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FINANCIAL ACCOUNTING

FORMATION 2 EXAMINATION - APRIL 2015

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
(If you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.)

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - APrIl 2015

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
Identify and explain the key issues that should be covered in a partnership agreement when setting up a
partnership.
(a)

(10 marks)

Cosrush limited is a company involved in the manufacture of toys for the retail industry. The following trial
balance was extracted from its books as at 31 december 2014:
(b)

Debit Credit

Inventory at 1 January 2014 124,000


€ €

Admininstrative expenses 245,800


building at Cost at 1 January 2014 1,200,000
Issued share Capital 200,000
Accumulated depreciation - Trucks - 1 January 2014 126,000
Purchases / revenue 1,248,600 2,146,300
Accumulated depreciation - fixtures & fittings - 1 January 2014 214,600
long-Term loan 350,000
Income Tax 23,000
Trade receivables / Trade Payables 362,000 145,200
Accumulated depreciation - building - 1 January 2014 320,000
Trucks at Cost at 1 January 2014 246,000
Allowance for doubtful debts 11,400
revaluation surplus 42,000
Current Tax Payable 23,000
returns 10,000 6,000
bank 86,400
fixtures & fittings at Cost at 1 January 2014 386,000
distribution Costs 242,000
retained earnings at 1 January 2014 589,300
4,173,800 4,173,800

The following information, based on your investigations, has also come to your attention:

(i) Inventory at 31 december 2014 is €146,000. This includes obsolete inventory costing €4,240 which will be
given away free to a local children’s charity.

(ii) depreciation is to be charged as follows:

buildings 2% straight line on Cost

fixtures & fittings 15% straight line on Cost

Trucks 25% reducing balance

depreciation for the year is charged in full in the year of purchase and none in the year of sale.

Page1
(iii) fixtures & fittings were sold for €30,000 on 1 december 2014. These were purchased in June 2009 for
€80,000. The proceeds from the sale were included (in error) in ‘revenue’ on the trial balance.

(iv) The building was revalued to €900,000 on 31 december 2014.

(v) Cosrush limited sells toys to one of its customers and provides 90 days credit for the customer who has the
option of returning the goods without charge up to the due date of payment. At the year-end, this customer
owes €120,000 (which is included in the revenue figure) to Cosrush limited, having made one purchase in
november 2014. Cosrush sells toys to this customer at cost plus a mark-up of 50%.

(vi) The current tax payable amount outstanding from 2013 was paid in full in July 2014. While the transaction
was correctly recorded in the firm’s bank account, the ‘Income Tax’ account was debited by mistake. The
income tax amount for 2014 is estimated at €28,000.

(vii) The interest of 4% on the loan needs to be provided for.

(viii) Cosrush limited wrote off additional bad debts of €5,000. The Allowance for doubtful debts should be set
at 5%.

(ix) Cosrush limited rented and paid for a storage warehouse for a year with the rental period commencing on 1
march 2014. The amount paid was €24,000.

(x) expenses are to be allocated evenly between distribution Costs and Administrative expenses.

REQUIREMENT:

Prepare, in a form suitable for publication, a statement of Profit or loss and other Comprehensive Income and
statement of financial Position for Cosrush limited for the financial year-ended 31 december 2014.

Note: All workings should be shown. (30 marks)

[Total: 40 Marks]

Page 2
mr. Patrick nolan, a sole trader, has asked you to prepare the receivable and payable control accounts and
ensure that the closing balances match to their respective list of balances. Currently, the closing balances at
2.

31 december 2014 are as follows:

receivables Control Account 126,845


Payables Control Account 103,240


receivables list of balances 123,589
Payables list of balances 104,476

on investigation, the following has been discovered:

(i) A contra entry of €3,250 has not been included in either control account.

(ii) A bad debt of €1,680 has been written off in the list of balances but has not been included in the
receivables control account.

(iii) The sales day book has been overcast by €890 and this has not been reflected in the control account.

(iv) Purchase returns to a supplier r. Groake of €256 have not been reflected in the control account.

(v) An invoice amounting to €981 for a customer K. Timmons has been entered in the sales day book as
€891.

(vi) A balance due to a supplier J. shanless amounting to €1,248 was not included in the list of balances.

(vii) A payment received from a customer T. George for €2,864 was posted to a supplier account f. Gorge
by mistake. The payment was correctly accounted for in the control account.

(viii) Goods purchased from a supplier m. Whelan amounting to €3,126 have been omitted from the relevant
control account.

(ix) A bad debt recovered of €300 relating to J. mcKenna has not been updated in the list of balances but
has been included in the control account.

(a) based on the information provided above:


REQUIREMENT:

(i) Prepare the receivables and Payables Control Accounts for the year-ended 31 december 2014.
(10 marks)

(ii) Prepare a statement reconciling the list of balances with the corrected control accounts for receivables
and Payables for the year-ending 31 december 2014.
(7 marks)

(b) outline reasons why control accounts are important in a business. (3 marks)

[Total: 20 Marks]

Page 3
The objective of IAs 38 – Intangible Assets is to prescribe the accounting treatment for intangible assets that
3.

are not dealt with specifically in another standard. IAs 38 requires an entity to recognise an intangible asset
(a)

if, and only if, specified criteria are met. The standard also specifies how to measure the carrying amount of
intangible assets and requires specified disclosures about intangible assets.

REQUIREMENT:

describe:
(i) What is an Intangible Asset?

(ii) When should Intangible Assets be recognised?

(iii) on recognition, the basis for the initial measurement of intangible assets. (6 marks)

You are a recently qualified Certified Public Accountant working with faugheen limited (faugheen) and you
report to the financial controller. The main business of the company is to provide taxi and bus services
(b)

throughout Ireland. In June 2014, faugheen was issued 40 taxi licences for the dublin area. The national
Public Transport Authority (which is responsible for the regulation of public bus passenger and taxi services)
decided in march 2015 to stop issuing new taxi licences as it was of the opinion that sufficient taxi licences
have been issued to cope with the public’s taxi requirements.

Initially faugheen paid €100 for each taxi licence. due to the national Public Transport Authority’s decision,
the demand for these licences increased and in April 2015 taxi licences are being freely bought and sold by
the public on an online regulated taxi auction website for €500 a licence. The financial controller of faugheen
estimates that the licences will be worth €1,000 each in may 2015. faugheen has not revalued intangible
assets in previous years and the company’s year-end is 31 may.

REQUIREMENT:

In planning for the year end accounts process the financial controller has asked you for a memo which addresses
the following:

(i) After initial recognition, on what basis can the taxi licences be included in the financial statements for the year
ended 31 may 2015?

(ii) What are the criteria for revaluation of an intangible asset?

(iii) on the basis of the information above and assuming that faugheen will adopt a revaluation policy for intangible
assets, calculate the value of the taxi licences that may be included in the financial statements for the year
ended 31 may 2015 AND show the accounting double entry required to record this transaction.
(9 marks)

The national Public Transport Authority recently decided that all current taxi licences which previously had an
infinite useful life will be valid for only five years, after which they will be invalid.
(c)

REQUIREMENT:

Assuming that faugheen had adopted and applied a revaluation policy as per (b) (iii) above, identify and explain
the accounting treatment that is necessary in its financial statements for the year ended 31 may 2015 in relation to
the taxi regulator’s decision AND show the accounting double entry required to record this transaction at the same
date.
(5 marks)

[Total: 20 Marks]

Page 4
ms. dora Cooney has approached you to prepare a set of financial statements for her business as she is
going to apply to the local country enterprise board for a grant to allow her to expand her confectionary
4.

business. up to now, dora’s bookkeeping has been inadequate but she has provided the following details to
you:

(i) Assets and liabilities


01/01/2014 31/12/2014

Catering equipment 10,000 14,000


€ €

delivery Van 15,000 13,000


Inventory 3,000 4,000
bank 6,800 ?
Cash in hand 400 250
Insurance Prepaid 1,000 1,200
Trade Payables 6,000 8,000
light & heat due 300 350

(ii) Takings for the year were as follows

Cash sales were €10,000 with the balance of sales being credit sales which were all received and lodged to
the bank account during 2014.

The business promptly lodges all receipts to the business in its bank account and pays all expenses by cheque
except for cash payments to one supplier of €2,400 and casual labour of €1,100. dora also took cash
drawings of €50 a week for herself.

(iii) In relation to sales, dora charges a mark-up of 50% on all purchases.

(iv) dora purchased some equipment costing €5,000 on 1 January 2014, which was financed by a three year loan
from the local credit union. dora owes interest on the loan at the year-end. The interest rate on the loan is
5%.

(v) bank Payments during the year were as follows:

Purchases 26,000

repairs & maintenance 3,400


diesel 1,200
Insurance 2,200
light & heat 1,600
General expenses 400
labour 2,150

REQUIREMENT:

Prepare:
(a) The statement of Profit or loss and other Comprehensive Income for ms. dora Cooney for the year-ended
31 december 2014.
(11 marks)

(b) The statement of financial Position for ms. dora Cooney as at 31 december 2014. (9 marks)

[Total: 20 Marks]

Page 5
skelug limited is involved in the manufacture of concrete products and its financial statements are as follows:
5.

Skelug Limited Statement of Financial Position as at 31 December 2014


2014 2013
€’000 €’000

Property, Plant & equipment 1,830 1,461


Non-Current Assets

Total Non-Current Assets 1,830 1,461

Inventories 262 289


Current Assets

Trade receivables 161 146


Cash & Cash equivalents 98 81
Total Current Assets 521 516

Total Assets 2,351 1,977

Equity & Liabilities

share Capital 300 200


Equity

share Premium 50 20
retained earnings 1,451 1,277
revaluation surplus 74 120
Total Equity 1,875 1,617

long Term loan 280 200


Non-Current Liabilities

Total Non-Current Liabilities 280 200

Trade Payables 148 116


Current Liabilities

bank overdraft 10 18
Current Tax Payables 38 26
Total Current Liabilities 196 160

Total Equity & Liabilities 2,351 1,977

Skelug Limited Statement of Profit or Loss & Other Comprehensive Income


for the year-ended 31 December 2014

revenue 4,300
€’000

Cost of sales (3,600)


Gross Profit 700
distribution Costs (176)
Administration expenses (124)
finance Costs (42)

Income Tax expense (46)


Profit before Tax 358

Profit for the Year 312

losses on Property revaluations, net of tax (46)


Other Comprehensive Income

Total Comprehensive Income for the year, net of tax 266

(Question 5 continued on Next Page)

Page 6
(Question 5 Continued)

(i) Property, Plant & equipment with a carrying value of €320,000 was sold for €280,000. This asset had
Notes:

originally cost €450,000.

(ii) depreciation of Property, Plant & equipment during the year amounted to €356,000.

(iii) dividends paid during the year amounted to €138,000 and are reported in the statement of Changes in equity.

REQUIREMENT:

Prepare a statement of Cash flows for the year-ended 31 december 2014 for skelug limited in accordance with
IAs 7 Statement of Cash Flows.
[Total: 20 Marks]

END OF PAPER

Page 7
SUGGESTED SOLUTIONS

The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - APrIl 2015

SOLUTION 1

(a) Items that should be included in a partnership agreement include the following:

The partnership agreement should state how much each partner is putting into and leaving in the part-
i) Capital.

nership.

The partnership agreement should include how any profits are to be split between the various partners.
ii) Profit-sharing Ratio

The agreement should disclose the interest rate that partners are entitled to, based on the amount of
iii) Interest on Capital and Drawings

capital invested in the partnership, or the interest to be paid to the partnership based on drawings from
the partnership. If no interest on capital or drawings is being paid/received, this should be included in
the partnership agreement.

The agreement should state what, if any, and when salaries are to be paid to partners.
iv) Partners Salaries

The partnership agreement should include details of the amount of drawings allowed by the partnership
v) Drawings

to partners.

The partnership agreement should state whether the business will be valued and goodwill allowed to
vi) Goodwill

be brought into the partnership accounts or not.

The partnership agreement should include details on these three aspects of the partnership.
vii) Admittance/Amalgamation/Dissolution of Partnership

(10 marks)

Page 8
(b) Cosrush Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2014
! ! ! !
Revenue TB + W1.iii + W1.v 2,146,300 - 30,000 - 120,000 1,996,300 0.25
- Revenue Returns TB - 10,000 0.25
Cost of Sales W2 - 1,144,840
Gross Profit 841,460 0.25
Profit on Disposal W3 - 10,000 0.25
Finance Costs W1.vii 14,000 0.25
Distribution Costs W2 292,675
Administrative Expenses W2 296,475 593,150 0.25
Profit/(Loss) before Tax 248,310 0.25
Income Tax Expense TB + W1.vi 23,000 - 23,000 28,000 28,000 0.25
PROFIT/(LOSS) FOR THE YEAR 220,310 0.25
Other Comprehensive Income
Revaluation Gain W3 44,000 0.25
Other Comprehensive Income for the year, net of tax 44,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 264,310 0.25

Cosrush Limited Statement of Financial Position as at 31st December 2014


! ! ! !
Property, Plant & Equipment W3 1,095,500 0.25
Total Non-Current Assets 1,095,500 0.25
Current Assets
Inventories W1.i + W1.v 141,760 80,000 221,760 0.25
Trade Receivables W1.v + W1.viii 225,150 0.50
Prepayments W1.ix 4,000 0.25
Cash & Cash Equivalents TB + W1.iii 86,400 0.25
Total Current Assets 537,310 0.25
TOTAL ASSETS 1,632,810 0.25
Equity & Liabilities
Equity
Share Capital 200,000 0.25
Retained Earnings W1.ix + W1.viii 589,300 220,310 809,610 0.25
Revaluation Surplus W3 42,000 44,000 86,000 0.25
Total Equity 1,095,610 0.25
Non-Current Liabilities
Long-term Loan 350,000 0.25
Total Non-Current Liabilities 350,000
Current Liabilities
Trade Payables TB + W1.iii 145,200 0.25
Current Tax Payable TB + W1.vi 23,000 - 23,000 28,000 28,000 0.25
Accruals W1.vii 14,000 0.25
Total Current Liabilities 187,200 0.25
TOTAL EQUITY & LIABILITIES 1,632,810 0.25

TOTAL MARKS 7.50

Page 9
Working - Journal Entries
Working - Closing Inventory ! !

Total Inventories at Cost per Inventory Count 146,000


Damaged Inventories - Cost 4,240
NRV - Selling Price less costs to sell -
Inventory Write Down 4,240
Value of Closing Inventories 141,760 0.50
! !
1.i Dr. Inventory + Current Assets SOFP 141,760 1.00
Cr. Closing Inventory - Cost of Sales SOPL & OCI 141,760
1.iii Dr. Revenue - Income SOPL & OCI 30,000
Cr. Disposal Account - Fixtures & Fittings 30,000
Dr. Disposal Account - Fixtures & Fittings 80,000 2.00
Cr. Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 80,000
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 60,000
Cr. Disposal Account - Fixtures & Fittings 60,000
Dr. Disposal Account - Fixtures & Fittings 10,000
Cr. Profit on Disposal SOPL & OCI 10,000
1.v Per IAS 18 Revenue, this is not a sale as the risks and rewards have not been transferred to the customer until the option
of the sale or return is finished i.e. after the 90 days. Therefore, the following entries are necessary

Dr. Revenue - Income SOPL & OCI 120,000 1.00


Cr. Trade Receivables - Current Assets SOFP 120,000

Dr. Inventory + Current Assets SOFP 80,000 1.00


Cr. Inventory - Cost of Sales SOPL & OCI 80,000

Revenue Amount 120,000


Mark-up - 50% on Cost 50% 40,000 1.00
Cost 80,000

1.vi Dr. Current Tax Payable - Current Liabilities SOFP 23,000


Cr. Income Tax - Expenses SOPL & OCI 23,000 1.00
Dr. Income Tax + Expenses SOPL & OCI 28,000
Cr. Current Tax Payable + Current Liabilities SOFP 28,000 1.00
1.vii Dr. Finance Costs + Expenses SOPL & OCI 14,000
Cr. Accruals + Current Liabilities SOFP 14,000 1.00
Loan Amount 350,000
Interest on Loan - 4% 4% 14,000
1.viii Dr. Bad Debt Write Off + Expenses SOPL & OCI 5,000 1.00
Cr. Trade Receivables - Current Assets SOFP 5,000

Dr. Allowance for Doubtful Debts + Expenses SOFP 450


Cr. Allowance for Doubtful Debts - Current Assets SOFP 450 1.00
Trade Receivables Balance per TB 362,000
- Disallowed Revenue W1.v - 120,000
- Bad Debt Written Off W1.viii - 5,000
237,000
- Allowance for Doubtful Debts - 5% - 11,850
Revised Trade Receivable 225,150 1.00
Current Allowance for Doubtful Debts TB 11,400
New Allowance for Doubtful Debts See Above 11,850
Increase in Allowance for Doubtful Debts 450
1.ix Dr. Prepayments + Current Assets SOFP 4,000
Cr. Rent - Expenses SOPL & OCI 4,000 1.00

Rent - 01.03.14 - 28.02.15 24,000


2 Months Prepaid 2/12 4,000

CURRENT MARKS 13.50

Page 10
Cost of Distribution Administration
Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 124,000 - - Cost of
Purchases Per TB 1,248,600 - - Sales
- Purchases Returns Per TB - 6,000
Closing Inventory W1.i - 141,760 - - 1.50
Write back into inventory of disallowed revenue W1.v - 80,000
Expenses Per TB - 242,000 245,800 487,800 Distribution
Bad Debt Write Off W1.viii - 2,500 2,500 5,000 Costs
Allowance for Doubtful Debts W1.viii - 225 225 450 1.50
Rent W1.ix - - 2,000 - 2,000 - 4,000
Depreciation - Buildings W3 - 12,000 12,000 24,000 Admin.
Depreciation - Plant & Equipment W3 - 22,950 22,950 45,900 Expenses
Depreciation - Office Equipment W3 - 15,000 15,000 30,000 1.50
Total 1,144,840 292,675 296,475

Working 3 - Property, Plant & Equipment Fixtures &


Buildings Fittings Trucks Total
! ! ! !
Cost Per TB 1,200,000 386,000 246,000 1,832,000
- Accumulated Depreciation b/d Per TB - 320,000 - 214,600 - 126,000 - 660,600
Carrying Value b/d at 1st January 2014 880,000 171,400 120,000 1,171,400 0.50
Disposal - Cost W1.iii - - 80,000 - - 80,000 0.50
Disposal - Accumulated Depreciation Note 1 - 60,000 - 60,000 0.50
880,000 151,400 120,000 1,151,400
Depreciation - Buildings - 2% Straight Line - 24,000 - - - 24,000 0.50
Depreciation - Fixtures & Fittings - 15% Straight Line - - 45,900 - - 45,900 0.50
Depreciation - Trucks - 25% of Reducing Balance - - - 30,000 - 30,000 0.50
856,000 105,500 90,000 1,051,500
Revaluation Gain Note 2 44,000 - - 44,000 0.50
Carrying Value c/d at 31st December 2014 900,000 105,500 90,000 1,095,500
Note 1 - Disposal of Equipment
Cost 80,000
Accumulated Depreciation - 15% straight line per annum
Depreciation 2009 12,000
Depreciation 2010 12,000
Depreciation 2011 12,000
Depreciation 2012 12,000
Depreciation 2013 12,000
60,000 - 60,000
Carrying Value of Equipment disposed 20,000
Disposal Account
Cost 80,000 Accumulated Depreciation 60,000
Disposal Proceeds 30,000
Profit on Disposal 10,000
90,000 90,000
Note 2 - Revaluation Gain
Dr. Property, Plant & Equipment + Non-Current Assets SOFP 44,000
Cr. Revaluation Surplus + Equity SOFP 44,000 1.00

CURRENT MARKS 9.00

TOTAL MARKS 30.00

Page 11
Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Inventory at 1 January 2014 124,000 80,000 80,000 124,000 221,760 221,760
Admininstrative Expenses 245,800 52,675 2,000 296,475
Building at Cost at 1 January 2014 1,200,000 44,000 1,244,000
Issued Share Capital 200,000 200,000
Accumulated Depreciation - Trucks - 1 January 2014 126,000 30,000 156,000
Purchases / Revenue 1,248,600 2,146,300 150,000 1,248,600 1,996,300
Accumulated Depreciation - Fixtures & Fittings - 1 January 2014 214,600 60,000 45,900 200,500
Long-Term Loan 350,000 350,000
Income Tax 23,000 28,000 23,000 28,000
Trade Receivables / Trade Payables 362,000 145,200 125,000 237,000 145,200
Accumulated Depreciation - Building - 1 January 2014 320,000 24,000 344,000

Page 12
Trucks at Cost at 1 January 2014 246,000 246,000
Allowance for Doubtful Debts 11,400 450 11,850
Revaluation Surplus 42,000 44,000 86,000
Current Tax Payable 23,000 23,000 28,000 28,000
Returns 10,000 6,000 10,000 6,000
Bank 86,400 86,400
Fixtures & Fittings at Cost at 1 January 2014 386,000 80,000 306,000
Distribution Costs 242,000 52,675 2,000 292,675
Retained Earnings at 1 January 2014 589,300 220,310 809,610
Profit on Disposal of Fixtures & Fittings 10,000 10,000
Finance Costs 14,000 14,000
Accruals 14,000 14,000
Prepayments 4,000 4,000
4,173,800 4,173,800 508,350 508,350 2,234,060 2,234,060 2,345,160 2,345,160
SOLUTION 2
(a)
(i)

Dr. Mr. M. Nolan Receivables Control Account Cr.


Balance 126,845 0.50
Sales Day Book Error (981 - 891) 90 Contras 3,250 2.00
Bad Debt Written Off 1,680 1.00
Sales Day Book 890 1.00

Balance C/d 121,115 1.00


126,935 126,935
Balance B/d 121,115 -

Dr. Mr. M. Nolan Payables Control Account Cr.


Balance 103,240 0.50
Contras 3,250 Purchases - M. Whelan 3,126 2.00
Purchases Returns - R. Groake 256 1.00

Balance C/d 102,860 1.00


106,366 106,366
Balance B/d 102,860

TOTAL MARKS 10.00

(ii) List of Individual Receivable Balances


Original Balance 123,589 0.50
Sales Day Book Error (981 - 891) 90 1.00
Receipt - T. George - 2,864 1.00
Bad Debt Recovered 300 1.00
Closing Adjusted Balance 121,115 0.50

List of Individual Payable Balances


Original Balance 104,476 0.50
J. Shanless Omitted Balance 1,248 1.00
Receipt - T. George - 2,864 1.00
Closing Adjusted Balance 102,860 0.50

TOTAL MARKS 7.00

Control accounts provide a check on the accuracy of entries made in the personal accounts in the receivables
(b)

and payables ledger. It is very easy to make a mistake in posting entries, because there might be hundreds
l

of entries to make. figures can get transposed. some entries might be omitted altogether so that an invoice
or a payment transaction does not appear in a personal account as it should. by comparing the total on the
receivables/payables control account with the total of individual balances on the personal accounts in the
receivables/payables ledger, it is possible to identify that fact that errors have been made.

Control accounts also assists in the location of errors where postings are made daily, weekly or even monthly.
If a person fails to record an invoice or a payment in a personal account or makes a transposition error, it would
l

be a formidable task to locate the error or errors at the end of a year. by using the control account, a
comparison with the individual balances in the receivable or payables ledger can be made for every week or
day of the month, and the error found much more quickly that if control accounts did not exist.

Page 13
Where there is a separation of duties, the control account provides an internal check. The person posting
entries to the control accounts will act as a check on a different person whose job it is to post entries to the
l

receivables/payables ledger accounts.

To provide total receivables/payables balances more quickly for producing a trial balance or statement of
financial position as a single balance is extracted more simply and quickly than many individual balances in
l

the receivable/payables ledger.


