Questions and Answers of Business Accounting

On 31 March 2016, Sonny Ltd had issued share capital of 80,000 ordinary £1 shares and reserves of £48,000. Two years later, the reserves had risen to £72,000 but the share capital was unchanged.
On 31 October 2014, its date of the statement of financial position, Daughters Ahead Ltd had issued share capital of 840,000 ordinary £1 shares and reserves of £476,000. Four years later, the share
Dad and Mum Ltd bought 84,000 of the 168,000 issued ordinary £1 shares of Child Ltd for £280,000 on 31 July 2017. The Child Ltd financial statements are drawn up annually to 31 December. The
On 1 January 2018, Offspring and Co Ltd had an issued share capital of 360,000 ordinary £1 shares. The balance of retained profit was £36,000 and there was also a general reserve of £28,800.
The following statements of financial position were drawn up as at 31 March 2018. The person drafting the statement of financial position of Parent Ltd was not too sure of an item and has shown it as
The following statements of financial position of Father Ltd and Son Ltd were drawn up as at 31 December 2017. Draw up the consolidated statement of financial position as at that date. Father Ltd
Draw up a consolidated statement of financial position as at 31 October 2016 from the following information.The dividend of Twins Ltd is for 2016 but has not yet been brought into the ledgers of
The following are the summarised statements of financial position of P Ltd and S Ltd at 31 December 2016.There were no additions or disposals of non-current assets by the group during the year.(b) P
P plc acquired 80% of the ordinary share capital of S plc for £150,000 and 50% of the issued 10% cumulative preference shares for £10,000, both purchases being effected on 1 May 2017. There have
X plc acquired 80% of the ordinary share capital of Y plc on 1 January 2016 for £300,000. The lists of balances of the two companies at 31 December 2016 were as follows:(a) A remittance of £2,000
From the following statements of financial position and further information you are to draw up a consolidated statement of financial position as at 31 December 2016.During the year Parent Ltd had
What do you think is an ‘onerous contract’?
What would be wrong with P recording goodwill as £3 in this case?
From the following statements of financial position and supplementary information you are to draw up a consolidated statement of financial position as at 31 March 2017.During the year Parent Holdings
Parent plc Statement of Financial Position as at 31 March 2018When Parent plc bought the shares of Subsidiary Ltd it valued the non-current assets at £132,000 instead of the figure of £121,000 as
Parental Venture plc Statement of Financial Position as at 31 December 2018When Parental Venture plc took control of Subsidiary Ltd it valued the non-current assets at 31.12.2017 at £100,000 instead
From the following statements of financial position, you are to draft a consolidated statement of financial position for the group of Parent Ltd and its two subsidiaries, Sub 1 and Sub 2. Parent Ltd
Would P6 be considered the ultimate parent company of S12?
Why do you think wholly owned subsidiaries are normally exempted from preparing consolidated financial statements?
From the following statements of financial position prepare a consolidated statement of financial position for the group of Parenting Ltd, Sub A and Sub B. Parent plc Statement of Financial Position
On 1 April 2014, Machinery Limited bought 80% of the ordinary share capital of Components Limited. On 1 April 2016, Machinery Limited was itself taken over by Sales Limited who purchased 75% of the
Why can’t we simply add together all of the separate statements of profit or loss to form the consolidated statement of profit or loss when the subsidiaries are partly owned and there are no
You are presented with the following summarised information for Norbreck plc and its subsidiary, Bispham Ltd:Additional information:(a) Norbreck plc acquired 80% of the shares in Bispham Ltd on 1
The following information relates to the Brodick group of companies for the year to 30 April 2017:Additional information:(a) The issued share capital of the group was as follows:Brodick plc:
Why was the £2 unrealised profit in the inventory held by S Ltd added to the consolidated figure for cost of sales in Working 2?
The following figures for the year to 30 April 2016 have been extracted from the books and records of three companies which form a group:Profits are deemed to accrue evenly throughout the year.Other
The following are the trial balances of ATH Ltd, GLE Ltd, and FRN Ltd as at 31 December 2018.ATH Ltd acquired the shares in FRN Ltd on 31 December 2016, when the balance of retained profits of FRN
In recent years, Khang Plc has earned a reputation for buying modestly performing businesses and selling them at a substantial profit within a period of two to three years of their acquisition. On 1
Large plc, a manufacturer and wholesaler, purchased 600,000 of the 800,000 issued ordinary shares of a smaller company, Small Ltd, on 1 January 2015 when the retained earnings account of Small Ltd
Why do you think control is now the key factor in determining the relationship between related companies, rather than ownership?
