SUGGESTED SOLUTIONS

KE1 – Financial Accounting & Reporting

Fundamentals

March 2016

All Rights Reserved

 SECTION 01
Answer 01

1.1
Learning Outcome/s:
1.1.3. Identify external environmental factors which affect the process of accounting
(including economical, technological and regulatory requirements).
Correct Answer C

1.2
Learning Outcome/s:
1.1.6. Identify the ethical requirements of financial reporting and the consequences of
unethical behaviour.
Correct Answer B

1.3
Learning Outcome/s:
1.2.4. Explain the elements of financial statements; assets, liabilities, equity, income,
expenses and cash flows.
Correct Answer D

1.4
Learning Outcome/s:
1.2.5. Explain the underlying assumption (going concern) in accounting and accounting
concepts (accrual, materiality, consistency, entity, matching, prudence, periodic)
Correct Answer B

1.5
Learning Outcome/s:
1.2.6. Explain qualitative characteristics of financial statements/financial information.
Correct Answer C

1.6
Learning Outcome/s:
4.1.2 Discuss items to be presented on the face of the Statement of Comprehensive Income
(SOCI), Statement of Financial Position (SOFP), Statement of Cash Flows (SOCF) and
Statement of Changes in Equity (SOCIE).
Correct Answer A

Suggested solutions (KE1) March 2016 Page 2 of 16

1.7
Learning Outcome/s:
4.8.2 Explain the difference between a finance lease and an operating lease.
Correct Answer C

1.8
Learning Outcome/s:
4.10.1 Define employee benefits.
Correct Answer D

1.9
Learning Outcome/s:
4.11.1 Identify basic financial assets and financial liabilities.
Correct Answer B

1.10
Learning Outcome/s:
4.13.2 Identify entities that can follow SLFRs for SMEs.
Correct Answer C

(2 x 10 = total 20 marks)

Suggested solutions (KE1) March 2016 Page 3 of 16

Answer 02

2.1

Learning Outcome/s:
2.1.2. Explain the purpose of source documents used in accounting.
Credit Note – A credit note is issued by a supplier to a customer in respect of goods
returned or overpayment made by the customer.

Remittance Advice – A remittance advice is issued to a supplier with a payment, detailing

which invoices are being paid and which credit notes have been setoff if any. It also
confirms the amount being paid, so that any discrepancies can be easily identified and
investigated.

GRN- A GRN is used to list the goods that a business has received from a supplier.

2.2
Learning Outcome/s:
2.3.4 Identify the characteristics of computerised accounting packages.

Advantages
- The packages can be used by non- specialists
- A large amount of data can be processed very quickly
- More accurate than manual systems
- Can analyse data readily.

2.3

Learning Outcome/s:
2.5.3. Solve omissions and errors embedded in accounting records and financial statements, using
suspense accounts.
(i) Suspense account Dr. 3,000
Debtors account Cr.3,000
(ii) Depreciation Dr. 6,350
Suspense account Cr.6,350
(iii) Sales Dr. 1,125
Purchase Dr. 1,125
Suspense account Cr.2,250

Suggested solutions (KE1) March 2016 Page 4 of 16

2.4
Learning Outcome/s:
3.2.4 Explain the concepts and principles surrounding consolidation of financial statements.
Parent – An entity that controls one or more entities.
Subsidiary – An entity that is controlled by another entity (known as the parent)

2.5

Learning Outcome/s:
4.2.1. List the criteria which must be satisfied in order to recognise an asset under Property, Plant
and equipment (PPE).
- It is probable that future economic benefits associated with the item will flow to the
entity and
- The cost of the item can be reliably measured.

2.6
Learning Outcome/s:
4.3.2. Explain the accounting treatment with regard to recognition of revenue arising from
interest, dividend and royalties.
Interest – accrual basis considering the effective interest method
Dividend – when right to receive is established
Royalties – accrual basis

2.7
Learning Outcome/s:
4.6.2. Explain accounting policies.
4.6.5. Explain accounting estimates.
- A change in accounting policy – must be applied retrospectively.
- A change in accounting estimates – must be applied prospectively

2.8

Learning Outcome/s:
4.8.4 Explain the accounting of a finance lease in lessees’ books.
(i) Depreciation Dr. 40, 000
Provision for depreciation Cr. 40, 000
(Being recording depreciation)

(ii) Because the lessee has the option to purchase the asset at the end of the lease term.
It is reasonably certain that the lessee will exercise this option.

