Financial Acc May 2016 1st Year Paper

Financial Accounting
1st Year Examination

May 2016

Solutions & Marking Scheme & Examiners Comments

Page 1 of 34 Fin. Accounting S2016 (FA)

Financial Acc May 2016 1st Year Paper

NOTES TO USERS ABOUT THESE SOLUTIONS

The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide
guidance to students and their teachers regarding possible answers to questions in our examinations.

Although they are published by us, we do not necessarily endorse these solutions or agree with the views
expressed by their authors.

There are often many possible approaches to the solution of questions in professional examinations. It should
not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative
answers will be marked on their own merits.

This publication is intended to serve as an educational aid. For this reason, the published solutions will often be
significantly longer than would be expected of a candidate in an examination. This will be particularly the case
where discursive answers are involved.

This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians
Ireland.

Accounting Technicians Ireland, 2016.

Page 2 of 34 Fin. Accounting S2016 (FA)

Financial Acc May 2016 1st Year Paper

Accounting Technicians Ireland

First Year Examination: Summer 2016
Paper: FINANCIAL ACCOUNTING
Tuesday 10 May 2016
9.30 a.m. to 12.30 p.m.
INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

Candidates must indicate clearly whether they are answering the paper in accordance with the law and
practice of Northern Ireland or the Republic of Ireland.

In this examination paper the / symbol may be understood and used by candidates in Northern Ireland
to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro.

Answer ALL THREE questions in Section A and TWO of the three questions in Section B. If more than
TWO questions are answered in Section B, then only the first two questions, in the order filed, will be
corrected.

Candidates should allocate their time carefully.

All workings should be shown.

All figures should be labelled as appropriate e.g. s, s, units, etc.

Answers should be illustrated with examples, where appropriate.

Candidates may ignore any VAT implications to transactions throughout this paper unless the question
specifically instructs them to do otherwise.

Question 1 begins on Page 2 overleaf.

Note:
The terminology in use for 2016 exams will be in line with the FRS 102. In some cases this differs slightly
from the terminology previously used (IFRS). For the 2016 exams, students who use IFRS terminology
will not be penalised, however it is preferred that students use FRS 102 terminology throughout.

Page 3 of 34 Fin. Accounting S2016 (FA)

Financial Acc May 2016 1st Year Paper

SECTION A

Answer ALL THREE QUESTIONS (Compulsory) in this Section

QUESTION 1 (Compulsory)
The following trial balance was extracted from the books of B. Buster, a sole trader, on 31 December 2015:
/ /
Buildings 200,750
Accumulated depreciation on buildings 78,210
Fixtures and fittings 154,410
Accumulated depreciation on fixtures and fittings 12,150
Delivery Vans 74,100
Accumulated depreciation on delivery vans 34,520
Inventory as at 1/1/2015 13,120
Receivables and payables 74,320 41,970
Allowance for receivables 2,150
Bank and cash 7,130
PRSI/NIC liability 3,150
Accruals 780
Sales and purchases 312,400 613,410
Returns 2,170 4,520
Discounts 1,780 2,950
Delivery van fuel 3,250
Power 6,410
Telephone and internet 7,520
Business insurance 14,420
Rates and water charges 5,250
Wages and salaries 87,135
Employers PRSI/NIC 9,160
5% Long term bank loan 135,000
Long term loan interest 3,740
Repairs on delivery vans 1,520
Irrecoverable debts 1,250
Drawings 9,100
Accumulated profits/losses 23,170
Suspense account 225
Capital 22,470
981,805 981,805

The following information, which has not been accounted for above, is also available:

1. The inventory count as at 31 December 2015 showed the following information. Based on this
information the value of closing inventory to be incorporated into the financial statements must be
calculated.
Product Quantity Cost per unit Sales Price per unit Costs to Sell per unit
in Units / / /
A 915 2.10 4.75 0.35
B 3,110 0.90 0.85 -
C 5,100 1.45 1.50 0.15

2. On 30 June 2015 B. Buster paid /2,220 for his personal house insurance out of the business bank
account funds. No part of the house is used in the business.

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Financial Acc May 2016 1st Year Paper

3. Rates and water charges are /350 per month. On 31 December 2015 B. Buster paid an invoice for
rates and water charges for quarter 1, 2016.

4. B. Buster was overcharged for power during 2015. The balance in the suspense account relates to a
refund of these power expenses. The refund was debited to the bank and no other entry was made.

5. On 30 June 2015 delivery van B was sold. Delivery van B had been purchased for /31,000 and had
accumulated depreciation of /24,455 as at 1 January 2015. /11,000 was received and lodged to the
bank for the sale of delivery van B. None of the above entries were recorded in the books and records
of B. Buster.
(See additional information at point six for depreciation policy).

6. Allowance to be made for depreciation as follows:

Buildings 2% straight line
Fixtures and fittings 5% reducing balance
Delivery Vans 15% straight line
The depreciation policy is to charge depreciation on a monthly basis from the month of purchase to the
month of sale/disposal.

7. B. Buster believes that the allowance for receivables is appropriate and does not need to be adjusted.

You are required to prepare:

a) The Income Statement for the year ended 31 December 2015.

11 Marks
b) The Statement of Financial Position as at that date.
9 Marks
Total 20 Marks

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Financial Acc May 2016 1st Year Paper

QUESTION 2 (Compulsory)
You have been provided with Bank Statement and the Bank T Account for S Sam for the month ended 30 April
2016.