Q plc has three subsidiaries: L Ltd, M Ltd, and N Ltd. All three were acquired on 1 January at the start of the financial year which has just ended. Q has a 55%, 70% and 95% holding respectively and
At the end of 2018, a parent company, P plc, with one subsidiary, had a holding representing 10% of the equity of R Ltd, a clothing company. It had cost £96,000 when purchased at the start of 2017.
Relevant statements of financial position as at 31 March 2017 are set out below:You have recently been appointed chief accountant of Jasmin (Holdings) plc and are about to prepare the group statement
The statements of financial position of Dad Ltd and Sibling Ltd are as follows:Required:Prepare the consolidated statement of financial position as at 31 December 2018. Dad Ltd Statement of Financial
Why do you think leasing is usually financially advantageous for both the lessor and the lessee?
(a) If you were lent £20,000 for 86 days at 5%, how much interest would you pay?(b) If a debt factor offered to discount a £5,000 bill of exchange at 10%, and if the bill had an outstanding period
What is the real rate of interest of discounting the bill of exchange in Question 27.1?Data From Question 27.1(a) If you were lent £20,000 for 86 days at 5%, how much interest would you pay?(b) If a
(a) If you were lent £9,000 for 99 days at 6%, how much interest would you pay?(b) If a debt factor offered to discount an £14,000 bill of exchange at 8%, and if the bill had an outstanding period
What is the real rate of interest of discounting the bill of exchange in Question 27.3?Data From Question 27.3(a) If you were lent £9,000 for 99 days at 6%, how much interest would you pay?(b) If a
Interest of £800 is charged and included in a loan of £5,400, i.e. the £4,600 is received. The loan has to be repaid at £1,350 per quarter over the next 12 months. What is the real rate of
If £8,000 is invested for 5 years at 6% compound per annum, how much interest is earned over the five years?
If the interest on the investment in Question 27.6 had been compounded every six months, how much interest would have been earned over the four years?Data From Question 27.6If £8,000 is invested for
Shares bought on 1 January 2014 for £4,000 were sold on 31 December 2019 for £7,900. What was the rate of annual compound interest on the investment?
Should you accept an offer of £60,000 for your rights over the next 15 years to the £4,800 annual rent from shop premises you own and have leased to a local company? You could invest the £60,000
In relation to the rental income, what rate of interest does the offer made in Question 27.9 represent? Having made this calculation should you change your decision taken in Question 27.9?Data From
A condition of a seven-year loan of £70,000 is that the borrower will pay equal annual amounts into a sinking fund so that it accumulates at the end of the seven years to the amount of the loan. The
If the interest on the sinking fund in Question 27.11 were at 8%, how much would the annual payments into it be?Data From Question 27.11A condition of a seven-year loan of £70,000 is that the
What is the implied interest rate if equipment can be leased for four years at £10,000 per annum and the cash price is £36,000?
The annual rental payments on a finance lease are £16,000. If the rate of interest on borrowing for this purpose is 8%, what is the capital value of the lease?
What sort of ‘deviations from the norm’ do you think they may be looking for?
Five categories of accounting ratios were described in this chapter. What are they?
The only difference between the current and acid test ratios is that inventory is omitted from the acid test ratio. Why is it appropriate to remove inventory from the analysis?
Why should different groups of people be interested in different categories of accounting ratios?
Huge plc acquired a holding of 600,000 of the 800,000 ordinary £1 shares of Large plc on 1 October 2015 when the revenue reserves of Large stood at £320,000. On 1 October 2016, the directors of
Three companies have the capital structures shown below.The return on capital employed was 20% for each firm in 2016, and in 2017 was 10%. Corporation tax in both years was assumed to be 55%, and
Martha is the accountant of a trading business. During the past year she produced interim accounts for the six months ended 30 November 2015, and draft final accounts for the year ended 31 May 2016,
When an organisation operates in more than one sector, how do you identify other appropriate organisations with which to make comparisons?
John Jones is considering purchasing shares in one of two companies and has extracted the following information from the statement of financial position of each company.Required:(a) Define the term
Why might having to repay a loan in these circumstances be disastrous for a company?
The following are extracted from the statements of financial position as at 31 March 2017 and 31 March 2018 of Glebe Ltd:Required:(a) Calculate for each of the two years two ratios that indicate the
What effect would increasing income in this way have upon gearing?