Suggested solutions (KE1) March 2016 Page 5 of 16

2.9

Learning Outcome/s:
4.9.6. Compute deferred tax.

Acc. Base Tax Base TD

PPE 410,000 350,000 60,000
Warranty provision 50,000 - (50,000)
Net TD 10,000
DT liability at 25% 2,500

2.10

Learning Outcome/s:
4.11.2. Explain initial and subsequent measurement of financial assets and financial liabilities.
i) Initial measurement of held to maturity investment is at FV plus transaction cost. i.e.
at 51,000. Subsequently the instrument should be measured at amortised cost using
EIR, and the gains and losses are recognised in P/L.

ii) Initial measurement is at FV (Rs, 2 mn) and the transaction cost of Rs. 15,000 is not
added to the FV. It should be recognised in P/L. Subsequently the instrument should
be measured at FV while gains and losses are recognised in P/L.

iii) AFS should be initially recognised at FV plus transaction cost (Rs. 50 mn).
Subsequently at FV with gains and losses are recognised in OCI.

(3 x 10 = total 30 marks)

Suggested solutions (KE1) March 2016 Page 6 of 16

 SECTION 2
Answer 03

Relevant Learning Outcome/s:

2.6.2 Prepare a reconciliation of control account balances with a total of individual accounts.
2.7.2 Prepare a reconciliation statement reconciling the cash book balance with the bank
statement balance.
(A)
(i) Trade Receivable control account Rs.
Balance as given 595,600
Add: Overstatement of discount allowed (5,400-4,500) 900
Less: Overstatement of sales (42,400 – 24,400) (18,000)
Correct control account balance 578,500

(ii) Correct total of sub-ledger balances 578,500

Less: Omitted balance (46,000)
Correction of discount allowed (15,000 – 10,500) (4,500)
Individual account balances total at the beginning 528,000

(B) Bank reconciliation as on 30.11.2015

Bank balance as per bank statement 275,500
Less: Un-presented cheques (84,500 + 5,000) (89,500)
Add: Unrealised deposits 124,200
Balance as per cash book (should be) 310,200

Therefore, opening bank balance as per cash book = Rs. 310,200

Bank reconciliation as on 31.12.2015

Balance as per bank statement 420,000
Less: Un-presented cheques (18,000 + 5,000) (23,000)
Add: Unrealised deposits 92,500
Balance as per cash book 489,500

 Closing bank balance as per cash book is Rs. 489,500

(Total: 10 marks)

Suggested solutions (KE1) March 2016 Page 7 of 16

 Answer 04
Relevant Learning Outcome/s:
3.3.2. Prepare the financial statements for a partnership including appropriation accounts (simple
financial statements for a partnership without change in the ownership during the period).
(a)
LMN Associates
Trading, Profit or Loss and Appropriation account
For the year ended 31 December 2015
Rs.
Sales 3,300,000
Less: Cost of sales (1,860 – 120 (drawings)) 1,740,000
Gross profit 1,560,000
Profit on office equipment disposed 50,000
Less: Expenses
Depreciation 150,000
Operational expenses 640,000
Interest on loan 20,000
810,000
Profit available for appropriation 800,000
APPROPRIATIONS:
Partners’ salary: Leo 240,000
Maxi 180,000 420,000
Interest on capital: Leo 50,000
Maxi 30,000
Neil 30,000 110,000
Share of profit Leo 108,000
Maxi 81,000
Neil 81,000 270,000
800,000
Workings
Partners’ current account
Leo Maxi Neil Leo Maxi Neil
Balance - 50,000 40,000 Balance 275,000 - -
31/12/2015 31/12/2015
M. Vehicle 100,000 - - Loan interest - - 20,000
taken
Stock 120,000 - - Partners’ 240,000 180,000 -
withdrawal salary
Drawings 250,000 150,000 Interest on 50,000 30,000 30,000
capital
Share of profit 108,000 81,000 81,000