(3 marks)

[Total: 20 marks]

Page 14
SOLUTION 3

REPORT
To: Financial Controller – Faugheen Limited
From: Future Financial Accountant
Re: IAS 38 – Intangible Assets
Date: April 2015

Paragraph 8 of IAs 38 states that an intangible asset is an identifiable non-monetary asset without
physical substance
(a) i)

ii) Per paragraph 21 of IAs 38, intangible assets shall be recognised if, and only if:

a) It is probable that the expected future economic benefits that are attributable to the asset will flow
to the entity; and
b) The cost of the asset can be measured reliably.

iii) on recognition, intangible assets should be measured at cost as per paragraph 24 of IAs 38.

(6 marks)

After initial recognition, an intangible asset shall be carried at it cost loss any accumulated amortisation
and any accumulated impairment losses as per paragraph 74 of IAs 38 or as per paragraph 75 of IAs
(b) i)

38, an intangible asset shall be carried at a revalued amount being its fair value at the date of the reval-
uation less any subsequent accumulated amortisation and any subsequent accumulated impairment
losses.

Paragraph 75 of IAs 38 states that revaluations must be at fair value at the date of the revaluation by
reference to an active market. revaluations shall be made with regularity that at the end of the re-
ii)

porting period the carrying amount of the asset does not differ materially from its fair value. An active
market is a market where all the following conditions exist;

a) The items traded are identical;


b) Willing buyers and sellers can normally be found at any time;
c) Prices are available to the public.

If faugheen limited wishes to revalue the taxi licences in its financial statements for the year ended 31
december 2014, it should include the taxi licences at €500 each i.e. 40 x €500 = €20,000. The €500
iii)

is the freely available price which any member of the public can avail of on the active market for taxi li-
cences

The double entry is as follows:

dr. Intangible Assets – non-Current Assets - sofP €16,000


Cr. revaluation surplus – equity – sofP €16,000

The revaluation surplus on the intangible assets will also be shown in other Comprehensive Income of
the statement of Profit or loss and other Comprehensive Income

(9 marks)

Per paragraph 97 of IAs 38, the depreciable amount of an intangible asset with a finite useful life shall be al-
located on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use
(c)

and shall cease at the earlier of the date that the asset is classified as held for sale or when the asset is dere-
cognised. The amortisation method used shall reflect the pattern in which the asset’s future economic ben-
efits are expected to be consumed by the entity which if this pattern cannot be determined reliably, then the
straight line method shall be used. The amortisation charge for each period shall be recognised in profit or
loss unless this or another standard permits or requires it to be included in the carrying amount of another
asset.

Page 15
faugheen limited taxi licences have a useful life of five years and consequently, the licences need to be
amortised in its financial statements over the five years. Given the taxi licences have been revalued to
€20,000, the licences will be amortised to the amount of €4,000 per annum over the next five years i.e.
€20,000/5 years. The double entry is as follows:

dr. Amortisation of Intangible Assets – expenses – P/l – soPl & oCI €4,000
Cr. Intangible Assets – non-Current Assets – sofP €4,000

(5 marks)

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

financial Accountant
[Total: 20 Marks]

Page 16
SOLUTION 4
a) Ms. Dora Cooney SOPL&OCI for the year-ended 31 December 2014
! ! !
Revenue Note 2 45,600 1.00
Cost of Sales
Opening Inventory 3,000 0.50
+ Purchases Note 1 30,400 2.00
- Closing Inventory - 4,000 0.50
Cost of Sales Total 29,400 0.50
Gross Profit 16,200 0.25
Expenses
Repairs & Maintenance 3,400 0.50
Diesel 1,200 0.50
Insurance Note 3 2,000 1.00
Light & Heat Note 4 1,650 1.00
General Expenses 400 0.50
Depreciation 3,000 1.00
Interest on Loan (5,000 * 5%) 250 0.50
Labour 3,250 0.50
Total Expenses 15,150 0.50
Net Profit 1,050 0.25

SUBTOTAL MARKS 11.00

Note 1 - Purchases Calculation


T. Payables Account
Bank Payments 26,000 Balance B/D 6,000
Purchases - Balancing Figure 28,000
Balance C/D 8,000
34,000 34,000
Balance B/D 8,000
Purchases on Credit 28,000
Cash Purchases 2,400
Overall Purchases 30,400
Note 2 - Revenue Calculation
Mark Up is 50% on Purchases 15,200

Revenue 45,600
Note 3 - Insurance Calculation
Insurance Account
Balance B/D 1,000 Expense - Balancing Figure 2,000

Bank Payment 2,200 Balance C/D 1,200


3,200 3,200
Balance B/D 1,200

Note 4 - Light & Heat Calculation


Light & Heat Account
Bank Payments 1,600 Balance B/D 300
Expense - Balancing Figure 1,650
Balance C/D 350
1,950 1,950
Balance B/D 350

Page 17
Bank Lodgments Calculation using Cash Account
Cash Account
Balance B/D 400 Casual Labour 1,100
Purchases for Resale 2,400
Cash Sales 10,000 Drawings - Bal. Fig. 2,600
Bank Lodgments - Bal. Fig. 4,050
Balance C/D 250
10,400 10,400
Balance B/D 250
Bank Account
Balance B/D 6,800 Purchases 26,000
Repairs & Maintenance 3,400
Diesel 1,200
Insurance 2,200
Bank Lodgments - Credit Sales 35,600 Light & Heat 1,600
Bank Lodgments - Cash 4,050 General Expenses 400
Labour 2,150
Balance C/D 9,500
46,450 46,450
Balance B/D 9,500

b) Ms. Dora Cooney Statement of Financial Position as at 31 December 2014


Non-Current Assets
PPE 27,000 0.50
Total Non-Current Assets 27,000
Current Assets
Inventory 4,000 0.50
Trade Receivables -
Cash & Cash Equivalents 9,750 2.00
Prepayment 1,200 0.50
Total Current Assets 14,950
Total Assets 41,950 0.50
Equity & Liabilities
Capital & Reserves
Capital 29,900 Note 1 2.00
Drawings - 2,600 0.50
Retained Earnings 1,050 0.50
Total Capital & Reserves 28,350
Non-Current Liabilities
Credit Union Loan 5,000 0.50
Total Non-Current Liabilities 5,000
Current Liabilities
Trade Payable 8,000 0.50
Accruals - Light & Heat Due 350 0.50
Accruals - Interest on Loan Due 250 0.50
Total Current Liabilities 8,600
Total Equity & Liabilities 41,950

SUBTOTAL MARKS 9.00

OVERALL MARKS 20.00

Page 18
Note 1 - Ms. Dora Cooney Statement of Financial Position as at 1 January 2014

Non-Current Assets
PPE 25,000
Total Non-Current Assets 25,000
Current Assets
Inventory 3,000
Trade Receivables -
Cash & Cash Equivalents 7,200
Prepayment 1,000
Total Current Assets 11,200
Total Assets 36,200
Equity & Liabilities
Capital & Reserves
Capital - Balancing Figure 29,900
Total Capital & Reserves 29,900
Non-Current Liabilities
Total Non-Current Liabilities -
Current Liabilities
Trade Payable 6,000
Accruals 300
Total Current Liabilities 6,300
Total Equity & Liabilities 36,200

Page 19
SOLUTION 5

(a)
Skelug Limited Statement of Cash flows for the year ended 31st December 2014

Cash flows from Operating Activities !'000 !'000


Profit before Taxation 358 1.00
Adjustments for
Depreciation 356 1.00
Loss on Sale of PPE 40 1.00
Interest Expense 42 1.00
796
Increase in Trade Receivables - 15 1.00
Decrease in Inventory 27 1.00
Increase in Trade Payables 32 1.00
Cash Generated from Operations 840
Interest Paid - 42 0.50
Income Taxes Paid - 34 1.50
Net Cash from Operating Activities 764 1.00

Cash flows from Investing Activities


Payments to acquire Property, Plant & Equipment - 1,091 3.00
Receipts from sale of Property, Plant & Equipment 280 1.00
Net Cash used in Investing Activities - 811 1.00

Cash flows from Financing Activities


Proceeds from Issue of Shares 130 1.00
Payments to due to Increase in Long Term Loans 80 1.00
Dividends Paid - 138 1.00
72 1.00

Net Increase in Cash & Cash Equivalents 25


Cash & Cash Equivalents at beginning of Year Note 1 63
Cash & Cash Equivalents at end of Year Note 1 88 1.00

Note 1 2014 2013


!'000 !'000
Cash on hand and balances with bank 98 81
Bank Overdraft - 10 - 18
Cash and Cash Equivalents 88 63

TOTAL MARKS 20.00

Page 20
Loss on Sale of PPE !'000
Cost 450
- Accumulated Depreciation - 130
Carrying Value at date of sale 320
Sales Proceeds 280
Loss on Sale of PPE 40

Interest Account
Balance b/d - Expense - SOPL & OCI 42

Interest Paid 42 Balance c/d -


42 42

Income Tax Account


Corporation Tax Paid 34 Balance b/d 26

Balance c/d 38 Expense - SOPL & OCI 46


72 72

Share Capital Account


Balance b/d - S. Capital 200
Balance b/d - S. Premium 20
Balance c/d - S. Capital 300
Balance c/d - S. Premium 50 Proceeds from Issue of S. Capital 130
350 350

Property, Plant & Equipment Account


Balance b/d 1,461 Depreciation 356

Disposal - carrying value 320

Revaluation Loss 46

Purchase of PPE 1,091 Balance c/d 1,830


2,552 2,552

Page 21
MARKING SCHEME

SOLUTION 1

(a) briefing note on any 2 – 2 x 5 marks each 10

Workings 22.5
statement of Profit or loss and other Comprehensive Income + 7.5
(b)

statement of financial Position

Total Marks 40

SOLUTION 2

(a) receivable and Payable Control Account 10

(b) reconciling list of balances with control account for receivables and payables 7

(c) The importance of control accounts in a business 3

Total Marks 20

SOLUTION 3

definition of an Intangible Asset 2


recognition of an intangible asset 2
(a)

measurement on recognition of an intangible asset 2

basis of inclusion of an intangible asset after initial recognition 2


Criteria for revaluation of an intangible assets 2
(b)

Value placed on taxi licences 3


double entry 2

Accounting treatment necessary relating to scenario 3


double entry 2
(c)

Total Marks 20

SOLUTION 4

(a) statement of Profit or loss and other Comprehensive Income 11

(b) statement of financial Position 9


Total Marks 20

SOLUTION 5

operating Activities 10
Investing Activities 5
financing Activities 4
Cash & Cash equivalents 1

Total Marks 20

Page 22
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2015

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - AugusT 2015

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
(a) outline benefits that financial statements provide to users of financial statements. (10 marks)

The following trial balance was extracted from the books of ramona limited, an importer of garden furniture
as at 31 december 2014:
(b)

Debit Credit

Accumulated depreciation - buildings at 31 december 2013 360,000


€ €

Accumulated depreciation - equipment at 31 december 2013 415,000


Accumulated depreciation - motor Vehicles at 31 december 2013 162,000
Administrative expenses 289,510
Allowance for bad debts 7,800
bank 79,620
Cash 960
Current Tax Payable 24,180
distribution Costs 540,384
equipment 728,000
Income Tax 24,180
Investments 286,000
buildings 1,600,000
long Term loan 1,099,800
opening Inventory 124,600
Purchases 2,525,130
retained earnings at 31 december 2013 77,624
revaluation surplus 18,600
revenue 4,076,200
share Capital - 100,000 at €2 each 200,000
share Premium 20,000
Trade Payables 252,980
Trade receivables 195,000
motor Vehicles 320,800
6,714,184 6,714,184

The following information, based on your investigations, has also come to your attention:

(i) ramona limited’s year-end inventory amounted to €142,800 valued at cost. Included in this amount is some
timber garden furniture which has been damaged by a forklift and is beyond repair. The cost of this damaged
inventory was €4,650. ramona limited sold it to a local wood chip company for €1,200 and incurred transport
costs of €170.

(ii) ramona limited purchases goods from the united states on 31 october 2014 costing usd$80,000. This was
included in Trade Payables on that date as €90,000 by mistake. The rate of exchange on 31 october 2014
was €1.00 equals usd$1.25. The full amount remains owing at 31 december 2014. The closing exchange
rate between the us dollar and the euro at the 31 december 2014 is €1.00 equal usd$1.20. foreign
exchange gains or losses are not to be included in either Cost of sales, Administrative expenses or distribution
Costs but as a separate line item.

Page1
(iii) depreciation is to be charged as follows:

building 5% straight line on Cost


equipment 15% reducing balance
motor Vehicles 15% straight line on Cost

depreciation is charged in full in the year of purchase and none in the year of sale.

(iv) All of the relevant expenses in the trial balance are to be split evenly between Administrative expenses and
distribution Costs.

(v) ramona limited owed €2,000 and €600 respectively for accountancy fees and light and heat at the year-end.

(vi) ramona limited received a government grant of €60,000 in relation to the building of an extension to its
buildings which cost €200,000 in total. ramona limited paid the net amount out of its bank account. ramona
limited believe that the grant should be amortised over twenty years.

(vii) Income tax for the year is €21,620. The amount in the trial balance is the previous estimate for the year
2014.

(viii) The Allowance for bad debts should be at 5% of Trade receivables.

(ix) The interest rate received on the investments is 3%. The amount had not been received by year-end.

REQUIREMENT:

Prepare, in a form suitable for publication, a statement of Profit or loss and other Comprehensive Income and
statement of financial Position for ramona limited for the financial year-ending 31 december 2014.

Note: All workings should be shown. (30 marks)

[Total: 40 Marks]

Page 2
mr. John deegan rents premises from which he operates a hardware shop. he also owns two offices which
he lets to tenants during the year. he has provided you with information of his transactions for the year-ended
2.

31 december 2014 and wants you to provide information to him as outlined in the requirements below:

(i) mr. deegan rents his premises at a rate of €30,000 per annum. his rental terms are that he pays
quarterly in advance commencing on 1 february 2014. on 1 August 2014, he agreed to rent additional
space from his landlord commencing on 1 november and his rate changed to €36,000 per annum from
1 november 2014 under the same terms and conditions as the original rental agreement (i.e. payable
quarterly in advance).

(ii) mr. deegan had no tenants in his offices at the start of the year due to building repairs that were required.
on 1 march 2014, mr. deegan rented one of the offices to Tam Accountancy solutions at the rate of
€6,000 per quarter receivable in arrears (i.e. the day after quarter end).

(iii) due to continuing success of Tam Accountancy solutions, the director, ms. Tammy horan rented the
other office from mr. deegan on 1 october 2014. on that date, both parties agreed to cancel the original
agreement for the rental of the first office (referred to in point (ii) above). Instead, from 1 october 2014,
both parties agreed to enter into a new rental agreement covering the two offices which were rented for
a total of €10,000 per quarter receivable in arrears (i.e. the day after quarter end).

(iv) mr. deegan pays insurance for his rented premises and offices that he owns. The insurance is split and
paid evenly in two amounts on 1 January and 1 August each year. The annual insurance premium in
2014 was €9,000.

(v) All payments and receipts were paid and lodged to the bank on the relevant dates as outlined above.

Prepare the following ledger accounts for the year-ended 31 december 2014:
REQUIREMENT:

(i) rent expense


(ii) rental Income
(iii) rent receivable
(iv) rent Prepaid
(v) bank
(vi) Insurance

note: for each account, you are required to show all transactions (with appropriate dates) and identify the
figure for inclusion in the trial balance of mr. John deegan as at 31 december 2014.

[Total: 20 Marks]

Page 3
mr. Jacob Condon owns a number of retail outlets selling a variety of different products. Jacob has a number
of questions relating to the calculation of revenue that should be recorded in his financial statements and has
3.

approached you for advice in relation to IAs 18 - Revenue.

mr. Condon has asked you to prepare a report which addresses the following questions:
REQUIREMENT:

What conditions need to be satisfied before revenue from the sale of goods can be recognised in the financial
statements in accordance with IAs 18 - Revenue.
(a)

(5 marks)

for retail goods, at what stage will the significant risk and rewards of ownership have passed to the customer?
(2 marks)
(b)

Provide two examples of situations where his retail outlets may retain the significant risk and rewards of
ownership.
(c)

(4 marks)

In relation to the financial statements for the year ended 31 december 2014, inform mr. Condon of the correct
amount of revenue that can be included arising from each of the following scenarios:
(d)

(i) mr. Condon sells washing machines for €500 each. This includes installation and inspection that each
washing machine is working properly. he sold and delivered fifteen washing machines in the last week
of december. his installation worker was not in a position, due to Christmas holidays, to install and
inspect four of the washing machines. These were installed and inspected in the first week of January
2015. All of the washing machines were paid for in december 2014.
(3 marks)

(ii) In one of mr. Condon’s retail outlets, there is a tradition of operating on a ‘cash on delivery’ basis for
sales of televisions. This outlet sold ten televisions worth €700 each in the week leading up to
Christmas. The delivery staff worked extra hours to ensure that all the televisions were delivered before
Christmas. All customers paid the delivery staff when the televisions were delivered.
(3 marks)

(iii) To boost the sale of bicycles to younger people in his outlets, mr. Condon decided to offer the option of
purchasing bicycles prior to Christmas with the right of return of the bicycles up to 15 January 2015. he
felt that this would allow younger people to try out these new bicycles post Christmas and return these
to his outlets if they were unhappy with any part of the bicycles. mr. Condon was very pleased with the
strategy as sales increased by over 30% to €28,000 and no bicycles were returned up to 15 January
2015.
(3 marks)

[Total: 20 Marks]

Page 4
The following is a summary of the receipts and payments of fassa football club for the year ended 31
december 2014:
4.

Receipts € Payments €
bank balance at 01 January 2014 6,000 rent 1,000
Cash balance at 01 January 2014 800 stationery 150
donation 700 Phone 800
membership subscriptions 4,000 light & heat 900
dance night 1,200 Coaching expenses 2,100
grant towards day to day running of club 2,100 dance Prizes 300
sponsorship 1,600 football gear 1,400
equipment 2,000
balance at 31 december 2014 7,750
16,400 16,400

The following information is also available at 31 december:

2013 2014
€ €
Clubhouse (net book Value) 60,000 60,000
equipment (net book Value) 11,000 12,500
subscriptions in Arrears 600 400
subscriptions in Advance 200 300
light & heat due 200 300

The rent paid was for the year-ending 30 June 2014 and it is paid on 1 July of each year. The rent for the year-
ending 30 June 2013 amounted to €1,100.

REQUIREMENT:

(a) Calculate the value of the Accumulated fund for fassa football Club at 1 January 2014. (6 marks)

(b) Prepare the Income and expenditure Account for fassa football Club for the year ended 31 december 2014.

(10 marks)

from an accounting perspective, identify and briefly explain the main advantages and disadvantages of a
receipts and payments account.
(c)

(4 marks)

[Total: 20 Marks]

Page 5
Consider the following financial information for Patterdale limited, a manufacturer of sauces for the food
industry, as at 31 december 2014 (with comparatives).
5.

Patterdale Limited Statement of Financial Position as at 31 December


2014 2013
€'000 €'000

Property, Plant & equipment 230,000 180,000


Non-Current Assets

Total non-Current Assets 230,000 180,000

Inventories 19,500 15,200


Current Assets

Trade receivables 14,200 14,700


Cash & Cash equivalents 8,240 12,400
Total Current Assets 41,940 42,300

TOTAL ASSETS 271,940 222,300

Equity & Liabilities

share Capital 80,000 50,000


Equity

share Premium 10,000 5,000


retained earnings 65,290 63,500
Total equity 155,290 118,500

100,000 90,000
Non-Current Liabilities

Total non-Current liabilities 100,000 90,000


Long-term Loan

Current liabilities
Trade Payables 15,900 13,300
Current Tax Payable 750 500
Total Current liabilities 16,650 13,800

TOTAL EQUITY & LIABILITIES 271,940 222,300

revenue 86,400 81,100


Other Relevant Information

Cost of sales 68,990 67,074


Administrative expenses 2,460 2,146
distribution Costs 4,750 4,080
finance Costs 5,300 4,600
Income Tax 710 400
Profit after tax 4,190 2,800

dividends Paid 2,400 1,700

using the above information:


REQUIREMENT:

(a) Calculate six appropriate ratios in order to comment on, and assess, the liquidity, profitability and gearing of
Patterdale limited.
(12 marks)

review the above financial statements and identify any additional long-term funding raised by Patterdale
limited in 2014. Indicate where this funding was spent.
(b)

(4 marks)

Identify and explain the main limitations of ratio analysis as a means of assessing the financial performance
of a business.
(c)

(4 marks)

[Total: 20 Marks]

Page 6
END OF PAPER
SUGGESTED SOLUTIONS

The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - AugusT 2015

SOLUTION 1

a) Possible benefits of financial statements to users of financial statements include the provision of information;

(i) To allow decisions to be made for the good of the company.

(ii) on the value of shareholders investments and the income they derive from their shareholding.

(iii) To allow employees to look for alternative work in a different company, or look for pay increases and pro-
motions based on the financial health of the company.

(iv) To allow trade payables and banks to identify if the company can meets it financial obligations and com-
mitments to them.

(v) To government agencies like revenue Commissioners and Central statistics office.

(vi) To allow accountants audit or prepare tax returns on behalf of the company.

