Practice questions
Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not
Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.
Q1Corrections and draft profit adjustments · Core · Paper 3 style · 6 marksThe draft profit for the year ended 31 December 2025 of Ravi Valley Cement plc was $286,400. The following matters have not been dealt with correctly.1 Inventory with a cost of $24,000 has a net realisable value of $17,500.2 Machinery bought on 1 January 2025 for $60,000 has not been depreciated. The policy is 10% per annum straight-line.3 The company has $200,000 6% debentures. Interest for the second half of the year has not been paid or accrued.4 An interim dividend of $15,000 was debited to administrative expenses.
- (a) Prepare a statement showing the corrected profit for the year ended 31 December 2025. [4]
- (b) Explain why an interim dividend paid must not be included in the statement of profit or loss. [2]
Show answer
- (a) Draft profit for the year 286,400Less inventory written down to NRV (24,000 − 17,500) (6,500)Less depreciation on new machinery (10% × 60,000) (6,000)Less debenture interest accrued (200,000 × 6% × 6/12) (6,000)Add interim dividend wrongly charged as an expense 15,000Corrected profit for the year 282,900
1 mark each adjustment, total own figure.
- (b) A dividend is a distribution (appropriation) of profit to the owners, not an expense of earning profit. It is deducted from retained earnings in the statement of changes in equity.
1 mark: appropriation/distribution to shareholders; 1 mark: shown in the SOCE / retained earnings.
Lyallpur Fabrics plc had the following equity at 1 January 2025: ordinary shares of $1 each $500,000; share premium $80,000; retained earnings $214,000.During the year ended 31 December 2025:• in March a final dividend for 2024 of $0.06 per share was paid• in May 100,000 ordinary shares were issued at $1.60 each, fully paid• in August land was revalued upwards by $45,000• in October an interim dividend of $0.04 per share was paid on all shares then in issue• the profit for the year was $96,500.
- (a) Prepare the statement of changes in equity for the year ended 31 December 2025. [6]
Show answer
- (a) Statement of changes in equity for the year ended 31 December 2025 Share cap Sh prem Reval res Ret earn TotalBalance 1 January 2025 500,000 80,000 0 214,000 794,000Share issue 100,000 60,000 160,000Revaluation of land 45,000 45,000Profit for the year 96,500 96,500Dividends paid (54,000) (54,000)Balance 31 December 2025 600,000 140,000 45,000 256,500 1,041,500
Dividends: final 500,000 × 0.06 = 30,000; interim 600,000 × 0.04 = 24,000. 1 mark opening balances; 1 mark share capital 100,000; 1 mark premium 60,000; 1 mark revaluation; 1 mark profit and dividends 54,000; 1 mark closing balances.
Kohat Builders plc issued $250,000 9% debentures on 1 July 2025. It also had a 7% bank loan of $80,000 outstanding for the whole of the year ended 31 December 2025.
- (a) Explain why debenture interest is charged in the statement of profit or loss but ordinary dividends are not. [2]
- (b) Calculate the finance costs for the year ended 31 December 2025. [3]
Show answer
- (a) Debenture holders are lenders: interest is a contractual cost of borrowing that must be paid whether or not profits are made, so it is an expense. Dividends are a distribution of profit to the owners and are shown in the statement of changes in equity.
1 mark each point.
- (b) $16,850
Debentures 250,000 × 9% × 6/12 = 11,250; loan 80,000 × 7% = 5,600; total 16,850. M1 time-apportioning; M1 loan interest; A1.
Jhelum Packaging plc is preparing its financial statements for the year ended 31 December 2025.
- (a) For each transaction state its effect on (i) the profit for the year and (ii) the statement of financial position.1 a bonus issue of shares using the share premium account2 accruing debenture interest owing at the year end3 an upward revaluation of land4 paying an ordinary dividend [4]
- (b) State where the gain on revaluation of land is reported in the statement of profit or loss and other comprehensive income. [1]
Show answer
- (a) 1 Profit: no effect; SOFP: share capital up, share premium down, total equity unchanged.2 Profit: decreases; SOFP: current liabilities up, retained earnings down.3 Profit: no effect; SOFP: non-current assets up, revaluation reserve up.4 Profit: no effect; SOFP: cash down, retained earnings down.
1 mark per transaction, both effects correct.
- (b) Under other comprehensive income (not in the profit for the year).
1 mark.