Balance c/d 203,000 91,000 91,000

673,000 291,000 131,000 673,000 291,000 131,000

Suggested solutions (KE1) March 2016 Page 8 of 16

(b) LMN Associates
Statement of financial position as at 31st December 2015
Assets
Non-current Assets: Rs.
Property, plant and equipment (850 – 150 – 50) 650,000
Current assets:
Inventories 480,000
Trade receivable 260,000
Cash at Bank 495,000
Total Assets 1,885,000
Capital and Liabilities
Partners’ Capital Account - Leo 500,000
- Maxi 300,000
- Neil 300,000 1,100,000
Partners’ Current Account - Leo 203,000
- Maxi 91,000
- Neil 91,000 385,000
Non-current liabilities:
Partners’ Loan Account - Neil 200,000
Current Liabilities:
Trade payables 200,000
1,885,000

(Total 10 marks)

Suggested solutions (KE1) March 2016 Page 9 of 16

Answer 05

Relevant Learning Outcome/s:

3.5.2. Prepare financial statements from incomplete records.
Rajah Traders
Statement of Profit or Loss for the year ended 31st December 2015
Rs.
Sales: Cash sales 1,846,000
Credit sales 2,880,000
4,726,000
Less: Cost of sales (working below) (3,129,000)
Gross Profit 1,597,000
Profit on sale of motor vehicle (648,000 – 350,000) 298,000
1,895,000
LESS: EXPENSES
Depreciation (4,284 + 248 – 3,780) 752,000
Rent (188 + 20 + 44) 252,000
Telephone (32 – 4.3 + 6.3) 34,000
Electricity (98.4 + 1.6) 100,000
Insurance (140.1 – 4.1) 136,000
Salaries 232,000
Selling and Distribution 260,000
1,766,000
Net profit for the year 129,000
Workings: Cost of sales
1. Inventory on 01.01.2015 840,000
Add: Purchases
Cash purchases 139,000
Credit purchases (W3) 3,130,000
4,109,000
Less: inventory on 31.12.2015 980,000
3,129,000

2. Trade Receivable control account

Balance b/d 440,000
Bank 2,480,000
Sales for the year 2,880,000 Balance c/d 840,000
3,320,000 3,320,000

3. Trade payable control account

Balance b/d 550,000
Bank 3,040,000 Purchases for the 3,130,000
year
Balance c/d 640,000
3,680,000 3,680,000
(Total 10 marks)

Suggested solutions (KE1) March 2016 Page 10 of 16

 Answer 06

Relevant Learning Outcome/s:

Learning Outcome
3.5 Incomplete Records
3.4 Non-Profit Entities
3.4.2. Prepare financial statements for non-profit entities
Sun Shine Sports Club
Statement of Income and Expenses for the year ended 31 December 2015
Income
Subscriptions 90,000
Life membership
Revenue 1,500
Interest income 5,600
Rent income 6,420
Gross receipt from sport meet 20,132
123,652

Expenses
Salaries 7,620
Insurance 20,000
Sports meet expenses (10,130+8,000) 18,130
Audit fees 12,000
Travelling 752
Depreciation (2,436+7,500) 9,936 68,438
Excess income over expenditure 55,214

Subscription Account

Income for the year 90,000 Receipt and payment a/c 93,000
Amount received for
2016 6,000 Outstanding for 2015 3,000
96,000 96,000

Suggested solutions (KE1) March 2016 Page 11 of 16

Sunshine Sports Club
Statement of Financial Position as at 31.12.2015

Non-Current Assets
Accu.
Cost Dep NBV
Land 240,000 240,000
Building 52,400 5,680 46,720
Sports Equipment 75,000 7,500 67,500 354,220

Current Assets
Subscription receivable (1,500 x 2) 3,000
Cash in hand & Bank balance 7,350
10,350
Total Assets 364,570
Equity
Accumulated
Fund 174,356
Add: Excess income over expenditure 55,214 229,570
Building Fund 110,500
340,070
Non-Current Liabilities
Deferred Life Membership fees (12,000 – 1,500) 10,500