(10 marks)

Page 8
b) Ramona Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2014
! ! ! ! !
Revenue 4,076,200 0.25
Cost of Sales Total W2 2,484,550

Gross Profit 1,591,650 0.25


Other Income W1.ix 8,580 0.25
Amortisation of Government Grants W1.vi 3,000 0.50
Distribution Costs W2 635,194
Administrative Expenses W2 384,320
Foreign Exchange Loss W1.ii 2,667 1,010,601 0.50
Profit/(Loss) before Tax 581,049 0.25
Income Tax TB + W1.vii 24,180 - 2,560 21,620 0.25
PROFIT/(LOSS) FOR THE YEAR 559,429 0.25
Other Comprehensive Income for the year, net of tax - 0.25
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 559,429 0.25

Ramona Limited Statement of Financial Position as at 31st December 2014


! ! ! ! !
Non-Current Assets
Property, Plant & Equipment W3 1,726,730 0.25
Investments TB 286,000 0.25
Total Non-Current Assets 2,012,730 0.25
Current Assets
Inventories W1.i 139,180 0.25
Trade Receivables W1.viii 185,250 0.25
Other Receivables W1.ix 8,580 0.25
Total Current Assets 333,010 0.25
TOTAL ASSETS 2,345,740 0.25
Equity & Liabilities
Equity
Share Capital TB 200,000 0.50
Share Premium TB 20,000 0.25
Retained Earnings TB + W1.vii 77,624 559,429 637,053 0.25
Revaluation Surplus TB 18,600 0.25
Total Equity 875,653 0.25
Non-Current Liabilities
Long-term Loan TB 1,099,800 0.25
Government Grants W1.vi 60,000 - 3,000 57,000 0.25
Total Non-Current Liabilities 1,156,800 0.25
Current Liabilities
Trade Payables TB + W1.ii 252,980 - 26,000 2,667 229,647 0.25
Current Tax Payable TB + W1.vii 24,180 - 2,560 21,620 0.25
Cash & Cash Equivalents TB + W1.vi+W1.ix - 79,620 - 960 - 60,000 200,000 59,420 0.25
Accruals W1.v 2,600 0.25
Total Current Liabilities 313,287 0.25
TOTAL EQUITY & LIABILITIES 2,345,740

PRESENTATION 0.50

TOTAL MARKS 9.00

Page 9
Working - Journal Entries
Working - Closing Inventory ! !
Total Inventories at Cost per Inventory Count 142,800
Damaged Inventories - Cost 4,650
NRV - Selling Price less costs to sell (!1,200 - 170) - 1,030
Inventory Write Down 3,620
Value of Closing Inventories 139,180

!'000 !'000
1.i Dr. Inventory + Current Assets SOFP 139,180 2.00
Cr. Closing Inventory - Cost of Sales SOPL & OCI 139,180
1.ii What Happened
31.10.14 Dr. Purchases + Cost of Sales SOPL & OCI 90,000
Cr. Trade Payables + Current Liabilties SOFP 90,000

What Should Have Happened


31.10.14 Dr. Purchases + Cost of Sales SOPL & OCI 64,000
Cr. Trade Payables + Current Liabilties SOFP 64,000

To Correct Entry
Dr. Trade Payables + Current Liabilties SOFP 26,000 1.00
Cr. Purchases + Cost of Sales SOPL & OCI 26,000

Foreign Currency Gain/Loss at Year-End


31.12.14 At exchange rate of !1.00 = USD$1.20, the amount outstanding should be worth 66,667
Therefore, there is an exchange loss of !2,667 rounded which needs to be accounted for as follows:

Dr. Foreign Exchange Loss +Expenses SOPL & OCI 2,667 1.00
Cr. Trade Payables + Current Liabilties SOFP 2,667
1.v Dr. Accountancy Fees + Expenses SOPL & OCI 2,000 1.00
Dr. Light & Heat + Expenses 600
Cr. Accruals + Current Liabilities SOFP 2,600
1.vi Dr. Bank - Current Liabilties SOFP 60,000 2.00
Cr. Government Grants - Non-Current Liabilities SOFP 60,000

Amortisation of the Government Grants


Dr. Government Grants + Non-Current Liabilities SOFP 3,000 1.00
Cr. Amortisation - Government Grants + Other Income SOPL & OCI 3,000

Addition of Extension to Property, Plant & Equipment


Dr. Buildings - Property, Plant & Equipment + Non-Current Assets SOFP 200,000 1.00
Cr. Bank + Current Liabilities SOFP 200,000

Depreciation of the addition to PPE will be performed in Working 3


1.vii Dr. Current Tax Payable + Current Liabilities SOFP 2,560 1.00
Cr. Income Tax - Expenses SOPL & OCI 2,560
1.viii Dr. Allowance for Bad Debts + Expenses SOPL & OCI 1,950 1.00
Cr. Trade Receivables - Current Assets SOFP 1,950

Trade Receivables Balance per TB 195,000

- Allowance for Bad Debts - 5% 9,750


Revised Trade Receivable 185,250

Current Allowance for Bad Debts TB 7,800


New Allowance Bad Debts See Above 9,750
Increase in Allowance for Bad Debts 1,950

1.ix Dr. Other Receivables + Current Assets SOFP 8,580


Cr. Investment Income + Other Income SOPL & OCI 8,580 1.00

Investment TB 286,000
Interest on Investments 3% 8,580

CURRENT MARKS 12.00

Cost of Distribution Administration


Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 124,600 - - Cost of
Purchases Per TB 2,525,130 - - Sales
Closing Inventory W1.i - 139,180 - - 2.00
Exchange Error W1.ii - 26,000
Expenses Per TB - 540,384 289,510 Distribution
Accountancy Fees W1.v - 1,000 1,000 2,000 Costs
Light & Heat W1.v - 300 300 600 2.00
Allowance for Bad Debts W1.viii - 975 975 1,950
Depreciation - Buildings W3 - 45,000 45,000 90,000 Admin
Depreciation - Equipment W3 - 23,475 23,475 46,950 Expenses
Depreciation - Motor Vehicles W3 - 24,060 24,060 48,120 2.00
Total 2,484,550 635,194 384,320
Working 3 - Property, Plant & Equipment Motor
Buildings Equipment Vehicles Total
! ! ! !
Cost 1,600,000 728,000 320,800 2,648,800
- Accumulated Depreciation b/d - 360,000 - 415,000 - 162,000 - 937,000
Carrying Value b/d at 1st January 2014 1,240,000 313,000 158,800 1,711,800 0.50
Disposal - Accumulated Depreciation 200,000 - - 200,000 0.50
Carrying Value 1,440,000 313,000 158,800 1,911,800
Depreciation - Buildings - 5% Straight Line - 90,000 - - - 90,000 0.50
Depreciation - Plant & Equipment - 15% Reducing Balance - - 46,950 - - 46,950 0.50
Depreciation - Vehicles - 15% Straight Line - - - 48,120 - 48,120 0.50
Carrying Value c/d at 31st December 2014 1,350,000 266,050 110,680 1,726,730 0.50

CURRENT MARKS 9.00

TOTAL MARKS 21.00

Page 10
Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Accumulated Depreciation - Buildings at 31.12.13 360,000 90,000 450,000
Accumulated Depreciation - Equipment at 31.12.13 415,000 46,950 461,950
Accumulated Depreciation - Motor Vehicles at 31.12.13 162,000 48,120 210,120
Administrative Expenses 289,510 94,810 384,320
Allowance for Bad Debts 7,800 1,950 9,750
Bank 79,620 60,000 200,000 60,380
Cash 960 960
Current Tax Payable 24,180 2,560 21,620
Distribution Costs 540,384 94,810 635,194
Equipment 728,000 728,000
Income Tax 24,180 2,560 21,620
Investments 286,000 286,000
Buildings 1,600,000 200,000 1,800,000
Long Term Loan 1,099,800 1,099,800
Opening Inventory 124,600 124,600 139,180 139,180
Purchases 2,525,130 26,000 2,499,130

Page 11
Retained Earnings at 31.12.13 77,624 559,429 637,053
Revaluation Surplus 18,600 18,600
Revenue 4,076,200 4,076,200
Share Capital - 100,000 at !2 each 200,000 200,000
Share Premium 20,000 20,000
Trade Payables 252,980 26,000 2,667 229,647
Trade Receivables 195,000 195,000
Motor Vehicles 320,800 320,800
Foreign Exchange Loss 2,667 2,667
Accruals 2,600 2,600
Government Grant 3,000 60,000 57,000
Amortisation of Government Grant 3,000 3,000
Other Receivables 8,580 8,580
Investment Income 8,580 8,580
6,714,184 6,714,184 492,427 492,427 4,226,960 4,226,960 3,478,520 3,478,520
SOLUTION 2
(a)
Rent Expense Account
! !
01.02.14 Bank 7,500 01.02.14 Rent Prepaid 7,500 0.50
01.05.14 Rent Prepaid 7,500 01.05.14 Rent Prepaid 7,500 0.50
01.05.14 Bank 7,500 01.08.14 Rent Prepaid 9,000 0.50
01.08.14 Rent Prepaid 7,500 01.11.14 Rent Prepaid 9,000 0.50
01.08.14 Bank 9,000 0.50
01.11.14 Rent Prepaid 6,000 31.12.14 SOPL & OCI 21,000 1.25
01.11.14 Bank 9,000 0.50
54,000 54,000

Rent Prepaid Account


! !
01.02.14 Rent Expense 7,500 01.05.14 Rent Expense 7,500 0.50
01.05.14 Rent Expense 7,500 01.08.14 Rent Expense 7,500 0.50
01.08.14 Rent Expense 9,000 01.11.14 Rent Expense 6,000 1.00
01.11.14 Rent Expense 9,000 0.50
31.12.14 SOFP 12,000 1.00
33,000 33,000

Rental Income Account


! !
01.10.14 Rent Receivable 4,000 01.03.14 Rent Receivable 6,000 0.50
01.06.14 Rent Receivable 6,000 0.50
31.12.14 SOPL & OCI 24,000 01.09.14 Rent Receivable 6,000 1.25
01.10.14 Rent Receivable 10,000 0.50
28,000 28,000

Rent Receivable Account


! !
01.03.14 Rental Income 6,000 01.06.14 Bank 6,000 0.50
01.06.14 Rental Income 6,000 01.09.14 Bank 6,000 0.50
01.09.14 Rental Income 6,000 01.10.14 Rental Income 4,000 0.50
01.10.14 Rental Income 10,000 01.10.14 Bank 2,000 0.50

31.12.14 SOFP 10,000 1.00


28,000 28,000

Bank Account
! !
01.06.14 Rent Receivable 6,000 01.01.14 Insurance Expense 4,500 0.50
01.09.14 Rent Receivable 6,000 01.02.14 Rent Expense 7,500 0.50
01.10.14 Rent Receivable 2,000 01.05.14 Rent Expense 7,500 0.50
01.08.14 Insurance Expense 4,500 0.50
01.08.14 Rent Expense 9,000 0.50
01.11.14 Rent Expense 9,000 0.50
31.12.14 SOFP 28,000 1.00
42,000 42,000

Insurance Expense Account


! !
01.01.14 Bank 4,500 01.08.14 Insurance Due 750 0.50
01.07.14 Insurance Due 750 0.50
01.08.14 Bank 4,500 0.50
31.12.14 SOPL & OCI 9,000 1.00
9,750 9,750

TOTAL MARKS 20.00

Page 12
SOLUTION 3

REPORT
To: Mr. Jacob Condon
From: Financial Accountant
Re: IAS 18 – Revenue
Date: August 2015

Per paragraph 14 of IAs 18 revenue, revenue from the sale of goods shall be recognised when all of the fol-
lowing conditions have been satisfied:
(a)

(i) The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
(ii) The entity retains neither continuing managerial involvement to the degree usually associated with own-
ership nor effective control over the goods sold;
(iii) The amount of revenue can be measured reliably;
(iv) It is probable that the economic benefits associated with the transaction will flow to the entity; and
(v) The costs incurred or to be incurred in respect of the transaction can be measured reliably.

(5 marks)

Per paragraph 15 of IAs 18, the assessment of when an entity has transferred the significant risks and rewards
of ownership to the buyer requires an examination of the circumstances of the transaction. In most cases for
(b)

retail sales, the transfer of the risks and rewards of ownership coincides with the transfer of the legal title or
the passing of possession to the buyer.
(2 marks)

Per paragraph 16 of IAs 18, examples of situations in which an entity may retain the significant risks and re-
wards of ownership are;
(c)

(i) When the entity retains an obligation for unsatisfactory performance not covered by normal warranty pro-
visions;
(ii) When the receipt of the revenue from a particular sale is contingent on the derivation of revenue by the
buyer from its sale of the goods;
(iii) When the goods are shipped subject to installation and the installation is a significant part of the con-
tract which has not yet been completed by the entity; and
(iv) When the buyer has the right to rescind the purchase for a reason specified in the sales contract and
the entity is uncertain about the probability of return.
(4 marks)

(d)

(i) Per 2 (a) of Appendix 1 of IAs 18 on the sale of goods shipped subject to conditions, revenue is normally recog-
nised when the buyer accepts delivery and installation and inspection are complete. The revenue from the
sale of eleven washing machines can only be included in the 2014 financial statements as the remaining four
were not installed and inspected until January 2015. The journal entry to account for this transaction in the
2014 financial statements would be as follows:

dr. Cash and Cash equivalents €7,500


Cr. revenue €5,500
Cr. deferred Income €2,000

(ii) Per 2 (d) of Appendix 1 of IAs 18 on the sale of goods shipped subject to conditions, revenue is recognised
when delivery is made and cash is received by the seller or its agent. Therefore, the full amount of revenue
for the ten televisions at €700 each i.e. €7,000 should be recognised in the 2014 financial statements as the
delivery man had delivered and collected all the cash on these sales prior to year-end. The journal entry to
account for this transaction in the 2014 financial statements would be as follows:

dr. Cash and Cash equivalents €7,000


Cr. revenue €7,000

(iii) Per 2 (b) of Appendix 1 of IAs 18 on the sale of goods shipped subject to conditions, if there is uncertainty
about the possibility of return, revenue is recognised when…. the goods have been delivered and the time pe-
riod for rejection has elapsed. Therefore, even though no sale was returned up to 15 January 2015, the rev-
enue from these sales cannot be included in the 2014 financial statements as at 31 december 2014,
customers still had the right to return the bicycles and therefore, the time period for rejection of the sales had
Page 13
not elapsed. Therefore, the journal entry to account for this transaction in the 2014 financial statements is as
follows:

dr. Cash and Cash equivalents €28,000


Cr. deferred Income €28,000 (9 marks)

I hope that the above responses clarify and answer your queries. If you have any further queries, please do
not hesitate to contact me.

Yours sincerely,

financial Accountant
[Total: 20 marks] 

Page 14
SOLUTION 4
a) Fassa Football Club Opening Accumulated Fund Figure
Non-Current Assets
Property, Plant & Equipment 71,000 1.00
Total Non-Current Assets 71,000
Current Assets
Subscription 600 0.50
Prepayments - Rent (1,100 * 6/12) 550 1.00
Cash & Cash Equivalents (6,000 + 800) 6,800 1.00
Total Current Assets 7,950

Total Assets 78,950 0.50

Equity & Liabilities


Accumulated Fund Balancing Figure 78,550 1.00
Total Accumulated Fund 78,550

Non-Current Liabilities -
Total Non-Current Liabilities -

Current Liabilities
Accruals 200 0.50
Subscriptions 200 0.50
Total Current Liabilities 400

Total Equity & Liabilities 78,950

SUBTOTAL MARKS 6.00

b) Fassa Football Club Income & Expenditure Account for the year-ended 31st December 2014
Income
Donation 700 0.50
Subscriptions Note 1 3,700 2.00
Dance Night (1,200 - 300) 900 1.00
Grant re day to day running of club 2,100 0.50
Sponsorship 1,600 0.50
Total Income 9,000

Expenditure
Rent Note 2 1,050 1.50
Stationery 150 0.50
Phone 800 0.50
Light & Heat (-200 + 900 + 300) 1,000 1.00
Coaching 2,100 0.50
Football Gear 1,400 0.50
Depreciation (11,000 + 2,000 - 12,500) 500 1.00
Total Expenditure 7,000

Excess of Expenditure over Income 2,000

Note 1 - Subscriptions Calculation


Subscriptions Account
Balance B/D 600 Balance B/D 200
I&E A/c - Balancing Figure 3,700 Bank Receipt 4,000

Balance C/D 300 Balance C/D 400


4,600 4,600

Balance B/D 400 Balance B/D 300


Note 2 - Rent Calculation
Rent Account
Balance B/D 550
Bank Payment 1,000 I&E A/c - Balancing Figure 1,050

Balance C/D 500 6/12th


1,550 1,550

Balance B/D 500

SUBTOTAL MARKS 10.00

c) The receipts and payments account is effectively a summary of a club's cash book
Advantages
1. Very easy to produce and understand
2. Serves as a basis for the preparation of the income and expenditure account and statement of financial position 2.00
Disadvantages
1. Takes no account of any amounts owing or prepaid
2. Includes items of capital expenditure and makes no distinction between capital and revenue items 2.00
3. Takes no account of depreciation of property, plant & equipment

OVERALL MARKS 20.00

Page 15
SOLUTION 5

Please note that different variations of ratio formulae will be accepted provided that they are correct.

(a) Calculation of Six Relevant Ratios

Patterdale Limited Possible Ratios in relation to its liquidity, profitability and gearing

2014 2013
Current 2.52 times 3.07 times

Quick 1.35 times 1.96 times

T. Receivable 60 days 66 days

T. Payable 84 days 72 days

Inventory 103 days 83 days

ROCE 4.00% 3.74%

Gross Profit 20.15% 17.29%

Net Profit 4.85% 3.45%

Gearing 39.17% 43.17%

Interest Cover 1.92 times 1.70 times

Debt to Equity 64.40% 75.95%

The current and quick ratio are good. however, the company is carrying too much inventory unless the com-
Commentary

pany is stockpiling for future sales. Inventory days are too high and have increased by over 24% year on year
which is worrying and management need to investigate the reasons for this increase in case there will be
losses from obsolete inventory. Trade receivable days have decreased by size 6 days year on year and
Trade Payable days have increased by 12 days year on year which is pleasing. both ratios appear to be high
for the industry. It appears as if management have focused on getting in trade receivables quicker and held
off payment to trade payables so as to manage the working capital and pay for the increase in inventory and
property, plant and equipment. gross and net Profit are strong but the return on capital employed is low high-
lighting that the return on the sizeable amount of assets is poor. Interest cover is low especially considering
the amount of profit versus the interest repayments on the loan. The gearing and debt to equity ratio have
improved year on year which is pleasing, the gearing ratio is acceptable but one would like to see the debt to
equity ratio continue to decline for the company. overall, the ratio analysis shows some positive indications
when comparing 2014 to 2013 but a lot of work is needed to manage the working capital and liquidity of the
company as well as earning a stronger return on its investment which reducing debt levels.
(12 marks)

The external funds raised were an increase in long term loans of €10 million as well as the issuance of new
shares which generated funds of €35 million. This funding was used to finance the purchase of new prop-
(b)

erty, plant and equipment.


(4 marks)

Page 16
(c) Possible limitations of ratios are as follows:

(i) underlying accounting principles: involves the application of both rules and judgement. This may result
in differing accounting numbers for similar circumstances for example, assets may be included at cost
or revalued amount which will lead to different ratio results for the same asset or different methods of
valuing inventory will provide different results and potentially render the ratios meaningless.
(ii) Timing problems: some businesses are subject to heavy seasonality e.g. milling, construction etc. This
may lead to final accounts being unrepresentative of the normal situation.
(iii) The impact of price changes: Comparing the accounts of an enterprise with updated figures due to in-
flation with those showing historic costs may be misleading.
(iv) ratio analysis just gives a solution shown as a number – it does not provide the explanation behind the
ratio.
(v) different formulae used to calculate ratios may make it difficult to compare ratios from different sources.
(vi) financial information can be “massaged” in several ways to make the figures used for ratios more at-
tractive. for example, many businesses delay payments to trade payables at the end of the financial
year to make the cash balance higher than normal and the trade payables days figure higher too

(4 marks)

[Total: 20 marks] 

Page 17
MARKING SCHEME

SOLUTION 1

(a) 5 benefits to users of preparing financial statements 5 x 2 marks each 10

Workings 21
statement of Profit or loss and other Comprehensive Income + 9
(b)

statement of financial Position

Total Marks 40

SOLUTION 2

Accounts - 6 20

Total Marks 20

SOLUTION 3

(a) Conditions necessary to satisfy recognition of revenue from sale of goods – 5 x 1 mark each 5

(b) risks and rewards transferred on retail goods 2

(c) examples of where retail outlets may retain the risks and rewards of ownership 4

(d) examples of IAs 18 in practice – 3 x 3 marks each 9

Total Marks 20

SOLUTION 4

(a) opening Accumulated fund 6

(b) Income & expenditure Account 10

(c) list and explanation of advantages and disadvantages of receipts and payment account 4

Total Marks 20

(a) Calculation & Commentary on 6 ratios – 6 x 2 marks each 12


SOLUTION 5

(b) raising and use of external funds 4

(c) limitations of ratios 4

Total Marks 20

Page 18
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2016

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - APrIl 2016

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
(a) Identify and explain the fundamental differences between a company and a partnership. (10 marks)

rubroc limited is a company involved in the distribution of quarry material for the construction and agricultural
industries. The following trial balance was extracted from their books as at 31 december 2015:
(b)

Debit Credit

Accumulated depreciation - building - 1 January 2015 34,750


€ €

Accumulated depreciation - office equipment - 1 January 2015 26,840


Accumulated depreciation - Trucks - 1 January 2015 350,000
Admininstrative expenses 103,510
Allowance for Trade receivables 10,574
bank 267,410
building at Cost at 1 January 2015 241,020
Current Tax Payable 16,500
distribution Costs 754,210
Income Tax 13,640
Inventory at 1 January 2015 nil
Issued share Capital - 100,000 at €1.50 each 150,000
land 240,000
office equipment at Cost at 1 January 2015 42,400
Purchases / Purchase returns 1,236,570 10,869
retained earnings at 1 January 2015 593,119
revenue returns / revenue 14,570 2,478,560
revaluation surplus 64,851
share Premium 30,000
Trade Payables 324,867
Trade receivables 487,600
Trucks at Cost at 1 January 2015 690,000

4,090,930 4,090,930

The following information, based on your investigations, has also come to your attention:

(i) expenses are to be allocated evenly between distribution Costs and Administrative expenses unless otherwise
stated. Interest on loans is to be included in finance Costs.

(ii) There is no closing inventory.

(iii) depreciation is to be charged as follows:

land not depreciated


buildings see Part v below
office equipment 20% reducing balance
Trucks 25% straight line on Cost

depreciation is calculated monthly from date of purchase to the date of sale.


Page1
(iv) A truck was involved in an accident on 1 may 2015 and had to be scrapped. €15,000 was received for the
scrappage of this truck. This amount was lodged to the bank account. The truck had originally cost €75,000
on 1 september 2013. rubroc limited replaced the truck by purchasing a new truck costing €80,000 on 1
July 2015.

(v) The new truck in part (iv) above was partially paid for by rubroc limited by cheque and by taking out a long
term loan of €60,000 carrying interest at 6% per annum which was not paid for by year-end.

(vi) The building was revalued on 1 January 2015 by a professional valuer who valued the building at €200,000.
The valuer places a useful economic life of twenty years from 1 January 2015 and that the residual value of
the building in twenty year’s time would be €50,000.

(vii) A customer of rubroc limited is suing the company, claiming that incorrect material was delivered. rubroc
limited’s solicitor has advised that it is more likely than not the company will be found liable. This would result
in rubroc limited being required to pay court and legal fees of €15,000. The judge in the case will decide
on damages. There is an 80% chance that the damages would be €100,000 whereas there is a 20% chance
the damages would be €60,000. rubroc limited intends to sue the quarry which it purchased the material
from for €80,000. The quarry disputes this claim by rubroc limited.

(viii) The income tax amount for the 2015 year included in the above trial balance is incorrect and should be
€18,900. This amount was paid in march 2016.

(ix) A VAT refund of €6,000 relating to purchases has not been accounted for. This amount was received in
february 2016.

(x) rubroc limited wrote off bad debts of €7,200. The Allowance for doubtful debts should be set at 4%.

(xi) rubroc limited had amounts owing at the year-end for Administrative expenses and distribution Costs of
€2,860 and €14,520 respectively.

REQUIREMENT:

Prepare, in a form suitable for publication, a statement of Profit or loss and other Comprehensive Income and a
statement of financial Position for rubroc limited for the financial year-ended 31 december 2015.

Note: All workings should be shown. (30 marks)

[Total: 40 Marks]

Page 2
2. The bank account of Collatc limited for the month of december 2015 was as follows:

(a) Prepare the bank reconciliation statement for Collatc limited at the 31 december 2015. (18 marks)
REQUIREMENT:
(18 Marks)
explain why the bank statement is usually taken as being more accurate than the details that appear in the
company’s own records.
(b)

(2 marks)
(2
M

[Total: 20 Marks]

Page 3
3.
(A) durine limited is a company involved in building wind farms in Ireland. The financial controller has asked you,
a newly qualified CPA for some help in correctly accounting for property, plant and equipment (PPe) within the
company for the financial year ending 31 december 2015.

