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A-Level Principles of Accounts

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A-Level Principles of Accounts

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    1. A-Level Principles of Accounts Paper 1, 2008 - Examination review By Mr. Patrick Ng Lecturer, Department of Business Administration Institute of Vocational Education (Chai Wan)

    4. Paper 1 (2008) A Review Section A: Compulsory (60%) Q. 1 CB/S + Accounting ratios Q. 2 Statement of cash flows (Direct method) Section B: Answer any Two (40%) Q. 3 Partnership: Admission of partners, trading & profit & loss appropriation a/c, & B/S Q. 4 Incomplete records & Clubs I&E, & B/S Q. 5 Correction of errors & Computation of revised profit

    5. Paper 1 (2008) Q. 1 (CB/S) Hearty Ltd acquired 60% of the ordinary shares of Sweety Ltd, which sells similar products as Hearty Ltd, on 1 January 2007 for $3,000,000. The purchase consideration was fully settled by the issuance of ordinary shares of Hearty Ltd at $2.50 per share. However, no accounting entries had been made for this acquisition.

    6. Paper 1 (2008) Q. 1 (CB/S) The capital and reserves of Sweety Ltd at 1 January 2007 are as follows: $ $1 ordinary shares 3,000,000 Share premium 300,000 Retained profits 450,000 3,750,000

    7. Paper 1 (2008) Q. 1 (CB/S) At the date of acquisition, the fair values of Sweety Ltds buildings and plant and machinery were $400,000 and $100,000 in excess of their carrying amounts respectively. The fair values of other assets and liabilities were the same as their carrying amounts. Required: (c) Prepare the cost of control a/c to calculate the amount of goodwill arising on consolidation. (5 marks)

    8. Paper 1 (2008) Ans. Q. 1(c) Cost of Control (60%) $000 $000 Investment in S 3,000 Ordinary shares (S) 1,800 ($3,000 x Share premium (S) 180 ($300 x Retained Profits (S) 270 (Pre-acquisition, $450 x Fair value adjustment - Buildings ($400 x 240 - Plant & Mach. ($100 x 60 Goodwill 450 ____ ____ 3,000 3,000

    9. Paper 1 (2008) Q. 1 (CB/S) Alternative Questions: (a) Prepare the journal entries to record the fair value adjustment of the subsidiarys assets at date of acquisition. (b) Explain the rationale behind the journal entries.

    10. Paper 1 (2008) Q. 1 (CB/S) Hearty Sweety $000 $000 Assets Non-current assets Buildings, net 6,200 1,200 Plant & Machinery, net Current Assets Inventory Trade receivables Cash at bank Current Liabilities Trade payables Accrued expenses

    11. Paper 1 (2008) Q. 1 (CB/S) Hearty Sweety $000 $000 Capital and reserves $1 ordinary shares 8,000 3,000 Share premium 1,500 300 General reserve 600 - Retained profits 2,080 1,200 ______ ______ 12,180 4,500 ==== ====

    12. Paper 1 (2008) Q. 1 (CB/S) The following information relates to the year ended 31 December 2007: (1) During the year, Hearty Ltd sold goods amounting to $400,000 at invoiced price to Sweety Ltd and this amount was still not yet settled at 31 December 2007. Half of these goods remained unsold by Sweety Ltd at the year end. It is the groups policy to charge intra-group sales at a mark-up of 25% on cost. Any unrealised profit is to be eliminated in full against the group profit only.

    13. Paper 1 (2008) Q. 1 (CB/S) (2) The books of Sweety Ltd had not taken into account the fair values of its non-current assets at the date of acquisition. Apportionment is to be made to minority interest regarding any depreciation adjustment arising from this revaluation. (3) Hearty Ltd, Sweety Ltd and the group adopt the following depreciation policies: Buildings 4% per annum on a straight-line basis Plant and machinery 15% per annum using the reducing balance method (4) At 31 December 2007, there was an impairment loss of $100,000 in the value of goodwill arising on consolidation. REQUIRED: Prepare the consolidated balance sheet of Hearty Ltd group as at 31 December 2007. (15 marks)

    14. Paper 1 (2008) Ans. 1(d) Analysis (1): Hearty (Note: Parent) sold goods, $400,000 at invoiced price to Sweety Half of these unsold by Sweety (mark-up, 25%) Amount not yet settled at year end Unrealised profit - eliminated in full against group profit only

    15. Paper 1 (2008) Ans. 1(d) Analysis (1): $000 W1 Retained profits Hearty 2,080 Sweety ($1,200 $450 (c)) x 60% 450 Unrealised profit Inventory (40) [($400 x ) x 25/125]

    16. Paper 1 (2008) Ans. 1(d) Analysis (2) & (3): Sweety had not taken fair values of its non-current assets at date of acquisition Apportionment is to be made to minority interest regarding any depreciation adjustment arising from this revaluation. (3) Depreciation policies: Buildings 4% p.a. on straight-line basis Plant & mach. 15% p.a. using reducing balance method

    17. Analysis (2) & (3): $000 W1 Retained profits Hearty 2,080 Sweety 450 Unrealised profit Inventory (40) [($400 x ) x 25/125] Depreciation adjustment Buildings ($400 x 4%) x 60% (9.6) Plant & Mach. ($100 x 15%) x 60% (9) W2 Minority interests (40%) Ordinary shares ($3,000 x 1,200 Share premium ($300 x 120 Fair value adjustment Buildings ($400 x 160 Plant & Mach. ($100 x 40 Retained profit ($1,200 $16 $15) x 40% 467.6

    18. Paper 1 (2008) Ans. 1(d) Analysis (4): (4) At 31/12/2007 impairment loss of $100,000 of goodwill

    19. Analysis (4): $000 W1 Retained profits Hearty 2,080 Sweety 450 Unrealised profit Inventory (40) [($400 x ) x 25/125] Depreciation adjustment Buildings ($400 x 4%) x 60% (9.6) Plant & Mach. ($100 x 15%) x 60% (9) Goodwill impairment loss (100) 2,371.4 W2 Minority interests (40%) Ordinary shares ($3,000 x 1,200 Share premium ($300 x 120 Fair value adjustment Buildings ($400 x 160 Plant & Mach. ($100 x 40 Retained profit ($1,200 $16 $15) x 40% 467.6 1,987.6

    20. Paper 1 (2008) Ans. 1(d) Hearty Group CB/S at 31/12/2007 $000 Assets Non-current assets Buildings, net [( + ) + (2) $400 (2) $16 Plant & Machinery, net ( + ) + (2) $100 (2) $15 Goodwill ($450 (c) $100 (4) Current Assets Inventory [( + ) (1) $40 Trade receivables [( + ) (1) $400 Cash at bank Current Liabilities Trade payables [( + ) (1) $400 Accrued expenses

    21. Paper 1 (2008) Ans. 1(d) $000 EQUITY Equity attributable to owners of the parent $1 ordinary shares ($8,000 + $1,200 (c) Share premium ($1,500 + $1,200 x ($2.5 - $1) (c) General reserve 600 Retained profits (W1) 2,371.4 15,471.4 Minority interests (W2) 1,987.6 Total equity 17,459

    22. For issues relating to accounting/ financial reporting, you may contact me (Mr. Patrick Ng) by pphng@vtc.edu.hk, 2595 2525. Thank you!

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