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)
PAST PAPER (PAPER 1) – QUESTIONS DISTRIBUTION
2004
Consolidated B/S – Goodwill, Minority
interest
Consolidated I/S
2005
2006
18
c
14
c
10
c
10
c
6
c
11
c
10
c
10
c
26
c
23
c
20
7
c
10
c
16
c
Statement of cash flows – Indirect
method
Accounting ratio analysis – Short-term
liquidity
Theory – Consolidated F/S
6
c
5
Incomplete records – Sole trader
17
Partnership – Appropriation, Revaluation,
Changes
20
Incomplete records – Partnership
Partnership – conversion to limited
company
2007
20
c
10
c
20
c
20
PAST PAPER (PAPER 1) – QUESTIONS DISTRIBUTION
2004
2005
2006
Control accounts
Statement of changes in equity
6
Theory – Development costs
4
4
Correction of errors/Suspense (journal
entry)
20
Theory – Items in Published accounts:
Prior Period Adjustment, EPS
20
Income & expenditure a/c & B/S
18
c
6
c
c
c
20
c
20
20
Valuation of fixed assets, depreciation
Valuation of inventory & perpetual
inventory system
Bank reconciliation statement
8
c
Theory – Use of financial statements
True and fair
2007
20
2
3
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 & Club’s I&E, & B/S
• Q. 5 – Correction of errors & Computation of
revised profit
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.
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
Paper 1 (2008) – Q. 1 (CB/S)
• At the date of acquisition, the fair values of
Sweety Ltd’s 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)
Paper 1 (2008) – Ans. Q. 1(c)
Cost of Control (60%)
Investment in S
$000
$000
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
Paper 1 (2008) – Q. 1 (CB/S)
Alternative Questions:
(a) Prepare the journal entries to
record the fair value adjustment
of the subsidiary’s assets at date
of acquisition.
(b) Explain the rationale behind the
journal entries.
Paper 1 (2008) – Q. 1 (CB/S)
Hearty
$000
Sweety
$000
6,200
1,200
Assets
Non-current assets
Buildings, net
Plant & Machinery, net
Current Assets
Inventory
Trade receivables
Cash at bank
Current Liabilities
Trade payables
Accrued expenses
Paper 1 (2008) – Q. 1 (CB/S)
Hearty
$000
Sweety
$000
Capital and reserves
$1 ordinary shares
Share premium
General reserve
Retained profits
8,000
1,500
600
2,080
______
12,180
====
3,000
300
1,200
______
4,500
====
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 group’s policy to charge intragroup sales at a mark-up of 25% on cost. Any
unrealised profit is to be eliminated in full against
the group profit only.
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)
Paper 1 (2008) – Ans. 1(d)
Analysis – (1):
(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
Paper 1 (2008) – Ans. 1(d)
Analysis – (1):
$000
W1 Retained profits
Hearty
Sweety ($1,200 – $450 (c)) x 60%
Unrealised profit – Inventory
[($400 x ½) x 25/125]
2,080
450
(40)
Paper 1 (2008) – Ans. 1(d)
Analysis (2) & (3):
(2) Sweety – had not taken fair values of its noncurrent 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
Analysis – (2) & (3):
$000
W1 Retained profits
Hearty
Sweety
Unrealised profit – Inventory
[($400 x ½) x 25/125]
Depreciation adjustment
– Buildings ($400 x 4%) x 60%
– Plant & Mach. ($100 x 15%) x 60%
W2 Minority interests (40%)
Ordinary shares ($3,000 x
Share premium ($300 x
Fair value adjustment
– Buildings ($400 x
– Plant & Mach. ($100 x
Retained profit ($1,200 – $16 – $15) x 40%
2,080
450
(40)
(9.6)
(9)
1,200
120
160
40
467.6
Paper 1 (2008) – Ans. 1(d)
Analysis – (4):
(4) At 31/12/2007 – impairment loss of
$100,000 of goodwill
Analysis – (4):
$000
W1 Retained profits
Hearty
Sweety
Unrealised profit – Inventory
[($400 x ½) x 25/125]
Depreciation adjustment
– Buildings ($400 x 4%) x 60%
– Plant & Mach. ($100 x 15%) x 60%
Goodwill impairment loss
W2 Minority interests (40%)
Ordinary shares ($3,000 x
Share premium ($300 x
Fair value adjustment
– Buildings ($400 x
– Plant & Mach. ($100 x
Retained profit ($1,200 – $16 – $15) x 40%
2,080
450
(40)
(9.6)
(9)
(100)
2,371.4
1,200
120
160
40
467.6
1,987.6
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 [( +
Accrued expenses
) – (1) $400
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)
Total equity
1,987.6
17,459
For issues relating to accounting/ financial
reporting, you may contact me
(Mr. Patrick Ng)
by [email protected], 2595 2525.
Thank you!