Bank T Account
/ /
07/04 Lodgement 51 3,650 01/04 Balance b/d 4,150
11/04 Lodgement 52 120 04/04 Cheque 1024 1,420
12/04 Standing Order 850 11/04 Cheque 1023 789
18/04 Lodgement 53 490 15/04 Cheque 1025 610
25/04 Lodgement 54 2,130 18/04 Cheque 1026 2,150
29/04 Lodgement 55 1,410 22/04 Standing Order 250
25/04 Cheque 1027 1,312
30/04 Balance c/d 4,856 29/04 Cheque 1028 850
29/04 Cheque 1029 1,975

13,506 13,506
01/05 Balance 4,856

S Sam
Bank Statement as at 30 April 2016
Date Details DR CR Balance
/ / /
01/04 Balance -2,150
01/04 Lodgement 50 150 -2,000
01/04 Cheque 1022 2,150 -4,150
05/04 Cheque 1024 1,240 -5,390
06/04 Quarterly charges 202 -5,592
07/04 Lodgement 51 3,560 -2,032
11/04 Lodgement 52 120 -1,912
12/04 Cheque 1023 789 -2,701
12/04 Credit transfer 103 -2,598
13/04 Standing Order 850 -3,448
14/04 ESB direct debit 741 -4,189
16/04 Cheque 1025 610 -4,799
18/04 Lodgement 53 940 -3,859
19/04 Cheque 1026 2,750 -6,609
23/04 Standing Order 250 -6,859
25/04 Cheque 1027 312 -7,171
25/04 Lodgement 54 2,130 -5,041
28/04 Annual interest 16 -5,025
29/04 Credit transfer 312 -4,713

(Guidance: if the amount for the same item in the bank account and the bank statement differs you should
assume that the bank statement is correct.)

You are required to prepare:

a) Reconcile the opening balance as per the cash book to the balance as per the bank statement.
3 Marks
b) Prepare the corrected Bank T Account for S Sam for the month ended 30 April 2016.
9 Marks
c) Prepare the Bank Reconciliation Statement as at 30 April 2016.
4 Marks
d) With the aid of examples from the Bank Statement and Bank T account above, outline two reasons as
to why it is important to prepare bank reconciliations regularly. Your answer should be presented in
report format.
4 Marks
Total 20 Marks

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Financial Acc May 2016 1st Year Paper

QUESTION 3 (Compulsory)
Answer ANY FOUR of the SIX Parts below

Part A
Prepare a note:
Describing the terms internal audit and external audit and
Outline two differences between the processes.
5 Marks

Part B
B. Blake is a sole trader. The trial balance extracted as at 29 February 2016 failed to agree. The credits
exceeded the debits by /9,210 and the difference was entered in a suspense account.

B. Blake undertook an investigation which yielded the following:

1. Purchases returns of /6,610 has been credited to the sales returns account as /6,450, the
corresponding entry was correctly treated;
2. A credit sale of /4,100 (excluding VAT) was recorded by debiting sales with /2,100 and crediting
receivables with /4,100. The rate of VAT tax is 15%.

You are required to:

i. Calculate the suspense account balance after adjusting for these errors.
2 Marks
ii. Prepare the journal entry for error 2.
3 Marks

Part C
D. Don has a term loan. The following details are available in relation to the term loan for the year ended 31
December 2015:

On 1 January 2015 D. Don owed the bank /75,000 by way of a term loan.
On 1 May 2015 D. Don borrowed an additional /20,000.
On 28 December 2015 D. Don repays /10,000 of the loan.
During the year ended 31 December 2015 the interest rate applicable on D. Dons loan was 5%.

You are required to:

i. Prepare the Loan T Account for D. Don for the year to 31 December 2015.
2 Marks
ii. In brief outline the difference between capital and revenue expenditure.
3 Marks

Part D
Outline your understanding of each of the error types below and state whether the error would leave the trial
balance in balance or not.

Error of omission
Error of transposition
Casting (arithmetical) error
Error of principle
Error of original entry

5 Marks

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Financial Acc May 2016 1st Year Paper

Part E

Outline your understanding of the terms relevance and reliability as they relate to financial accounting
information. Are these characteristics of accounting information ever in conflict?
5 Marks

Part F
The following information is available for a sole trader for a financial year:
Inventory at the start of the accounting period was /9,750.
During the period, the sole trader purchased goods for resale totalling /87,200.
Purchases returns amounted to /1,210
Carriage inwards costs totalled /930.
The closing inventory at the year-end was at /8,740.
Discounts received during the year amounted to /540.

The mark up of the business during the year is 50%.

You are required to:

Calculate the gross profit made by the sole trader during the financial year.

5 Marks
Total 20 Marks

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Financial Acc May 2016 1st Year Paper

SECTION B

Answer any TWO of the three questions in this Section

QUESTION 4

Part A
With the aid of a relevant example outline your understanding of the prudence concept.
3 Marks

Part B
Many businesses which sell goods and services on credit use credit limits.
i. Outline two advantages of selling goods on credit;
2 Marks
ii. Outline your understanding of the term credit limit.
2 Marks

Part C
The following information is available for sole trader G. Dungan for the year ended 31 December 2015:
/
Draft receivables debit balances as at 31 December 2015 632,150
Allowances for receivables as at 1 January 2015 48,500
Draft irrecoverable debts written off during the year 41,210
Irrecoverable debts previously written off recovered during the year 3,520

As at 31 December 2015 G. Dungan reviewed his receivables listing and decided the following (none of these
adjustments have been reflected in the draft figures above):
An additional /11,790 of debts should be written off as irrecoverable;
G. Dungan considers that /15,380 of debts should be made the subject of a specific allowance;
The general allowance for receivables should be set at 5% of the remaining receivable balances.

