Financial Reporting – Page 4

FA – L1 – Q88 – Preparation of not-for-profit accounts

Prepare income and expenditure account and statement of financial position for XY Healthcare Co Sports and Social Club for 20X9, including subscriptions and inventory adjustments.

Question

You have agreed to take over the role of bookkeeper for the XY Healthcare Co Sports and Social Club.
The summarised statement of financial position on 31 December 20X8 as prepared by the previous bookkeeper contained the following items.

Assets	GH₵
Heating oil for clubhouse	700
Shop and cafe inventories	5,000
New sportswear, for sale, at cost	4,000
Used sportswear, for hire, at valuation	1,000
Equipment for groundsman
Cost	10,000
Depreciation	(2,000)
Subscriptions due	200
Bank
Current account	800
Deposit account	20,000
Capital and liabilities	GH₵
Accumulated fund	29,200
Payables
Shop and cafe inventories	600
Sportswear	900

The bank account summary for the year to 31 December 20X9 contained the following items.

Receipts	GH₵
Subscriptions	11,000
Bankings
Shop and cafe	10,000
Sale of sportswear	6,000
Hire of sportswear	4,500
Interest on deposit account	400

Payments	GH₵
Rent and repairs of clubhouse	6,000
Heating oil	4,000
Sportswear	4,500
Grounds person	9,000
Shop and cafe purchases	9,000
Transfer to deposit account	3,000

You discover that the subscriptions due figure as at 31 December 20X8 was arrived at as follows.

Subscriptions due	GH₵
Subscriptions unpaid for 20X7	10
Subscriptions unpaid for 20X8	230
Subscriptions paid for 20X9	(40)

Corresponding figures at 31 December 20X9 are:

Subscriptions due	GH₵
Subscriptions unpaid for 20X7	10
Subscriptions unpaid for 20X8	20
Subscriptions unpaid for 20X9	90
Subscriptions paid for 20X0	(200)

Subscriptions due for more than 12 months should be written off with effect from 1 January 20X9.

Asset balances at 31 December 20X9 include:

Assets	GH₵
Heating oil for clubhouse	700
Shop and cafe inventories	5,000
New sportswear, for sale, at cost	4,000
Used sportswear, for hire, at valuation	1,000
Closing payables at 31 December 20X9 are for:
Shop and cafe inventories	800
Sportswear	450
Heating oil for clubhouse	200

Two thirds of the sportswear purchases made in 20X9 had been added to inventory of new sportswear in the figures given in the list of assets above, and one third had been added directly to the inventory of used sportswear for hire.
Half of the resulting ‘new sportswear for sale at cost’ at 31 December 20X9 is actually over two years old. You decide, with effect from 31 December 20X9, to transfer these older items into the inventory of used sportswear, at a valuation of 25% of their original cost.
No cash balances are held at 31 December 20X8 or 31 December 20X9. The equipment for the grounds person is to be depreciated at 10% per annum, on cost.

Required:
Prepare the income and expenditure account and statement of financial position for the XY Healthcare Co Sports and Social Club for 20X9.

Answer

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Topic: Preparation of not-for-profit accounts

FA – L1 – Q85 – Preparation of not-for-profit accounts

Calculate subscriptions due and prepare receipts and payments account for Afrika Hospital Sports Club for 20X9.

Question

The following balances have been obtained from the books of Afrika Hospital Sports Club:

	June 30, 20X8	June 30, 20X9
Cash	1,204,800	1,586,500

The following information is also available in respect of the year ended June 30, 20X9:
Payments during the year

	GH¢
Building	753,000
Sports Equipment	442,800
Investments	436,000

There were also a series of general expenses paid.
Membership
The club had 600 members on June 30, 20X9. No new members were admitted during the year but 10 members left the club on January 1, 20X9. Subscription per member is GH¢ 500 per month.
Some members pay subscriptions in advance but others pay late sometimes. The amounts paid in advance and amounts in arrears at each year end were as follows:

	June 30, 20X8	June 30, 20X9
Advance subscription	86,000	92,000
Subscriptions receivable	326,000	357,000

Required:
(a) Calculate the total subscriptions due from the members for the year ending June 30 20X9.
Use a T account (subscriptions account) to calculate the cash received from members and then complete a receipts and payments account identifying the cash paid as general expenses as a balancing figure.