The following costs have occurred on a wind farm site:



Preparation of site 80,000
Annual maintenance once operational 30,000
VAT on materials (recoverable) 120,000
staff training on correctly operating the wind farm once operational 25,000
Import duty on materials purchased 28,000
Initial surveying of site 40,000
Project manager’s salary to build and manage the wind farm 140,000
Wages of employees to build the wind farm 300,000
Annual wages of employees once the wind farm is operating 100,000
Testing costs 60,000
materials purchased for wind farm net of VAT 250,000
discount received on materials purchased 33,000

(a) Calculate the amount that should be capitalised as property, plant and equipment for the above wind farm.
REQUIREMENT:

(5 marks)

In accordance with IAs 16 – Property, Plant & Equipment explain the accounting treatment allowed for the
measurement of PPe:
(b)

(i) At recognition;

(ii) After recognition. (3 marks)

(c) In the context of IAs 16 – Property, Plant & Equipment:

(i) discuss what is meant by the term ‘fair Value’;

(ii) how can the fair value of a building be determined? (3 marks)

durine limited’s head office building is the only building it owns. using professional valuers, it revalued this
building on 1 January 2015, at €2,100,000. durine limited has adopted a revaluation policy for buildings from
(B)

this valuation date and has decided that the original useful life of buildings has not changed as a result of the
revaluation. The building was acquired on 1 January 2005. The cost of the building on acquisition was
€2,500,000 and the accumulated depreciation to the 31 december 2014 amounted to €500,000. The
depreciation up to 1 January 2015 was depreciated evenly since acquisition. The professional valuer believes
that the residual value on the building would be €600,000 at the end of its useful life.

In accordance with IAs 16 – Property, Plant & Equipment:


REQUIREMENT:

(i) how should the depreciable amount of an asset be allocated? (1 mark)

(ii) how often should the residual value and the useful life of an asset be reviewed? (1 mark)

(iii) Calculate the depreciation amount of the building for the year ending 31 december 2015 based on the
information provided in the above scenario.
(7 marks)

[Total: 20 Marks]

Page 4
Terry and Thomas are in partnership sharing profits and losses 2:1. They had originally invested €50,000 and
€40,000, respectively. Their current account balances on 1 January 2015 were €14,000 credit for Terry and
4.

€9,900 debit for Thomas.

The partnership agreement specifies the following:


1) The payment of interest on drawings and receipt of interest on capital at the rate of 5% per annum and
3% per annum, respectively.
2) The partners take drawings in the same proportion as they share profits or losses. Terry takes drawings
of €2,400 a month with Thomas taking the amount of drawings as allowed by the partnership rules.
3) Thomas is entitled to take a salary of €2,000 a month.
4) The interest on drawings is calculated as if the drawings for the six month period had been taken in full
on the first day of the period.

on 1 July 2015, Terry decides to retire. both partners agree to have the partnership valued and bring in the
resultant goodwill into the partnership. Terry agrees to leave €30,000 of his capital as a loan to the business
earning interest at the rate of 4% per annum and to withdraw the balance of what is owing to him. An
independant expert values the goodwill on 1 July at €90,000.

on 1 July, Thomas decides to enter a new partnership with Toby where they share profits or losses 3:1. They
decided to keep the same interest rates from the previous partnership agreement in relation to drawings and
capital. Thomas’s salary was changed to €2,200 a month. from this period to the year-end, Thomas took
drawings of €10,000 and Toby took drawings of €5,000. Toby introduced capital of €25,000 on his admission
to the partnership. The goodwill was cancelled in the same proportion as they share profits or losses.

The profits for the year amounted to €108,000 and these profits occurred evenly throughout the year.

REQUIREMENT:

for the year ended 31 december 2015:

(a) Prepare the Profit & loss Appropriation Accounts. (12 marks)

(b) Post to and balance the Current Account of all the individual partners. (8 marks)

[Total: 20 Marks]

Page 5
redona limited operates a hotel in dublin and the following is its results for the last three years with its year
end being 31 december.
5.

revenue increase / (decrease) (5%) 4% 12%


2013 2014 2015

non-Current Assets increase / (decrease) 40% 10% 2%


Gross Profit 60% 61% 66%
net Profit 23% 25% 21%
return on Capital employed 12% 15% 10%
Current ratio 1.4:1 1.6:1 1.8:1
Acid ratio 0.6:1 1.0:1 0.9:1
debt to equity ratio 50% 44% 43%
dividend Cover 4 times 8 times 10 times

REQUIREMENT:

(a) using all of the above information, comment on the performance of redona limited from 2013 to 2015.

(12 marks)

Identify and explain the main advantages of ratio analysis as a means of assessing the financial performance
of a business.
(b)

(5 marks)

(c) Comment on the use of the Gross Profit ratio to the service industry. (3 marks)

[Total: 20 Marks]

END OF PAPER

Page 6
SUGGESTED SOLUTIONS
The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - APrIl 2016

(a) discuss the differences that exist between a company and a partnership.
SOLUTION 1

Name – A partnership cannot use the word “limited” in its name.

No separate legal personality – a partnership has no separate legal personality, separate from its
partners/members of the partnership. however, a company does have a separate personality from its
shareholders. A company owns its property, not the shareholders. Partners own the partnership property.

Unlimited Personal Liability– a partnership has unlimited liability for all the debts of the firm (except under
the limited Partnership Act 1907) whereas shareholders in a company have liability limited.

Succession – when one partner dies, the partnership is dissolved unless the partnership agreement provides
otherwise. however, a company has “perpetual succession”. shareholders may die but the company
continues until it is wound up.

Management – a partnership is managed by the partners together – they are the shareholders, managers and
workers. A company is managed by the directors not the shareholders.

Shares – partners have a share in a partnership as agreed between them. A partner’s share cannot be
transferred without the consent of the other partners. In reality there is not a substantial difference in the
definition of a share between a company and a partnership.

Size – a partnership can have between 2 and 20 partners, except solicitors and accountants. A private
company can have more and a public company can have 7 or more shareholders.

Regulation – a company has memorandum & Articles of Association and a partnership usually has a
Partnership Agreement to regulate its affairs.

Legislation – The Partnership Act, 1890 is the primary piece of law (legislation) which governs partnerships
(and the limited Partnership Act, 1907). Companies are governed by the Companies Acts 1963 – to date,
and various eu regulations.

Taxation – it is often said that partnerships are tax-transparent. Tax is paid by the partners on the profits each
partner makes at the usual income tax levels for an individual. A company, being a separate legal personality,
pays corporation tax (currently at 12.5%) but in addition to this, the shareholders will pay tax on any dividends
received from the company.

Accounts – Partnerships are not required to file accounts in the Company records office. Companies must
file accounts at the Company records office. Therefore while a lot of a company’s financial details are a
matter of public record, Partnerships financial details are kept private.

Withdrawal of Capital – Technically speaking, partners may withdraw their capital contributions without any
restrictions (unless regulated by the partnership agreement). A shareholder cannot, generally, withdraw his/her
capital under the capital maintenance rules of the Companies Acts.

In Court – A company cannot represent itself in court, it must do so through a solicitor. Any of the partners
in a partnership can represent themselves in court.
(10 marks)

Page 7
(b) Rubroc Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2015
! ! ! !
Revenue TB 2,478,560 0.25
- Revenue Returns TB - 14,570 0.25
Cost of Sales W2 - 1,219,701
Gross Profit 1,244,289 0.25
Finance Costs W1.v 1,800 0.25
Distribution Costs W2 938,832
Administrative Expenses W2 276,472 1,217,104 0.25
Profit/(Loss) before Tax 27,185 0.25
Income Tax Expense TB + W1.viii 13,640 5,260 18,900 0.25
PROFIT/(LOSS) FOR THE YEAR 8,285 0.25
Other Comprehensive Income
Revaluation Loss W3 - 6,270 0.25
Other Comprehensive Income for the year, net of tax - 6,270
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,015 0.25

Rubroc Limited Statement of Financial Position as at 31st December 2015


! ! ! !
Property, Plant & Equipment W3 651,198 0.25
Total Non-Current Assets 651,198 0.25
Current Assets
Inventories W1.ii -
Trade Receivables W1.x 461,184 0.50
Other Receivables W1.ix 6,000 0.25
Cash & Cash Equivalents TB + W1.iv + W1.v 267,410 15,000 - 20,000 262,410 0.25
Total Current Assets 729,594 0.25
TOTAL ASSETS 1,380,792 0.25
Equity & Liabilities
Equity
Share Capital 150,000 0.25
Share Premium 30,000 0.25
Retained Earnings TB + SOPL 593,119 8,285 601,404 0.25
Revaluation Surplus W3 64,851 - 6,270 58,581 0.25
Total Equity 839,985 0.25
Non-Current Liabilities
Long-term Loan W1.v 60,000 0.25
Total Non-Current Liabilities 60,000
Current Liabilities
Trade Payables TB 324,867 0.25
Current Tax Payable TB + W1.viii 16,500 5,260 21,760 0.25
Provisions W1.vii 115,000 0.25
Accruals W1.v + W1.xi 1,800 2,860 14,520 19,180 0.25
Total Current Liabilities 480,807 0.25
TOTAL EQUITY & LIABILITIES 1,380,792 0.25

SUBTOTAL MARKS 7.50

Page 8
Working - Journal Entries
! !
1.ii No Closing Inventory at year-end
1.iv Dr. Bank + Current Assets SOFP 15,000
Cr. Disposal Account - Trucks 15,000
Dr. Disposal Account - Trucks 75,000
Cr. Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 75,000 2.00
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 31,250
Cr. Disposal Account - Trucks 31,250
Dr. Loss on Disposal + Expenses SOPL & OCI 28,750
Cr. Disposal Account - Trucks 28,750

1.v Dr. Property, Plant & Equipment (PPE) + Non-Current Assets SOFP 80,000
Cr. Long-term Loan + Non-Current Liabilities SOFP 60,000 1.00
Cr. Bank - Current Assets SOFP 20,000
Dr. Finance Costs + Expenses SOPL & OCI 1,800 1.00
Cr. Accruals + Current Liabilities SOFP 1,800
Loan 60,000
Loan Interest 6% 3,600
Time Apportion 6 Months 1,800

1.vi Dr. Revaluation Loss (W3) - Equity SOFP 6,270 1.00


Cr. Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 6,270

Dr. Depreciation - Administrative Expenses + Expenses SOPL & OCI 3,750


Dr. Depreciation - Distribution Costs + Expenses SOPL & OCI 3,750 1.00
Cr. Accumulated Depreciation - PPE - Non-Current Assets SOFP 7,500

Calculation of Depreciation on Buildings

Revalued Amount - Residual Value 200,000 - 50,000


Remaining Useful Life 20

Depreciation for the year 7,500

1.vii IAS 37 Provisions, Contingent Liabilities & Contingent Assets

Given more likely than not that Rubroc will be found guilty, a present obligation is assumed to exist - IAS 37, para 15-16
Given that a single obligation is being measured, a provision is made for the outflow of the most likely outcome, IAS 37
para 40.
Consequently, a provision is recognised for !15,000 and !100,000 i.e. !115,000

Dr. Administrative Expenses + Expenses SOPL & OCI 57,500


Dr. Distribution Costs + Expenses SOPL & OCI 57,500 2.00
Cr. Provisions + Current Liabilities SOFP 115,000
Rubroc suing its supplier may give rise to a contingent asset.
A contingent asset is a possible asset arising from past events whose existence will only be confirmed by the
occurence of one or more uncertain future events not wholly within the control of the entity.
However, a contingent asset is not recognised in the financial statements and therefore, the !80,000 cannot be recognised 1.00
in Rubroc's financial statements for the year-ended 31 December 2015.
1.viii Dr. Income Tax + Expenses SOPL & OCI 5,260
Cr. Current Tax Payable + Current Liabilities SOFP 5,260 1.00

1.ix Dr. Other Receivables + Current Assets SOFP 6,000


Cr. Purchases - Expenses SOPL & OCI 6,000 1.00
1.x Dr. Bad Debt Write Off + Expenses SOPL & OCI 7,200
Cr. Trade Receivables - Current Assets SOFP 7,200 1.00

Dr. Allowance for Doubtful Debts + Expenses SOPL & OCI 8,642
Cr. Allowance for Doubtful Debts - Current Assets SOFP 8,642 1.00
Trade Receivables Balance per TB 487,600
- Bad Debt Written Off W1.viii - 7,200
480,400
- Allowance for Trade Receivables - 4% - 19,216
Revised Trade Receivable 461,184
Current Allowance for Trade Receivables TB 10,574
New Allowance for Trade Receivables See Above 19,216
Increase in Allowance for Trade Receivables 8,642
1.xi Dr. Administrative Expenses + Expenses SOPL & OCI 2,860
Dr. Distribution Costs + Expenses SOPL & OCI 14,520 1.00
Cr. Accruals + Current Liabilities SOFP 17,380

SUBTOTAL MARKS 14.00

Page 9
Cost of Distribution Administration
Working 2 - Expenses Sales ! Costs ! Expenses !
Opening Inventory Per TB - - - Cost of
Purchases Per TB 1,236,570 - - Sales
- Purchases Returns Per TB - 10,869
Closing Inventory W1.ii - - - 0.50
Vat Refund W1.ix - 6,000
Expenses Per TB - 754,210 103,510 Distribution
Loss on Disposal W1.iv - 14,375 14,375 28,750 Costs
Provision W1.vii - 57,500 57,500 115,000 2.00
Bad Debt Write Off W1.x - 3,600 3,600 7,200
Allowance for Doubtful Debts W1.x - 4,321 4,321 8,642
Accruals W1.xi - 14,520 2,860 17,380
Depreciation - Buildings W3 - 3,750 3,750 7,500 Admin.
Depreciation - Plant & Equipment W3 - 1,556 1,556 3,112 Expenses
Depreciation - Office Equipment W3 - 85,000 85,000 170,000 2.00
Total 1,219,701 938,832 276,472

Working 3 - Property, Plant & Equipment Office


Land Buildings Equipment Trucks Total
! ! ! ! !
Cost Per TB 240,000 241,020 42,400 690,000 1,213,420
Accumulated Depreciation b/d Per TB - - 34,750 - 26,840 - 350,000 - 411,590
Carrying Value b/d at 1st January 2013 240,000 206,270 15,560 340,000 801,830 0.50
Revaluation Loss - - 6,270 - - - 6,270 0.50
240,000 200,000 15,560 340,000 795,560
Disposal - Cost W1.iv - - - - 75,000 - 75,000 0.50
Disposal - Accumulated Depreciation Note 1 - - - 31,250 31,250 0.50
240,000 200,000 15,560 296,250 751,810
Addition W1.iv - - - 80,000 80,000 0.50
240,000 200,000 15,560 376,250 831,810
Depreciation - Buildings W1.vi - - 7,500 - - - 7,500 0.50
Depreciation - Office Equipment - 20% Reducing Balance - - - 3,112 - - 3,112 0.50
Depreciation - Trucks - 25% Straight Line - - - - 170,000 - 170,000 0.50
Carrying Value c/d at 31st December 2015 240,000 192,500 12,448 206,250 651,198
Note 1 - Disposal of Truck ! !
Cost 75,000
Accumulated Depreciation - 25% straight line per annum
Depreciation 2013 - 4 Months 6,250
Depreciation 2014 18,750
Depreciation 2015 - 4 Months 6,250
31,250 - 31,250
Carrying Value of Equipment disposed 43,750
Disposal Account
Cost 75,000 Accumulated Depreciation 31,250
Disposal Proceeds 15,000
Loss on Disposal 28,750
75,000 75,000

SUBTOTAL MARKS 8.50

TOTAL MARKS 22.50

Page 10
Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Accumulated Depreciation - Building - 1 January 2015 34,750 7,500 15,000 42,250
Accumulated Depreciation - Office Equipment - 1 January 2015 26,840 3,112 6,224 29,952
Accumulated Depreciation - Trucks - 1 January 2015 350,000 201,250 340,000 488,750
Admininstrative Expenses 103,510 172,962 276,472
Allowance for Trade Receivables 10,574 8,642 19,216
Bank 267,410 15,000 20,000 262,410
Building at Cost at 1 January 2015 241,020 6,270 234,750
Current Tax Payable 16,500 5,260 21,760
Distribution Costs 754,210 184,622 938,832
Income Tax 13,640 5,260 18,900
Inventory at 1 January 2015 -
Issued Share Capital - 100,000 at !1.50 each 150,000 150,000
Land 240,000 240,000
Office Equipment at Cost at 1 January 2015 42,400 42,400
Purchases / Purchase Returns 1,236,570 10,869 6,000 1,230,570 10,869

Page 11
Retained Earnings at 1 January 2015 593,119 8,285 601,404
Revenue Returns / Revenue 14,570 2,478,560 14,570 2,478,560
Revaluation Surplus 64,851 6,270 58,581
Share Premium 30,000 30,000
Trade Payables 324,867 324,867
Trade Receivables 487,600 7,200 480,400
Trucks at Cost at 1 January 2015 690,000 80,000 75,000 695,000
Loss on Sale of Truck 75,000 75,000
Long Term Loan 60,000 60,000
Finance Costs 1,800 1,800
Accruals 19,180 19,180
Provisions 115,000 115,000
Other Receivables 6,000 6,000
Bad Debt Write Off 7,200 7,200

4,090,930 4,090,930 765,976 765,976 2,489,429 2,489,429 1,960,960 1,960,960


SOLUTION 2

2(a)
(a) Step 1: Reconcile the opening balance in the bank account with the opening balance on the bank statements
!
Balance per Bank Account - 01/12/2015 28,754
Add Items not yet Debited -
28,754 1.00

Balance per Bank Account - 01/12/2015 28,471


Add Unpresented Lodgements 670 1.00

Less Unpresented Cheques


Cheque 8751 - 245 1.00
Cheque 8753 - 142 1.00
28,754 1.00

Adjusted Bank Account


December ! December !
31 Balance 37,042 31 Lodgement (05/12/15) - Difference 90 1.50
31 Lodgement (19/12/15) - Difference 9 31 Cheque 8756 - Difference 18 1.50
31 Lodgement 2,451 31 Gas 486 1.50
31 Rates 1,600 0.75
31 Closing Balance 37,308 0.75
39,502 39,502

Bank Reconciliation Statement


Closing Balance per Bank Statement - 31/12/2015 43,265 0.75
Less Unpresented Cheques
Cheque 8755 548 0.75
Cheque 8757 1,654 0.75
Cheque 8759 1,499 0.75
Cheque 8760 2,147 - 5,848 1.50
Add Lodgement not yet Cleared
Lodgement - 31/12/2015 890 890 0.75
Bank Errors
1245785621 - 23/12/2015 - 999 - 999 0.75
Balance as per Adjusted Bank Account 37,308 1.00

SUBTOTAL MARKS 18.00

Q 2 (b) Human Error - There is more chance of errors happening in the bank account details in a company due to human
e

(b)
Q 2 (b) Human Error - There is more chance of errors happening in the bank account details in a company due to human
error in inputting details. T 2.00

TOTAL MARKS 20.00

Page 12
SOLUTION 3

(A)
REPORT
To: Financial Controller – Durine Limited
From: Future Financial Accountant
Re: IAS 16 – Property, Plant & Equipment (PPE)
Date: April 2016

(a) The amount that can be capitalised for this wind farm is as follows:

€ €
Preparation of site 80,000 Yes 80,000
Annual maintenance once operational 30,000 no
Vat on materials (recoverable) 120,000 no
staff training on correctly operating the wind farm once operational 25,000 no
Import duty on materials purchased 28,000 Yes 28,000
Initial surveying of site 40,000 Yes 40,000
Project manager salary to build and manage the wind farm 140,000 Yes 140,000
Wages of employees to build the wind farm 300,000 Yes 300,000
Annual wages of employees once the wind farm is operating 100,000 no
Testing costs 60,000 Yes 60,000
materials purchased for wind farm net of vat 250,000 Yes 250,000
discount received on materials purchased 33,000 Yes -33,000
Amount to be Capitalised 865,000

(5 marks)

(i) Per paragraph 15 of IAs 16, at initial recognition, all items of PPe are recognised at cost.
(b)

(ii) Per paragraph 29 of IAs 16, two methods of valuing PPe after initial recognition are allowed i.e.

a) Cost model i.e. PPe is carried at cost less accumulated depreciation and impairment losses
b) revaluation model i.e. PPe is carried at a revalued amount

The revalued amount is equal to the fair value at date of revaluation less subsequent accumulated depreciation
and impairment losses.
(3 marks)

(i) Per paragraph 6 of IAs 16, fair value is the amount for which an asset could be exchanged between
(c)

knowledgeable, willing parties in an arm's length transaction.

(ii) from market based evidence by appraisal by professionally qualified valuers. (3 marks)

Page 13
(i) Per paragraph 6 of IAs 16, it should be allocated over its useful life (1 mark)
(B)

(ii) Per paragraph 51 of IAs 16, the residual value and the useful life of an asset shall be eviewed at least at each
financial year end and if expectations differ from previous estimates, the change(s) shall be accounted for as
a change in an accounting estimate in accordance with IAs 8 Accounting Policies, Changes in Accounting
estimates and errors.
(1 mark) 

(iii) The depreciation amount is as follows:

Working - Property, Plant & Equipment Buildings Total


€ €
Cost 2,500,000 2,500,000
- Accumulated depreciation -500,000 -500,000
Carrying Value b/d at 1st January 2015 2,000,000 2,000,000
revaluation Gain 100,000 100,000
2,100,000 2,100,000
depreciation - buildings - note 1 -37,500 -37,500
Carrying Value c/d at 31st december 2015 2,062,500 2,062,500

note 1
buildings - original Cost 2,500,000
buildings - original Accumulated depreciation 500,000
Accumulated depreciation / Cost = 20%

building has been depreciated by 20% over 10 years (01.01.05 - 31.12.14) so annual rate ofdepreciation has
been 2% i.e. 20% / 10 years as asset has been depreciated evenly since acquistion. Therefore the original
useful life is 50 years i.e. 100% / 2% and the remaining useful life is 40 years. Therefore, the remaining
useful life is 10 years

To Calculate the new depreciation amount, we use the following depreciation formula

revalued Cost of Asset – residual Value i.e. 2,100,000 - 600,000


expected useful life of Asset 40 Years

depreciation = 37,500 (7 marks)

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

financial Accountant
[Total: 20 Marks]

Page 14
SOLUTION 4

Old P'ship New P'ship


! !
Net Profit 108,000 split evenly per month 54,000 54,000 1.00
Less Loan Interest - - 600 1.00
Add Interest on Drawings Note 1
Terry 360 - 1.00
Thomas 180 250 1.00
Toby - 125 1.00

Less Salary - Thomas - 2,000*6 Mths : 2,200*6 Mths (12,000) - 13,200 1.00
Less Interest on Capital Note 2
Terry (750) - 0.50
Thomas (600) - 600 1.00
Toby - - 375 0.50
Residual Profits 41,190 39,600 1.00
Residual Profits Split
Terry 2:1 27,460 - 1.00
Thomas 1:2 in 1st Partnership and 3:1 in 2nd Partnership 13,730 29,700 1.00
Toby 1:3 - 9,900 1.00
41,190 39,600
Note 1 - Interest on Drawings Interest on
Amount No. of Mths Interest Drawings
Terry ! !
01.01.15 - 30.06.15 14,400 6 5% 360
01.07.15 - 31.12.15 - 6 5% - 360
14,400
Thomas
01.01.15 - 30.06.15 7,200 6 5% 180
01.07.15 - 31.12.15 10,000 6 5% 250 430
17,200
Toby
01.01.15 - 30.06.15 - 6 5% -
01.07.15 - 31.12.15 5,000 6 5% 125 125
5,000
Total Interest on Drawings 915
Note 2 - Interest on Capital
Terry Thomas Toby
! ! ! !
50,000 x 3% x 6 / 12 750
- x 3% x 6 / 12 -
40,000 x 3% x 6 / 12 600
40,000 x 3% x 6 / 12 600
- x 3% x 6 / 12 -
25,000 x 3% x 6 / 12 375
750 1,200 375 2,325

SUBTOTAL MARKS 12.00

Page 15
(b)
Partners Current Account
Terry Thomas Toby Terry Thomas Toby
! ! ! ! ! !
Balance B/D - 9,900 - Balance B/D 14,000 - - 1.00
Interest on Capital 750 1,200 375 0.50
Salary - 25,200 - 0.50
Residual Profits 27,460 43,430 9,900 0.50
Interest on Loan 600 - - 0.50
Goodwill 60,000 30,000 - 1.00
Goodwill - 67,500 22,500 1.00
Interest on Drawings 360 430 125 0.50
Drawings 14,400 17,200 5,000 0.50
Bank 88,050 1.00
Balance C/D - 4,800 Balance C/D - 17,700 1.00

102,810 99,830 27,625 102,810 99,830 27,975

Balance B/D - - 17,700 Balance B/D - 4,800 -

SUBTOTAL MARKS 8.00

TOTAL MARKS 20.00

Page 16
Solution 5

(a) Commentary on Performance of Redona Limited from 2013 to 2015

The decrease and increase in redona limited revenue appears to be in line with how the hotel sector has
Revenue increase / (decrease)

performed in the recession and coming out of the recession in 2014. The hotel sector in dublin has shown a
noticeable improvement in revenue in 2015 so redona limited has displayed a decent performance with its
revenue over the period.

redona limited appears to have carried out a sizeable capital improvement programme in 2013 with some
Non-Current Assets increase / (decrease)

residue of this spend rolling over to 2014. The 2015 spend is small and is consistent with the hotel not needing
much capital spend given the refurbishment in 2013 and 2014.