Colin Black is considering investing a substantial sum in the ordinary shares of Jacks Ltd. Having some accounting knowledge he has extracted the following information from the accounts for the last
What effect would increasing non-current asset values in these ways have upon gearing?
The following information has been extracted from the accounts of Witton Way Ltd:Additional information:During the year to 30 April 2016, the company tried to stimulate sales by reducing the selling
You are presented with the following information for three quite separate and independent companies:Additional information:1 The operating profit before interest and tax for the year to 31 March 2018
The chairman of a family business has been examining the following summary of the accounts of the company since it began three years ago.The company’s products are popular in the locality and in
The following information is provided for Bessemer Ltd which operates in an industry subject o marked variations in consumer demand. Required:(a) The forecast dividends for each of the next
An investor is considering the purchase of shares in either AA plc or BB plc whose latest accounts are summarised below. Both companies carry on similar manufacturing activities with similar selling
The following are the summarised accounts for B Limited, a company with an accounting year ending on 30 September.Required:(a) calculate, for each year, two ratios for each of the following user
The following are the financial statements of D Limited, a wholesaling company, for the year ended 31 December:The following information should be taken into consideration.1 You may assume that:(i)
G plc is a holding company with subsidiaries that have diversified interests. G plc’s board of directors is interested in the group acquiring a subsidiary in the machine tool manufacturing
J plc supplies and fits car tyres, exhaust pipes and other components. The company has branches throughout the country. Roughly 60% of sales are for cash (retail sales). The remainder are credit
Company managers are aware that the readers of financial statements often use accounting ratios to evaluate their performance. Explain how this could lead to decisions which are against the
What are the two forms of earnings management? Provide examples of both.
What would cause a manager to engage in earnings management when doing so did not benefit the company the manager works for?
Why would a company with no debt covenants engage in earnings management?
LIFO is not permitted under IFRS. How does this affect the coal distributor’s ability to identify an appropriate value for its inventory?
What is the difference between capture theory and private interest group theory?
Why do you think the phrase ‘visible position’ is used here, rather than simply the word ‘position’?
What is the relationship between legitimacy theory, social contracts, and the stakeholders of an entity?
A bank uses a set of 20 questions to assess the financial position of applicants for loans. Since introducing this approach 5 years ago, it has found that only 1 per cent of loans granted have proved
If you were the senior loan officer in the bank in Question 30.3, would you support this suggestion?Data From Question 30.3A bank uses a set of 20 questions to assess the financial position of
A manager is responsible for monitoring his employer’s debt covenants. These are linked to the debt to equity ratio, which must not rise above 40 per cent. The manager has noticed that the draft
If the covenant in Question 30.5 was related to the price of the company’s shares, what steps could be taken to raise the price of its shares?Data From Question 30.5A manager is responsible for
What would be the long-term impact upon the company of the measures adopted in Questions 30.5 and 30.6?Data From Question 30.5A manager is responsible for monitoring his employer’s debt covenants.
Why is knowledge of double entry important in identifying whether some of these theories have correctly predicted behaviour?
Should accountants give the user groups the information they are asking for, or the information for which they should be asking?
Complete the following table by entering the appropriate valuation base in each unshaded box. Past Present Future Entry value Exit value
If you paid £1,000 for a computer, what value would you say it had?
Explain the relationship between deprival value; replacement cost; net realisable value; and economic value.
Summarise the potential flaws in this method.
What is the difference between current purchasing power (CCP) and current cost accounting (CCA)?
What flaw can you see in this method?
Which groups of users of published financial statements take precedence in the development of accounting standards? Why?
If you replaced the £1,000 cost of the widgets in the above calculation of profit with the £1,100 it will cost to replace it, does it remind you of any of the alternatives to historical cost
State whether you consider the following statements to be true or false:(a) During inflationary periods, historical cost financial statements do not reflect a true and fair view.(b) The preparation
Apart from the subjectivity in some of the adjustments made to the original figures, such as for depreciation, if you were asked for the main disadvantage of historical cost accounting, especially in
State whether you consider the following statements to be true or false:(a) The current cost of plant and machinery is likely to be its net realisable value.(b) A company should distribute dividends
What does the difference between the change under the historical cost convention and under the current cost convention of £1,000 (£1,500 - £500) – the monetary working capital adjustment –
What are the practical difficulties a company may encounter in ascertaining the current values of its assets?

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