(b) Afrika Hospital is a public sector entity. Identify what you expect its principal aims to be, and explain the importance of financial reporting in this sector, with reference to groups that may use the hospital’s financial reports.

Answer

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Tags: Financial Reporting, Not-for-profit accounts, Objectives, Public Sector, Stakeholders
Level: Level 1

Topic: Preparation of not-for-profit accounts

FA – L1 – Q63 – Correction of Errors

Prepare journal entries to correct errors in B.B. Ventures' trial balance, including unposted returns, sales errors, and inventory issues.

Question

The trial balance prepared by B.B. Ventures showed a difference of GH₵47,060, which was put on the credit side of a suspense account. An investigation disclosed that:
(i) The total of purchase return day book amounting to GH₵16,160 had not been posted to the ledger.
(iii) The sales account had been added short by GH₵10,000.
(iv) An asset bought four years ago for GH₵7,000 and depreciated to GH₵1,200 had been sold for GH₵1,500 at the beginning of the year. The receipt of cash has been posted in the bank book but corresponding entries have not been recorded.
(v) A credit sale of GH₵1,470 had been credited to the customer’s account as GH₵1,740. An irrecoverable debt of GH₵1,560 has to be written off. Allowance for receivables is to be maintained at 10% of receivables. Receivables appearing in the trial balance are GH₵23,390, and the allowance for receivables account shows a credit balance of GH₵2,320.
(vi) A sub-total of GH₵29,830 on the list of closing inventory had been carried over as GH₵29,380, and another sheet had been overcast by GH₵1,000.

Required:
(a) Prepare journal entries to correct the above errors. (Narrations are not required)

(b) Explain why it is important that the accountant of B.B. Ventures behaves in an ethical manner when preparing financial statements.

Answer

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Tags: Error Correction, Ethics, Financial accounting, Financial Reporting, Professional conduct, Trial Balance
Level: Level 1

Topic: Correction of Errors

FA – L1 – Q23 – Non-current assets and depreciation

Prepare ledger accounts for lorries, disposals, and depreciation for Akosua Transport Limited for the year to 30 April 20X9.

Question

Akosua Transport Limited is a haulage contractor. At 1 May 20X8 the company had three lorries, details of which are as follows:

Lorry registration number	Date purchased	Cost (GH¢000)
KWE 1	1 July 20X5	16,000
AMA 2	1 February 20X7	21,000
EFI 3	1 April 20X8	31,000

During the year to 30 April 20X9, the following lorry transactions took place:
(a) KWE 1 was sold on 31 July 20X8 for GH¢3 million on cash terms. On 1 August 20X8 Akosua Transport Limited replaced it with a new lorry, registration number NAA 4 for which he paid GH¢35 million in cash.
(b) On 1 December 20X8, the new lorry (NAA 4) was involved in a major accident, and as a result was completely written off. The company was able to agree a claim with his insurance company, and on 31 December 20X8 he received GH¢30 million from the insurance company. On 1 January 20X9 he bought another lorry (registration number KOF 5) for GH¢41 million.
(c) During March 20X9, the company decided to replace the lorry bought on 1 April 20X8 (registration number EFI 3) with a new lorry. It was delivered on 1 April 20X9 (registration number ADU 6). The company agreed a purchase price of GH¢26 million for the new lorry, the terms of which were GH¢20 million in part-exchange for the old lorry and the balance to be paid immediately in cash.

Notes:
(1) Akosua Transport Limited uses the straight-line method of depreciation.
(2) The lorries are depreciated over a five-year period by which time they are assumed to have an exchange value of GH¢1 million each.
(3) A full year’s depreciation is charged in the year of acquisition, but no depreciation is charged if a lorry is bought and sold or otherwise disposed of within the same financial year.
(4) Akosua Transport Limited does not keep separate ledger accounts for each individual lorry.

Required
(a) Write up the following accounts for the year to 30 April 20X9:
(i) lorries account
(ii) lorries disposal account
(iii) allowance for depreciation on lorries account.

(b) Show how the lorries account and the allowance for depreciation account would be presented in Akosua Transport Limited’s statement of financial position as at 30 April 20X9.

Answer

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Tags: Depreciation, Financial Reporting, Non-current Assets, Statement of Financial Position, Straight-line Method, Transport Industry
Level: Level 1

Topic: Non-current assets and depreciation

AAA – L3 – Q51 – Assurance services

Suggest procedures for reviewing interim financial information of Dablaseem Hospital Company Ltd.

