Answers

ACCA Certified Accounting Technician Examination – Paper T6(GBR) December 2004 Answers
Drafting Financial Statements (UK Stream) and Marking Scheme

1 (a) Guyridge Marks Workings (£)

Trading and profit and loss account for the year ended 31 October 2004 0·5
£ £ £
Sales (W1) 395,000 3
Opening stock 25,000 0·5
Purchases (W2) 195,000 2
Carriage inwards 4,500 0·5
––––––––
224,500
Less closing stock (37,000) 0·5
––––––––
Cost of goods sold (187,500) 0·5
––––––––
Gross profit 207,500 0·5
Expenses
Vehicle running expenses 13,500 0·5
Insurance 8,000 1·5 (5,000 + 4,000 – 1,000)
Heating and lighting 6,250 1·5 (7,000 – 3,000 + 2,250)
Telephone 3,500 0·5
Advertising 4,250 1·5 (2,250 + 2,000)
Rent and rates 14,000 1·5 (15,000 – 1,000)
Office supplies 1,250 0·5
Depreciation for: Vehicles 6,000 1
Equipment 12,000 18,000 1
––––––
Bad debts 15,000 0·5
Discounts allowed 5,000 0·5
––––––––
(88,750)
––––––––
Net profit before appropriation 118,750 0·5
Interest on drawings: Kevin 2,000 0·5
David 1,000 3,000 0·5
–––––––– ––––––––
121,750
Interest on capital: Kevin 8,000 0·5
David 5,000
________ (13,000)
________ 0·5
108,750
––––––––
––––––––
Share of Profit: Kevin 2/3 72,500 1
1
David /3 36,250 1
––––––––
108,750
––––––––
–––––––– –––
23
–––
–––
(b) Current Accounts
Kevin
£ £
Drawings 60,000 Balance b/f 23,000 1
Interest on drawings 2,000 Interest on capital 8,000 1
Balance c/f 41,500 Share of profit 72,500 0·5
–––––––– ––––––––
103,500 103,500
––––––––
–––––––– ––––––––
––––––––
David
£ £
Drawings 30,000 Balance b/f 21,000 1
Interest on drawings 1,000 Interest on capital 5,000 1
Balance c/f 31,250 Share of profit 36,250 0·5
––––––– –––––––
62,250 62,250
–––––––
––––––– –––––––
––––––– –––
5
–––
–––

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 Marks
(c) Guyridge
Balance Sheet as at 31 October 2004 0·5
Cost Accumulated Net Book
Depreciation Value
£ £ £
Fixed assets
Vehicles 32,000 14,000 18,000 1
Equipment 60,000 24,000 36,000 1
––––––– ––––––– ––––––––
92,000 38,000 54,000 1
–––––––
––––––– –––––––
–––––––
Current Assets
Stock 37,000 0·5
Debtors (W1) 55,000 0·5
Prepayments 1,000 1
Bank (W3) 68,000 3
––––––––
161,000
––––––––
––––––––
Current liabilities
Creditors (W2) 10,000 0·5
Accruals 2,250 1
––––––––
12,250
––––––––
––––––––
Net current assets 148,750
––––––––
202,750
––––––––
––––––––
Partners’ capital accounts
Kevin 80,000 0·5
David 50,000 130,000 0·5
–––––––
Partners’ current accounts
Kevin 41,500 0·5
David 31,250 72,750 0·5
––––––– ––––––––
202,750
––––––––
–––––––– –––
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–––
–––
Allocation
Workings of marks
W1 Debtors Control Account
£ £
Debtors b/f 80,000 Bad debts 15,000 0·5 + 0·5
Sales (bal. fig) 395,000 Settlement discounts 5,000 0·5 + 0·5
Bank 400,000 0·5
Debtors c/f 55,000 0·5
–––––––– ––––––––
475,000 475,000
––––––––
–––––––– ––––––––
––––––––
W2 Creditors Control Account
£ £
Bank 200,000 Creditors b/f 15,000 0·5 + 0·5
Creditors c/f 10,000 Purchases (bal. fig) 195,000 0·5 + 0·5
–––––––– ––––––––
210,000 210,000
––––––––
–––––––– ––––––––
––––––––