Oasis Hotels plc, Dubai, has a draft profit of $418,700 for the year ended 30 September 2026. The following items need attention.1 The company has an 8% bank loan of $150,000, outstanding all year. Only $7,500 of the interest has been paid and recorded.2 An ordinary dividend paid of $42,000 was debited to finance costs.3 A customer's debt of $3,800 is irrecoverable and must be written off.4 Trade receivables before the write-off were $193,800. The allowance for doubtful debts, currently $2,900, is to be 2% of trade receivables after the write-off.5 Insurance of $2,600 paid for October 2026 was charged as an expense.6 Kitchen equipment (cost $24,000, accumulated depreciation $20,500) was sold for $5,000 cash. The proceeds were credited to revenue and no other entries were made.
- (a) Prepare a statement showing the corrected profit for the year ended 30 September 2026. [6]
- (b) State where the gain on disposal of the equipment is shown in the financial statements. [1]
Show answer
- (a) Draft profit 418,700Less loan interest accrued (12,000 − 7,500) (4,500)Add dividend wrongly charged to finance costs 42,000Less irrecoverable debt (3,800)Less increase in allowance (3,800 − 2,900) (900)Add insurance prepaid 2,600Less disposal proceeds wrongly in revenue (5,000)Add gain on disposal (5,000 − 3,500) 1,500Corrected profit 450,600
1 mark each: interest (12,000 − 7,500 = 4,500); dividend; irrecoverable debt; allowance (2% × 190,000 = 3,800, increase 900); prepayment; disposal (remove 5,000 from revenue, add gain 5,000 − 3,500 = 1,500: net −3,500). Corrected profit $450,600.
- (b) In the statement of profit or loss, as other income (or deducted from expenses).
1 mark.
On 1 April 2025 the equity of Bolan Minerals plc was: ordinary shares of $0.50 each $400,000; share premium $120,000; general reserve $50,000; retained earnings $310,000.During the year ended 31 March 2026:1 a rights issue of 1 share for every 4 held was made at $0.90 per share, fully taken up2 after the rights issue, a bonus issue of 1 share for every 5 held was made, using the share premium account3 profit for the year was $128,0004 $20,000 was transferred to the general reserve5 a dividend of $0.05 per share was paid on all shares in issue after the bonus issue.
- (a) Calculate the number of ordinary shares in issue at 31 March 2026. [1]
- (b) Prepare the equity section of the statement of financial position at 31 March 2026. [5]
- (c) Explain why the bonus issue does not change the total equity of the company. [2]
Show answer
- (a) 1,200,000
800,000 + rights 200,000 = 1,000,000; bonus 200,000; total 1,200,000.
- (b) EquityOrdinary shares of $0.50 each (1,200,000 shares) 600,000Share premium 100,000General reserve (50,000 + 20,000) 70,000Retained earnings 358,000Total equity 1,128,000
Share capital 600,000 (1); share premium 120,000 + 80,000 − 100,000 = 100,000 (1); general reserve (1); retained earnings 310,000 + 128,000 − 20,000 − 60,000 = 358,000 (1); total (1).
- (c) A bonus issue only transfers an amount from a reserve (share premium) to share capital. No cash is received, so total equity is unchanged; only its make-up changes.
1 mark: transfer between equity accounts; 1 mark: no cash/resources received.
Coastal Fisheries plc, Gwadar, has a draft profit of $164,000 for the year ended 30 June 2026. The following errors have been found.1 Closing inventory of frozen fish was included at cost, $12,400; its net realisable value is $9,100.2 Proceeds of $50,000 from an issue of ordinary shares at par were credited to revenue.3 A new boat engine costing $18,000, bought at the start of the year, was charged to repairs. Engines are depreciated at 25% per annum reducing balance.4 Debenture interest of $3,600 owing at the year end has not been recorded.5 The final dividend for the previous year, $25,000, was charged to administrative expenses.
- (a) Complete a table showing the effect (increase, decrease or no effect, with the amount) of correcting each item on (i) the profit for the year and (ii) the net assets. [5]
- (b) Calculate the corrected profit for the year. [2]
Show answer
- (a) Item Profit for the year Net assets1 decrease $3,300 decrease $3,3002 decrease $50,000 no effect3 increase $13,500 increase $13,5004 decrease $3,600 decrease $3,6005 increase $25,000 no effect
1 mark per item, both columns correct. Item 3: capitalise 18,000 less depreciation 25% × 18,000 = 4,500. Item 2: share issue proceeds move from profit to share capital; net assets unchanged. Item 5: dividend moves to retained earnings; net assets unchanged.
- (b) $145,600
164,000 − 3,300 − 50,000 + 13,500 − 3,600 + 25,000 = 145,600. M1 A1.
Mirpur Ceramics plc had a profit before tax of $340,000 for the year ended 31 March 2026. Income tax on this year's profit is estimated at $78,000. Last year's financial statements included a tax liability of $61,000, but $64,500 was paid in settlement during this year.
