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The performance of candidates in the March 2010 objective test questions section for the Professional Stage
Financial Accounting paper was good. Candidates performed well across all syllabus areas.
When practising OT items, care should always be taken to ensure that the principles underlying any
particular item are understood rather than rote learning the answer. In particular, candidates should ensure
that they read all items very carefully.
The following table summarises how well* candidates answered each syllabus content area.
Syllabus area
Number of questions
Well answered
Poorly answered
LO1
LO2
LO3
Total
15
13
*If 50% or more of the candidates gave the correct answer, then the question was classified as well
answered.
Brief comments on the two poorly answered questions, which covered LO1 (accounting and reporting
concepts) and LO2 (preparation of single company financial statements), are below (this paper was marked
under the new electronic marking system and no further information regarding responses was available):
Item 1
This item asked which roles are undertaken by the International Accounting Standards Committee
Foundation (IASCF). Candidates clearly do not understand the structure that surrounds and supports the
International Accounting Standards Board.
Item 2
This item, required candidates to identify which adjustments should be recognised as a prior period error.
Four short scenarios were provided which included a settled legal claim, a computational error, a fraud and a
revised tax liability.
Page 1 of 13
Question 1
Overall marks for this question can be analysed as follows:
Total: 18
General comments
This question is a typical question testing the preparation of an income statement and statement of financial
position from a trial balance. A number of adjustments were required, including the reversal of a provision,
an inventory valuation issue, an adjustment for the over provision of tax and deferred revenue.
(a)
Karonga plc Statement of financial position as at 31 December 2009
ASSETS
Non-current assets
Property, plant and equipment (W5)
943,435
Current assets
Inventories (W3)
Trade receivables (1,075,000 60,750 (W4))
Cash and cash equivalents
1,161,000
1,014,250
189,500
2,364,750
Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital
Retained earnings (28,090 + 227,895)
3,308,185
1,325,000
255,985
1,580,985
Non-current liabilities
Bank loan
Current liabilities
Trade and other payables (583,700 + 12,500(W1))
Taxation (W5)
1,025,300
596,200
105,700
701,900
3,308,185
Page 2 of 13
Revenue (W1)
6,196,400
Cost of sales (W2)
(3,506,501)
Gross profit
Administrative expenses (W2)
2,689,899
(2,315,434)
Operating profit
Finance costs
Profit before tax
Income tax expense (105,700 8,300)
374,465
(49,170)
325,295
(97,400)
227,895
Note: Marks will be awarded if items are included in a different line item in the income statement
provided that the heading used is appropriate.
W1 Revenue adjustment
6,208,900
(12,500)
6,196,400
W2 Expenses
Trial balance
Opening inventory
Less: closing inventory (W3)
Bad debt reversal (W4)
Depreciation charge buildings (12,710 (40% / 60%)
Depreciation charge plant & equipment
Provision reversal
Admin
expenses
2,324,000
(1,650)
5,084
(12,000)
2,315,434
Cost of
sales
3,553,100
1,093,800
(1,161,000)
7,626
12,975
3,506,501
W3 Inventory adjustment
Closing inventory
Net realisable value write down (20 - 15) x 500 items
1,163,500
(2,500)
1,161,000
W4 Bad debt
Opening allowance
Movement in year (balancing figure)
62,400
(1,650)
60,750
Page 3 of 13
Cost
985,500
103,800
Acc dep
88,970
31,210
12,975
12,710
1,089,300
145,865
943,435
As in previous sittings, candidates were clearly very well-prepared for this type of question. Almost all
candidates produced a well-laid out income statement and statement of financial position with all narrative
and sub-totals completed. Some candidates lost presentation marks for the statement of financial position
by not adding across numbers in brackets, failing to complete sub-totals or by having incomplete or
abbreviated narrative. On the income statement the most common presentational failing was to not
include a sub-total for profit from operations. However, overall presentation is improving with each sitting.
As ever, candidates should remember that this type of question requires financial statements to be in a
form suitable for publication.
Workings generally were set out clearly, with the standard cost matrix generally being produced.
Candidates must remember that if they do not provide clear workings for calculations and their final
answer is incorrect they risk gaining no marks for a working that may be worth 2 or 3 marks. Clear
workings, even if only bracketed will score partial marks for incorrect answers.
Most candidates were able to deal with the more straightforward adjustments such as the depreciation
charges, closing inventory and adjusting revenue for the payments made in advance, although the
corresponding entry in current liabilities was not always included.
Common errors included the treatment of the tax figures which seemed to cause some confusion as to
how to deal with the over provision from the previous year. Candidates commonly put the same figure in
the income statement and statement of financial position, although this was split between whether it was
the income tax charge or the liability.
Candidates often used the correct brought forward and carried forward figures for the specific bad debt
allowance but missed the additional allowance that needed making of 7,000. Other candidates correctly
calculated the carried forward figure and hence calculated that an adjustment of 1,650 was needed but
then either didnt recognise this in the income statement or added it to expenses rather than deducting it.