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 Allocation of
marks
W3 Bank
£ £
Balance b/f 10,000 Creditors control 200,000 0·5 + 0·5
Debtors control 400,000 Drawings: Kevin 60,000) 0·5 + 0·5
David 30,000)
Carriage inwards 4,500)
Vehicle expenses 13,500)
Insurance 5,000)
Heating and lighting 7,000) 1
Telephone 3,500)
Advertising 2,250)
Rent and rates 15,000)
Office supplies 1,250)
Balance c/f 68,000
–––––––– ––––––––
410,000 410,000
––––––––
–––––––– ––––––––
––––––––

2 (a) Goodwill on acquisition of Bury Ltd £000 £000 Marks

Cost of investment 24,000 0·5
Share capital (£30,000 x 70%) 21,000 0·5
General reserve (£500,000 x 70%) 350 1
Profit and loss account (£1,500,000 x 70%) 1,050 (22,400) 1
––––––– –––––––
Goodwill 1,600
–––––––
–––––––
–––
Total 3
–––
–––

(b) (i) Black Ltd 0·5

Consolidated profit and loss account for the year ended 31 October 2004
£000 Workings (£000)
Turnover 323,200 2·0 245,000 + 95,000 – 16,800
Cost of sales (176,640) 2·5 140,000 + 52,000 – 16,800 + 1,440*
–––––––––
Gross Profit 146,560
Distribution costs (22,000) 0·5
Administrative expenses (68,000) 0·5
Goodwill amortisation W1 (160) 1·0
–––––––––
Profit on ordinary activities before taxation 56,400
Tax on profit on ordinary activities (18,250) 0·5
–––––––––
Profit on ordinary activities after taxation 38,150
Minority interest (4,500) 2·0 30% x 15,000
–––––––––
Group profit for the year 33,650
Dividends (20,000) 0·5
–––––––––
Retained profit for the year 13,650
–––––––––
––––––––– ––––
Total 10·0
——
——

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(ii) Black Ltd Marks
Consolidated Balance Sheet as at 31 October 2004 0·5
£000 £000
Fixed assets
Intangible – unamortised goodwill 800 2·0 (1,600 – (160 x 5))
Tangible, net book value 150,000 0·5 (110,000 + 40,000)
––––––––
150,800
Current assets
Stock, at cost 15,810 1·5 (13,360 + 3,890 – 1,440*)
Debtors 12,420 2·5 (14,640 + 6,280 – 7,000** – 1,500***)
Bank 6,070 0·5 (3,500 + 2,570)
––––––––
34,300
––––––––
––––––––
Creditors amounts falling due within one year
Creditors 9,960 2·0 (9,000 + 2,460 – 1,500***)
Dividends payable to Minority
Interests 3,000 1·0
Dividends 20,000 0·5
––––––––
32,960
––––––––
––––––––
Net current assets 1,340
––––––––
Net Assets 152,140
––––––––
––––––––
Capital and Reserves
£1 Ordinary shares 100,000 0·5
General reserves 9,550 1·5 (9,200 + ((1,000 – 500) x 70%)
Profit and loss account (W2) 30,506 3·0
Minority interest 12,084 1·0 (30% x 40,280)
––––––––
152,140
––––––––
––––––––
––––
Total 17·0
——
——
Notes:
* Exclusion of unrealised profit held in stock (£1,440,000)
** Exclusion of the intragroup dividends from debtors (£7,000,000)
*** Intracompany indebtedness
Workings
W1 Annual goodwill amortised
£1,600,000/10 years = £160,000
W2 Profit and loss account as at 31 October 2004
£000 £000
Black Ltd Balance Sheet 27,300
Less unrealised profit (1,440)
Bury Ltd:
Retained profits 9,280
Pre-acquisition reserves (1,500)
–––––––
7,780
Group share (70% x £7,780,000) 5,446
Less goodwill amortised as at 31 October 2004 (5 years) (800)
–––––––
30,506
–––––––
–––––––