- (a) Calculate the income tax expense for the year ended 31 March 2026. [2]
- (b) Calculate the profit for the year. [1]
- (c) State the amount of the current tax liability in the statement of financial position at 31 March 2026. [1]
- (d) Explain what is meant by an under-provision for tax and how it is treated. [2]
Show answer
- (a) $81,500
Current estimate 78,000 + under-provision for the previous year (64,500 − 61,000) 3,500. M1 A1.
- (b) $258,500
340,000 − 81,500.
- (c) $78,000
1 mark. The previous year's liability has been settled.
- (d) The tax actually agreed and paid for the previous year was more than the amount estimated in last year's financial statements. The shortfall is added to this year's tax expense.
1 mark meaning; 1 mark treatment.
Nile Valley Textiles plc, Egypt, has a draft profit of $127,800 for the year ended 31 December 2025. These errors have been found.1 A rights issue of 40,000 ordinary shares of $1 each at $1.75 per share was recorded as Dr Bank $70,000, Cr Share capital $70,000.2 Repairs to the factory roof of $8,600 were debited to the buildings account. (Ignore depreciation.)3 Rent of $2,400 owed by a tenant at the year end has not been recorded.4 Goods sent to a customer on sale or return at a selling price of $6,000 (cost $4,500) were recorded as a credit sale. The customer has not yet accepted the goods.
- (a) Prepare journal entries to correct items 1–4. Narratives are not required. [5]
- (b) Calculate the revised profit for the year. [3]
Show answer
- (a) Dr $ Cr $1 Share capital 30,000 Share premium 30,0002 Repairs (profit or loss) 8,600 Buildings 8,6003 Other receivables 2,400 Rent receivable (income) 2,4004 Revenue 6,000 Trade receivables 6,000 Inventory 4,500 Cost of sales 4,500
1 mark each for 1–3; 2 marks for 4. Item 1: premium 40,000 × 0.75 = 30,000.
- (b) $120,100
127,800 − 8,600 + 2,400 − 6,000 + 4,500 = 120,100. 1 mark repairs; 1 mark rent; 1 mark sale or return (net −1,500) and answer.
Extracts from the equity of Thar Coal Services plc (ordinary shares of $1 each): 1 Jan 2025 $ 31 Dec 2025 $Ordinary share capital 400,000 520,000Share premium 60,000 132,000Retained earnings 233,000 301,400During the year there was one issue of shares for cash. A final dividend of $0.07 per share for 2024 was paid before the share issue, and an interim dividend of $0.05 per share was paid after it. There were no other changes in equity apart from the profit for the year.
- (a) Calculate the number of shares issued during the year and the issue price per share. [3]
- (b) Calculate the cash received from the share issue. [1]
- (c) Calculate the profit for the year. [3]
Show answer
- (a) 120,000 shares at $1.60
520,000 − 400,000 = 120,000 shares; premium 72,000 ÷ 120,000 = $0.60; price $1 + $0.60 = $1.60. M1 A1 A1.
- (b) $192,000
120,000 × 1.60.
- (c) $122,400
Dividends 400,000 × 0.07 + 520,000 × 0.05 = 54,000. Profit = 301,400 − 233,000 + 54,000 = 122,400. M1 dividends; M1 method; A1.
The draft statement of financial position of Shalimar Paper plc at 31 March 2026 showed: ordinary shares of $1 each $300,000; share premium $40,000; retained earnings $406,000 (opening balance $94,000 plus draft profit for the year $312,000); trade payables $48,000. There were no other equity or liability balances. The following have been found.1 On 1 October 2025 the company issued $120,000 7% debentures 2032 at par. The cash received was credited to revenue. No interest has been paid.2 On 31 March 2026 a building with a carrying amount of $410,000 was revalued at $520,000. The gain was credited to the statement of profit or loss.3 Inventory costing $15,600 has a net realisable value of $11,200.
- (a) Prepare a statement showing the corrected profit for the year ended 31 March 2026. [4]
- (b) Prepare the equity and liabilities section of the statement of financial position at 31 March 2026, after the corrections. [4]
Show answer
- (a) Draft profit 312,000Less debenture proceeds wrongly credited to revenue (120,000)Less debenture interest accrued (120,000 × 7% × 6/12) (4,200)Less revaluation gain wrongly credited to profit (110,000)Less inventory written down (15,600 − 11,200) (4,400)Corrected profit for the year 73,400
1 mark each adjustment.
- (b) Equity and liabilitiesOrdinary shares of $1 each 300,000Share premium 40,000Revaluation reserve 110,000Retained earnings (94,000 + 73,400) 167,400Total equity 617,400Non-current liabilities: 7% debentures 2032 120,000Current liabilities: trade payables 48,000 other payables (interest) 4,200Total equity and liabilities 789,600
1 mark revaluation reserve; 1 mark retained earnings; 1 mark debentures as non-current liability; 1 mark accrued interest as current liability with correct total.