Question

Dablaseem Hospital Company Ltd. prepares its annual financial statements to 31st December each year. Due to the magnitude of the transactions, interim financial statements for each half year are prepared at the end of June every year. This is done to facilitate the early completion and audit of the annual financial statements. Nhwehwem & Associates are the independent financial statement auditors of Dablaseem Hospital Co. Ltd. This year’s interim financial information have been prepared and are ready for review.

You are the audit senior of the auditing firm and the head of the audit team to carry out the review of the interim financial information.

Required:

Suggest the procedures you would use to carry out the review of the interim financial information.

Answer

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Tags: Assurance services, Audit Procedures, Financial Reporting, interim financial information, Review engagement
Level: Level 3

Topic: Assurance Services

AA – L2 – Q27 – Risk Assessment and Internal Control

Identify five audit risks for Unity Football Club and explain auditor responses. Describe proof in total calculations for UFC’s ticket sales, loan interest, and payroll expenses. Explain three internal controls for UFC’s club shop or snack bars and their objectives.

Question

You are the senior responsible for planning the audit of Unity Football Club Limited (UFC) for the year ended May 31, 2008.
UFC runs a football club which was promoted to the top division in the league this season. The football season starts on September 1 and ends on May 31 so that the players get a break over the summer months.
UFC own their football stadium which now has the capacity to seat 25,000 people. Of the 25,000 seats, 19,000 are allocated to UFC supporters (home supporters) and are sold to season ticket holders only. The remaining 6,000 tickets are for away supporters and cannot be sold to UFC supporters.
Season tickets cost GH¢260 for adults and GH¢175 for children. Following their recent promotion all the season tickets have been sold this year with 70% of season tickets sold to adults and the remaining 30% to children. Tickets for away supporters are always sold at GH¢20 per ticket regardless of whether the ticket is sold to an adult or a child. On average 50% of away supporter tickets have been sold for each of the 14 home games played at UFC’s stadium during the football season.
UFC’s other revenue streams include the sale of football kits and other memorabilia from the club shop, and food and drink sales from the club snack bars.
Following promotion to the top division, the club added an extra stand to the stadium to increase the seating capacity to the current level of 25,000. Other existing areas of the stadium also underwent maintenance in order to restore them to their original condition. The work was carried out during June and July, 2007 and cost a total of GH¢3,360,000. To finance this UFC took out a GH¢2,900,000 loan on June 1, 2007.
The loan carries an interest rate of 7% and is repayable over the next five years. The loan is secured on the stadium.
The directors feel that the club’s greatest assets (other than the stadium) are the football players themselves. The players have performed so well this year that some of the other football clubs in the same division have made preliminary offers to buy three of UFC’s players. UFC is particularly pleased about this as these players joined the club through their youth academy programme. Consequently the directors would like to value these three players as intangible non-current assets in UFC’s financial statements. The players will be valued at the offer price received from the other clubs. The directors feel this is a prudent valuation because they are confident that the eventual selling price would be much higher than the preliminary offer.
One of the major drawbacks of the club’s promotion has been that the club has had to increase the level of players’ salaries. The total salary expense for the year is estimated to be in the region of GH¢2,800,000. This is a particularly surprising figure as it is higher than the other operating costs for the year which are estimated at GH¢2,400,000.
UFC has just appointed a team of internal auditors. They have not been in position long enough to help you with your audit work but the directors are keen for the internal auditors to improve the company’s internal controls in relation to the club shop and snack bars.

Required:
(a) Using the information provided, describe FIVE (5) audit risks and explain the auditor’s response to each risk in planning the audit of UFC.

(b) Describe how the auditor could perform a proof in total calculation to confirm each of UFC’s revenue from ticket sales, loan interest and payroll expense for players’ salaries.

(c) Explain THREE (3) internal controls the internal auditors of UFC should implement relating to the club shop or snack bars, and state the objective of each of the three controls.

Answer

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Tags: Audit Risk, Auditor Response, Capital Expenditure, Financial Reporting, Internal controls
Level: Level 2

Topic: Risk Assessment and Internal Control

AA – L2 – Q21 – Risk Assessment and Internal Control

Explain the meaning of audit risk and its importance to the auditor. Identify risks in auditing Aurum LLC and explain why they need consideration.