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 Marks
Dividend for the year 10,000
3 (a) Dividend per share ––––––––––––––––––––––– –––––––– = 20p per share 1·5
Number of shares in issue 50,000

Profit after tax for ord sh’holders 11,150

Dividend cover –––––––––––––––––––––––––––– ––––––– = 1·1 1·5
Dividend 10,000

Net Profit after tax 11,150

Earnings per share ––––––––––––––––––––––– –––––––– = 22p 1·5
No. of ordinary shares 50,000

Price per share 150

Price earnings ratio –––––––––––––––––––– ––––– = 6·7 1·5
Earnings per share 22·3

Debt 1,000
Debt/equity ratio –––––––– ––––––– = 3% 1·5
Equity 32,520

Profit before interest and taxation 12,715

Interest cover ––––––––––––––––––––––––––––– ––––––– = 254 times 1·5
Interest 50
——
Total marks 9
––––
––––

(b) (i) & (ii)

Notes on Tressven Plc’s ratios

Ratio Tressven Plc Hilladay Plc Comment on the ratio calculated

Dividend per share 20p 10p The level of dividend per share available to Tressven Plc
shareholders is double that available to Hilladay Plc.
This may suggest a generous level of dividend which will
please shareholders in the short term.

Dividend cover 1·1 5 The level of dividend does not appear to be justified by
the available profit. It also suggests that this level of
dividend may not be sustainable in the future.

Earnings per share 22p 20p The EPS for Tressven Plc is similar to Hilladay Plc’s EPS.
However, Hilladay Plc has retained half its earnings for
future investment. This is not the case for Tressven Plc
and would suggest that profit levels may stagnate.

Price earnings ratio 6·7 13·4 A comparison of the PE ratio suggests that investors
are keener to invest in Hilladay Plc than Tressven Plc.
This may be because of concerns regarding the future
profitability of Tressven Plc.

Debt/equity ratio 3% 15% The debt/equity ratio for Tressven Plc seems low in
comparison with Hilladay Plc. It may be that Tressven
Plc is not borrowing sufficiently to invest in the future of
the company. Alternatively Hilladay Plc may have high
borrowings.

Interest cover 254 100 Tressven Plc can comfortably afford to meet its interest
charges, so can Hilladay Plc. This suggests that Tressven
Plc could afford to increase its borrowing to invest.

There should be some evidence of trying to interpret the ratios, while acknowledging the limitations of the information
available. Other comments, if appropriate, will also be given credit.
1 mark for making a relevant comment about each ratio up to 6 marks.

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4 (a) The main purposes of the ‘Statement of Principles’ are:

(i) To provide a framework for the future development of accounting standards.

(ii) To inform interested parties of the approach taken by the ASB in formulating standards.

(iii) To provide guidance to practitioners when applying accounting standards.

(iv) To provide a basis for reducing the number of alternative accounting treatments permitted by accounting standards.

(v) To assist auditors in forming an opinion as to whether financial statements conform with accounting standards.

(vi) To assist the users of financial statements when interpreting the information.

(1 mark for each reason up to a maximum of 5 marks)

(b)
User Group Information needs

Current (and future) investors They need to assess the financial performance of the organisation to understand
the level of risk and the returns provided by their investment.
Key information requirements: ability to generate cash, level of profitability, and
dividends.

Lenders They need information on the ability of the organisation to repay loans and any
interest.
Key information: profitability, ability to manage working capital (liquidity), current
level of borrowing, value of assets.

Customers Customers that are dependent on the organisation for significant levels of
business or are considering placing long term contracts will need to know
whether it will stay in business or not.
Key information requirements: ability to generate cash, and profitability.

Suppliers (and trade creditors) They will want to know whether the organisation will stay in business and
whether they will be paid.
Key information requirements: ability to generate cash, and profitability.

Marking Scheme
1/ mark for identifying the user group and up to 2 marks for stating their information requirements. Maximum of 10 marks.
2

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