The following balances were extracted from the books of Saffron Foods plc at 30 June 2026. $Revenue 1,840,000Cost of sales 1,104,000Distribution costs 186,000Administrative expenses 212,000Debenture interest paid 9,0006% debentures 300,000Delivery vans at cost 160,000Delivery vans: accumulated depreciation 40,000Office equipment at cost 90,000Additional information1 Administrative expenses include ordinary dividends paid of $60,000.2 Depreciation for the year has not been charged: delivery vans 25% reducing balance (distribution costs); office equipment 10% on cost (administrative expenses).3 Inventory included in cost of sales must be written down by a further $7,000.4 The debentures were in issue all year.5 Tax for the year is estimated at $82,000.
- (a) Calculate the distribution costs and the administrative expenses for the year. [3]
- (b) Prepare the statement of profit or loss for the year ended 30 June 2026. [5]
Show answer
- (a) Distribution costs $216,000; administrative expenses $161,000
Vans 25% × (160,000 − 40,000) = 30,000 added to distribution (1); dividend 60,000 removed from admin (1); office equipment 10% × 90,000 = 9,000 added (1).
- (b) Saffron Foods plc — Statement of profit or loss for the year ended 30 June 2026Revenue 1,840,000Cost of sales (1,104,000 + 7,000) (1,111,000)Gross profit 729,000Distribution costs (186,000 + 30,000) (216,000)Administrative expenses (212,000 − 60,000 + 9,000) (161,000)Profit from operations 352,000Finance costs (18,000)Profit before tax 334,000Tax (82,000)Profit for the year 252,000
1 cost of sales and gross profit; 1 expenses (own figures from (a)) and profit from operations; 1 finance costs 18,000 (full year, not 9,000 paid); 1 tax; 1 profit for the year.
The draft statement of financial position of Highland Tea plc, Kandy, at 30 June 2026 shows current assets of inventory $84,000, trade receivables $66,000 and cash $12,000, and current liabilities of trade payables $58,000, accruals $4,000 and tax payable $28,000. The draft profit for the year is $98,000. The following matters have been found.1 Damaged inventory costing $9,000 has a net realisable value of $3,500.2 A customer owing $4,800 went into liquidation before the year end; the debt should be written off.3 An electricity accrual of $1,700 was omitted.4 A payment of $6,000 to a supplier was entered in the cash book but not in the trade payables.
- (a) Calculate the revised profit for the year. [3]
- (b) Calculate the current ratio before and after the corrections. Give your answers to two decimal places. [4]
- (c) Comment on the change in the current ratio. [1]
Show answer
- (a) $86,000
98,000 − 5,500 − 4,800 − 1,700 = 86,000. Item 4 does not affect profit. 1 mark each adjustment.
- (b) Before 1.80 : 1; after 1.77 : 1
Before 162,000 ÷ 90,000 = 1.80. After: current assets 162,000 − 5,500 − 4,800 = 151,700; current liabilities 90,000 + 1,700 − 6,000 = 85,700; ratio 1.77. 1 mark before; 1 mark CA; 1 mark CL; 1 mark after.
- (c) The ratio has fallen only slightly and remains comfortably above 1, so liquidity is still adequate; the draft figures overstated liquidity.
1 mark.
Pamir Outdoor Gear plc has a draft profit of $205,300 for the year ended 31 December 2025. Retained earnings at 1 January 2025 were $142,000.1 An interim dividend of $18,000 paid in July 2025 was debited to administrative expenses.2 A final dividend of $32,000 for 2025, proposed by the directors in February 2026, was charged as an expense and shown as a current liability.3 Goods sent on sale or return at a selling price of $9,000 were included in revenue; the customer has not accepted them. The company sells at cost plus 50%.4 Development costs of $14,000 meeting all the IAS 38 criteria for recognition were written off. Production of the new product starts in 2026.5 The final dividend for 2024, $25,000, was paid in April 2025 and correctly recorded.
- (a) Prepare a statement showing the corrected profit for the year ended 31 December 2025. [5]
- (b) Calculate the retained earnings at 31 December 2025. [3]
Show answer
- (a) Draft profit 205,300Add interim dividend charged as an expense 18,000Add proposed final dividend wrongly accrued 32,000Less sale or return goods in revenue (9,000)Add those goods returned to inventory at cost 6,000Add development costs to be capitalised 14,000Corrected profit 266,300
1 mark interim dividend; 1 mark final dividend (IAS 10: proposed after the year end, so not a liability); 1 mark revenue; 1 mark inventory at cost 9,000 ÷ 1.5 = 6,000; 1 mark development costs.