Question

21 Golden LLC

Golden LLC designs, manufactures and retails traditional Ghanaian jewellery. Inventory is held at the design warehouse and at three shops. Inventory is also sometimes sent to customers for approval prior to a sale being made. Your firm has been re-appointed as auditors for the year ended 31st December 20X8.

Golden LLC has had a difficult year. A recession has caused a fall in revenue and the future is uncertain. A fourth shop was closed during the year and the premises are still up for sale. The financial director was dismissed half way through the year and is pursuing a claim for unfair dismissal. A replacement has not yet been found.

The managing director is due to retire next year and is likely to require loans he has made to the business to be repaid. Negotiations with the bank in respect of loans to cover these repayments have started.

Required

(a) State what you understand by audit risk and why it is important to the auditor.

(b) Identify the risks arising from the above that will need to be considered when planning the audit of Golden LLC. Explain why these risks need to be considered.

Answer

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Tags: Audit Risk, Financial Reporting, Going Concern, Internal controls, Inventory Management
Level: Level 2

Topic: Risk Assessment and Internal Control

Tag (SQ): Financial Reporting

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FA – L1 – Q88 – Preparation of not-for-profit accounts

Prepare income and expenditure account and statement of financial position for XY Healthcare Co Sports and Social Club for 20X9, including subscriptions and inventory adjustments.

FA – L1 – Q85 – Preparation of not-for-profit accounts

Calculate subscriptions due and prepare receipts and payments account for Afrika Hospital Sports Club for 20X9.

FA – L1 – Q63 – Correction of Errors

Prepare journal entries to correct errors in B.B. Ventures' trial balance, including unposted returns, sales errors, and inventory issues.

FA – L1 – Q23 – Non-current assets and depreciation

Prepare ledger accounts for lorries, disposals, and depreciation for Akosua Transport Limited for the year to 30 April 20X9.

AAA – L3 – Q51 – Assurance services

Suggest procedures for reviewing interim financial information of Dablaseem Hospital Company Ltd.

AA – L2 – Q27 – Risk Assessment and Internal Control

Identify five audit risks for Unity Football Club and explain auditor responses. Describe proof in total calculations for UFC’s ticket sales, loan interest, and payroll expenses. Explain three internal controls for UFC’s club shop or snack bars and their objectives.

AA – L2 – Q21 – Risk Assessment and Internal Control

Explain the meaning of audit risk and its importance to the auditor. Identify risks in auditing Aurum LLC and explain why they need consideration.

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FA – L1 – Q88 – Preparation of not-for-profit accounts

Prepare income and expenditure account and statement of financial position for XY Healthcare Co Sports and Social Club for 20X9, including subscriptions and inventory adjustments.

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FA – L1 – Q85 – Preparation of not-for-profit accounts

Calculate subscriptions due and prepare receipts and payments account for Afrika Hospital Sports Club for 20X9.

You're reporting an error for "FA – L1 – Q85 – Preparation of not-for-profit accounts"

FA – L1 – Q63 – Correction of Errors

Prepare journal entries to correct errors in B.B. Ventures' trial balance, including unposted returns, sales errors, and inventory issues.

You're reporting an error for "FA – L1 – Q63 – Correction of Errors"

FA – L1 – Q23 – Non-current assets and depreciation

Prepare ledger accounts for lorries, disposals, and depreciation for Akosua Transport Limited for the year to 30 April 20X9.

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AAA – L3 – Q51 – Assurance services

Suggest procedures for reviewing interim financial information of Dablaseem Hospital Company Ltd.

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AA – L2 – Q27 – Risk Assessment and Internal Control

Identify five audit risks for Unity Football Club and explain auditor responses. Describe proof in total calculations for UFC’s ticket sales, loan interest, and payroll expenses. Explain three internal controls for UFC’s club shop or snack bars and their objectives.

You're reporting an error for "AA – L2 – Q27 – Risk Assessment and Internal Control"

AA – L2 – Q21 – Risk Assessment and Internal Control

Explain the meaning of audit risk and its importance to the auditor. Identify risks in auditing Aurum LLC and explain why they need consideration.

You're reporting an error for "AA – L2 – Q21 – Risk Assessment and Internal Control"

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