Current Liabilities
Subscription received in advance (1,500 x 4) 6,000
Sports meet expenses payable 8,000
14,000
364,570

(Total 10 marks)

Suggested solutions (KE1) March 2016 Page 12 of 16

 SECTION 3
Answer 07

Learning Outcome
3.2.3 Prepare financial statements for the purpose of management and publication
2.4.2. Prepare the year-end financial statements for accruals, pre-payments, depreciation, bad
debts and closing stocks.
4.7.2. Explain adjusting events and non-adjusting events.
4.12.3. Explain the criteria to be satisfied when recognising provisions in financial statements.
(a)
Asiamart (Pvt.) Ltd.
Statement of Comprehensive Income
For the year ended 31 March 2015
(In Rs. 000’s)

Sales (20,780 – 160) 20,620

Less: Cost of sales
(11,400 + 200) 11,600
Gross Profit 9,020
Profit on sale of vehicle (880-850) 30
9,050
Administration expenses:
1,840 + 608 (depreciation) (2,448)
Selling & Distribution expenses:
1,080 + 23 (debt prov’n)
+ 40 (bad debt) + 900 (dep’n) (2,043)
Financial exp: (120 Deb int + 80 Pref div) (200)
Profit before taxation 4,359
Income tax expenses 1,020 + 28 (under prov) (1,048)
Net Profit for the year 3,311
Other Comprehensive income:
Revaluation of Land 250
Total Comprehensive income 3,561

(b) Asiamart (Pvt) Ltd.

Statement of Changes in Equity for the year ended 31.03.2015
Stated Revaluation Retained Total
Capital Surplus Profit
Balance on 01.04.2014 4,800 - 1,600 6,400
Revaluation of land - 250 - 250
Net Profit for the year - - 3,311 3,311
Interim dividend paid - - (400) (400)
Balance on 31.03.2015 4,800 250 4,511 9,561

Suggested solutions (KE1) March 2016 Page 13 of 16

(c) Asiamart (Pvt.)Ltd.
Statement of Financial Position as at 31 March 2015 (½ m)
(In Rs. 000’s)
Non-current Assets
Property, plant and equipment: 7,922

Current Assets:
Inventory (2,500 - 200) 2,300
Trade Receivable
1680 - 160 – 20 – 40 - 73 (Prov) 1,387
Other receivable Vehicle sales 880
Cash and cash equivalent 460 5,027
Total Assets 12,949

Equity and Liabilities:

Stated Capital (Ord. Capital) 4,800
Revaluation surplus 250
Retained Profit 4,511
9,561
Non-current Liabilities:
Redeemable preference shares 1,000
12% Debentures 1,000 2,000

Current Liabilities:
Trade payables 900
Income tax payable (1,048 – 700) 348
Accrued debenture interest 60
Pref. dividend payable 80 1,388
12,949

Suggested solutions (KE1) March 2016 Page 14 of 16

(d) Note to Property, Plant and Equipment
(Rs. 000’s)
Land Buildings M. Vehicle Furniture Equip Total
Cost:
Balance on 01/04/14 3,400 3,000 4,400 980 1,800 13,580
Additions - - - - - -
Disposal - - (1,600) - - (1,600)
Revaluation 250 ) - - - - 250
Balance on 31/03/15 3,650 3,000 2,800 980 1,800 12,230

Accumulated Depreciation:
Balance on 01/04/14 - 940 1,640 320 650 3,550
Charge for the year - 150 900 98 360 1,508
Disposal - - (750) - - (750)
Balance on 31/03/15 - 1,090 1,790 418 1,010 4,308

Net Book Value on 31/03/15: 3,650 1,910 1,010 562 790 7,922

Total Net Book Value = Rs. 7,922,000

(Total 20 marks)

Suggested solutions (KE1) March 2016 Page 15 of 16

 Notice of Disclaimer
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Suggested solutions (KE1) March 2016 Page 16 of 16

KE1 – Financial Accounting & Reporting Fundamentals: Executive Level Examination March 2016