IB124 Introduction to Financial Accounting

Autumn Term 2020

Seminar Questions
Seminar 1 – Week 2
Users of financial statements, the accounting equation, the statement of financial
position, definitions of assets and liabilities
Seminar 2 – Week 3
The statement of profit or loss, double-entry bookkeeping
Seminar 3 – Week 4
Closing off the accounting system at period-end, accruals and prepayments
Seminar 4 – Week 5
Depreciation, disposal of non-current assets, irrecoverable debts and allowance for
receivables
Seminar 5 – Week 6
From trial balance to final financial statements, inventory valuation, company issues
Seminar 6 – Week 7
Published financial statements for companies, regulation of company financial
reporting
Seminar 7 – Week 8
Statements of cash flow
Seminar 8 – Week 9
Interpretation of financial statements
Seminar 9 – Week 10
Interpretation of financial statements, conclusion
Seminar Approach

The material for each seminar is divided into two main sections:

 Class discussion section

 Additional study section

Before your seminar you are required to prepare full solutions to all questions
within the CLASS DISCUSSION section. It is these questions which your tutor will
work through within your seminars. You will be required to share your
thoughts/ideas/solutions within your seminars – so make sure you prepare
thoroughly in advance of the session.

Further practice questions are provided in the ADDITIONAL STUDY section of the
materials for each seminar. Although time constraints prevent us from working
through these questions within the seminar sessions they all cover examinable
topics/material and therefore you should fully attempt each question, making sure
you understand all the issues/techniques before consulting the solutions.

Solutions to all seminar questions will be available via my.wbs once all seminars have
been held in the relevant week.

Note that some questions are from the core textbook. Some of their solutions are
available in the textbook. Others will be provided via my.wbs.
 Seminar 6 – Week 7

Class Discussion

Question 1

The following information has been extracted from the statement of financial position of
Astro Products Ltd as at 30 April 20X1.
£000
Allotted and called-up share capital
Equity shares of 50p each 2,000
6% redeemable preference shares of £1 each 1,000
3,000

Retained earnings 950

There were no other reserves in the statement of financial position at 30 April 20X1. You
are given the following additional information relating to the year ended 30 April 20X2:

(i) The company issued one million equity shares at a price of 75p per share on 1 January
20X2.
(ii) The management have decided to revalue the land and buildings that had a net book
value of £400,000 at a value of £600,000.
(iii) The profit from operations for the year ended 30 April 20X2 was £475,000.
(iv) The income tax charge on the profit for the year ended 30 April 20X2 was estimated to
be £325,000.
(v) On 4 July 20X1 the company paid the previous year’s final equity dividend of 9p per
share, and on 17 December 20X1 interim dividends of 2p per equity share and half the
preference dividend. On 1 July 20X2 the directors proposed the remaining dividend
on the preference shares and a final dividend of 10p each on the equity shares.
(vi) The directors have agreed to transfer £350,000 to a general reserve at 30 April 20X2.

Required:

As far as the information permits, prepare the statement of comprehensive income and
statement of changes in equity for the year ended 30 April 20X2, and a statement of
financial position extract at that date showing the composition of the equity.
Question 2

(Adapted from Thomas and Ward (2019) Introduction to Financial Accounting, Chapter 27
Question 27.19)

The following is the trial balance of D. Cooper Ltd at 30 September 20X1:

Debit Credit
£ £
Called-up share capital
100,000 equity shares of £1 each 100,000
50,000 7% redeemable preference shares of 50p each 25,000
Premises cost (buildings cost £160,000) 200,000
Premises accumulated depreciation 60,000
Goodwill 29,100
Plant and machinery 80,000
Plant and machinery accumulated depreciation 13,100
Inventories 9,400
Trade receivables 11,200
Trade payables 8,300
Bank 6,050
Sales 135,250
Purchases 49,700
Directors’ salaries 22,000
Rates 4,650
Light and heat 3,830
Plant hire 6,600
Interest on debentures 1,200
10% debentures 24,000
Allowance for receivables 910
Share premium 33,730
Retained earnings 2,580
Revenue reserve 20,060
Interim dividend on equity shares 3,250
Irrecoverable debts 700
Listed investments 8,000
Investment income 650
£ 429,630 £ 429,630

Additional information:

1. Inventories at 30 September 20X1 are valued at £13,480.

2. Rates include a payment of £2,300 for the six months from 1 July 20X1.
3. The directors wish to provide for the audit fee of £1,750.
4. Depreciation on the buildings is straight-line over 40 years and on plant and
machinery is 15% per annum using the straight-line method. Goodwill did not suffer
any diminution in value.
5. The allowance for receivables is to be adjusted to 10% of the trade receivables at the
end of the year.
6. The preference share dividends are outstanding at the end of the year and the last
half year’s interest on the debentures has not been paid.
7. The tax on this year’s profits is estimated at £6,370.
8. The directors propose to declare a final dividend on the equity shares of 13 pence per
share and transfer £2,500 to revenue reserves.

