Session 1: Introduction to international financial accounting

Practice 3

Source : Chantiri Chaudemanche R., Université Paris Dauphine)

Exercise 1

During the year 20N, the company MALAVOY carried out transactions which were recorded by the
accountant. At 01/12/N, the draft balance sheet and the income statement of the company were as
follows:

Balance Sheet of MALAVOY as at 01/12/N

Assets Liabilities & Equity
(in thousands of Euros)
Gross Depn./ Net
provn.
Fixed assets 4800 Shareholders’ Equity 5 250

Tangible fixed assets Share capital 3 000

Reserves 1 250
Land 400 400 Provisional profit (loss) 1 000
Buildings 3 600 2 200 1 400
Plant & equipment 5 400 2 400 3 000

Current assets 5500 Liabilities 5 050

Stocks of raw materials 1 100 Borrowings (loan) 4 200
Stocks of finished goods 2 700 Trade accounts payable 850
Trade a/cs receivable 450
Cash & cash equivalents 1 250

10 300 10 300

Income Statement for the period ended 01/12/N

Expenses Income
(in thousands of Euros)

Operating expenses 18 000 Operating income 23 000

Finance costs 4 000

22 000 23 000

The accountant still has the following transactions to record (in thousands of Euros) relating to the
month of December N:1
1. 05/12 MALAVOY pays the supplier YOUNAN: 420.
2. 08/12 Purchase of stocks of raw materials on credit for 400 excluding tax.

1
We assume, for simplicity, that the rate of VAT is 20 %.
 3. 10/12 Cash purchase of equipment for 360 excluding tax.
4. 14/12 Sale to various customers of three-quarters of the stock of finished goods at a price of
2000 excluding taxes, of which 1000 is for cash and the remainder on credit.
5. 18/12 The customer BIENVENU pays his debt: 400.
6. 20/12 Credit sale of finished goods to customer BERTEIL of 1200 including tax.
7. 23/12 Purchase on credit of a batch of raw materials for 300 excluding tax.
8. 27/12 Set up then payment of salaries for the month of December: 1500 (for simplicity,
employers’ social security contributions are to be disregarded).
9. 31/12 Receipt then payment of an electricity bill: 100 excluding tax.

 Prepare the income statement for the period reflecting the events listed in 1 to 9 above

The following additional information is transmitted to you on 31/12/N:

10. The loan appearing on the balance sheet was taken out on 01/01/N. It is repayable at a constant
rate over four years; yearly interest rate: 5%; the interest is accounted and paid on December 31,
each year.
11. The fixed assets included in the opening balance sheet have a constant level of use. The annual
depreciation rates are:
Property 12% per year
Plant and equipment 24% per year

The equipment purchased on 10/12 and put into operation on 15/12 is depreciated on a straight-
line basis over 3 years.

12. According to the physical stock take, the final stock levels are:
Stocks of raw materials: 1 300; Stocks of finished goods: 3 200

 Discuss the different accounting principles used in the adjusting entry process.

 Present the balance sheet and income statement for 31/12/N

 Is the company successful?

Exercise 2
As at 31/12/20N, the trial balance before adjusting entries of the company BLACKJACK is as follows (in
Euros):
 Indicate in the left hand column the classification of each account (Fixed assets-
FA, Current assets-CA, Shareholders’ equity-S/H, Liabilities-L, Expenses-Exp or
Income-Inc).

Debit balance Credit balance

Share capital 250 000
Retained earnings brought forward 42 000
Provisions for liabilities and charges 12 000
Borrowings 150 000
Land 50 000
Property 100 000
Transport equipment 80 000
 Computer equipment 60 000
Software under development 50 000
Investments in associates 6 000
Depreciation of transport equipment 16 000
Depreciation of computer equipment 14 000
Provision for diminution in value of associates 1 000
Stocks of goods for resale 20 000
Trade accounts payable 130 000
Customer accounts receivable 14 500
Other receivables 114 000
Doubtful customer receivables 1500
Input VAT(on goods and services) 2000
Output VAT 2500
Provision for impairment of customer 480
receivables. 65 500
Bank 7 000
Cash in hand 1 404 980
Purchases 95 000
Rents 35 000
Studies and research 25 000
Advertising 300 000
Staff costs 14 500
Interest expense 1 910 000
Sales 1 000
Finance income
TOTAL 2 486 980 2 486 980

 Present the balance sheet and the income statement of this company.

The following information is communicated to you regarding the year 20N:

1- BLACKJACK is engaged in a legal dispute against a former employee. On the basis of

the relevant case law, a provision of 12 000 Euros was recorded at the end of 20N-1. The
Court of First Instance has just ordered BLACKJACK to pay damages of 20 000.
BLACKJACK has decided to appeal.

2- Here is the status of doubtful customer receivables as at 31.12.20N:

Client Amount of the customer Provision at 31.12.20N-1 Events arising during 20N
receivable (including taxes)
Valedepic 1200 0 The customer has not honoured
its debt. We think that only 60%
of the customer receivable
balance will be recovered.
Bingo 1500 480 The customer is now completely
insolvent.

3- Stock as at 31/12/20N amounts to 30 000 Euros; however a provision for impairment of

5 000 Euros is required.

4- The share portfolio of investments in associates was as follows on 31/12/20N-1:

 Shares Purchase price Provisions
A 2 000 1 000
B 4 000
As at 31/12/20N, the estimated value of shares in A is 3 000, and the average market
price of shares in B for the month of December 20N is 4 200.

5- A 10-year loan was entered into on 01/10/20N at a rate of interest of 6%. The interest is
payable once per year, on 30 September.

6- Tangible fixed assets:

- The computer equipment is depreciated using the reducing-balance tax method, which is assumed
to correspond to its economic depreciation. The depreciation charge for the year N is 16 100.
- Transport equipment is depreciated on a straight-line basis over 5 years.
- The item Property relates to commercial premises acquired on 1st January 20N. Component
accounting is not envisaged as the structural elements like the heating system have similar useful
economic lives estimated to be 20 years. The residual value is estimated to be zero and the level of
use is constant.

7- Software designed to manage billing, payroll and accounting is developed by the

company’s technical department: as at 31/12/20N-1, the accountant had identified 50 000
Euros of expenditure to be capitalised. During the year 20N, costs of 20 000 Euros
relating to testing and trials are recorded in expenses; similarly, expenses of 15 000 Euros
relating to technical documentation will be recorded in expenses. The software is
completed on 01/09/20N. Its useful economic life is reasonably predicted to be 5 years.

8- Land is estimated at 100 000 Euros.

 Draw up the intermediate balance sheet and income statement at 31/12/20N

reflecting the events listed in 1 to 6.

 Draw up the final balance sheet and income statement at 31/12/20N.

 To what extent does the balance sheet prepared previously reflect the value of
BLACKJACK?