You are required to:

Prepare the following for G. Dungan for the year ended 31 December 2015:

i. The allowance for receivables T account;

5 Marks
ii. Irrecoverable debts expense T account;
2 Marks
iii. Outline your understanding of why businesses set up specific allowance for receivables;
2 Marks
iv. Prepare appropriate extracts from the Current Asset Section of the Statement of Financial
Position and the Expenses Section from the Income Statement.
4 Marks
Total 20 Marks

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Financial Acc May 2016 1st Year Paper

QUESTION 5
The assets and liabilities of Green Lawns Tennis Club as at 1 April 2015 and the 31 March 2016 include the
following:
1 April 2015 31 March 2016
/ /
Courts and clubhouse 324,410 324,410
Fixtures and fittings cost 21,110 ?
Fixtures and fittings accumulated depreciation 4,150 ?
5% long term loan 175,000 ?
Bar inventory 18,410 20,700
Bar payables 13,540 14,740
Insurance prepaid 3,150 2,750
Annual subscriptions in arrears 47,960 51,330
Annual subscriptions in advance 3,750 4,970
Bar wages due 2,875 3,150
Life subscriptions fund 120,000 ?

The bank T account is as follows:

Bank Account
/ /
Members subscriptions (all annual) 94,410 Balance b/d (1/4/2015) 32,100
Bank interest 107 Advertising for dinner dance 515
Bar receipts 121,150 General repairs & expenses 29,140
Annual dinner dance ticket sales 17,630 Payments to bar payables 51,760
Fees from non-members 9,450 Payments for bar wages 45,350
Loan interest 7,000
Power & Internet 6,190
Repayment of loan principle (31/3/2016) 10,500
Fixtures and fittings 3,150
Insurance 18,120
Catering for dinner dancer 4,175
General expenses for dinner dance 2,220
Bank charges 360
Balance c/d 32,167
242,747 242,747
Balance b/d (1/4/16) 32,167

Additional Information
The life subscription fund relates to a once off deal that was offered to members in 2013 to help part
finance an extension to the clubhouse. The value of the life membership fund originally was
/150,000 and is being credited to the income and expenditure account over 10 years.
Fixtures and fittings are being depreciated at 10% p.a. on the straight line method. During the financial
year /3,150 of additional fixtures and fittings were purchased. The clubs depreciation policy is to
charge a full year of depreciation in the year of purchase and none in the year of sale. The courts and
clubhouse are not depreciated.

You are required to:

i. Calculate the accumulated fund as at 1 April 2015.
3 Marks
ii. Prepare the Bar Trading account for the year ended 31 March 2016.
5 Marks
iii. Calculate the profit/loss of the dinner dance.
2 Marks
iv. Prepare the Income and Expenditure Account for the year ended 31 March 2016
10 Marks
Total 20 Marks

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Financial Acc May 2016 1st Year Paper

QUESTION 6

Part A
The following books of prime entry are available for a sole trader for the month of March 2016.

Purchases Day Book

Date Analysis Total Net VAT
/ / /
03-March Goods for resale 6,050 5,500 550
19-March Goods for resale 4,125 3,750 375
10,175 9,250 925

Purchase Returns Day Book

Date Analysis Total Net VAT
/ / /
11-March Goods for resale 1,298 1,180 118
1,298 1,180 118

Sales Day Book

Date Analysis Total Net VAT
/ / /
9-March Sale of goods 1,375 1,250 125
24-March Sale of goods 21,890 19,900 1,990
23,265 21,150 2,115

Sales Returns Day Book

Date Analysis Total Net VAT
/ / /
28-March Sale of goods 2,365 2,150 215
2,365 2,150 215

Cheque Payments Book

Date Analysis Total VAT Payables NCA
/ / / /
7-March Payables 15,250 - 15,250
19-March VAT 6,410 6,410
28-March Fixtures & Fittings 5,420 5,420
27,080 6,410 15,250 5,420

Cash Receipts Book

Date Analysis Total Receivables
/ /
16-March Receivables 18,210 18,210
18,210 18,210

You are required to:

Post the books of prime entry above to the relevant T accounts and balance these T accounts. (Guidance: please
note that some closing balances may appear unusual as you have not been given opening balances above)
8 Marks

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Financial Acc May 2016 1st Year Paper

QUESTION 6 (Contd)

Part B
The following information is available for sole trader C. Connor for the year ended 31 December 2015:

/
Opening receivables debit balances 101,740
Opening receivables credit balances 2,320
Sales (90% credit, 10% cash) 1,074,600
Sales returns (90% credit, 10% cash) 21,110
Cash received from customers (92% from credit customers) 995,600
Irrecoverable debts 16,150
Irrecoverable debts previously written off recovered (these 1,170
funds have been included in cash receipts above)
Opening allowance for receivables 17,620
Contra entry with balances on payables ledger 4,320
Interest charged on over-due accounts 930
Discount allowed 1,785
Closing receivables credit balances 1,510

Included in the cash received from credit customers above was a cheque for /3,125 which was dishonoured.
C. Connor does not believe that this debt is irrecoverable.

Requirement:
With the aid of a receivables control account, calculate the closing receivables figure for C. Connor as at 31
December 2015.
9 Marks

Part C
Outline any two of the purposes of Control Accounts within the financial accounting process.
3 Marks
Total 20 Marks

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 Financial Acc May 2016 1st Year Paper

1st Year Examination: May 2016

Financial Accounting

Suggested Solutions
and
Examiners Comments

Students please note: These are suggested solutions only; alternative answers may also be deemed to be
correct and will be marked on their own merits.