- (b) $365,300
142,000 + 266,300 − interim 18,000 − previous year's final 25,000 = 365,300. 1 mark profit; 1 mark both dividends; 1 mark answer.
At 31 December 2025 a printing machine owned by Urdu Press plc has a carrying amount of $84,000. Because of falling demand, its fair value less costs to sell is estimated at $61,000 and its value in use at $69,500. The machine has never been revalued.
- (a) State the recoverable amount of the machine. [2]
- (b) Calculate the impairment loss. [1]
- (c) Explain how the impairment loss is treated in the financial statements. [2]
Show answer
- (a) $69,500
Recoverable amount is the higher of fair value less costs to sell (61,000) and value in use (69,500). M1 A1.
- (b) $14,500
84,000 − 69,500.
- (c) The machine's carrying amount is reduced to its recoverable amount. The loss is charged as an expense in the statement of profit or loss (because the asset has not been revalued, so there is no revaluation reserve to set it against).
1 mark carrying amount reduced; 1 mark expense in profit or loss.
Zarghun Juices plc bought a bottling machine. The costs were: $List price 145,000Trade discount on list price 5%Sales tax (recoverable from the tax authority) 12,000Import duty 9,200Delivery to the factory 2,400Installation 6,300Testing before use 1,800Training staff to operate the machine 3,000One-year maintenance contract 4,500
- (a) Calculate the cost of the machine to be recognised as a non-current asset under IAS 16. [4]
- (b) Explain how the staff training and the maintenance contract are treated. [2]
Show answer
- (a) $157,450
List price less 5% trade discount 137,750; add import duty 9,200, delivery 2,400, installation 6,300, testing 1,800. Exclude recoverable sales tax, staff training and the maintenance contract. 1 mark discount; 1 mark duty and delivery; 1 mark installation and testing; 1 mark exclusions and total.
- (b) Both are revenue expenditure: they do not bring the asset to working condition, so they are charged as expenses in the statement of profit or loss (the maintenance contract over the year it covers).
1 mark each.
Bukhara Carpets plc bought a building on 1 January 2016 for $600,000. It is depreciated at 2.5% per annum on cost (a 40-year life, no residual value). On 31 December 2025, after the depreciation for 2025 had been charged, the building was revalued at $690,000. The useful life is unchanged.
- (a) Calculate the revaluation gain. [2]
- (b) Prepare the journal entry to record the revaluation. A narrative is not required. [3]
- (c) Calculate the depreciation charge on the building for the year ending 31 December 2026. [2]
Show answer
- (a) $240,000
Accumulated depreciation 600,000 × 2.5% × 10 = 150,000; carrying amount 450,000; gain 690,000 − 450,000 = 240,000. M1 A1.
- (b) Dr $ Cr $Accumulated depreciation: buildings 150,000Buildings (690,000 − 600,000) 90,000 Revaluation reserve 240,000
1 mark eliminating accumulated depreciation; 1 mark building increased by 90,000; 1 mark revaluation reserve.
- (c) $23,000
690,000 ÷ remaining life 30 years = 23,000. M1 A1.
Arabian Spice Traders plc holds four product lines at 31 May 2026.Line Cost $NotesA 12,000Net realisable value $15,400B 8,600Expected selling price $8,300; selling costs $1,200C 21,000Net realisable value $26,500D 5,400Selling price $4,800 after repackaging costing $600; selling costs $300
- (a) Calculate the value of inventory at 31 May 2026 in accordance with IAS 2. [4]
- (b) Explain why the comparison of cost and net realisable value is made item by item rather than for the inventory as a whole. [2]
Show answer
- (a) $44,000
Lower of cost and NRV for each item: A 12,000; B NRV 8,300 − 1,200 = 7,100; C 21,000; D NRV 4,800 − 600 − 300 = 3,900. Total 44,000. 1 mark each item.
- (b) Comparing totals would let the profit expected on some items hide the losses on others (here total cost 47,000 is below total NRV 52,900, so no write-down would be made). Prudence requires each foreseeable loss to be recognised.
1 mark losses hidden/offset; 1 mark prudence.
Gilgit Hotels plc bought land for $300,000 in 2020. Land is not depreciated. In December 2023 the land was revalued to $380,000 and a revaluation reserve was created. At 31 December 2026 the land is revalued at $270,000.
