movements in Equity for dividends and the
Income Statement as an expense deducted from Operating profit for the year 31.12.18 are as follows:
A. Statement of movements in equity, dividends: nil Income statement, expense: £40,000
B. Statement of movements in equity, dividends: £6’000 Income statement, expense: £40,000
C. Statement of movements in equity, dividends: £8’400 Income statement, expense: nil
D. Statement of movements in equity, dividends: £16,800 Income statement, expense: nil

DO NOT CONSIDER TRIAL BALANCE FUGURES FOR QUESTIONS 12-14

Q12. Debtors control account of Snegurka Limited at 31 March 2019 had a balance of £128,545 while the list of
debtors' balances totalled £128,106. You establish the following:
i. the total of £29,450 for sales in the sales day book had been posted as £29,540 to the control account
ii. the credit balance of £128 on a debtor’s account had been listed as a debit balance
iii. a bad debt of £240 had been correctly written off in the ledger but no entry had been made in the control
account
iv. discounts allowed totalling £185 had been entered on the wrong side of the control account
v. the remainder of the errors arose from the failure to post a credit note to a debtor’s account.

The corrected amount of Debtors is:

A. £ 127,769
B. £ 127,845
C. £ 128,505
D. £ 128,765
Q.13. The equity and reserve section of the statement of financial position of Elka plc on January 1st, 2019 was as
follows:
£
Share capital (200,000 shares of 50p each): 100,000
Share premium: 120,000
Revaluation reserve: 30,000
Retained profits: 210,000
Total equity 460,000

On that day, the company made a rights issue, issuing 120,000 shares for £5 each and then made a 4 for 1 bonus issue.
What will the balance on the share capital and share premium accounts at the end of the day, assuming the company
offsets the bonus issue against the Revaluation reserve, to the extent that is possible?
Share capital £ Share premium £
A. 800,000 20,000
B. 800,000 50,000
C. 740,000 20,000
D. 740,000 50,000

Q.14. At 31.3.19, the cash book of Olivie Company showed an overdraft of £21,111. On 30.3.19, the bank wrote to
Olivie Company stating that a cheque of £525 received from a customer and banked on 25.3.19 has bounced and had
been dishonored. This letter was only received by the Company on 2.04.19. Receipts of £30,555 banked on 31.3.19
were not cleared through the banking system until April 2019, while cheques totaling £44,931, issued by the company
in March 2019 were also not cleared through the banking system until April 2019. Bank charges of £150 had not been
entered in the cash book.

What was Olivie’ bank balance in the bank statement as at 31.03.19?

A. £ (21,786)
B. £ (7,410)
C. £ 2,590
D. £ 23,145
Section B (22 marks) Use separate answer sheet for the Section B

Question 15
Snow plc is a company which manufactures and sells small aerostats (air balloons) for the sports and tourist market.
The summarized financial statements for the years ended 31st December 2018 and 2019 are as follows:

Balance Sheets as at 31st

2019 2018
December
£000 £000
Fixed assets
Land and buildings 350 450
Plant, equipment and
800 1000
vehicles
1150 1450
Current assets
Stock 500 700
Debtors 320 370
Bank 210 0
1030 1070
Current liabilities
Creditors -420 -680
Taxation -210 -115
Overdraft 0 -335
-630 -1130
Non-current liabilities
Loans -460 -530
1090 860
Equity
Ordinary share capital (£1
800 600
each)
Retained earnings 290 260
1090 860
Profit and loss accounts for the years ended 31st
2019 2018
December

£000 £000

Turnover 2350 2200

Cost of sales -1550 -1600

Gross profit 800 600
Administrative costs -135 -85
Selling and distribution costs -155 -95
Research and development costs -200 -80
310 340
Loss on sale of property -30 0
Profit before interest and tax 280 340
Interest paid -70 -80
Profit before tax 210 260
Taxation -180 -160
Net profit for the year 30 100

market price of share in pounds 1,45 1,65

The directors of Snow plc were concerned with the financial performance and financial position revealed by the
financial statements for 2019. They had commissioned consultants to carry out an analysis and the principal criticisms
of these consultants were:

(i) a gross profit below that of the market sector.