Statistical Analysis By Question

Question No. 1 2 3 4 5 6
Average Mark (%) 68% 59% 53% 42% 61% 59%
Nos. Attempting 1190 1127 1179 716 714 817

Statistical Analysis - Overall

Pass Rate 65%
Average Mark 56%
Range of Marks Nos. of Students
0-39 298
40-49 124
50-59 216
60-69 211
70 and over 347
Total No. Sitting Exam 1196
Total Absent 290
Total Approved Absent 37
Total No. Applied for Exam 1523

General Comments:

GENERAL COMMENTS ON THE PAPER OVERALL:

Weak scripts were characterised by two main issues:

1.) Not all questions answered

Often but not always this was a result of candidates spending too much time on Q1 or
answering all 6 parts of Q3 despite the instructions clearly stating to only answer 4 parts.
2.) Poor knowledge meaning parts of questions were left blank in particular question 2.
3.) Failed to show workings for questions, particularly question 1.
4.) Concentration on theory parts of questions with little or no attempt at calculations.
5.) Performance in Q2 & Q4 was very disappointing.
Candidates should be reminded of the need to revise the entire syllabus in preparation for their exam
and to follow the instructions given by the examiner on the paper.

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 Financial Acc May 2016 1st Year Paper

Examiners Comments on Question One

Generally this question was well answered.

Candidates struggled in the following areas:
Calculation of the closing inventory. Candidates are valuing all inventory items at cost or
NRV as opposed to taking inventory items by category.
Failed to adjust business insurance in the Statement of Profit and Loss.
Failed to account for the interest accrual.
Calculation of the profit on the sale of the TFA. Many failed to even attempt this calculation.
Calculation of the depreciation on delivery vans.
Also of concern was that a number of candidates who calculated depreciation for the year
but failed to include it in the Statement of Profit and Loss indicating that they were focused
solely on the impact on accumulated depreciation.
Treated the accumulated profit/loss reserve as a loss in error.
Included allowance for receivables as an expense.

Solution One
B. Buster
Statement of Profit and loss for the year ended 31 December 2015 0.25 Marks

Ref to / / / Total
Workings Marks
Allocated
Sales 613,410 0.5
Sales returns (2,170) 0.5
Net sales 611,240

Cost of sales
Opening inventory 13,120 0.25
Purchases 312,400 0.5
Purchases returns (4,520) 0.5
307,880
321,000
Less closing inventory 1 (11,450) 0.25
Cost of sales (309,550)
Gross Profit 301,690
Discount received 2,950 0.5

Less Expenses
Depreciation buildings 6 4,015 0.75
Depreciation fixtures and fittings 6 7,113 0.75
Depreciation delivery vans 6 8,790 1
Business insurance 2 12,200 0.5
Rates and water charges 3 4,200 0.5
Delivery van fuel 3,250 0.25
Delivery van repairs 1,520 0.25
Wages and salaries 87,135 0.25
Employers PRSI/NIC Costs 9,160 0.5
Discount allowed 1,780 0.5
Telephone and internet 7,520 0.25
Irrecoverable debts 1,250 0.25
Interest 7 6,750 0.5
Profit on sale of TFA 5 (6,780) 1
Power 4 6,185 0.5
Total expenses (154,088)

Operating profit 150,552

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Financial Acc May 2016 1st Year Paper

Solution One (Contd)

B. Buster
Statement of financial position as at 31 December 2015 0.25 Marks

Non-current assets Ref to / / / Total

Workings Marks
Allocated
Buildings 200,750 (82,225) 118,525
Fixtures and fittings 154,410 (19,263) 135,147
Delivery vans 5&6 43,100 (16,530) 26,570 0.5
280,242 0.5

Current assets
Closing inventory 1 11,450 1.5
Receivables 74,320 0.25
Closing allowance (2,150) 72,170 0.25
Prepayments 3 1,050 0.5
Cash and bank 5 3,870 1
88,540

Total assets 368,782

Equity and Liabilities

Equity
Capital 22,470 0.5
Accumulated profit/loss 23,170 0.5
Profits for 2015 150,552 0.5
Accumulated profits 196,192
Drawings 2 (11,320) 0.75
184,872

Non-current liabilities 135,000 0.5

Current liabilities
Payables 41,970 0.5
Accruals 3,790 0.5
PRSI/NIC liability 3,150 0.5
48,910

Total Equity and Liabilities 368,782

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Financial Acc May 2016 1st Year Paper

Solution One (Contd)

Working 1
Product Quantity Lower of cost & NRV Total
per unit
in Units / /
A 915 2.10 1,921.5
B 3,110 0.85 2,643.5
C 5,100 1.35 6,885
11,450

Workings 2
/
Drawings as per TB 9,100
Drawings of insurance 2,220
Restated drawings 11,320

/
Insurance as per TB 14,420
Drawings (2,220)
Restated insurance 12,200

Workings 3
Quarter 1 is January to March 2016 = 350*3 = 1,050 of a prepayment
/
Rates and water charges as per TB 5,250
Prepayment (1,050)
Restated rates and water charges 4,200

Workings 4
/
Power as per TB 6,410
Refund of charges (225)
6,185

Workings 5
/
Delivery Van B purchase price 31,000
Delivery Van B depreciation 6 months 2015 (2,325)
Delivery Van B accumulated depreciation 1/1/15 (24,455)
NRV 4,220
Sold for 11,000
Profit 6,780

/
Bank as per TB (7,130)
Delivery van receipts 11,000
Restated bank 3,870

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Financial Acc May 2016 1st Year Paper

Solution One (Contd)