- (a) Calculate how much of the fall in value is charged against the revaluation reserve and how much is charged in the statement of profit or loss for 2026. [3]
- (b) Prepare the journal entry for the fall in value. A narrative is not required. [3]
- (c) State the carrying amount of the land at 31 December 2026. [1]
Show answer
- (a) Revaluation reserve $80,000; profit or loss $30,000
Total fall 380,000 − 270,000 = 110,000. The reserve for this asset is used first (80,000); the remaining 30,000 is an impairment loss in profit or loss. 1 mark each figure.
- (b) Dr $ Cr $Revaluation reserve 80,000Impairment loss (profit or loss) 30,000 Land 110,000
1 mark each line.
- (c) $270,000
1 mark.
Hala Ajrak Printers plc bought a machine on 1 January 2022 for $240,000. It was depreciated straight-line over 10 years with a residual value of $20,000. On 1 January 2026 the directors decided that the machine has only 4 more years of useful life and a residual value of $12,000.
- (a) Calculate the carrying amount of the machine at 1 January 2026. [2]
- (b) Calculate the depreciation charge for the year ended 31 December 2026 and the carrying amount at that date. [2]
- (c) Explain why the change is not applied to the depreciation charged in earlier years. [2]
Show answer
- (a) $152,000
Annual depreciation (240,000 − 20,000) ÷ 10 = 22,000; 4 years = 88,000; 240,000 − 88,000. M1 A1.
- (b) Depreciation $35,000; carrying amount $117,000
(152,000 − 12,000) ÷ 4 = 35,000. M1 A1.
- (c) It is a change in an accounting estimate (IAS 8), not an error or a change of policy. It is applied prospectively, to the current and future years only; past figures were based on the best information available at the time.
1 mark change in estimate; 1 mark prospective treatment.
The directors of Kalash Mountain Resorts plc are preparing the financial statements and are unsure how to deal with a number of uncertain items.
- (a) Define the following terms as used in IAS 37: (i) a provision, (ii) a contingent liability. [2]
- (b) State the three conditions that must be met before a provision is recognised. [3]
- (c) State how a probable contingent asset is treated. [1]
Show answer
- (a) (i) A liability of uncertain timing or amount. (ii) A possible obligation whose existence depends on uncertain future events, or a present obligation that is not probable or cannot be measured reliably.
1 mark each.
- (b) There is a present obligation (legal or constructive) from a past event; an outflow of resources to settle it is probable; a reliable estimate of the amount can be made.
1 mark each.
- (c) It is disclosed in a note but not recognised in the statement of financial position.
1 mark.
Indus Ferries plc has the following matters at 31 March 2026.1 A passenger is suing the company for injuries suffered on one of its ferries in January 2026. The lawyers say the company will probably lose, and estimate damages of $85,000.2 The company has guaranteed a $200,000 bank loan of a supplier. The supplier has had some cash-flow difficulties; the company's advisers consider a default possible but not probable.3 The company is claiming $40,000 compensation from a shipyard for late delivery of a ferry. The lawyers think the claim will probably succeed, but the shipyard has not agreed.
- (a) For each matter, state how it should be treated in the financial statements for the year ended 31 March 2026. Give reasons. [6]
- (b) The draft profit before dealing with these matters was $520,000. Calculate the revised profit. [1]
Show answer
- (a) 1 Recognise a provision of $85,000: present obligation from a past event, outflow probable, reliable estimate. Charge to profit or loss; show as a liability.2 Disclose as a contingent liability in a note only: an outflow is possible, not probable.3 Do not recognise; disclose as a contingent asset in a note because the inflow is probable but not virtually certain.
1 mark treatment and 1 mark reason for each matter.
- (b) $435,000
Only the provision affects profit.
The draft profit of Saddar Electronics plc for the year ended 31 March 2026 is $310,000. The financial statements will be authorised for issue on 30 June 2026. These events occurred after the year end.1 20 April 2026: a customer who owed $18,000 at 31 March 2026 was declared bankrupt; nothing will be received.2 5 May 2026: a fire destroyed inventory worth $60,000 in the warehouse.3 12 May 2026: goods held in inventory at 31 March 2026 at a cost of $25,000 were sold for $19,000, with selling costs of $1,000.4 1 June 2026: the directors proposed a final dividend of $40,000.
- (a) Classify each event as adjusting or non-adjusting and state how each should be treated. [4]
- (b) Calculate the revised profit for the year ended 31 March 2026. [3]
Show answer
- (a) 1 Adjusting: confirms the customer could not pay at the year end; write off $18,000.2 Non-adjusting: the condition (fire) arose after the year end; disclose in a note if material.3 Adjusting: gives evidence of NRV at the year end; write inventory down to 18,000.4 Non-adjusting: no obligation existed at the year end; disclose in a note, no liability.
1 mark each.