Required:

Prepare the statement of profit or loss and statement of changes in equity for D. Cooper Ltd
for the year ended 30 September 20X1 and the statement of financial position at that date.

Additional Study

Question 3

Adapted from Thomas and Ward (2019), Introduction to Financial Accounting, Chapter 27
Question 27.12

(a) The following items usually appear in the final statements of a limited company:

(i) Interim dividends

(ii) General reserve
(iii) Share premium

Required:

Explain the meaning of each of the above terms.

(b) The following information has been obtained from the books of Drayfuss Ltd:

Retained earnings at 1 April 20X0 £355,000

General reserve £105,000
Issued capital (fully paid) 80,000 8% £1 redeemable preference shares
250,000 50p equity shares (fully paid)
Profit from operations
for the year ended 31 March 20X1 £112,500
Tax on profits £17,500
An interim preference dividend of 4% had been paid and a final dividend of 4% had been
proposed by the directors. No interim equity dividend had been declared, but the directors
proposed a final dividend of 15p per share. The directors agreed to transfer £150,000 to
general reserve.

Required:

Prepare the statement of changes in equity for the year ended 31 March 20X1.

Question 4

Adapted from Thomas and Ward (2019), Introduction to Financial Accounting, Chapter 27
Question 27.20

The following is the trial balance of L. Johnson plc at 31 December 20X1:

Debit Credit
£ £
Issued and called-up share capital:
80,000 equity shares of £1 each 80,000
50,000 5% irredeemable preference shares of £1 each 50,000
Freehold buildings: cost 150,000
Freehold buildings: accumulated depreciation 13,000
Motor vehicles: cost 35,000
Motor vehicles: accumulated depreciation 5,600
Plant and machinery: cost 40,000
Plant and machinery: accumulated depreciation 7,050
Development costs (cost £10,000) 10,000
Development costs: accumulated amortisation 3,400
Interim preference dividend 1,250
Allowance for receivables 860
Wages and salaries 5,948
Irrecoverable debts 656
Goodwill 10,000
Listed investments 4,873
Purchases / Sales 78,097 130,354
Capital redemption reserve 22,500
Directors’ remuneration 13,000
Returns inwards / outwards 1,629 1,834
Rates 596
Dividends received 310
Retained earnings 3,126
Light and heat 1,028
Audit fee 764
Revenue reserve 8,400
 Share premium 5,350
10% debentures 30,000
Inventories 9,436
Trade receivables / payables 11,600 8,450
Bank 3,643
£ 373,877 £ 373,877

Additional information:

1. Tax on the profits for the year is estimated at £2,544.

2. Rates include £200 for the six months ended on 31 March 20X2.
3. Electricity for the quarter to 31 January 20X2 of £330 has not been accounted for.
4. The allowance for receivables is to be adjusted to 5% of the trade receivables at the end
of the year.
5. The company’s depreciation/amortisation methods are as follows:
Freehold buildings: Straight-line over 50 years
Motor vehicles 25% on the reducing balance method
Plant and machinery 20% on the reducing balance method
Development costs 10% straight-line
6. The value of goodwill has not fallen below the value recorded in the trial balance.
7. Inventory at 31 December 20X1was £12,456.
8. It is proposed to pay a final dividend on the equity shares of 6.25 pence per share and
the remaining preference dividend for the year.
9. The directors have decided to transfer £4,000 to the revenue reserve.

Required:

Prepare in a format for publication (i.e. as specified by IAS 1 Presentation of Financial

Statements) the statement of profit or loss and statement of changes in equity for L.
Johnson plc for the year ended 31 December 20X1 and the statement of financial position at
that date.

Question 5

Briefly outline the benefits and criticisms of the IASB’s Conceptual Framework.