Workings 6
/
Buildings 200,750
Depreciation 2%
4,015

/
Delivery van B 31,000
Depreciation 15%
Annual 4,650
6 Months 2,325

/
Remaining delivery vans 43,100
Depreciation 15%
Annual 6,465

Total depreciation 6,465 + 2,325 = 8,790

/
Accumulated depreciation delivery vans 34,520
Accumulated on delivery van sold (24,455)
Depreciation 6,465
16,530

/
Fixtures and fittings 154,410
Accumulated depreciation (12,150)
142,260
Deprecation 5%
7,113

Workings 7
/
Loan 135,000
5%
Annual interest 6,750
Paid (3,740)
Accrual 3,010

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 Financial Acc May 2016 1st Year Paper

Examiners Comments on Question Two

This question was very poorly answered and for many candidates who failed a poor performance in
this question was a significant factor. There appears to be evidence of question spotting here by many
candidates. Bank reconciliation statements are generally very well answered by candidates. However,
this question type has not been asked as a full question in several sittings and it appears that many
candidates did not prepare/omitted this section of the syllabus.

Some significant areas of concern were as follows:
Many candidates could not make a meaningful effort for this question
Part A was very challenging, many candidates appeared not to know how to attempt this part
For Part B many candidates prepared the cashbook from scratch as opposed to the corrected
cash book as requested in the examination. Mark were no deducted for this however this
was an example of poor examination strategy as preparing the cashbook from scratch was
time consuming.
Part D some candidates are not preparing their answer in the format requested.

Where this question was answered well candidates were generally on their way to passing the exam.

Solution Two

Part A
Total Marks
/ Allocated
Opening balance as per bank balance (2,150) 1

Add outstanding Lodgement 150 1

Less O/S Cheques

1022 (2,150) 1
Balance as per Bank T Account (4,150)
3 Marks

Part B
Corrected Bank T Account

Part B
Corrected Bank T Account
Total / / Total
Marks Marks
Allocated Allocated
1 Error: cheque 1024 180 01/05 Balance b/d 4,856 0.5
0.5 Credit transfer 103 Charges 202 0.5
1 Lodgement 53 450 Error: Lodgement 51 90 1
1 Error: cheque 1027 1,000 Standing order error 1,700 1
0.5 Interest 16 ESB - DD 741 0.5
0.5 Credit transfer 312 Cheque 1026 600 1
Corrected balance 6,128

8,189 8,189
01/05 Corrected balance 6,128
9 Marks

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Financial Acc May 2016 1st Year Paper

Part C

Bank Reconciliation as at 30 April 2016 0.5 Marks

Total Marks
/ Allocated
Balance per bank (4,713) 1

Add outstanding Lodgement 55 1,410 1

Less O/S Cheques

1028 850 0.5
1029 1,975 0.5
(2,825)
Balance (6,128) 0.5
4 Marks

0.5 Mark for/6,128 is for having the bank rec and cashbook account reconcile to the same number.

Part D
To: Whom it May Concern
From: An Accounting Technician
Subject: Importance of Preparing Bank Reconciliations
Date: May 2016

I have been asked to prepare a report outlining the importance of regular preparation of bank
reconciliations. It is important for all businesses to prepare regular bank reconciliations for the
following reasons:

Preparation of regular bank reconciliations will help to identify errors, such errors may have
been made either by the bank, the sole trader or both. For example, a business may have
omitted to post receipts from customers. In the above example there were credit transfers
which the business would not be aware of until preparing the bank reconciliation statement.
Preparation of bank reconciliation will also highlight items such as bank interest, charges,
standing orders, direct debits and dishonoured cheques. These will be known by the bank but
not identified by a business until it receives the bank statement and prepares the bank
reconciliation. Bank charges of 202 would not have been known to the sole trader until the
bank reconciliation was prepared.

Should you have any further queries please feel free to contact me.
An Accountant Technician
1 Mark for format, 1 Mark for each reason and 0.5 Mark each example

4 Marks
Total 20 Marks

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 Financial Acc May 2016 1st Year Paper

Examiners Comments on Question Three

Part A
This question part was not well answered. Some candidates described management accounting when
describing internal audit. The explanation of internal audit in the main was very vague and candidates
struggled to score marks with many candidates simply talking around internal audit being an internal

function. External audit was better explained. Many candidates did not include the differences
between internal and external audit.

Part B
Not well answered. The suspense account was completed incorrectly by many candidates. Candidates
also struggled to provide the correct journal entry.

Part C
A popular question part that was well answered. Many candidates included interest in the loan T
account in error. Part ii was well answered though most candidates failed to realise that the loan was
a capital item and the interest a revenue item from part I of the question.

Part D
Answers were mixed with some candidates having prepared this well. Some explained the error type
and then omitted to state whether it left the trial balance in balance or not.

Part E
Very unpopular question which was in the main poorly answered by those that attempted it.

Part F
Well answered although a number of candidates made no attempt to calculate the mark up or simply
doubled the cost of sales which indicated they did not understand the mark up of 50% instruction.
Perhaps more worryingly some students labelled the cost of sales as gross profit which indicated their
grasp of the basics of this subject is not what it should be.