Only a few candidates carried the double entry through completely by deducting the full closing allowance
from trade receivables, 7,000 was a more common deduction.
The treatment of the legal provision also caused a few problems. Very few candidates realised that the
provision needed reversing. A mix of treatments were seen with candidates either including the provision
in the statement of financial position or providing for it in the current year even though it was a brought
forward balance.
Total possible marks
Maximum full marks
18
18
Page 4 of 13
Question 2
Overall marks for this question can be analysed as follows:
Total: 19
General comments
This question tested the preparation of a consolidated statement of cash flows and supporting note. A
subsidiary was disposed of during the year. Missing figures to be calculated included dividends paid (to the
group and to the non-controlling interest), interest paid, tax paid, depreciation and amortisation charge for the
year and proceeds from the issue of share capital following a bonus issue during the year.
Chitipa plc
Consolidated statement of cash flows for the year ended 31 December 2009
182,850
(167,900)
(38,950)
(24,000)
172,500
148,500
234,600
71,000
22,700
9,500
(7,500)
(46,500)
48,100
331,900
Page 5 of 13
Workings
(1) Interest paid
Cash ()
C/d
73,000
5,000
78,000
B/d
CIS
7,000
71,000
78,000
Cash ()
C/d
76,050
33,900
109,950
B/d
CIS (69,900 + 3,750)
36,300
73,650
109,950
(3) PPE
B/d
Additions
695,000
360,000
Disposal of sub
Deprecation charge ()
C/d
1,055,000
308,900
22,700
723,400
1,055,000
C/d
550,000
550,000
B/d
Bonus issue
Cash received ()
400,000
100,000
50,000
550,000
Bonus issue
C/d
50,000
215,000
265,000
B/d
Cash received ()
140,000
125,000
265,000
Dividends in SCE ()
Bonus issue
C/d
27,500
50,000
303,140
380,640
B/d
CIS
295,100
85,540
380,640
Cash ()
Disposal (306,100 x 20%)
C/d
11,850
61,220
448,260
521,330
B/d
CIS
490,800
30,530
521,330
Page 6 of 13
19
19
Page 7 of 13
Question 3
Overall marks for this question can be analysed as follows:
Total: 22
General comments
This question required the preparation of a consolidated statement of financial position. The group has an
associate, with the acquisition of a subsidiary during the year. A fair value adjustment in relation to a piece of
equipment, with depreciation adjustment, was required. Inter-company trading had taken place during the
year between the parent and associate company and a suspense account needed eliminating, which was
created on the acquisition of property, plant and equipment on deferred payment terms.
Rumphi plc
(a) Consolidated statement of financial position as at 31 December 2009
000
Assets
Non-current assets
Property, plant and equipment (W8)
Intangibles
Goodwill
Investment in associate (W7)
Current assets
Inventories
Trade and other receivables (120,840 + 945,600)
Cash and cash equivalents (72,600 + 189,500)
000
1,488,350
36,000
143,723
108,585
1,776,658
52,960
1,066,440
262,100
1,381,500
3,158,158
Total assets
Equity and liabilities
Equity attributable to Rumphi plc shareholders
Ordinary share capital
Retained earnings (W5)
Attributable to the equity holders of Rumphi plc
Non-controlling interest (W4)
930,000
802,840
1,732,840
348,948
2,081,788
Non-current liabilities
Deferred payment (W8)
Current liabilities
Trade and other payables (236,380 + 470,330)
Taxation (172,000 + 157,660)
Total equity and liabilities
40,000
706,710
329,660
1,036,370
3,158,158
Workings
(1) Group structure
Rumphi
Page 8 of 13
Share capital
Share premium account
Retained earnings
Goodwill on business
PPE FV uplift
FV depreciation adjustment (12,000 / 8yrs x 4/12)
31 Dec 2009
350,000
125,000
748,260
(71,600)
12,000
(500)
1,163,160
Acquisition
350,000
125,000
600,710
(71,600)
12,000
1,016,110
Post acq
147,550
(500)
147,050
900,000
(1,016,110)
304,833
188,723
(45,000)
143,723
Consideration transferred
Net assets at acquisition (W2)
Non-controlling interest at acquisition (1,016,110 (W2) x 30%)
Less: Impairment
348,948
751,320
(1,700)
102,935
(45,000)
13,285
(10,000)
(8,000)
802,840
Rumphi plc
Less:PURP (6,800 x 25%)
Luwa Ltd (147,050 (W2) x 70%)
Less: Impairment
Dedza Ltd ((145,695 92,555) x 25%))
Less: Impairments to date
Machine depreciation adjustment (W8)
(6) PURP
%
100
(60)
40
Sale price
Cost
Gross profit
13,600 x = 6,800
Dedza Ltd
34,000
(20,400)
13,600
107,000
13,285
(10,000)
(1,700)
108,585
800,300
644,550
12,000
(500)
40,000
(8,000)
1,488,350
Page 9 of 13
22
22
Page 10 of 13
Question 4
Overall marks for this question can be analysed as follows:
Total: 21
General comments
The first part of this question is a single topic question focusing on non-current assets, including aspects on
leasing. Candidates were required to prepare a finance lease calculation, assess a research and development
project and also carry out an impairment review. Parts b) and c) covered concepts issues, with a discussion on
substance over form and how the four qualitative characteristics related to lease transactions.