- (b) $285,000
310,000 − 18,000 − (25,000 − 18,000) = 285,000. 1 mark each adjustment, 1 mark answer (non-adjusting events ignored).
Crescent Appliances plc sold 12,000 washing machines in 2025 with a one-year warranty. Past experience shows that 80% need no repairs, 15% need minor repairs costing $40 each and 5% need major repairs costing $250 each. The warranty provision brought forward from 2024 is $180,000. At 31 December 2025 the provision should equal the expected cost of repairs on the machines sold in 2025. The draft profit is $960,000. In addition:• a former employee is suing the company for $70,000; lawyers believe the claim will possibly, but not probably, succeed• the company's insurer has confirmed in writing that it will pay $15,000 for flood damage costs already charged as an expense in 2025; nothing has been recorded.
- (a) Calculate the warranty provision required at 31 December 2025. [3]
- (b) State the amount to be charged in the statement of profit or loss for the warranty provision. [1]
- (c) Explain how the lawsuit and the insurance claim should be treated. [2]
- (d) Calculate the revised profit for the year. [2]
Show answer
- (a) $222,000
12,000 × (15% × 40 + 5% × 250) = 12,000 × 18.50. M1 expected value; M1 both outcomes; A1.
- (b) $42,000 (increase in the provision)
1 mark.
- (c) Lawsuit: an outflow is only possible, so it is disclosed as a contingent liability, not provided for. Insurance: the inflow is virtually certain (written confirmation), so it is no longer contingent and is recognised as a receivable and income of $15,000.
1 mark each.
- (d) $933,000
960,000 − 42,000 + 15,000 = 933,000. M1 A1.
Neelum Mineral Water plc has 2,000,000 ordinary shares of $0.50 each. Profit for the year ended 31 December 2025 was $380,000 and retained earnings at that date are $1,150,000. An interim dividend of $0.04 per share has been paid. The directors propose a final dividend of $0.12 per share. The company has cash of $90,000 and plans to extend its factory next year.
- (a) Calculate the total cost of the proposed final dividend. [1]
- (b) Calculate the dividend cover for the year if the final dividend is paid. Give your answer to two decimal places. [2]
- (c) Advise the directors whether they should pay the proposed final dividend. Justify your answer. [5]
Show answer
- (a) $240,000
2,000,000 × $0.12.
- (b) 1.19 times
Total dividends 80,000 + 240,000 = 320,000; 380,000 ÷ 320,000 = 1.19. M1 A1.
- (c) For: retained earnings of $1,150,000 mean the dividend is legally possible; shareholders expect a return and the share price may fall if it is cut; a stable dividend signals confidence.Against: cash is only $90,000, so the company would need to borrow about $150,000, adding interest; dividend cover of 1.19 is low, so most of this year's profit is paid out; the factory extension planned for next year needs funds.Decision: pay a reduced final dividend (for example $0.05 per share, $100,000) or delay payment until cash allows.
Up to 2 marks for points for, up to 2 marks for points against (using figures), 1 mark for a justified decision.
Tarbela Engineering plc has 1,500,000 ordinary shares of $1 each, share premium of $400,000, retained earnings of $900,000 and cash of $260,000. The directors are considering two options.Option A: pay a cash dividend of $0.15 per share.Option B: make a bonus issue of 1 share for every 5 held, using the share premium account, and pay no cash dividend.
- (a) Show the effect of each option on share capital, share premium, retained earnings, total equity and cash. [4]
- (b) Advise the directors which option they should choose. Justify your answer. [4]
Show answer
- (a) Cash dividend Bonus issueOrdinary share capital no change +$300,000Share premium no change −$300,000Retained earnings −$225,000 no changeTotal equity −$225,000 no changeCash −$225,000 no change
Option A: 1,500,000 × 0.15 = 225,000. Option B: 1,500,000 ÷ 5 = 300,000 shares × $1 = $300,000 from share premium. 1 mark each correct column pair (share capital/premium; retained earnings; total equity; cash).
- (b) Cash dividend: rewards shareholders with cash and meets their income expectations, but leaves only $35,000 cash, which may cause liquidity problems. Bonus issue: no cash leaves the company and reserves are kept for growth; shareholders receive more shares, but the share price will fall in proportion, so they gain no real wealth and may be disappointed. Decision: e.g. a bonus issue (or a smaller cash dividend) because cash is needed for operations.
1 mark each for two relevant points, 1 mark use of figures, 1 mark justified decision.
While preparing the financial statements for the year ended 31 December 2025, the accountant of Kirthar Foods plc discovered that closing inventory at 31 December 2024 had been overstated by $36,000 because of a counting error. This is a material error. Retained earnings at 1 January 2025, as previously reported, were $512,000. The draft profit for 2025, calculated using the incorrect opening inventory, is $148,000. Dividends of $50,000 were paid in 2025.