A good performance by redona limited in capitalising on improving market conditions in 2015 by increasing
Gross Profit Percentage

its rates and thereby increasing its gross margin. Again the results are in line with the hotel sector in dublin.

redona limited performed poorly in this ratio. As dublin gradually came out of recession in 2014, redona
Net Profit Percentage

limited net profit percentage increased and showed the hotel was performing well. however, there has been
a sizeable decrease in the net profit percentage from 2014 to 2015 which is very disappointing especially in
light of the increase in the gross profit percentage. This is an area that the hotel management and
shareholders needs to examine closely to identify and correct the reasons for the decrease in net profit
percentage from 2014 to 2015.

Again a disappointing return and the decrease in profit is the significant reason for the decrease in the ratio.
Return on Capital Employed

underneath the line, the capital employed would have increased year on year which would also help to
decrease the ratio but the change in profit from 2014 to 2015 has been the main driver for the decrease in the
ratio from 2014 to 2015.

The company has struggled with this ratio particularly in 2013 and 2014 but it is improving and 2015 is getting
Current Ratio

closer to the norm of 2:1. overall, the result from 2013 to 2015 has been decent and continued focus on this
ratio can ensure that it gets to a satisfactory level in the years ahead.

Again this ratio has improved from 2013 to 2015 but it is disappointing to see that it decreased from the 2014
Acid Ratio

level. Therefore, management need to find the reasons for the decrease and work to ensure that it gets back
to the norm of 1:1 at a minimum. The 2013 ratio shows that the hotel was carrying a sizeable quantity of
inventory which then decreased in 2014 and increased again in 2015. This is surprisingly high for a hotel and
needs serious investigation as normally inventory would not be at this level in a hotel.

It is pleasing to note the improvement in this ratio from 2013 to 2015 as the company has paid down its debt
Debt to Equity Ratio

and improved its reserves. The decrease has slowed down in 2015 which is probably due to decreased
profits leading to decreased cash flow to pay back debt as well as the company trying to improve its current
ratio by holding on to more of its cash.

This ratio is going in the right direction as increased profits due to higher revenue are helping to increase the
Dividend Cover

cover. It also appears as if a decision was made to reduce the amount of the dividend and leave more of the
profit in the hotel to be used for future investment. management need to ensure that the shareholders are
happy with the decrease in the level of the dividend given the increased profits despite lower profit margins,
the hotel is enjoying.

overall, the hotel is performing well with management’s main focus to ensure that inventory levels are reduced
to hotel norms and to remedy the decrease in net profits for 2015 while ensuring that the hotel improves its
ratios overall due to a more buoyant hotel market existing in dublin.
(12 marks)

Page 17
financial ratios provide a standardised method with which to compare companies and industries. ratios can
(b) Comparison

put all companies on a relatively equal playing field in the eyes of analysts; companies are judged on their
performance rather than their size, sales volume or market share.

ratios can reveal trends in particular industries, creating benchmarks against which the performance of all
Industry Analysis

industry players can be measured thus providing valuable information to users, shareholders, trade payables,
banks.

ratios help investors and analysts to evaluate the strengths and weaknesses of individual companies or
Stock Valuation

industries and allow them to highlight companies to invest in or to avoid investing in.

ratios can provide guidance to entrepreneurs when creating business plans or preparing presentations for
Planning and Performance

lenders and investors. ratios can also serve as an impetus for strategic change within an organisation,
providing management with relevant guidance and feedback as ratio valuations shift in response to
organisational changes. ratios help to ensure managers perform by revealing financial weaknesses and
opportunities.

It highlights important information in simple formats. A user can judge a company by just looking at a small
Simplicity

amount of numbers instead of reading the whole financial statements.


(5 marks)

It depends on the service industry. for example, an accountancy practice will usually not have any cost of
sales and therefore, the gross profit ratio is meaningless as all its costs are under expenses. however, a hotel
(c)

while providing a service will have a cost of sales for its food and beverage operations and therefore, the
gross profit ratio is relevant.
(3 marks)

[Total: 20 Marks]

Page 18
MARKING SCHEME

SOLUTION 1

(a) differences – 2 x 5 marks each 10

Workings 22.5
statement of Profit or loss and other Comprehensive Income + 7.5
(b)

statement of financial Position

Total Marks 40

SOLUTION 2

(a) bank reconciliation 18

(b) explanation 2

Total Marks 20

SOLUTION 3

(a) Calculation of amount to be capitalised 5

Accounting treatment at recognition 1.5


Accounting treatment after recognition 1.5
(b)

fair Value 1.5


how should fair Value be determined 1.5
(c)

depreciable amount of an asset be allocated 1


how often residual value and useful life be reviewed 1
(d)

depreciation amount 7

Total Marks 20

SOLUTION 4

(a) Profit & loss Appropriation Account 11

(b) Preparation of Partners Current Accounts 7

(c) Journal entries for Introduction and removing of Goodwill 2

Total Marks 20

SOLUTION 5

(a) Commentary on performance of redona limited 12

(b) Advantages of ratio Analysis 5

(c) Gross Profit applicable to a service industry 3

Total Marks 20

Page 19
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2016

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - AugusT 2016

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
Identify and explain the main elements of the statement of financial Position and the statement of Profit or
loss and other Comprehensive Income.
(a)

(10 marks)

The following trial balance was extracted from the books of hoella limited (hoella), a company with a number
of retail shops, as at 31 december 2015:
(b)

Debit Credit

motor Vehicles 68,000


€ €

Investments - 6% 100,000
Trade receivables 324,700
Intangible Assets 200,000
Trade Payables 246,807
fixtures & fittings 214,900
share Premium 20,000
distribution Costs 265,874
share Capital - 100,000 at €1.30 each 130,000
Current Tax Payable 1,200
revenue 1,687,542
Accumulated depreciation - Premises at 31.12.14 387,500
revaluation surplus 10,520
Investment Income 4,800
bank 2,413
Accumulated Amortisation of Intangible Assets at 31.12.14 40,000
retained earnings at 31.12.14 482,222
Allowance for bad debts 12,458
Purchases 897,541
Administrative expenses 325,887
opening Inventory 78,654
Accumulated depreciation - motor Vehicles at 31.12.14 24,560
long Term loan 124,750
Accumulated depreciation - fixtures & fittings at 31.12.14 145,784
Premises 845,000
3,320,556 3,320,556

The following information, based on your investigations, has come to light:

(i) hoella’s year-end inventory amounted to €89,120 valued at cost. Included in this amount is some inventory
which has been damaged and is beyond repair. The cost of this damaged inventory is €3,250. hoella can
sell it at 70% of the selling price and normally makes a mark-up of 40% on cost.

(ii) hoella purchased some fixtures and fittings on 1 April 2015 for €60,000 plus import duties of €2,900. The
import duties were included in Administrative expenses and credited to the bank upon payment.

Page1
(iii) depreciation is to be charged as follows:

Premises 2% straight line on Cost


fixtures & fittings 15% straight line on Cost
motor Vehicles 20% reducing balance

depreciation is charged in full in the year of purchase and none in the year of sale.

(iv) All of the relevant expenses in the trial balance are to be split evenly between Administrative expenses and
distribution Costs, respectively.

(v) hoella sold 40,000 shares for €75,000 and lodged the money to the bank.

(vi) The intangible asset has a finite useful life and was reviewed on 1 January 2015. from the review, it was
identified that the intangible asset’s useful economic life is now 10 years from the date of the review.

(vii) Income tax for 2015 is estimated at €40,200. The company paid €28,200 towards this income tax bill on 30
december 2015.

(viii) The Allowance for bad debts should be at 4% of Trade receivables.

(ix) The balance of the interest that was due on the investments was received in 2016.

REQUIREMENT:

Prepare, in a form suitable for publication, based on Ifrs, a statement of Profit or loss and other Comprehensive
Income and statement of financial Position for hoella limited for the financial year-ending 31 december 2015.

Note: All workings should be shown. (30 marks)

[Total: 40 Marks]

Page 2
The trial balance of Kafty limited, a company involved in the manufacturing sector, had a credit suspense
balance of €14,400 at its year-end 31 december 2015. Concerned about this, management asked you to
2.

investigate and you have uncovered the following issues:

1. An invoice relating to accountancy fees of €3,200 needs to be accounted for.

2. A decrease in the allowance for trade receivables of €4,600 was debited in error to the bad debt
recovered account.

3. Included in revenue was the sale of shares at par value amounting to €15,600. The amount was lodged
to the bank account.

4. Additions to Property, Plant & equipment of €8,000 purchased and paid for by cheque on 1 July 2015
had been expensed to the repairs and maintenance account. Kafty limited’s depreciation policy is to
depreciate in full in the year of purchase at a rate of 15% per annum.

5. due to a software problem, credit sales of €7,100 have been debited to trade payables.

6. rent due of €840 has been posted to the rent prepaid account in error.

7. A dividend paid of €2,300 has been credited to finance costs.

8. Wages paid to mr. Kafty of €2,200 have been credited to the director’s loan account.

(a) Prepare journal entries for Kafty limited to record and correct relevant transactions from the above information
REQUIREMENT:

for the financial statements for the year-ending 31 december 2015.


(15 marks)

(b) Prepare the suspense account for the year-ending 31 december 2015 (5 marks)

[Total: 20 Marks]

Page 3
3. Note: This question consists of two parts; Part 1 and Part 2. Students should note that the companies
in each part are separate and are not related to each other.

mr. Toby Jordan, the managing director of Tojo limited has a number of specific queries in relation to Inventory and
Part 1

has asked you for advice in relation to IAs 2 - Inventories. As part of its overall inventory, Tojo limited has three
items of inventories whose costs and net realisable values are as follows:

Cost - € NRV - €
1 72 80
Item

2 56 48
3 92 96
220 224

(a) Calculate the closing value of each item of inventory and hence the total value of closing inventory for these
REQUIREMENT:

items for Tojo limited at the year-end.


(4 marks)

(b) In the context of IAs2 - Inventories, prepare a report for mr. Toby Jordan which:

(i) outlines the items that comprise inventory.

(ii) explains how inventories are measured.

(iii) Provides three examples of costs which are specifically excluded from the costs of inventories and
instead are recognised as expenses in the period in which they are incurred.

(iv) briefly discusses three situations in which net realisable value is likely to be less than cost.
(12 marks)

davis limited’s closing inventory at 31 december 2015 is €347,841. This includes €4,640 for items accidentally
Part 2

destroyed on 31 december 2015 after the count was completed. Also included is €2,980 which relates to the cost
of inventory damaged in october 2015, which can be reworked at a cost of €680 and which can then be sold for
€2,410.

Calculate the closing value of inventory at the year-end. (4 marks)


REQUIREMENT:

[Total: 20 Marks]

Page 4
mr. ray dineen is a retailer whose main branch is in Waterford and has a second branch in Kilkenny. The
following trial balances have been extracted from his books as at 31 december 2015.
4.

Waterford Kilkenny
Dr. Cr. Dr. Cr.
€’000 €’000 €’000 €’000
receivables/Payables 300 270 200
drawings 27
Purchases/sales 2,700 3,140 1,210
distribution expenses 140 37
Allowance for unrealised profit 9
Current Accounts 269 205
Current Tax Payable 36
Income Tax 34 18
Allowance for doubtful debts 9 4
Capital 87
Property, Plant & equipment 970 290
bank 245 47
Inventory sent to branch 936 910
Administration expenses 62 34
Inventory (1 Jan 2015) 60 39
Accumulated depreciation (1 Jan 2015) 320 156
4,807 4,807 1,575 1,575

1) At 31 december 2015, there was €38,000 cash in transit from Kilkenny to Waterford.
Additional Information:

2) goods invoiced at €26,000 were in transit from Waterford to Kilkenny on 31 december 2015.
3) All goods are purchased by the Waterford branch. goods are then sent to Kilkenny and are invoiced at cost
plus 30%.
4) Closing inventory was valued at 31 december 2015 at cost of €28,000 in Waterford and at invoice price of
€39,000 in Kilkenny.
5) The Allowance for doubtful debts is to be maintained at a rate of 3%.
6) depreciation is to be provided for the year on property, plant and equipment at the rate of 10% straight line.

REQUIREMENT:

In adjacent columns, prepare the statement of Profit or loss for the year ended 31 december 2015 for mr.
dineen for:
(a)

(i) The Waterford shop;

(ii) The Kilkenny shop; and

(iii) The Combined business.

(b) Prepare a combined statement of financial Position for mr. dineen as at 31 december 2015.

[Total: 20 Marks]

Page 5
5. oakview limited is involved in the manufacture of soups and its financial statements are as follows:

Oakview Limited Statement of Financial Position as at 31 December 2015

2015 2014
€’000 €’000

Property, Plant & equipment 1,942 1,628


Non-Current Assets

Total Non-Current Assets 1,942 1,628

Inventories 196 129


Current Assets

Trade receivables 187 199


Cash & Cash equivalents 53 54
Total Current Assets 436 382

Total Assets 2,378 2,010

Equity & Liabilities

share Capital 140 100


Equity

share Premium 45 45
retained earnings 1,499 1,014
revaluation surplus 48 26
Total Equity 1,732 1,185

long Term loan 512 646


Non-Current Liabilities

Total non-Current liabilities 512 646

Trade Payables 115 146


Current Liabilities

bank overdraft - 12
Current Tax Payables 19 21
Total Current Liabilities 134 179

Total Equity & Liabilities 2,378 2,010

Oakview Limited Statement of Profit or Loss & Other Comprehensive Income


for the year-ended 31 December 2015

€’000
revenue 3,658
Cost of sales (2,672)
gross Profit 986
distribution Costs (169)
Administration expenses (157)
finance Costs (34)

Income Tax expense (95)


Profit before Tax 626

Profit for the Year 531

gain on Property revaluations 22


Other Comprehensive Income

Other Comprehensive Income for the year, net of tax 22

Total Comprehensive Income for the year, net of tax 553

Page 6
Notes:

(i) Property, Plant & equipment with a carrying value of €200,000 was sold for €180,000. This asset had
originally cost €250,000.

(ii) depreciation of Property, Plant & equipment during the year amounted to €98,000.

(iii) dividends paid during the year amounted to €46,000 and are reported in the statement of Changes in equity.

REQUIREMENT:

Prepare a statement of Cash flows for the year-ended 31st december 2015 for oakview limited in accordance with
IAs 7 - Statement of Cash Flows.
[Total: 20 Marks]

END OF PAPER

Page 7
SUGGESTED SOLUTIONS
The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - APrIl 2016

(a) The elements that relate to financial position of an entity are those that comprise the statement of financial
SOLUTION 1

position:

• Assets
• liabilities; and
• equity

Those relative to financial performance comprise elements in the statement of profit or loss and other
comprehensive income:

• Income
• expenses

The elements relating to financial position are defined in paragraph 49 of IAs 1 as follows:

Asset - A resource controlled by an entity as a result of past events and from which future economic benefits
are expected to flow to the entity

liability – A present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits

equity – The residual interest in the assets of an entity after deducting all its liabilities

The above form the accounting equation i.e.

Assets – liabilities = equity

Income is defined as encompassing both revenue and gains


revenue arises in the course of ordinary activities i.e. sales, fees, etc.
however, gains may or may not arrive in the course of ordinary activities and include:

that arising on the disposal of non-current assets


and unrealised gains on the revaluation of marketable securities
or increases in the carrying value of long term non-current assets.

expenses - includes losses as well as those expenses that arise in the course of ordinary activities of the entity
expenses in the course of ordinary activities include: cost of sales, wages and salaries etc.
losses would include those arising on the disposal of non-current assets and those arising from disasters

(10 marks)

Page 8
(b)
Hoella Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2015
! ! ! ! !
Revenue 1,687,542 0.25
Cost of Sales Total W2 887,140 0.25

Gross Profit 800,402 0.25


Other Income TB + W1.ix 1,200 4,800 6,000 0.25
Distribution Costs W2 307,768
Administrative Expenses W2 364,881 672,649 0.25
Profit/(Loss) before Tax 133,753 0.25
Income Tax W1.vii 40,200 0.25
PROFIT/(LOSS) FOR THE YEAR 93,553 0.25
Other Comprehensive Income for the year, net of tax - 0.25
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 93,553 0.25

Hoella Limited Statement of Financial Position as at 31st December 2015


! ! ! ! !
Non-Current Assets
Property, Plant & Equipment W3 565,698 0.25
Investments TB 100,000 0.25
Intangible Assets TB + W1.vi 200,000 - 40,000 - 16,000 144,000 0.50
Total Non-Current Assets 809,698 0.25
Current Assets
Inventories W1.i 89,055 0.25
Trade Receivables W1.viii 311,712 0.25
Other Receivables W1.ix 1,200 0.25
Cash & Cash Equivalents - 0.25
Total Current Assets 401,967 0.25
TOTAL ASSETS 1,211,665 0.25
Equity & Liabilities
Equity
Share Capital TB + W1.v 130,000 52,000 182,000 0.25
Share Premium TB + W1.v 20,000 23,000 43,000 0.25
Retained Earnings TB 482,222 93,553 575,775 0.25
Revaluation Surplus TB 10,520 0.25
Total Equity 811,295 0.25
Non-Current Liabilities
Long-term Loan TB 124,750 0.25
Total Non-Current Liabilities 124,750 0.25
Current Liabilities
Trade Payables TB 246,807 0.25
Bank Overdraft TB + W1.v+W1.vii 2,413 60,000 - 75,000 28,200 15,613 0.50
Current Tax Payable TB + W1.vii 1,200 40,200 - 28,200 13,200 0.50
Total Current Liabilities 275,620 0.25
TOTAL EQUITY & LIABILITIES 1,211,665

PRESENTATION 0.50

TOTAL MARKS 9.00

Page 9
Working - Journal Entries
Working - Closing Inventory ! !
Total Inventories at Cost per Inventory Count 89,120
Damaged Inventories - Cost 3,250
NRV - 50% of Selling Price Note 1 - 3,185
Inventory Write Down 65
Value of Closing Inventories 89,055
Note 1
Cost 3,250
Markup - 40% of Cost i.e. 40% * !3,250 40% 1,300
Selling Price 4,550
70% of Selling Price - 3,185 * 70% 70% 3,185
!'000 !'000
1.i Dr. Inventory + Current Assets SOFP 89,055 2.00
Cr. Closing Inventory - Cost of Sales SOPL & OCI 89,055
1.ii Import duties incorrectly included in Administrative Expenses instead of being capitalised
What Happened
Dr. Administrative Expenses + Expenses SOPL & OCI 2,900
Cr. Bank - Current Assets SOFP 2,900

What Should have Happened


Dr. Property, Plant & Equipment + Non-Current Assets SOFP 62,900 1.00
Cr. Bank - Expenses SOPL & OCI 62,900
Correct Error
Dr. Property, Plant & Equipment + Non-Current Assets SOFP 62,900
Cr. Administrative Expenses - Expenses SOPL & OCI 2,900 1.50
Cr. Bank - Current Assets SOFP 60,000
1.v Dr. Bank + Current Assets SOFP 75,000
Cr. Share Capital + Equity SOFP 52,000 1.00
Cr. Share Premium + Equity SOFP 23,000
1.vi Dr. Amortisation of Intangible Assets + Expenses SOPL & OCI 16,000 2.00
Cr. Accumulated Amoritisation of Intangible Assets - Non-Current Assets SOFP 16,000
1.vii Dr. Income Tax + Expenses SOPL & OCI 40,200 1.00
Cr. Current Tax Payable + Current Liabilities SOFP 40,200
Dr. Current Tax Payable - Current Liabilities SOFP 28,200 1.00
Cr. Bank - Current Assets SOFP 28,200
1.viii Dr. Allowance for Bad Debts + Expenses SOPL & OCI 530 1.00
Cr. Trade Receivables - Current Assets SOFP 530

Trade Receivables Balance per TB 324,700

- Allowance for Bad Debts - 4% 12,988


Revised Trade Receivable 311,712

Current Allowance for Bad Debts TB 12,458


New Allowance Bad Debts See Above 12,988
Increase in Allowance for Bad Debts 530

1.ix Dr. Other Receivables + Current Assets SOFP 1,200


Cr. Investment Income + Other Income SOPL & OCI 1,200 1.00

Investment TB 100,000
Interest on Investments 6% 6,000
Less Investment Income already accounted for TB 4,800
Balance to be accounted for 1,200

CURRENT MARKS 11.50

Page 10
Cost of Distribution Administration
Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 78,654 - - Cost of
Purchases Per TB 897,541 - - Sales
Closing Inventory W1.i - 89,055 - - 2.00
Expenses Per TB - 265,874 325,887 Distribution
Import Duties W1.ii - - - 2,900 Costs
Amortisation of Intangible Asset W1.vi - 8,000 8,000 16,000 2.00
Allowance for Bad Debts W1.viii - 265 265 530
Depreciation - Premises W3 - 8,450 8,450 16,900 Admin
Depreciation - Fixtures & Fittings W3 - 20,835 20,835 41,670 Expenses
Depreciation - Motor Vehicles W3 - 4,344 4,344 8,688 2.00
Total 887,140 307,768 364,881
Working 3 - Property, Plant & Equipment Motor
Premises Equipment Vehicles Total
! ! ! !
Cost 845,000 214,900 68,000 1,127,900
- Accumulated Depreciation b/d - 387,500 - 145,784 - 24,560 - 557,844
Carrying Value b/d at 1st January 2015 457,500 69,116 43,440 570,056 0.50
Addition - 60,000 - 60,000 0.50
Addition - Import Duties W1.ii - 2,900 - 2,900 0.50
Carrying Value 457,500 132,016 43,440 632,956
Depreciation - Premises - 2% Straight Line - 16,900 - - - 16,900 0.50
Depreciation - Fixtures & Fittings - 15% Straight Line - - 41,670 - - 41,670 0.50
Depreciation - Vehicles - 20% Reducing Balance - - - 8,688 - 8,688 0.50
Carrying Value c/d at 31st December 2015 440,600 90,346 34,752 565,698 0.50

CURRENT MARKS 9.50

TOTAL MARKS 21.00

Page 11
Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Motor Vehicles 68,000 68,000
Investments - 6% 100,000 100,000
Trade Receivables 324,700 324,700
Intangible Assets 200,000 200,000
Trade Payables 246,807 246,807
Fixtures & Fittings 214,900 62,900 277,800
Share Premium 20,000 23,000 43,000
Distribution Costs 265,874 41,894 307,768
Share Capital - 100,000 at !1.30 each 130,000 52,000 182,000
Current Tax Payable 1,200 28,200 40,200 13,200
Revenue 1,687,542 1,687,542
Accumulated Depreciation - Premises at 31.12.14 387,500 16,900 404,400
Revaluation Surplus 10,520 10,520
Investment Income 4,800 1,200 6,000