Solution Three
Part A
External Audit
An external audit is where an independent accountant, an auditor, examines the books and records of the
company with the objective of forming an opinion and prepares an audit report that must be included in the
financial statements. If the auditors are satisfied that the books and financial statements of the company have
been prepared in line with the relevant statutory requirements and professional standards, the audit report will
state that the financial statements of the company gives a true and fair view of the state of affairs of the
company at the end of the accounting year. The audit report gives shareholders an impression as to the extent to
which they can rely upon the financial statements prepared and presented to them by the directors.
1.5 Marks

Internal Audit
Large companies in addition to external auditors tend to have an internal audit department. This is because in
order to run a company effectively and meet their legal responsibilities, directors need assurance in a number of
areas in addition to the accuracy of their published financial statements (external audit). Internal audits help
directors confirm that the internal controls and procedures of entities are adequate and working appropriately. It
is becoming more expected for large companies to have internal auditors.
1.5 Marks

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Financial Acc May 2016 1st Year Paper

Differences
External auditors are appointed by shareholders and answer to them. Internal auditors are employed by
and answer to the companys management.
Internal auditors have a deeper focus when compared to external auditors. For example an internal
auditor will scrutinise the companys accounting procedures.
There is a legal requirement for most companies to conduct an annual external audit. Internal audit
functions are generally only required by PLCs.
Any other relevant difference will be accepted for full marks

2 Marks

Part B (i)

Suspense Account
Total / / Total Marks
Marks Allocated
Allocated
0.5 Suspense account balance 9,210 Error 2 2,000 0.75
0.75 Error 1 160 Adjusted suspense account 7,370
balance

9,370 9,370

2 Marks

(ii)
Debit Credit Total
Marks
Allocated
/ /
Dr Receivables 4,100 0.5
Cr Sales 2,100 0.5
Cr Suspense 2,000 0.25

Dr Receivables 4,715 0.5

Cr Sales 4,100 0.5
Cr VAT 615 0.5
Being the correction of error. Credit sales incorrectly posted. 0.25
3 Marks

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Financial Acc May 2016 1st Year Paper

Part C
(i)
Loan Account
Total / / Total
Marks Marks
Allocated Allocated
0.5 Loan repayment 10,000 1/1/15 Opening Balance 75,000 0.5
0.5 Balance 85,000 1/5/15 Additional Loan 20,000 0.5
95,000 95,000
1/1/16 Balance 85,000

2 Marks

(ii)

Capital Expenditure: this is expenditure on goods that will last for more than one year and are not bought for
resale but to be used by the business to help generate sales. Examples include premises, equipment, delivery
vans etc. That is capital expenditure is expenditure on non-current assets or the repayment of loans.

Revenue (Current) Expenditure: this is expenditure on goods that will be used up within one year and are not
bought for resale. They relate to the day-to-day running of the business and are incurred in the for the purpose
of the trade of the business. Examples include wages, rent, rates, telephone etc.
3 Marks

Part D

Error of omission is where a transaction is completely omitted from the books. The trial balance will remain in
balance.
Error of transposition this is where there is a debit and a credit entry but they are not the same. The trial
balance will not balance.
Casting error this is where a numerical error has occurred in the balancing process. The trial balance will not
balance.
Error of principle is where an item is entered into the wrong class of accounts. The trial balance will remain in
balance.
Error of original entry is where the original figure used to make the double entry is incorrect. The trial
balance will remain in balance.
5 Marks

Part E

Relevance
Information is relevant if it has the ability to influence an economic decision of users and is provided in time to
influence those decisions. To be useful information must be provided within the time period in which is has the
ability to influence the economic decisions of users.
1.5 Marks
Reliable
Financial accounting information is generally taken as reliable if: it can be depended upon to represent a true
and fair view, is free from bias, is free from material error, is complete and under conditions of uncertainty has
been prepared in line with the prudence concept.
1.5 Marks

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Financial Acc May 2016 1st Year Paper

Relevance in conflict with Reliability

The information that is the most relevant many not necessarily be the most reliable and vice versa. For example
the historical cost versus current cost account. While the historical cost of a building is the most reliable it may
not be the most relevant if the building was purchased several years ago. However while the current value of
the building may be the most relevant for inclusion in financial statements it may not be the most reliable given
that the current value will, in all probability, come from a valuation of the property which ultimately is based on
the opinion of a property valuer.

The general rule here is that the information that is the most relevant or whichever information is reliable
should be included in the financial statements. Thus unreliable information should never be included.
2 marks
5 Marks

Part F

/ / / Total
Marks
Allocated
Sales 131,895

Cost of sales
Opening inventory 9,750 0.5
Purchases 87,200 0.5
Purchases returns (1,210) 85,990 0.5
Carriage inwards 930 0.5
96,670
Less closing inventory (8,740) 0.5
Cost of sales (100%) (87,930)
Gross Profit (50% mark up on cost) 43,965
Discount received 540
5 Marks
0.5 Mark for leaving out discount received from the calculation
2 Marks for the process and procedure to calculate gross profit.

Total 20 Marks

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 Financial Acc May 2016 1st Year Paper

Examiners Comments on Question Four

Part A
Solutions to the prudence theory question were mixed.

Part B
Selling on credit and credit limit were both reasonably well explained, though some candidates for
credit limit stated that it was the amount of time customers before paying in error.

Part C
(i)
The calculation of the allowance for receivables was mixed. Some candidates re-wrote off
irrecoverable debts previously written off in error while others were not aware of how to handle the
specific allowance.

(ii)
Specific allowances theory was not well explained with a lot of candidates explaining allowances in
general and not distinguishing between a specific and general allowance.

There were easy marks for the extracts which were often picked up by the students who attempted it.

A significant number of the students that attempted this question did not answer all parts of the
question.

Solution Four

Part A
Prudence
In conditions of uncertainty, a cautious approach should be taken, so that gains and assets are not overstated
and losses and liabilities are not understated. This means that:

Sales and profit should not be included in the statement of profit and loss until the cash has been
received or that there is reasonable certainty that the cash maybe received.
In contrast, losses should be recognised in the statement of profit and loss as soon as they are
foreseen and considered reasonably certain.

