This question was a shortened form of a traditional preparation of a single company's financial statements requiring a schedule of adjustments to retained earnings figure (part (a)) and the preparation of a statement of financial position (part (b)) from a summarised trial balance (i.e. after a draft statement of profit or loss had been prepared).

Adjustments were required for: the issue of a loan note with an effective interest rate different to the nominal rate (due to issue costs and a redemption premium); a revaluation of land and buildings; depreciation and income and deferred tax calculations.

This question was generally well answered with most candidates showing a sound knowledge of preparing financial statements. Most of the errors by candidates were made within the adjustments:

The loan note issue costs were sometimes added to (rather than deducted from) the issue proceeds (with consequential effects on the calculation of interest charges and the loan carrying value in the statement of financial position). In this case only the initial error caused marks to be lost provided the correct method of calculation had been used.

Most did well with the revaluation, but some forgot to include the revalued amount of the land (in the carrying value of the assets) and some incorrectly depreciated the land. Some candidates that had calculated the carrying amount of the land and buildings (and the plant) did not adjust the retained earnings for the related depreciation in part (a); others incorrectly included the revaluation surplus as part of their calculation of retained earnings.

The deferred tax seem to cause the most problems; many correctly calculated the movement on deferred tax for the year at $1.9 million, but they then debited the whole of this to profit or loss (via the schedule of adjustments to retained earnings). However deferred tax of $2.4 million related to the revaluation of the land and buildings and should have been debited to the revaluation reserve leaving a credit of $500,000 ($2.4 million - $1.9 million) as the correct adjustment to retained earnings.

A significant minority of candidates did not prepare a schedule of adjustments to retained earnings (as required by part (a)) even where the relevant figures had been calculated as part of the preparation of the statement of financial position.

This left markers trying to allocate some credit for these items in the workings.

This was especially true of the depreciation and income tax charges. This is an example of poor examination technique on the part of those candidates.

Generally the answers to the statement of financial position were quite good and most errors related to previously mentioned issues.