Page 12
Bank 2,413 75,000 88,200 15,613
Accumulated Amortisation of Intangible Assets at 31.12.14 40,000 16,000 56,000
Retained Earnings at 31.12.14 482,222 93,553 575,775
Allowance for Bad Debts 12,458 530 12,988
Purchases 897,541 897,541
Administrative Expenses 325,887 41,894 2,900 364,881
Opening Inventory 78,654 89,055 89,055 78,654 89,055 89,055
Accumulated Depreciation - Motor Vehicles at 31.12.14 24,560 8,688 33,248
Long Term Loan 124,750 124,750
Accumulated Depreciation - Fixtures & Fittings at 31.12.14 145,784 41,670 187,454
Premises 845,000 845,000
Amortisation of Intangible Assets 16,000 16,000
Income Tax 40,200 40,200
Allowance for Bad Debts (Expense) 530 530
Other Receivables 1,200 1,200
3,320,556 3,320,556 396,873 396,873 1,782,597 1,782,597 1,905,755 1,905,755
SOLUTION 2
a) Issue 1 ! ! ! !
Should Have Happened Actually Happened
Dr. Accountancy Fees 3,200 Nothing
Cr. Accruals 3,200
To Correct
Dr. Accountancy Fees 3,200 1.50
Cr. Accruals 3,200
Issue 2
Should Have Happened Actually Happened
Dr. Trade Receivables 4,600 Dr. Trade Receivables 4,600
Cr. Allowance for Trade Receivables 4,600 Dr. Bad Debt Recovered 4,600
Cr. Suspense 9,200
To Correct
Dr. Suspense 9,200
Cr. Bad Debt Recovered 4,600 2.00
Cr. Allowance for Trade Receivables 4,600
Issue 3
Should Have Happened Actually Happened
Dr. Bank 15,600 Dr. Bank 15,600
Cr. Share Capital 15,600 Cr. Revenue 15,600
To Correct
Dr. Revenue 15,600 1.50
Cr. Share Capital 15,600
Issue 4
Should Have Happened Actually Happened
Dr. Property, Plant & Equipment (PPE) 8,000 Dr. Repairs & Maintenance 8,000
Cr. Bank 8,000 Cr. Bank 8,000
Dr. Depreciation Expense 1,200
Cr. Accumulated Depreciation - PPE 1,200
To Correct
Dr. Property, Plant & Equipment (PPE) 8,000
Dr. Depreciation Expense 1,200 2.00
Cr. Accumulated Depreciation - PPE 1,200
Cr. Repairs & Maintenance 8,000
Issue 5
Should Have Happened Actually Happened
Dr. Trade Receivables 7,100 Dr. Trade Receivables 7,100
Cr. Revenue 7,100 Dr. Trade Payables 7,100
Cr. Suspense 14,200
To Correct
Dr. Suspense 14,200
Cr. Trade Payables 7,100 2.00
Cr. Revenue 7,100
Issue 6
Should Have Happened Actually Happened
Dr. Rent Expense 840 Dr. Rent Prepaid 840
Cr. Rent Due 840 Cr. Rent Expense 840
To Correct
Dr. Rent Expense 1,680
Cr. Rent Due 840 2.00
Cr. Rent Prepaid 840
Issue 7
Should Have Happened Actually Happened
Dr. Retained Earnings 2,300 Dr. Suspense 4,600
Cr. Bank 2,300 Cr. Finance Costs 2,300
Cr. Bank 2,300
To Correct
Dr. Finance Costs 2,300
Dr. Retained Earnings 2,300 2.00
Cr. Suspense 4,600
Issue 8
Should Have Happened Actually Happened
Dr. Wages 2,200 Dr. Suspense 4,400
Cr. Bank 2,200 Cr. Director's Loan 2,200
Cr. Bank 2,200
To Correct
Dr. Wages 2,200
Dr. Director's Loan 2,200 2.00
Cr. Suspense 4,400

SUBTOTAL MARKS 15.00

Page 13
b) Suspense Account
2 Bad Debt Recovered 4,600 Opening Balance 14,400 1.00
2 Allowance for Trade Receivables 4,600 7 Retained Earnings 2,300 1.00
5 Trade Payable 7,100 7 Finance Costs 2,300 1.00
5 Revenue 7,100 8 Wages 2,200 1.00
8 Directors Loan 2,200 0.50
23,400 23,400 0.50

SUBTOTAL MARKS 5.00

OVERALL MARKS 20.00

Page 14
SOLUTION 3

PART 1:
REPORT

To: mr. Toby Jordan, managing director – Tojo limited


from:future financial Accountant
re: IAs 2 – Inventories
date: August 2016

The comparison should be made for each item of inventory and thus a value of €212 would be attributed to
inventories i.e.
(a)

Cost - € NRV - € Lower of Cost/NRV - €


1 72 80 72
Item

2 56 48 48
3 92 96 92
220 224 212
(4 marks)

Inventories per IAs 2 comprise


(b)
(i)

a) merchandise
b) Production supplies
c) materials
d) Work in Progress
e) finished goods

(ii) Inventories are measured at the lower of cost or net realisable value (nrV)

Paragraph 16 of IAs 2 outlines examples of costs which are excluded from the cost of inventories and instead
recognised as expenses in the period in which they are incurred i.e.
(iii)

a) Abnormal amounts of wasted materials, labour or other production costs;


b) storage costs unless these costs are necessary in the production process before a further production
stage;
c) Administrative overheads that do not contribute to bringing inventories to their present location and
condition; and
d) selling costs.

(iv) The principal situations in which net realisable value is likely to be less than cost is where there has been;

a) An increase in costs or a fall in selling price


b) Physical deterioration of inventories
c) obsolescence of Products
d) A decision as part of a company’s marketing strategy to manufacture and sell products at a loss
e) errors in production or purchasing
(12 marks)

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

financial Accountant

Page 15
PART 2:

(a) Working - Closing Inventory ! !

Total Inventories at Cost per Inventory Count 347,841


Accidentally Destroyed Inventory 4,640
Damaged Inventories - Cost 2,980
NRV - Selling Price less costs to sell (2,410 - 680) - 1,730
Inventory Write Down 1,250
Value of Closing Inventories 341,951
! !
Dr. Inventory + Current Assets SOFP 341,951
Cr. Closing Inventory - Cost of Sales SOPL & OCI 341,951
(4 marks)

[Total : 20 Marks]

Page 16
SOLUTION 4

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Page 17
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Page 18
Oakview Limited Statement of Cash flows for the year ended 31st December 2015

Cash flows from Operating Activities !'000 !'000


Profit before Taxation 626 1.00
Adjustments for
Depreciation 98 1.00
Loss on Sale of PPE 20 1.00
Interest Expense 34 1.00
778
Decrease in Trade Receivables 12 1.00
Increase in Inventory - 67 1.00
Decrease in Trade Payables - 31 1.00
Cash Generated from Operations 692
Interest Paid - 34 0.50
Income Taxes Paid - 97 1.50
Net Cash from Operating Activities 561 1.00

Cash flows from Investing Activities


Payments to acquire Property, Plant & Equipment - 590 3.00
Receipts from sale of Property, Plant & Equipment 180 1.00
Net Cash used in Investing Activities - 410 1.00

Cash flows from Financing Activities


Proceeds from Issue of Shares 40 1.00
Payments made due to Decrease in Long Term Loans - 134 1.00
Dividends Paid - 46 1.00
- 140 1.00

Net Increase in Cash & Cash Equivalents 11


Cash & Cash Equivalents at beginning of Year Note 1 42
Cash & Cash Equivalents at end of Year Note 1 53 1.00

Note 1 2015 2014


!'000 !'000
Cash on hand and balances with bank 53 54
Bank Overdraft - - 12
Cash and Cash Equivalents 53 42

TOTAL MARKS 20.00

Page 19
SOLUTION 5

Loss on Sale of PPE !'000


Cost 250
- Accumulated Depreciation - 50
Carrying Value at date of sale 200
Sales Proceeds 180
Loss on Sale of PPE 20

Interest Account
Balance b/d - Expense - SOPL & OCI 34

Interest Paid 34 Balance c/d -


34 34

Income Tax Account


Corporation Tax Paid 97 Balance b/d 21

Balance c/d 19 Expense - SOPL & OCI 95


116 116

Share Capital Account


Balance b/d - S. Capital 100
Balance b/d - S. Premium 45
Balance c/d - S. Capital 140
Balance c/d - S. Premium 45 Proceeds from Issue of S. Capital 40
185 185

Property, Plant & Equipment Account


Balance b/d 1,628 Depreciation 98

Revaluation Gain 22 Disposal - carrying value 200

Purchase of PPE 590 Balance c/d 1,942


2,240 2,240

Page 20
Workings

MARKING SCHEME

SOLUTION 1

(a) define and explain the elements of financial statements 10

Workings 21
statement of Profit or loss and other Comprehensive Income + 9
(b)

statement of financial Position

Total Marks for Solution 1 40

SOLUTION 2

(a) suspense Journal entries 15

(b) suspense Account 5

Total Marks for Solution 2 20

SOLUTION 3

PART 1

(a) Calculation of closing inventory using individual lower or cost and nrV 4

(b) (i) Items comprising Inventory 2

(ii) how Inventory is measured 2

(iii) 3 Costs excluded from Inventory and expensed instead 4

(iv) 2 situations where cost is less than nrV 4

Part 2

(a) Calculation of closing inventory using lower of cost and nrV 4

Total Marks for Solution 3 20

SOLUTION 4

(a) statement of Profit or loss and other Comprehensive Income 12

(b) statement of financial Position 8

Total Marks for Solution 4 20

Page 21
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2017

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2017

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
(a) Identify and discuss the main qualitative characteristics of financial statements.
(10 Marks)

(b) Ruberh Ltd is a company involved in the manufacture of t-shirts for the retail industry. The following trial
balance was extracted from their books as at 31 December 2016:

Debit Credit
€ €
Accumulated Depreciation - Building - 1 January 2016 440,000
Accumulated Depreciation - Fixtures & Fittings - 1 January 2016 124,500
Accumulated Depreciation - Trucks - 1 January 2016 211,000
Admininstrative Expenses 345,781
Allowance for Bad & Doubtful Debts 12,200
Bank 44,000
Building at Cost at 1 January 2016 1,800,000
Current Tax Payable 16,500
Distribution Costs 457,810
Fixtures & Fittings at Cost at 1 January 2016 247,500
Income Tax (2016) 22,500
Intangible Assets 240,000
4% Investments (at cost) 120,000
Investment Income 3,600
Inventory at 1 January 2016 186,400
Issued Share Capital 100,000
Long-Term Loan 260,000
Purchases / Revenue 1,984,200 3,145,720
Retained Earnings at 1 January 2016 1,468,571
Revaluation Surplus 22,000
Trade Receivables / Trade Payables 289,500 245,600
Trucks at Cost at 1 January 2016 400,000
6,093,691 6,093,691

The following additional information has also come to your attention:

(i) Inventory at 31 December 2016 is €236,400. Included in this is a batch of t-shirts which cost €4,800 and is
viewed as being worthless on that date.

(ii) Depreciation is to be charged as follows:

Building 3% Straight Line on Cost

Fixtures & Fittings 20% Reducing Balance

Trucks 20% Straight Line on Cost

Depreciation for the year is charged in full in the year of purchase and none in the year of sale.
(iii) A new truck costing €80,000 was purchased in June 2016. An existing truck which was purchased for €60,000
Page1
in June 2012 was traded in against the new truck and the balance of €70,000 was paid in June 2016.

(iv) The building was revalued to €1,300,000 on 1 January 2016. A professional valuer estimates the residual
value will be €100,000 and that its remaining useful life is thirty years.

(v) In February 2017, 4% investments had declined in value to €100,000.

(v) A tax payment was made in December 2016 amounting to €20,000.

(vii) Provide for the balance of the investment income owing.

viii) Ruberh Ltd received and recovered a €4,000 bad debt previously written off in December 2016. The
Allowance for Doubtful Debts should be set at 4%.

(ix) Intangible assets includes an internally generated brand worth €20,000. Intangible assets are to be amortised
over ten years.

(x) Expenses are to be allocated evenly between Distribution Costs and Administrative Expenses.

REQUIREMENT:

Prepare, in a form suitable for publication, based on IFRS, a Statement of Profit or Loss and Other Comprehensive
Income and Statement of Financial Position for Ruberh Ltd for the financial year-ended 31 December 2016.

Note: All workings should be shown. (30 Marks)

[Total: 40 Marks]

2. Huerty Ltd issued 100,000 €2.00 shares at €2.80 per share. Monies due were as follows:

Page 2
On Application: €1.60 including premium
On Allotment: €0.80
Call: €0.40

Applications were received for 120,000 shares with the excess applications returned on application.
At the call stage, 2,000 shares were forfeited. These were subsequently reissued for €2.00 cash.

REQUIREMENT:

(a) Write up the relevant journal entries, including narratives, for the above issue of shares. (16 Marks)

(b) Discuss what is meant by the terms:

(i) Call.
(ii) Forfeiture. (4 Marks)

[Total: 20 Marks]

3.

Page 3
(A) Ireland has committed to a target that 16% of its total final energy consumption will come from renewable
sources by 2020. As part of its plan to encourage a diverse and sustainable renewable energy sector the
government has recently introduced grants to companies investing in solar farms. Encouraged by this
government support your employer, Duyan Plc, has also recently entered into the solar energy market. It
purchases or leases farmland upon which it installs solar panels. The financial controller of this section of the
business has asked you to research IAS 20 - Accounting for Government Grants and Disclosure of
Government Assistance and advise how it should account for government grants in the company’s financial
statements for the financial year ending 31 December 2016.

REQUIREMENT:

Prepare a memo addressed to the Financial Controller which, in accordance with IAS 20 – Accounting for
Government Grants and Disclosure of Government Assistance will:

(a) Explain:

(i) The term ‘a government grant’;


(ii) The difference between government grants relating to assets and government grants relating to
income;
(iii) When government grants should be recognised; and
(iv) How government grants should be recognised in the Statement of Profit or Loss and Other
Comprehensive Income account.
(8 Marks)

(b) Outline the two methods of presenting a government grant in the financial statements. (3 Marks)

(B) In March 2016, Duyan Plc installed and paid for €500,000 of property, plant and equipment (PPE) on a farm.
The PPE will be depreciated over twenty five years. In July 2016, the government provided a grant of 40% to
the company towards this PPE. The company’s depreciation policy is to charge a full year’s depreciation in
the year of purchase and none in the year of sale.

REQUIREMENT:

(a) For each method of presenting a Government Grant in financial statements as referred to in your answer
to b) above, provide the journal entries based on the above information.
(6 Marks)

(b) Explain how the repayment of a Government Grant already received should be accounted for in the
financial statements.
(3 Marks)

[Total: 20 Marks]
4. Mr. Robert Cunningham owns and runs his own farm supplies store. There is a mark-up on cost of sales of

Page 4
50% on everything he sells. However, his record keeping is poor. Upon investigation, the following has been
provided to you:

Summarised Statement of Assets and Liabilities as at 31 December 2015


(i.e. closing position from the previous year).


Non-Current Assets 70,000
Inventory 20,000
Cash in Till 1,000
Cash in Bank 3,800
Trade Payables 3,600
Equity (Retained Earnings - €51,200, Capital - €40,000) 91,200

In the year to 31 December 2016:

1. There were no sales on credit.

2. €156,500 of sales was lodged to the bank.

3. The following bank payments were made:



Trade Payables 130,000
Repairs & Maintenance 8,000
Insurance 4,800
Light & Heat 6,000
Personal House Insurance 1,000

4. Cash payments made out of the till:


Trade Payables 6,800
Wages 30,000
Drawings 10,800

5. The closing cash till balance was €900 and the closing trade payables were €4,200. All trade payables
purchases related to the purchase of inventory.

6. Depreciation for the year amounts to €3,000.

7. The value of the closing bank balance and closing inventory are not known.

REQUIREMENT:

Prepare:

(a) A two column cash and bank account for the year ended 31 December 2016. (8 Marks)

(b) A Statement of Profit or Loss for the year ended 31 December 2016. (8 Marks)

(c) A Statement of Financial Position as at 31 December 2016. (4 Marks)

[Total: 20 Marks]

5. Falylk Ltd is involved in the manufacture of agricultural products and its financial statements are as follows:

Page 5
Falylk Ltd Statement of Financial Position as at 31 December 2016

2016 2015
€’000 €’000
Non-Current Assets
Property, Plant & Equipment (PPE) 5,120 3,940
Total Non-Current Assets 5,120 3,940

Current Assets
Inventories 1,380 1,220
Trade Receivables 780 680
Cash & Cash Equivalents 50 112
Total Current Assets 2,210 2,012

Total Assets 7,330 5,952

Equity & Liabilities


Equity
Share Capital 240 200
Share Premium 60 50
Retained Earnings 3,798 2,402
Revaluation Surplus 120 80
Total Equity 4,218 2,732

Non-Current Liabilities
Long Term Loan 1,500 1,600
Total Non-Current Liabilities 1,500 1,600

Current Liabilities
Trade Payables 1,470 1,500
Bank Overdraft 32 60
Current Tax Payables 110 60
Total Current Liabilities 1,612 1,620

Total Equity & Liabilities 7,330 5,952

Notes:

(i) The company’s profit for the year before tax amounted to €1,476,000.

(ii) The company’s income tax expense for the year was €80,000.

(iii) The cost of Property, Plant & Equipment (PPE) at 1 January 2016 amounted to €4,860,000. The company’s
depreciation policy is to depreciate all assets at 20% straight line on cost from the date of purchase to the date
of sale. The additions to PPE occurred on 31 December 2016. On 1 July 2016, the company sold PPE which
originally had cost €1,000,000. On the date this PPE was sold, its carrying value was €600,000 and the firm
made a loss on the sale of the PPE of €40,000. The revaluation was performed on 31 December 2016.

(iv) The company’s finance cost for the year equals its cash payment of €92,000.

REQUIREMENT:
Prepare a Statement of Cash Flows for the year-ended 31 December 2016 for Falylk Ltd in accordance with IAS 7
Statement of Cash Flows.

[Total: 20 Marks]

END OF PAPER

Page 6
SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN
IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2017

SOLUTION 1

(a) If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent.
The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable
with the fundamental qualitative characteristics being relevance and faithful representation.

Relevance
To be useful information must be relevant to the decision-making needs of users. Information has the quality
of relevance when it influences the economic decisions of users by helping them evaluate past, present or
future events or confirming, or correcting, their past evaluations. The relevance of information is affected by
its nature and materiality. In some cases, the nature of information alone is sufficient to determine its relevance.
In other cases, both the nature and materiality are important. Information is material if its omission or
misstatement could influence the economic decisions of users taken on the basis of the financial statements.

Faithful Representation
Financial reports represent economic phenomena in words and numbers. To be useful, financial information
must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it
purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It
would be complete, neutral and free from error. Of course, perfection is seldom, if ever, achievable.

A complete depiction includes all information necessary for a user to understand the phenomenon being
depicted, including all necessary descriptions and explanations. A neutral depiction is without bias in the
selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasised, de-
emphasised or otherwise manipulated to increase the probability that financial information will be received
favourably or unfavourably by users. Faithful representation does not mean accurate in all respects. Free from
error means there are no errors or omissions in the description of the phenomenon, and the process used to
produce the reported information has been selected and applied with no errors in the process. In this context,
free from error does not mean perfectly accurate in all respects. However, a representation of that estimate
can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations
of the estimating process are explained, and no errors have been made in selecting and applying an
appropriate process for developing the estimate.

Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the
usefulness of information that is relevant and faithfully represented. The enhancing qualitative characteristics
may also help determine which of two ways should be used to depict a phenomenon if both are considered
equally relevant and faithfully represented

Users' decisions involve choosing between alternatives, for example, selling or holding an investment, or
investing in one reporting entity or another. Consequently, information about a reporting entity is more useful
if it can be compared with similar information about other entities and with similar information about the same
entity for another period or another date.

Comparability
Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and
differences among, items. Users must be able to compare the financial statements of an entity through time
in order to identify trends in its financial position and performance. Users must also be able to compare the
financial statements of different entities in order to evaluate their relative financial position, performance and
changes in financial position. Hence, the measurement and display of the financial effect of like transactions
and other events must be carried out in a consistent way throughout an entity and over time for that entity and
in a consistent way for different entities. The need for comparability should not be confused with mere
uniformity. It is inappropriate for an entity to leave its accounting policies unchanged when more relevant and
reliable alternatives exist. It is important that the financial statements show corresponding information for the
preceding periods. Permitting alternative accounting methods for the same economic phenomenon
diminishes comparability.

Page 7
Verifiability
Verifiability helps assure users that information faithfully represents the economic phenomena it purports to
represent. Verifiability means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified
information need not be a single point estimate to be verifiable. A range of possible amounts and the related
probabilities can also be verified. Verification can be direct or indirect. Direct verification means verifying an
amount or other representation through direct observation, for example, by counting cash. Indirect verification
means checking the inputs to a model, formula or other technique and recalculating the outputs using the
same methodology. It may not be possible to verify some explanations and forward-looking financial
information until a future period, if at all. To help users decide whether they want to use that information, it would
normally be necessary to disclose the underlying assumptions, the methods of compiling the information and
other factors and circumstances that support the information.

Timeliness
Timeliness means having information available to decision-makers in time to be capable of influencing their
decisions. Generally, the older the information is the less useful it is. However, some information may continue
to be timely long after the end of a reporting period because, for example, some users may need to identify
and assess trends.

Understandability
Classifying, characterising and presenting information clearly and concisely makes it understandable. Some
aspects of financial statements are inherently complex and cannot be made easy to understand. Excluding
information about these from financial reports might make the information in those financial reports easier to
understand. However, those reports would be incomplete and therefore potentially misleading. Users must
be able to understand financial statements. They are assumed to have a reasonable knowledge of business
and economic activities and accounting and a willingness to study the information properly. Complex matters,
if relevant for decision-making, should not be left out of financial statements simply due to its difficulty in being
understood.
(10 Marks)

Page 8
(b)
Ruberh Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2016
! ! ! ! !
Revenue TB 3,145,720 0.25
Cost of Sales W2 - 1,939,000
Gross Profit 1,206,720 0.25
Investment Income TB + W1.vii 3,600 1,200 4,800 0.25
Bad Debt Recovered W1.viii 4,000 0.25
Distribution Costs W2 572,800
Administrative Expenses W2 460,771 1,024,771
Profit/(Loss) before Tax 181,949 0.25
Income Tax Expense TB 22,500 0.25
PROFIT/(LOSS) FOR THE YEAR 159,449 0.25
Other Comprehensive Income
Revaluation Loss W3 - 22,000 0.25
Other Comprehensive Income for the year, net of tax - 22,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 137,449 0.25

Ruberh Limited Statement of Financial Position as at 31st December 2016


! ! ! ! !
Property, Plant & Equipment W3 1,531,400 0.25
Investments TB + W1.v 120,000 0.25
Intangible Asset TB + W1.ix 240,000 - 20,000 - 22,000 198,000 0.25
Total Non-Current Assets 1,849,400 0.25
Current Assets
Inventories W1.i 231,600 0.25
Trade Receivables W1.viii 277,920 0.50
Other Receivables W1.vii 1,200 0.25
Current Tax Asset TB + W1.vi - 16,500 20,000 3,500 0.25
Cash & Cash Equivalents - 0.25
Total Current Assets 514,220 0.25
TOTAL ASSETS 2,363,620 0.25
Equity & Liabilities
Equity
Share Capital 100,000 0.25
Retained Earnings W1.ix + W1.viii 1,468,571 159,449 1,628,020 0.25
Revaluation Surplus W3 22,000 - 22,000 - 0.25
Total Equity 1,728,020 0.25
Non-Current Liabilities
Long-term Loan 260,000 0.25
Total Non-Current Liabilities 260,000
Current Liabilities
Trade Payables TB + W1.iii 245,600 0.25
Bank TB + W1.iii + W1.vi 44,000 70,000 20,000 - 4,000 130,000 0.25
Total Current Liabilities 375,600 0.25
TOTAL EQUITY & LIABILITIES 2,363,620 0.25

TOTAL MARKS 7.50

Page 9
Working - Journal Entries
Working - Closing Inventory ! !