An example of prudence can be seen in the allowance for receivables. As at the year end the entity does not
know which receivables will not be able to pay the balances due. If it did these balances would need to be
written off as irrecoverable debts. However based on past experience and knowledge of the economy the entity
knows that in all probability not all receivables will be able to discharge the balances owed. The entity therefore
sets up an allowance for receivables to reflect balances that the entity expects not to receive and this is deducted
from receivables in the statement of financial position. Therefore the figure reported for receivables can be
thought of as the funds the entity expects to receive as opposed to the total balances owed as at the year end.
Prudence should only be used under conditions of uncertainty. Where there is no uncertainty there is no
justification to use prudence.

3 Marks (2 for explanation and 1 Mark for example)

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Part B

(i) Advantages of selling goods on credit

The business customer base may increase (increased sales)

It helps improve the business cash flow by increasing sales, if the cash is collected on time from
receivables

It helps build a relationship with the customer in the long run.

(Any two of these advantages or other relevant advantages)

2 Marks

(ii) Credit Limit

It is normal practice for businesses to set credit limits for individual customers. A credit limit is the max
amount of credit that the business is willing to offer to a customer and credit limits will vary from customer to
customer. If a customer uses a credit limit wisely the credit limit can be extended over time, giving the
receivable access to interest free credit. It is the function of the credit control department to set credit limits.
The major function of credit limits is that they should help to reduce the risk of irrecoverable debts for a
business.

2 Marks

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 Financial Acc May 2016 1st Year Paper

Solution Four (Contd)

Part C

/ Total
Marks
Allocated
Draft receivables debit balances as at 31 December 2015 632,150 0.5
Additional irrecoverable debt (11,790) 1
Restated receivables 620,360

General Allowance workings

/
Restated receivables 620,360
Specific allowances (15,380) 0.75
604,980
General Allowance 5%
Closing general allowance 30,249 0.5
Specific allowance 15,380 0.75
Total closing allowance 45,629
Opening allowance for receivables (48,500) 0.5
Decrease in allowance for receivables 2,871

(i)

Allowance for receivables T Account

Total Details / Details / Total
Marks Marks
Allocated Allocated

4.5 Statement of P&L 2,871 Balance b/d 48,500 0.5

Balance c/d 45,629
48,500 48,500
Balance c/d 45,629

0.5 Mark for balancing the account

4.5 Marks for /2.871 broken down above

(ii)
Irrecoverable Debt Expenses T Account
Total Details / Details / Total
Marks Marks
Allocated Allocated

0.75 Receivables 41,210 Allowance for rec. 2,871 0.5

0.75 Receivables 11,790
Statement of P&L 50,129
53,000 53,000

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Financial Acc May 2016 1st Year Paper

(iii)
A specific allowance is set up when a business has a specific concern that a debt owed by a receivable may not
be recoverable. The business may have knowledge that the receivable is having financial difficulty, the debt
may have been owed for a long period of time or the receivable may be disputing the balance owed. Therefore a
key difference between the general allowance and the specific allowance for receivables is that the specific
allowance will be tied to a list of specific receivables as opposed to the general population of receivables.
2 Marks

Solution Four (Contd)

(iv)
D. Dungan
Statement of Profit and Loss for the year ended 31 December 2015 (Extract)
Total
Marks
allocated
Less Expenses
Irrecoverable debts 50,129 1
Irrecoverable debts recovered (3,520) 1
(Irrecoverable debts and movement in the allowance for receivables can be shown separately).

D. Dungan
Statement of financial position as at 31 December 2015 (Extract)

Current assets Total

Marks
allocated
Receivables 620,360 1
Allowances for receivables (45,629) 1
574,731
4 Marks
Total: 20 Marks

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 Financial Acc May 2016 1st Year Paper

Examiners Comments on Question Five

In general, this question was well answered and a significant number of students scored heavily.
Where challenges did arise was around the treatment of insurance, the calculation of bar wages and
bar purchases and the release of one year of the life subscription.

Some students incorrectly calculated the value of accumulated funds at 31 March 2016 rather than the
opening accumulated funds at 1 April 2015 as was required.


Solution Five

Part i
1/4/2015 1/4/2015 Total
Marks
Allocated
/ /
Assets
Court and clubhouses 324,410 0.25
Fixtures and fittings 21,110 0.25
Fixtures and fittings (accumulated depreciation) (4,150) 0.25
Bar inventory 18,410 0.25
Subscriptions in arrears 47,960 0.25
Insurance prepaid 3,150 0.25
410,890
Liabilities
Bar payables 13,540 0.25
Subscriptions in advance 3,750 0.25
Bar wages due 2,875 0.25
5% long term loan 175,000 0.25
Bank 32,100 0.25
Life subscriptions fund 120,000 0.25
(347,265)
Opening Accumulated Fund 63,625
3 Marks

Part ii
Green Lawns Tennis Club
Bar Trading Account for the year ended 31 March 2016. 0.5 Mark
/ / Total
Marks
Allocated
Sales 121,150 0.5

Cost of sales
Opening inventory 18,410 0.5
Purchases 52,960 1.5
71,370
Less closing inventory (20,700) 0.5
Cost of sales (50,670)
Gross Profit 70,480
Less expenses
Bar wages (45,625) 1.5
Bar profit 24,855
5 Marks

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Working 1
Marks above broken down as follows:
Bar Payables A/C
Total / /Total
Marks Marks
Allocated Allocated
0.5 Bank 51,760 Balance b/d 13,540 0.5
0.5 Balance c/d 14,740 Bar Trading Account Purchases 52,960
66,500 66,500
Balance b/d 14,740

Solution Five (Contd)