Blantyre Ltd
(a) Summary of costs included in income statement for the year ended 31 December 2009
Administrative expenses:
Depreciation (85,000 / 5yrs)
17,000
Amortisation (192,000 / 4yrs x 6/12 months)
24,000
Impairment of know-how (W3)
11,000
Research costs
70,000
Promotional advertising costs
15,000
Staff training costs
13,000
Finance costs (W1)
6,400
Statement of financial position as at 31 December 2009 (extracts)
Non-current assets
Property, plant and equipment (85,000 17,000)
Intangible assets (120,000 15,000 + 157,000)
68,000
262,000
Non-current liabilities
Finance lease liabilities (W1)
43,200
Current liabilities
Finance lease liabilities (62,400 43,200) (W1)
19,200
5,000
96,000
(85,000)
16,000
SOTD = (4 x 5) 2 = 10
B/fwd (85,000 5,000) = 80,000
Year ended
31 December 2009
31 December 2010
B/f
80,000
62,400
Interest
Payment
(24,000)
(24,000)
C/f
62,400
43,200
(3) Impairment
Carrying amount at 31 Dec 2009 (192,000 24,000)
Recoverable amount
Impairment
180,000
4,000
3,200
4,800
192,000
168,000
(157,000)
11,000
Page 11 of 13
In part (a) most candidates picked up a considerable number of marks for correct calculations, however many
lost marks for their statement of financial position extracts, as these were not properly presented.
The majority of candidates made a good attempt at the leasing table. The most common error was to not
deduct the deposit of 5,000 paid upfront. Candidates however often made a mistake in allocating the lease
liability between current and non-current, with a significant minority of candidates allocating the full 24,000
payment as current thereby not understanding that it should only be the capital element of this.
Common errors included calculating an incorrect sum-of-digits figure, taking the fair value of 152,000 as the
recoverable amount of the technical know-how rather than the estimated future cash flows of 157,000, not
excluding 13,000 staff training costs from the amount originally recognised for the technical know-how and
failing to compare the amortised carrying amount of the technical know-how to the recoverable amount.
Total possible marks
Maximum full marks
13
13
(b)
Substance over form is an accounting concept that should be applied to all accounting areas in accordance
with the IASB Framework. Leasing is an example of the application of this concept.
To recognise the substance of a transaction, its economic reality should be reflected rather than merely its
legal form.
IAS 17, Leases looks at the economic reality of a lease through the assessment of which party carries the risks
and rewards of ownership, rather than looking at legal ownership. If the effect of the lease transaction is such
that in commercial effect it is similar to borrowing the money and buying the asset outright, both IAS 17 and the
IASB Framework require the asset and in effect a related loan to be recognised.
Conversely, if the risks and rewards of ownership remain with the lessor, as they do in an operating lease, then
in effect the substance of the transaction is the same as its legal form and no asset or corresponding liability
should be recognised.
Answers to part (b) were adequate, with most candidates quoting a reasonable definition of substance over
form, recognising that the way finance leases are accounted for is an example of this concept and discussing
the transfer of risks and rewards. However, most candidates focused on the recognition of the asset with no
mention of a corresponding liability. Whilst some candidates discussed the fact that assets held under
operating leases are not capitalised because the risks and rewards are not transferred, it was rare to see the
point that for operating leases substance is the same as legal form.
Total possible marks
Maximum full marks
4
3
(c)
Qualitative characteristics and IAS 17.
Relevance
Information is relevant if it can influence the economic decisions of users. By showing the true substance of a
finance lease, a company is made to show the debt that it has in its financial statements. This may influence
potential lenders in the future. The commitments note in relation to operating leases and the liability note in
relation to finance leases will also provide potential lenders essential information on what the companys
commitments and obligations already are.
Reliability
Information is reliable if it is free from error or bias, complete and portrays events in a way that reflects their
reality.
Page 12 of 13
Answers to part (c) were often poor. Most marks were scored from brief general points about the four
qualitative characteristics. Reliability was probably the characteristic that was dealt with the best although
some candidates strayed into IAS 16 and discussed whether it was more reliable to record an asset at its
historic cost or its fair value. Points were often repeated and often placed under the wrong characteristic. With
regards to understandability, many cited very complex notes as an example of the application of this concept.
Total possible marks
Maximum full marks
8
5
Page 13 of 13