Total Inventories at Cost per Inventory Count 236,400


Worthless Inventories - Cost 4,800
NRV - Selling Price less costs to sell -
Inventory Write Down 4,800
Value of Closing Inventories 231,600 0.50
! !
1.i Dr. Inventory + Current Assets SOFP 231,600 1.00
Cr. Closing Inventory - Cost of Sales SOPL & OCI 231,600
1.iii Dr. Property, Plant & Equipment (PPE) + Non-Current Assets SOFP 10,000
Cr. Disposal Account - Trucks 10,000
Dr. Property, Plant & Equipment (PPE) + Non-Current Assets SOFP 70,000
Cr. Bank + Current Liabilities SOFP 70,000
Dr. Disposal Account - Trucks 60,000 2.00
Cr. Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 60,000
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 48,000
Cr. Disposal Account - Trucks 48,000
Dr. Loss on Disposal + Expenses SOPL & OCI 2,000
Cr. Disposal Account - Trucks 2,000
1.v Per paragraph 11 of IAS 10, this is a non-adjusting event. The decline in fair value does not normally relate
to the condition of the investments at the end of the reporting period, but reflects circumstances that have 1.00
arisen subsequently. Similarly, it does not update the amounts disclosed for the investments as at the end
of the reportIng period, although it may need to give additional disclosure. Therefore, there is no adjustment
needed in the financial statements for the year-ended 31 December 2016 to reflect the decrease in value.
1.vi Dr. Current Tax Asset + Current Assets SOFP 20,000
Cr. Bank + Current Liabilities SOFP 20,000 1.00
1.vii Dr. Other Receivables + Current Assets SOFP 1,200
Cr. Investment Income + Other Income SOPL & OCI 1,200 1.00
Investment 120,000
Interest on Investment - 3% 4% 4,800
Already accounted for Per TB 3,600
Balance to be included in Other Income 1,200 0.50
1.viii Dr. Trade Receivables + Current Assets SOFP 4,000 1.00
Cr. Bad Debt Recovered + Other Income SOPL & OCI 4,000
Dr. Bank + Current Assets SOFP 4,000
Cr. Trade Receivables - Current Assets SOFP 4,000 0.50

Dr. Allowance for Doubtful Debts + Current Assets SOFP 620


Cr. Allowance for Doubtful Debts - Expenses SOPL & OCI 620 1.00
Trade Receivables TB 289,500
+ Write Back of Bad Debt Recovered 4,000
- Bad Debt Recovered Received - 4,000
289,500
- Allowance for Bad & Doubtful Debts - 4% - 11,580
Revised Trade Receivable 277,920 1.00
Current Allowance for Bad & Doubtful Debts TB 12,200
New Allowance for Bad & Doubtful Debts See Above 11,580
Decrease in Allowance for Bad & Doubtful Debts 620
1.ix Dr. Expenses + Expenses SOPL & OCI 20,000
Cr. Intangible Assets - Non-Current Assets SOFP 20,000 1.00

Dr. Amortisation of Intangible Assets + Expenses SOPL & OCI 22,000


Cr. Intangible Assets - Non-Current Assets SOFP 22,000 1.00

Intangible Asset TB 240,000


- Internally Generated Brand - 20,000 0.50
Revised Intangible Asset 220,000

Amortisation of Intangible Asset Over Ten Years 22,000 0.50

CURRENT MARKS 13.50

Page 10
Cost of Distribution Administration
Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 186,400 - - Cost of
Purchases Per TB 1,984,200 - - Sales
Closing Inventory W1.i - 231,600 - - 0.50
Expenses Per TB - 457,810 345,781
Loss on Disposal W1.iii - 1,000 1,000 2,000 Distribution
Allowance for Bad & Doubtful Debts W1.viii - - 310 - 310 - 620 Costs
Internally Generated Brands W1.ix - 10,000 10,000 20,000 2.00
Amortisation of Intangible Assets W1.ix - 11,000 11,000 22,000
Revaluation Loss W3 - 19,000 19,000 38,000
Depreciation - Buildings W3 - 20,000 20,000 40,000 Admin.
Depreciation - Plant & Equipment W3 - 12,300 12,300 24,600 Expenses
Depreciation - Office Equipment W3 - 42,000 42,000 84,000 2.00
Total 1,939,000 572,800 460,771

Working 3 - Property, Plant & Equipment Fixtures &


Buildings Fittings Trucks Total
! ! ! !
Cost Per TB 1,800,000 247,500 400,000 2,447,500
- Accumulated Depreciation b/d Per TB - 440,000 - 124,500 - 211,000 - 775,500
Carrying Value b/d at 1st January 2016 1,360,000 123,000 189,000 1,672,000
Revaluation Loss Note 1 - 60,000 - - - 60,000 0.50
1,300,000 123,000 189,000 1,612,000
Addition - - 80,000 80,000 0.50
Disposal - Cost W1.iii + Note 2 - - - 60,000 - 60,000 0.50
Disposal - Accumulated Depreciation W1.iii + Note 2 - - 48,000 48,000 0.50
1,300,000 123,000 257,000 1,680,000
Depreciation - Buildings Note 3 - 40,000 - - - 40,000 0.50
Depreciation - Fixtures + Fittings - 20% Reducing Balance - - 24,600 - - 24,600 0.50
Depreciation - Trucks - 20% Straight Line on Cost - - - 84,000 - 84,000 0.50
Carrying Value c/d at 31st December 2016 1,260,000 98,400 173,000 1,531,400
Note 1 - Revaluation Loss
Dr. Revaluation Surplus - Equity SOFP 22,000
Dr. Expenses + Expenses SOPL&OCI 38,000 1.00
Cr. Property, Plant & Equipment - Non-Current Assets SOFP 60,000
Note 2 - Disposal of Equipment
Cost 60,000
Accumulated Depreciation - 20% straight line per annum
Depreciation 2012 12,000
Depreciation 2013 12,000
Depreciation 2014 12,000
Depreciation 2015 12,000
48,000 - 48,000
Carrying Value of Equipment disposed 12,000
Disposal Account
Cost 80,000 Accumulated Depreciation 48,000
Trade In Value 10,000
Loss on Disposal 4,000
80,000 62,000
Note 2 - Depreciation of Buildings
Revalued Amount - Residual Value
Remaining Estimated Useful Life

1,300,000 100,000
30

Depreciation on Buildings 40,000

CURRENT MARKS 9.00

TOTAL MARKS 22.50

Page 11
Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Accumulated Depreciation - Building - 1 January 2016 440,000 40,000 480,000
Accumulated Depreciation - Fixtures & Fittings - 1 January 2016 124,500 24,600 149,100
Accumulated Depreciation - Trucks - 1 January 2016 211,000 48,000 84,000 247,000
Admininstrative Expenses 345,781 115,300 310 460,771
Allowance for Bad & Doubtful Debts 12,200 620 11,580
Bank 44,000 4,000 90,000 130,000
Building at Cost at 1 January 2016 1,800,000 60,000 1,740,000
Current Tax Payable 16,500 20,000 3,500
Distribution Costs 457,810 115,300 310 572,800

Page 12
Fixtures & Fittings at Cost at 1 January 2016 247,500 247,500
Income Tax 22,500 22,500
Intangible Assets 240,000 42,000 198,000
Investments - 4% 120,000 120,000
Investment Income 3,600 1,200 4,800
Inventory at 1 January 2016 186,400 186,400
Issued Share Capital 100,000 100,000
Long-Term Loan 260,000 260,000
Purchases / Revenue 1,984,200 3,145,720 1,984,200 3,145,720
Retained Earnings at 1 January 2016 1,468,571 159,449 1,628,020
Revaluation Surplus 22,000 22,000 -
Trade Receivables / Trade Payables 289,500 245,600 4,000 4,000 289,500 245,600
Trucks at Cost at 1 January 2016 400,000 80,000 60,000 420,000
Inventory at 31 December 2016 231,600 231,600 231,600 231,600
Other Receivables 1,200 1,200
Bad Debt Recovered 4,000 4,000
6,093,691 6,093,691 642,020 642,020 3,386,120 3,386,120 3,251,300 3,251,300

- - -
SOLUTION 2

(a)
Dr. Bank 192,000 0.75
Cr. Application & Allotment Account 192,000 0.75
being applications proceeds banked 0.50
Dr. Application & Allotment Account 32,000 0.75
Cr. Bank 32,000 0.75
being money returned to over-subscribers 0.50
Dr. Bank 80,000 0.75
Cr. Application & Allotment Account 80,000 0.75
being cash on allotment received and banked 0.50
Dr. Application & Allotment Account 240,000 0.75
Cr. Share Capital Account 160,000 0.75
Cr. Share Premium Account 80,000 0.50
being allotment of shares
Dr. Call Account 40,000 0.75
Cr. Share Capital Account 40,000 0.75
Being call of final instalment owed 0.50
Dr. Bank - (100,000 - 2,000) * !0.40 39,200 0.50
Cr. Call Account 39,200 0.50
being call receipts banked 0.50
Dr. Forfeiture Account - 2,000 * !0.40 800 0.50
Cr. Call Account 800 0.50
Being forfeited shares 0.50
Dr. Bank 4,000 0.50
Cr. Forfeiture Account - 2,000 * !2.00 4,000 0.50
being receipts from forfeited shares reissued banked 0.50
Dr. Forfeiture Account - 2,000 * !1.60 3,200 0.50
Cr. Share Premium Account 3,200 0.50
being allocation of additional premium on forfeited shares reissued 0.50

SUBTOTAL MARKS 16.00

(b) Call: Where the purchase price is payable in instalments, the


company will call for instalments on their due dates of payments. 2.00
Forfeiture: If a shareholder fails to pay a call, his shares may be
forfeited without the need to return the money he has paid. These 2.00
forfeited shares may then be reissued to other shareholders.

TOTAL MARKS 20.00

Page 13
SOLUTION 3

REPORT
To: Financial Controller – Duyan Limited
From: Future Financial Accountant
Re: IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance
Date: April 2017

Part A

(a) (i) Government grants per paragraph 3 of IAS 20 are assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain conditions relating to the
operating activities of the entity.

(ii) Grants related to assets are government grants whose primary condition is that an entity qualifying for
them should purchase, construct or otherwise acquire long term assets.

Grants relating to income are government grants other than those related to assets.

(iii) Government grants, including non-monetary grants at fair value shall not be recognised until there is a
reasonable assurance that

a) The entity will comply with the conditions attaching to them; and
b) The grants will be received.

(iv) Paragraph 12 of IAS 20 states that government grants shall be recognised in profit or loss on a
systematic basis over the periods in which the entity recognises as expenses the related costs for which
the grants are intended to compensate i.e. if an asset is to be depreciated over ten years, then the
government grant will be amortised to profit or loss over ten years as well.
(8 Marks)

(b) Per paragraph 24, government grants related to assets, including non-monetary grants at fair value, shall be
presented in the statement of financial position either by setting up the grant as deferred income or by
deducting the grant in arriving at the carrying amount of the asset. Two methods of presentation of government
assets related to assets are permitted

(a) Recognise the grant as deferred income that is recognised in profit or loss on a systematic basis over
the useful life of the asset.

(b) Deducts the grant in calculating the carrying amount of the asset. The grant is recognised in profit or
loss over the life of a depreciable asset as a reduced depreciation expense.
(3 Marks)
Part B

(a) Method (a)

The asset would be capitalised as follows:


Dr. Property, Plant & Equipment (PPE) €500,000
Cr. Bank €500,000

Receipt of Grant
Dr. Bank €200,000
Cr. Deferred Income – Liabilities €200,000

Depreciation of the asset - €500,000 / 25 Years


Dr. Depreciation Expense €20,000
Cr. Accumulated Depreciation (PPE) €20,000

Amortisation of Grant - €200,000 / 25 Years


Dr. Deferred Income €8,000
Cr. Other Income €8,000

Page 14
Method (b)
The asset would be capitalised as follows:

Dr. Property, Plant & Equipment (PPE) €500,000


Cr. Bank €500,000

Receipt of Grant
Dr. Bank €200,000
Cr. Property, Plant & Equipment (PPE) €200,000

Depreciation of the asset – (Cost €500,000 – Grant €200,000) / 25 years


Dr. Depreciation Expense €12,000
Cr. Accumulated Depreciation (PPE) €12,000

(6 Marks)

(b) A government grant per paragraph 32 of IAS20, that becomes repayable shall be accounted for as a change
in accounting estimate. Repayment of a grant related to income shall be applied first against any unamortised
deferred credit recognised in respect of the grant and then in profit or loss. Repayment of a grant related to
an asset shall be recognised by increasing the carrying amount of the asset or reducing the deferred income
balance by the amount repayable. The cumulative additional depreciation that would have been recognised
in profit or loss to date in the absence of the grant shall be recognised immediately in profit or loss.
(3 Marks)

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

Financial Accountant
[Total: 20 Marks]

Page 15
SOLUTION 4

a) Dr. Cr.
Cash Bank Cash Bank
Balance b/d 1,000 3,800 0.50
Cash Sales Banked 156,500 0.50
Cash Sales Banked 156,500 0.50
Trade Payable 6,800 130,000 1.00
Repairs & Maintenance 8,000 0.50
Insurance 4,800 0.50
Light & Heat 6,000 0.50
Wages 30,000 0.50
Drawings 10,800 1,000 1.00
Cash Sales 204,000 1.50
Balance c/d Balance c/d 900 10,500 1.00
205,000 160,300 205,000 160,300
Balance b/d 900 10,500 Balance b/d

SUBTOTAL MARKS 8.00

b) Sales 150% 204,000 204,000 0.50


Cost of Sales 100% ? Therefore, 204,000/1.5 = CoSales 136,000 1.00
Gross Profit 40% ? 68,000

Trade Payables Account


Bank Payments 130,000 Balance b/d 3,600 1.00
Cash Payments 6,800 0.50
Purchases - Balancing Figure 137,400 1.00
Balance c/d 4,200
141,000 141,000
Cost of Sales
Opening Inventory 20,000
+ Purchases 137,400
- Closing Inventory X
= Cost of Sales Total 136,000

10,000 + 137,400 - X = 136,000 - 21,400


X = !18,600
Mr. Robert Cunningham Statement of Profit or Loss for the year-ended 31 December 2016
! ! !
Revenue 204,000 0.25
Cost of Sales
Opening Inventory 20,000 0.25
+ Purchases 137,400 0.50
- Closing Inventory - 21,400 0.50
Cost of Sales Total 136,000 0.25
Gross Profit 68,000 0.25
Expenses
Repairs Maintenance 8,000 0.25
Insurance 4,800 0.25
Light & Heat 6,000 0.25
Wages 30,000 0.25
Depreciation 3,000 0.25
Total Expenses 51,800 0.25
Net Profit/(Loss) 16,200 0.50

SUBTOTAL MARKS 8.00

Page 16
c) Mr. Robert Cunningham Statement of Financial Position as at 31 December 2016
Non-Current Assets
PPE 67,000 (70,000 - 3,000) 0.50
Total Non-Current Assets 67,000
Current Assets
Inventory 21,400 0.50
Cash & Cash Equivalents 11,400 (10,500 + 900) 1.00
Total Current Assets 32,800
Total Assets 99,800
Equity & Liabilities
Equity
Equity 40,000 0.50
Drawings - 11,800 (10,800 + 1,000) 0.50
Retained Earnings 67,400 (51,200 + 16,200) 0.50
Total Equity 95,600
Non-Current Liabilities
Total Non-Current Liabilities -
Current Liabilities
Trade Payable 4,200 0.50
Total Current Liabilities 4,200
Total Equity & Liabilities 99,800

SUBTOTAL MARKS 4.00

TOTAL MARKS 20.00

Page 17
SOLUTION 5

Falylk Limited Statement of Cash flows for the year ended 31 December 2016

Cash flows from Operating Activities !'000 !'000


Profit before Taxation 1,476 1.00
Adjustments for
Depreciation 872 2.00
Loss on Sale of PPE 40 1.00
Interest Expense 92 1.00
2,480
Increase in Inventories - 160 1.00
Increase in Trade Receivables - 100 1.00
Decrease in Trade Payables - 30 1.00
Cash Generated from Operations 2,190
Interest Paid - 92 0.50
Income Taxes Paid - 30 1.50
Net Cash from Operating Activities 2,068 1.00

Cash flows from Investing Activities


Payments to acquire Property, Plant & Equipment - 2,612 3.00
Receipts from sale of Property, Plant & Equipment 560 1.00
Net Cash used in Investing Activities - 2,052 1.00

Cash flows from Financing Activities


Proceeds from Issue of Shares 50 1.00
Payments due to decrease in Long Term Loan - 100 1.00
- 50 1.00

Net Increase in Cash & Cash Equivalents - 34


Cash & Cash Equivalents at beginning of Year Note 1 52
Cash & Cash Equivalents at end of Year Note 1 18 1.00

Note 1 2016 2015


!'000 !'000
Cash on hand and balances with bank 50 112
Bank Overdraft - 40 - 60
Cash and Cash Equivalents 10 52

TOTAL MARKS 20.00

Page 18
MARKING SCHEME

SOLUTION 1

(a) Define and discuss the qualitative characteristics of financial statements 10

(b) Workings 22.5


Statement of Profit or Loss and Other Comprehensive Income + 7.5
Statement of Financial Position

Total Marks for Solution 1 40

SOLUTION 2

(a) Journal Entries 16

(b) Explanation of ‘Call’ and ‘Forfeiture’ 4

Total Marks for Solution 2 20

SOLUTION 3
Part A
(a) (i) Government Grant 2

(ii) Government Grants relating to assets and income 2

(iii) Recognition of Government Grants 2

(iv) Recognition of Government Grants in Statement of Profit or Loss 2

(b) Presentation of two methods of Government Grants 3

Part B
(a) Journal Entries to reflect application of two methods 6

(b) Accounting for repayment of Government Grant 3

Total Marks for Solution 3 20

SOLUTION 4
(a) Two Column Cash & Bank Accounts 8

(b) Statement of Profit or Loss 8

(c) Statement of Financial Position 4

Total Marks for Solution 4 20

SOLUTION 5
Operating Activities 11

Investing Activities 5

Financing Activities 3

Cash & Cash Equivalents1

Total Marks for Solution 5 20

Page 19
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2017

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2017

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
(a) Discuss the advantages of, and the obstacles to, the harmonisation of accounting standards internationally.

(10 Marks)

(b) The following trial balance was extracted from the books of Cantelaow Limited, a manufacturing company, as
at 31 December 2016:

Debit Credit
€ €
Trade Receivables 425,600
Trade Payables 314,526
Share Capital - 100,000 at €1.00 each 100,000
Revenue 2,458,752
Revaluation Surplus 10,000
Retained Earnings at 31.12.15 1,716,925
Purchases 1,457,823
Premises 1,624,000
Office Equipment 186,000
Motor Vehicles 240,000
Long Term Loan 350,000
Inventory at 31.12.15 235,800
Distribution Costs 457,820
Bank 521,450
Allowance for Bad Debts 18,600
Administrative Expenses 489,610
Accumulated Depreciation - Premises at 31.12.15 458,700
Accumulated Depreciation - Motor Vehicles at 31.12.15 86,000
Accumulated Depreciation - Office Equipment at 31.12.15 124,600
5,638,103 5,638,103

The following information, based on your investigations, has also come to light;

(i) Cantelaow Limited’s inventory was counted on 29 December 2016 and amounted to €246,200 at cost. On
31 December 2016, there were credit sales of €40,000 that still needed to be accounted for in its financial
statements. Cantelaow Limited typically makes a profit margin of 25% on its sales.

(ii) Cantelaow Limited sold a motor vehicle on 1 April 2016 for €10,000. It purchased the motor vehicle on 1
January 2014 for €24,000.

(iii) Depreciation is to be charged as follows:

Premises 2% Straight Line on Cost


Office Equipment 25% Reducing Balance
Motor Vehicles 20% Straight Line on Cost

Depreciation is charged from the date of purchase to the date of sale.

Page1
(iv) Cantelaow Limited received a government grant of €100,000 during the year. This was in relation to an
extension completed on 1 July 2016 to its premises that cost €400,000 and was paid in full. The grant should
be amortised on the same basis as the premises is to be depreciated.

(v) Cantelaow Limited purchased goods on credit on 30 November 2016, that cost £45,000 sterling. On that
date, it mistakenly entered this amount as €45,000 in its records. Cantelow Limited made a payment of
£30,000 sterling to the trade payable on 15 December 2016 which has not yet been recorded in its accounts.
The exchange rates on the relevant dates were as follows:

30 November 2016 €1 = £ 0.90


15 December 2016 €1 = £ 0.80
31 December 2016 €1 = £ 0.85

(vi) During the year Cantelaow Limited wrote off a bad debt of €3,600. This has yet to be included in its financial
statements. In addition, the closing balance for the Allowance for Bad Debts should be at 5% of Trade
Receivables.

(vii) There were accruals to Administrative Expenses and Distribution Costs of €2,400 and €1,600 respectively
at the year end.

(viii) All of the relevant expenses in the trial balance are to be split evenly between Administrative Expenses and
Distribution Costs. Losses on disposal of Property, Plant & Equipment and exchange losses on foreign
exchange are to be included as separate line items on the face of the Statement of Profit or Loss and Other
Comprehensive Income.

REQUIREMENT:

Prepare, in a form suitable for publication, based on IFRS, a Statement of Profit or Loss and Other Comprehensive
Income and Statement of Financial Position for Cantelaow Limited for the financial year-ending 31 December 2016.

Note: All workings should be shown. (30 Marks)

[Total: 40 Marks]

Page 2
2. The statement of financial position for Montag Soccer Club as at 31 December 2015 is as follows:
€ €
Non-Current Assets
Land and clubhouse at cost 140,000
Equipment (Cost = €50,000) 36,000
Total Non-Current Assets 176,000

Current Assets
Bar Inventory 6,100
Cash & Cash Equivalents 4,300
Subscriptions Owing 2,090
Total Current Assets 12,490

Total Assets 188,490

Equity
Accumulated Fund 81,540
Total Equity 81,540

Non-Current Liabilities
Non-Current Loan 96,000
Total Non-Current Liabilities 96,000

Current Liabilities
Trade Payables re Club Bar 8,400
Subscriptions in Advance 1,550
Accruals for Bar Wages 1,000
Total Current Liabilities 10,950

Total Equity & Liabilities 188,490

The Montag Soccer clubs bank account for 2016 is as follows:


€ €
Balance at 1 January 4,300 Bar Purchases 60,360
Subscriptions 82,460 Bar Expenses 8,420
Bar Sales 93,700 Bar Wages 26,380
Competition Entries 10,830 Rates 3,200
Loan Repayments 7,500
Competition Expenses 3,900
Purchase of Equipment 15,000
Sundry Expenses 1,020
Balance at 31 December 65,510
191,290 191,290

Other information to note:


1. Closing balances at 31 December 2016 are €
Bar Inventory 5,900
Subscriptions Owing 1,700
Subscriptions in Advance 1,960
Trade Payables – Bar 8,600
Accruals - Wages 1,500

2. The rate of interest on the loan is 5% based on the closing balance of the previous year.

3. Depreciation on Equipment is 10% straight line on cost. There is no depreciation on the Land &
Clubhouse. The depreciation policy is to provide a full year’s depreciation in the year of purchase and
none in the year of sale.