Working 2
Marks above broken down as follows:
Wages A/C
Total / / Total
Marks Marks
Allocated Allocated
0.5 Bank 45,350 Balance b/d 2,875 0.5
0.5 Balance c/d 3,150 Bar Trading Account 45,625
48,500 48,500
Balance b/d 3,150

Part iii
Dinner Dance / Total
Marks
Allocated
Proceeds 17,630 0.5
Advertising (515) 0.5
Catering for dinner dancer (4,175) 0.5
General expenses for dinner dance (2,220) 0.5
10,720
2 Marks

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Financial Acc May 2016 1st Year Paper

Part iv
Green Lawns Tennis Club
Statement of Profit and Loss for the year to 31 March 2016 0.5 Mark
/ / Total
Marks
Allocated
Income
Subscriptions 96,560 2.5
Release of one year life subscriptions 15,000 1
Profit on bar 24,855 0.5
Interest received 107 0.5
Proceeds of dinner dance 10,720 0.5
Fees from non-members 9,450 0.5
156,692
Expenditure
Power and internet 6,190 0.25
Bank charges 360 0.25
Insurance 18,520 1.5
Loan interest 8,750 1
General repairs and maintenance 29,140 0.5
Depreciation fixtures and fittings 2,426 0.5
(65,386)
Excess of income over expenses 91,306
10 Marks
Total: 20 Marks
0.25 Mark if no accrual for loan interest is calculated.

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Solution Five (Contd)

Workings
Marks above broken down as follows:

Total Details / Details / Total

Marks Marks
Allocated Allocated

0.5 Opening subs in arrears 47,960 Opening subs in advance 3,750 0.5
I/E value for subs 96,560 Cash received for subs 94,410 0.5
0.5 Closing subs in advance 4,970 Closing subs in arrears 51,330 0.5
149,490 149,490
Opening subs in arrears 51,330 Opening subs in advance 4,970

Insurance Account
Total Details / Details / Total
Marks Marks
Allocated Allocated
0.5 Opening balance 3,150 Income and Exp A/C 18,520
0.5 Bank 18,120 Closing balance 2,750 0.5

21,270 21,270
Opening balance 2,750

Loan Interest Working

/
Loan principle 175,000
Interest at 4% 5%
8,750
Loan interest paid 7,000
Loan interest to be accrued 1,750

Depreciation on fixtures and fittings

/
Fixtures and fittings 21,110
Depreciation 10%
2,111

/
Fixtures and fittings additions 3,150
Depreciation 10%
Annual 315

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 Financial Acc May 2016 1st Year Paper

Examiners Comments on Question Six

This question was also particularly well answered by those who attempted it.
Some candidates were not familiar with how to treat the VAT element when posting to the T
Accounts.

The control account part of the question was again generally well answered.

Solution 6

Part A
Payables A/C
/ /
Purchases returns 1,298 Purchases book 10,175
Cheque payments 15,250 Balance c/d 6,373

16,548 16,548
Balance b/d 6,373

1.5 Marks (0.5 per entry)

Receivables A/C
/ /
Sales book 23,265 Sales returns book 2,365
Cash receipts book 18,210
Balance c/d 2,690
23,265 23,265
Balance b/d 2,690
1.5 Marks (0.5 per entry)

VAT
/ /
Purchases book 925 Purchases returns 118
Sales returns 215 Sales book 2,115
Cheque payments 6,410 Balance c/d 5,317

7,550 7,550
Balance b/d 5,317
2.5 Marks (0.5 per entry)

Fixtures and Fittings Account

/ /
Cheque payments 5,420

0.25 Mark (0.25 per entry)

Bank
/ /
Cash receipts book 18,210 Cheque payments 27,080
Balance b/d 8,870
27,080 27,080
Balance c/d 8,870
0.5 Mark (0.25 per entry)

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Financial Acc May 2016 1st Year Paper

Sales Returns Account

/ /
Receivables 2,150

0.25 Mark (0.25 per entry)

Purchases Returns Account

/ /
Payables 1,180

0.25 Marks (0.25 per entry)

Sales Account
/ /
Sales book 21,150

0.25 Marks (0.25 per entry)

Purchases Account
/ /
Purchases book 9,250

8 Marks
0.25 Mark (0.25 per entry)
0.75 Mark to be awarded based on balancing T accounts & general presentation. Not every T account
needs to be balance. But students must have shown with at least one T account that they
know how to balance the

Part B

Receivables Control Account

Total Marks / / Total
Allocated Marks
Allocated
0.5 Balance b/d. 101,740 Balance b/d 2,320 0.5
1 Credit Sales 967,140 Sales returns 18,999 1
1 Irrecoverable debts, recovered 1,170 Cash receipts 915,952 1
0.5 Interest charged 930 Irrecoverable debts 16,150 0.5
0.5 Dishonoured cheques 3,125 Contra 4,320 0.5
Discounts allowed 1,785 0.5
1 Balance c/d 1,510 Balance c/d 116,089
1,075,615 1,075,615
Balance b/d 116,089 Balance b/d 1,510
9 Marks

0.5 Marks for leaving out opening allowance for receivables

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Part C
Any two of the following purposes of control accounts
The function on control accounts is to keep the nominal ledger free of details and yet have the
receivables and payables balances for the Trial Balance.
They are a means of proving the accuracy of the ledger accounts of receivables and payables. Control
accounts help to locate errors and mistakes within the nominal ledger system
Control accounts can help calculate missing figures in the case where an business had not maintained
complete records.
Control accounts tend to act as an internal check as the individual who prepares the control account is
not normally the person who posts entries to the personal ledgers.

Any two for full marks or any other valid reason

3 Marks
Total: 20 Marks

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