- (a) Calculate the restated retained earnings at 1 January 2025. [2]
- (b) Calculate the corrected profit for 2025. [2]
- (c) Calculate the retained earnings at 31 December 2025. [2]
- (d) Explain how IAS 8 requires a material prior period error to be corrected. [2]
Show answer
- (a) $476,000
512,000 − 36,000: the 2024 profit was overstated by the overstatement of closing inventory. M1 A1.
- (b) $184,000
Opening inventory for 2025 was overstated, so cost of sales was too high: 148,000 + 36,000. M1 A1.
- (c) $610,000
476,000 + 184,000 − 50,000 = 610,000. The error has reversed itself by the end of 2025. M1 A1.
- (d) It is corrected retrospectively: the comparative figures for the prior period are restated and the opening balance of retained earnings is adjusted in the statement of changes in equity, rather than putting the correction through the current year's profit.
1 mark retrospective/restate comparatives; 1 mark adjust opening retained earnings.
In 2026 the auditors of Swat Marble plc found that a machine bought on 1 July 2024 for $80,000 had been debited to repairs in 2024. The company depreciates machinery at 20% per annum straight-line, with a time apportionment in the year of purchase. The error is material. The year end is 31 December. Retained earnings at 1 January 2026, as previously reported, were $645,000. The draft profit for 2026 is $210,000 (no depreciation has been charged on the machine).
- (a) Calculate the restated retained earnings at 1 January 2026. [3]
- (b) Calculate the corrected profit for 2026. [1]
- (c) Calculate the carrying amount of the machine at 31 December 2026. [2]
- (d) Explain why the correction for 2024 and 2025 is not included in the profit for 2026. [2]
Show answer
- (a) $701,000
2024: profit understated by 80,000 − depreciation 8,000 (6 months) = 72,000; 2025: depreciation 16,000 omitted. 645,000 + 72,000 − 16,000 = 701,000. 1 mark each step.
- (b) $194,000
210,000 − 2026 depreciation 16,000.
- (c) $40,000
80,000 − 8,000 − 16,000 − 16,000. M1 A1.
- (d) Including it would distort the 2026 profit and make comparison with earlier years misleading. IAS 8 requires material prior period errors to be corrected retrospectively through opening retained earnings, with comparatives restated.
1 mark distortion/comparability; 1 mark IAS 8 retrospective treatment.
Solaris Devices plc, Islamabad, spent the following in the year ended 30 June 2026.1 Salaries of scientists investigating new battery materials, with no particular product in view: $42,0002 Testing a prototype of a new solar phone charger (all IAS 38 development criteria are met): $68,0003 Market research carried out before the charger project was approved: $9,0004 Designing tools for production of the new charger (criteria met): $25,000
- (a) Calculate the amount to be charged as an expense and the amount to be recognised as an intangible asset for the year. [4]
- (b) State two of the criteria that development expenditure must meet before it can be recognised as an asset under IAS 38. [2]
Show answer
- (a) Expense $51,000; intangible asset $93,000
Research (1) and market research before approval (3) are expensed: 51,000. Development meeting all criteria (2) and (4) is capitalised: 93,000. 1 mark per item correctly treated.
- (b) Any two: technically feasible to complete; intention to complete and use or sell; ability to use or sell; probable future economic benefits (a market exists); adequate technical, financial and other resources to complete; expenditure can be measured reliably.
1 mark each.
Medisonic plc capitalised development costs of $180,000 for a new ultrasound scanner in 2024. Commercial production began on 1 January 2025 and the costs are amortised straight-line over the expected sales life of 5 years. At 31 December 2026 a competitor launched a cheaper scanner, and the recoverable amount of the development costs was estimated at $90,000.
- (a) Calculate the amortisation charge for 2026. [1]
- (b) Calculate the carrying amount of the development costs at 31 December 2026 before any impairment. [2]
- (c) Calculate the impairment loss at 31 December 2026. [2]
- (d) Calculate the total charge in the statement of profit or loss for 2026 relating to the development costs. [1]
- (e) Explain why capitalised development costs are amortised. [2]
Show answer
- (a) $36,000
180,000 ÷ 5.
- (b) $108,000
180,000 − 2 × 36,000 (2025 and 2026). M1 A1.
- (c) $18,000
108,000 − recoverable amount 90,000. M1 A1.
- (d) $54,000
Amortisation plus impairment.
- (e) Matching: the costs are spread over the periods that benefit from sales of the product; the asset has a limited useful life, so its carrying amount should fall as the benefits are used up.
1 mark matching; 1 mark finite life/benefits consumed.