(ii) a lack of expenditure on research and development (as a percentage of turnover) compared to competitors.
(iii) a disappointing earnings per share figure compared to earlier years.
(iv) low utilisation of tangible fixed assets (there have been no acquisitions of fixed assets in the year to 31st December
2019).
(v) Poor debtors control.
(vi) Inefficient stock holding.
(vii) Long payment period for trade creditors.
(viii) Poor liquidity.
(ix) Balance sheet gearing too high compared to the sector (basing on Equity).
(x) Low price earnings ratio.
In order to address these problems Snow plc commissioned the consultants to recommend possible strategic actions
with a view to improving the profit and loss account and balance sheet position.
The Board acted quickly on many of the consultants’ recommendations and is pleased with the overall position
revealed by the financial statements for the year to 31 December 2019.

Required:
(a) Calculate for the years ended 31st December 2018 and 2019 showing your workings (showing the formula used)
one accounting ratio which can be used to evaluate the performance of Snow plc in respect of each of the consultants’
criticisms (i) – (x). (Answer to 2 places of decimals, for any average amounts needed take ending balances as proxy).
(15 marks 15 for each ratio)
(b) Based on the financial statements and the ratios calculated in (a) suggest the possible strategic actions
recommended by the consultants and evaluate their success or otherwise.
(7 marks)
Section C (23 marks) Use separate answer sheet for the Section C

Question 16
Extracts from the financial statements for Oleni Ltd for the year ended 31 March 2018 are as follows:

Statements of financial position at 31-Mar

2018 2017
£ £
Non-current assets
Property plant and equipment 3 492 700 3 356 750
Intangible assets 458 350 150 250
Current assets
Inventories 280 250 382 550
Trade receivables 84 500 72 250
Investments 12 500 6 200
Cash - 10 100
Total assets 4 328 300 3 978 100

Equity share capital (£1 shares) 2 000 000 1 750 000

Share premium 800 000 875 000
Retained earnings 378 400 703 350

Non-current liabilities
Preference shares 500 000 400 000
Сurrent liabilities
Bank overdraft 370 650 -
Tax payable 205 000 180 000
Trade payables 74 250 69 750
Accrued interest - -
Total equity and liabilities 4 328 300 3 978 100

Statement of profit or loss for the year ended 31 March 2018

£
Loss from operations (12 450)

Preferred dividends (37 500)

Loss before tax (49 950)

Income tax (175 000)

Loss for year (224 950)

Additional Information

1. Included in result from operations is a profit of £19 750 in respect of the disposal of machinery in the year. This
machinery had a net book value of £280 250 at the disposal date. Only 80% of sale proceeds were received for in
cash and 20% are to be received in 3 months time .
During the period some new fixed assets were purchased.
2. The depreciation charge on property plant and equipment for the year was £375 300.
3. Trade payables include preference dividends of £2 500 (2017 £3 500)
4. Intangible assets were purchased for cash during the year. Intangible assets with a carrying amount of £17 000
were sold for £24 000 during the year. The profit on disposal has been offset against operating costs. No
amortization was charged for the year.
5. On 1 April 2017 Oleni Ltd made a 1 for 10 bonus issue from share premium. A further share issue took place in
December 2017 for cash.
6. Oleni Ltd declared and paid odinary dividend during the year.
7. Redeemable preference shares were issued for cash during the year.
8. The government bonds (which a reported as current investments) are highly liquid and management has decided
to class them as cash equivalents.

Required:

Prepare a Statement of Cash Flows for Oleni for the year ended 31 March 2018 showing operating cash flows using
the indirect method.

(23 marks)