REQUIREMENT:
Prepare the following accounts for Montag Soccer Club:
(a) A Bar Trading Account for the year ended 31 December 2016; (11 marks)
(b) An Income and Expenditure Account for the year ended 31 December 2016. (9 marks)
[Total: 20 Marks]
Page 3
3. The financial controller of Octwon Limited, (a technology company) has asked you, a trainee financial
accountant within the company, for advice on how to account for various transactions that occurred after the
financial year end date of 31 December 2016.

REQUIREMENT:
Octwon Limited has asked you to prepare a report which addresses the following:

Part A:
(a) Outline the possible reasons why a company would not prepare its financial statements on a going concern
basis.
(3 marks)

(b) In accordance with IAS 10 – Events after the Reporting Period, describe what is meant by ‘event after the
reporting period’.
(3 marks)

(c) If a company receives information after the reporting period about conditions that existed at the end of the
reporting period, explain how this information should be dealt with in the financial statements.
(2 marks)

Part B:
The following issues have arisen in Octwon Limited during the financial year ended 31 December 2016

(i) The company had an investment valued at €200,000 in its financial statements for the year ended 31
December 2016. Due to fears over Brexit, the investment reduced in value to €180,000 by 10 January 2017.

(ii) It purchased a motor vehicle on 30 December 2016 and paid a non-refundable deposit of €5,000 on that date.
It also wrote a cheque on that date for the balance of €20,000 which it posted to the seller. The seller received
and cashed the cheque on 3 January 2017.

(iii) Octwon Limited was sued by a customer who was unhappy with the quality of product delivered to it in June
2016. The court case was heard in late October 2016 but it was not until 8 January 2017 that the judge ruled
in favour of Octwon Limited and awarded it legal costs of €20,000 to cover its solicitor’s fees. The legal costs
were paid by its customer to Octwon Limited on 12 January 2017. Octwon Limited was unsure of winning the
case and it had previously included a provision in its financial statements for the year ended 31 December 2016
for compensation and legal costs as follows:
€ €
Dr Legal Fees – Administrative Expenses 25,000
Dr Cost of Sales 35,000
Cr Provisions – Current Liabilities 60,000

(iv) One of Octwon’s Limited customers was declared bankrupt on 5 January 2017, owing €4,000 to Octwon
Limited.

REQUIREMENT:

Advise the management of Octwon Limited on the proper accounting treatment of each of the above issues so as
to ensure that the financial statements are prepared in accordance with IFRS.
(12 marks)

[Total: 20 Marks]

Page 4
4. The trial balance for Mr. Roger Kissane, a shop owner in Dublin, for the year ended 31 December 2016 does
not balance. Mr. Kissane had identified the following issues but is unsure how to account for these and has
approached you for assistance in rectifying the following:

1. Purchase returns of €964 have been debited to the purchases account in error.

2. A non-current loan received of €10,000 has been credited to equity by mistake.

3. A payment of €1,000 paid to ‘Trade Payables T Casey’ was credited to ‘Trade Receivable R. Casey’ by
mistake.

4. In reviewing his cheque journal, Roger realised that he accidently recorded repairs and maintenance
of €900 as insurance.

5. Mr. Kissane took purchases of €1,000 from his shop home for a personal party. No adjustment has been
included in the financial statements for this transaction.

6. Deposit interest of €400 that relates to a personal deposit account has been included in the business
trial balance by debiting bank interest expense and crediting suspense.

REQUIREMENT:

(a) Prepare journal entries for Mr. Roger Kissane to record and correct relevant transactions from the above
information for the financial statements for the year-ending 31 December 2016.
(13 marks)

(b) Prepare the suspense account and calculate the opening balance on the suspense account. (4 marks)

(c) Identify which accounting errors can be detected by preparing a trial balance. (3 marks)

[Total: 20 Marks]

Page 5
5. Bohermaw Limited is a company which is involved in the retail trade. The following are their results for the last
two years.

Bohermaw Limited
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2016

2016 2015
€’000 €’000
Sales 5,800 3,990
Cost of Sales (4,123) (2,863)
Gross Profit 1,677 1,127
Distribution Costs (193) (177)
Administration Costs (218) (126)
Profit before Interest & Tax 1,266 824
Interest (188) (194)
Taxation (108) (120)
Profit for the Year 970 510

Bohermaw Limited Statement of Financial Position for the year ended 31 December 2016
2016 2016 2015 2015
€’000 €’000 €’000 €’000
Non-Current Assets 3,610 3,225

Current Assets
Inventory 580 460
Trade Receivables 460 280
Cash & Cash Equivalents 200 160
Total Current Assets 1,240 900

Total Assets 4,850 4,125

Equity & Liabilities

Equity
Share Capital 1,000 1,000
Retained Earnings 1,525 555
Total Equity 2,525 1,555

Non-Current Liabilities
Long-term Debt 1,700 2,000
Total Non-Current Liabilities 1,700 2,000

Current Liabilities
Trade Payables 400 320
Bank Overdraft 147 30
Taxation 108 120
Accruals 47 100
Total Current Liabilities 702 570

Total Equity & Liabilities 4,927 4,125

Notes:
(i) The Opening Inventory for 2015 was €500,000.

(ii) The number of shares in issue is 1,000,000 for both years.


2016 2015
(iii) Market price per share at year-end €12.00 €6.20

Page 6
REQUIREMENT:
(a) Calculate for both years the following ratios in relation to Bohermaw Limited. (8 marks)

1) Gross Profit Percentage


2) Net Profit Percentage
3) Current Ratio
4) Trade Receivable Days
5) Trade Payable Days
6) Return on Capital Employed
7) Earnings Per Share
8) Price Earnings Ratio.

(b) Draft a report to the Board of Directors of Bohermaw Limited in which you provide a commentary on the
company’s position and performance. Use the ratios calculated at (a) above as the basis for your commentary.

(10 Marks)

(c) Discuss whether or not you would recommend to the Directors to sell the company for €15m as offered by a
third party.
(2 marks)

[Total: 20 Marks]

END OF PAPER

Page 7
SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2017

SOLUTION 1

(a) Discuss the advantages and obstacles to the harmonisation of accounting internationally.
Advantages of International Harmonisation
i) Investors have greater comparability of financial statements which enables easier investment decisions.
This is important in the context of global investing which has become more significant in the last decade;
ii) Governments will have reduced funding requirements as they will not have to develop accounting
standards for their own country;
iii) Accounting firms with international practices will find it easier to deal with staff resourcing in countries
experiencing boom or recessionary times due to common accounting standards allowing staff
transferability between countries with no major impact on services delivered;
iv) Companies
• Management control of foreign subsidiaries will be easier;
• Consolidation of financial statements of subsidiaries will be easier as they will operate under the
same standards;
• Easier to comply with stock exchange reporting requirements;
• Investment more likely as investors will have greater knowledge and reliance on the financial
statements.
(5 Marks)

Obstacles to International Harmonisation


i) Different purposes of financial statements i.e. IFRS’s aimed at investment decision making whereas
many countries use financial statements for tax purposes;
ii) Nationalism – possible unwillingness to accept another countries standards;
iii) Different legal systems whereby some countries require certain accounting practices and policies and
other countries do not;
iv) Different users of financial statements. Countries vary in the importance they place on users groups
v) Lack of strong accountancy bodies. Many accountancy bodies in various countries are not independent
or strong enough to press for harmonisation of accounting standards in their jurisdiction;
vi) Language and cultural differences. Both of these can cause difficulties in the adoption of standards
accounting standards.
(5 Marks)

Page 8
(b)
Cantelaow Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2016
! ! ! ! ! !
Revenue 2,458,752 40,000 2,498,752 0.25
Cost of Sales Total W2 1,482,423 0.25

Gross Profit 1,016,329 0.25


Amortisation of Government Grant W1.v 1,000 0.25
Loss on Disposal of PPE W1.ii 3,200 0.25
Exchange Loss W1.vi 250 0.25
Distribution Costs W2 512,385 0.25
Administrative Expenses W2 543,375 1,059,210 0.25
Profit/(Loss) before Tax (41,881) 0.25
Income Tax - 0.25
PROFIT/(LOSS) FOR THE YEAR (41,881) 0.25
Other Comprehensive Income for the year, net of tax - 0.25
TOTAL COMPREHENSIVE INCOME FOR THE YEAR (41,881) 0.25

Cantelaow Limited Statement of Financial Position as at 31st December 2016


! ! ! ! ! !
Non-Current Assets
Property, Plant & Equipment W3 1,671,270 0.25
Total Non-Current Assets 1,671,270 0.25
Current Assets
Inventories W1.i 216,200 0.25
Trade Receivables W1.viii 438,900 0.25
Cash & Cash Equivalents TB + W1.ii + W1.iii 521,450 10,000 - 400,000 100,000 - 37,500 193,950 0.25
Total Current Assets + W1.vi 849,050 0.25
TOTAL ASSETS 2,520,320 0.25
Equity & Liabilities
Equity
Share Capital TB 100,000 0.25
Retained Earnings TB + SOPL 1,716,925 - 41,881 1,675,044 0.25
Revaluation Surplus TB 10,000 0.25
Total Equity 1,785,044 0.25
Non-Current Liabilities
Long-term Loan TB 350,000 0.25
Government Grant W1.iii 100,000 - 1,000 99,000
Total Non-Current Liabilities 449,000 0.25
Current Liabilities
Trade Payables W1.vi 282,276 0.25
Accruals W1.viii 4,000 0.50
Total Current Liabilities 286,276 0.25
TOTAL EQUITY & LIABILITIES 2,520,320

PRESENTATION 1.00

TOTAL MARKS 8.50

Page 9
Working - Journal Entries
!'000 !'000
1.i Total Inventories at Cost per Inventory Count 246,200
Less Goods Sold See Below (30,000)
Value of Closing Inventories 216,200

Dr. Trade Receivables + Current Assets SOFP 40,000


Cr. Revenue + Income SOPL & OCI 40,000 1.00

Cr. Closing Inventory + Cost of Sales SOPL & OCI 30,000


Dr. Inventory - Current Assets SOFP 30,000

Dr. Inventory + Current Assets SOFP 216,200 1.00


Cr. Closing Inventory - Cost of Sales SOPL & OCI 216,200
1.ii Dr. Bank + Current Assets SOFP 10,000
Cr. Disposal Account 10,000
Dr. Disposal Account 24,000
Cr. Motor Vehicles - Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 24,000
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 10,800
Cr. Disposal Account 10,800
Dr. Loss on Disposal of PPE + Expenses SOPL & OCI 3,200 1.00
Cr. Disposal Account 3,200
1.v Dr. Premises - PPE + Non-Current Assets SOFP 400,000
Cr. Bank - Current Assets SOFP 400,000 0.50
Dr. Bank + Current Assets SOFP 100,000
Cr. Government Grant - Deferred Income - Non-Current Liabilities SOFP 100,000 1.00
Dr. Government Grant - Deferred Income + Non-Current Liabilities SOFP 1,000
Cr. Amortisation of Government Grant + Income SOPL & OCI 1,000 1.00
1.vi What Happened - 30.11.16
Dr. Purchases + Cost of Sales SOPL & OCI 45,000
Cr. Trade Payables + Current Liabilities SOFP 45,000 0.50

What Should Have Happened - 30.11.16


Dr. Purchases + Cost of Sales SOPL & OCI 50,000
Cr. Trade Payables + Current Liabilities SOFP 50,000 0.50

To Correct - 30.11.16
Dr. Purchases + Cost of Sales SOPL & OCI 5,000
Cr. Trade Payables + Current Liabilities SOFP 5,000 1.00

Payment - 15.12.16
Dr. Trade Payables - Current Liabilities SOFP 37,500
Cr. Bank - Current Assets SOFP 37,500 1.00

Closing Balance of Trade Payable - 31.12.16 Sterling Euro


Purchase 45,000 50,000
- Payment (30,000) (37,500)
Closing Balance - 31.12.16 15,000 12,500
Exchange Rate 0.85
Converted Into Euro 12,750 12,500
Exchange Difference - Loss 250

Dr. Exchange Loss + Cost of Sales SOPL & OCI 250


Cr. Trade Payables + Current Liabilities SOFP 250 1.00

Trade Payables TB 314,526


Error in Entry W1.vi 5,000
Payment W1.vi (37,500)
Exchange Loss W1.vi 250
Revised Trade Payables 282,276 0.50
1.vii Dr. Bad Debt Write Off + Expenses SOFP 3,600 0.50
Cr. Trade Receivables - Current Assets SOFP 3,600
Dr. Allowance for Bad & Doubtful Debts + Expenses SOPL & OCI 4,500 0.50
Cr. Trade Receivables - Current Assets SOFP 4,500

Trade Receivables Balance per TB 425,600


Revenue W1.1 40,000
- Bad Debt Write Off (3,600)
462,000
- Allowance for Bad Debts - 5% 23,100
Revised Trade Receivable 438,900

Current Allowance for Bad & Doubtful Debts TB 18,600


New Allowance for Bad & Doubtful Debts See Above 23,100
Increase in Allowance for Bad & Doubtful Debts 4,500

1.viii Dr. Adminstrative Expenses + Expenses SOPL & OCI 2,400


Dr. Distribution Costs + Expenses SOPL & OCI 1,600
Cr. Accruals + Current Liabilities SOFP 4,000 0.50

CURRENT MARKS 11.50

Page 10
Cost of Distribution Administration
Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 235,800 - - Cost of
Purchases Per TB 1,457,823 - - Sales
Closing Inventory W1.i (216,200) - - 2.00
Expenses Per TB - 457,820 489,610 Distribution
Purchases W1.vi 5,000 Costs
Bad Debt Write Off W1.vii - 1,800 1,800 3,600 2.00
Allowance for Bad & Doubtful Debts W1.vii - 2,250 2,250 4,500
Accruals W1.viii 2,400 1,600
Depreciation - Premises W3 - 18,240 18,240 36,480 Admin
Depreciation - Fixtures & Fittings W3 - 7,675 7,675 15,350 Expenses
Depreciation - Motor Vehicles W3 - 22,200 22,200 44,400 2.00
Total 1,482,423 512,385 543,375
Working 3 - Property, Plant & Equipment Office Motor
Premises Equipment Vehicles Total
! ! ! !
Cost 1,624,000 186,000 240,000 2,050,000
Accumulated Depreciation b/d (458,700) (124,600) (86,000) (669,300)
Carrying Value b/d at 1st January 2016 1,165,300 61,400 154,000 1,380,700 0.50
Disposal W1.ii - - - 24,000 - 24,000 0.50
Disposal - Accumulated Depreciation W1.ii - - 10,800 10,800 0.50
Carrying Value 1,165,300 61,400 140,800 1,367,500
Addition - Premises W1.iii 400,000 - - 400,000 0.50
1,565,300 61,400 140,800 1,767,500
Depreciation - Premises - 2% Straight Line on Cost (36,480) - - (36,480) 0.50
Depreciation - Office Equipment - 25% Reducing Balance - (15,350) - (15,350) 0.50
Depreciation - Motor Vehicles - 20% Straight Line on Cost - - (44,400) (44,400) 0.50
Carrying Value c/d at 31st December 2016 1,528,820 46,050 96,400 1,671,270 0.50

CURRENT MARKS 10.00

TOTAL MARKS 21.00


30.00

Page 11
SOLUTION 2

(a)

Montag Club Bar Trading Account for the year-ended 31 December 2016
! !
Sales 93,700 1.00
Less Cost of Sales
Opening Inventory 6,100 1.00
+ Purchases 60,560 3.00
- Closing Inventory - ( 5,900) 1.00
1.00
Total
L Cost of Sales 60,760 0.50
Gross Profit 32,940 1
0.50
+ 3
Expenses
- 1
Bar
T Expenses 8,420 1.00
0.50
Bar Wages 26,880 2.00
G
Total Expenses 35,300 0.50
E Loss
Net - ( 2,360 ) 1.00
1
B 2
T SUBTOTAL MARKS 11.00
N 1.00
M

(b) S 3
P (10,830 - 3,900) 1
T
Montag Club Income & Expenditure Account for the year-ended 31 December 2016 0.50
Income
E € €
Subscriptions 81,660 3.00
0
Profit
R on Competition 6,930 (10,830 - 3,900) 1.00
0
Total
L Income 88,590 96,000*0.05 0.50
1
S
Expenditure 0
D
Loss on Bar 2,360 (50,000+15,000)*0.10 1
0.50
T
Rates 3,200 0.50
0.50
Loan Interest
E 4,800 96,000*0.05 1.00
0.50
Sundry Expenses 1,020 0.50
Depreciation 6,500 (50,000+15,000)*0.10 1.00
Total Expenditure 17,880 S 0.50
Excess of Income over Expenditure 70,710 0.50

O
SUBTOTAL MARKS 9.00

OVERALL MARKS 20.00

Page 12
Bar Purchases Calculation € €
T. Payables Bar Account
Bank Bar Payments 60,360 Balance B/D 8,400

Purchases - Balancing Figure 60,560


Balance C/D 8,600 Balance B/D 8,400
68,960 68,960
P
B Balance
Balance B/D
B/D 8,600
8,400
Subscriptions Calculation 6 68,960
Subscriptions Account
P
Balance
B B/D 2,090 BBalance B/D 1,550
Income - I&E A/c
Subscriptions - Balancing Figure
Calculation 6 €
81,660 Bank Receipt €
82,460
68,960
Subscriptions Account
Balance B/D
Balance C/D 1,960 Balance
2,090 Balance B/D
B C/D 1,700
1,550
Income
S - I&E A/c - Balancing Figure 85,710 Bank Receipt
81,660 85,710
82,460

Balance C/D
Balance B/D 1,700 Balance
1,960 Balance B/D
Balance C/D
B/D 1,960
1,700
1,550
I 85,710 Bank Receipt 85,710
82,460
Wages Calculation
Balance
B B/D Wages Account
1,700 Balance
Balance B/D
C/D 1,960
1,700
Bank Payments 26,380
8 Balance B/D 1,000
85,710
W
B Expense - I&E A/c - Balancing Figu
Balance B/D 26,880
1,960
Balance C/D 1,500 Balance B/D 1,000

27,880 €
27,880
Wages Calculation
Wages Account
BBank Payments 26,380 Balance
Balance B/D
B/D 1,500
1,000
2 27,880
Expense - I&E A/c - Balancing Figu 26,880
Balance C/D 1,500 B
27,880 27,880

Balance B/D 1,500


SOLUTION 3

REPORT
To: Financial Controller – Octwon Limited
From: Assistant Financial Accountant
Re: IAS 10 – Events after the Reporting Period
Date: August 2017

PART A
(a) Per paragraph 14 of IAS 10, a company would not prepare its financial statements on a going concern basis
if management determines after the reporting period either that it intends to liquidate the company or to cease
trading or that it has no realistic alternative but to do so.
(3 Marks)

(b) Paragraph 3 of IAS 10 states that events after the reporting period are those events, favourable and
unfavourable, that occur between the end of the reporting period and the date when the financial statements
are authorised for issue. Two types of events can be identified i.e.
a) Adjusting events are those events that provide evidence of conditions that existed at the end of the
reporting period
b) Non-adjusting events are those events that are indicative of conditions that arose after the reporting
period
(3 Marks)

(c) Per paragraph 19 of IAS 10, if a company receives information after the reporting period about conditions
that existed at the end of the reporting period, it shall update disclosures that relate to these conditions, in the
light of the new information.
(2 Marks)

PART B
(i) Per paragraph 11 of IAS 10, this is a non-adjusting event. The decline in fair value does not normally relate
to the condition of the investments at the end of the reporting period, but reflects circumstances that have
arisen subsequently. Similarly, the company does not update the amounts disclosed for the investments as
at the end of the reporting period, although it may need to give additional disclosure

(ii) Per paragraph 9 (c) of IAS 10, this is an adjusting event. The determination after the statement of financial
position dates of the cost of assets purchased before the end of the reporting period is an adjusting event after
the reporting period and the adjusting event needs to be recognised in its financial statements for the relevant
year ended. Therefore, the full cost of the motor vehicle needs to be reflected in its financial statements for
the year ended 31 December 2016.

(iii) Per paragraph 9 (a) of IAS 10, this is an adjusting event. The event took place during the reporting period and
the settlement after the reporting period of the court case confirms that there was a present obligation at the
end of the reporting period. Therefore, the previous provision should be reversed and the money received for
legal fees should be netted against any legal costs that Octwon Limited bore in defending the case in the
financial statements for the year ended 31 December 2016.

(iv) Per paragraph 9 (b i) of IAS 10, this is an adjusting event. The receipt of information after the reporting period
indicating that an asset was impaired at the end of the reporting period for example the bankruptcy of a
customer that occurs after the reporting period usually confirms that a loss existed at the end of the reporting
period on a trade receivable. Therefore, Octwon Limited should write off the amount as a bad debt in its
financial statements for the year ended 31 December 2016
(12 Marks)

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

Financial Accountant
Total (20 Marks)

Page 14
SOLUTION 4
a)
(a) Issue 1 ! ! ! !
Should Have Happened Actually Happened
Dr. Trade Payables 964 Dr. Trade Payables 964
Cr. Purchase Returns 964 Dr. Purchases 964
Cr. Suspense 1,928
To Correct
Dr. Suspense 1,928 1.00
Cr. Purchase Returns 964 1.00
Cr. Purchases 964 1.00
Issue 2
Should Have Happened Actually Happened
Dr. Bank 10,000 Dr. Bank 10,000
Cr. Bank Loan - Non-Current 10,000 Cr. Equity 10,000
To Correct
Dr. Equity 10,000 1.00
Cr. Bank Loan - Non-Current 10,000 1.00
Issue 3
Should Have Happened Actually Happened
Dr. Trade Payables 1,000 Dr. Suspense 2,000
Cr. Bank 1,000 Cr. Trade Receivable 1,000
Cr. Bank 1,000
To Correct
Dr. Trade Payables 1,000 1.00
Cr. Trade Receivable 1,000 1.00
Cr. Suspense 2,000 1.00
Issue 4
Should Have Happened Actually Happened
Dr. Repairs & Maintenance Expense 900 Dr. Insurance Expense 900
Cr. Bank 900 Cr. Bank 900
To Correct
Dr. Repairs & Maintenance Expense 900 0.50
Cr. Insurance Expense 900 0.50
Issue 5
Should Have Happened Actually Happened
Dr. Drawings 1,000 Nothing
Cr. Purchases 1,000
To Correct
Dr. Drawings 1,000 1.00
Cr. Purchases 1,000 1.00
Issue 6
Should Have Happened Actually Happened
Nothing Dr. Bank Interest Expense 400
Cr. Suspense 400
To Correct
Dr. Suspense 400 1.00
Cr. Bank Interest Expense 400 1.00

TOTAL MARKS 13.00

b)
(b) Suspense Account
1 Purchase Returns 964 Opening Balance 328 1.50
1 Purchases 964 3 Trade Payables 1,000 1.00
6 Bank Interest Expense 400 3 Trade Receivable 1,000 1.00
2,328 2,328 0.50

SUBTOTAL MARKS 4.00

(c)
c) Errors of Transposition
Errors of Omission (if the omission is one-sided) SUBTOTAL MARKS 3.00
Errors of Commission (if one-sided, or say two debit entries are made for example)

OVERALL MARKS 20.00

Page 15
SOLUTION 5
(a) 2016 2015
Gross Profit Percentage €1,677/ €5,800 = 28.91% €1,127/ €3,990 = 28.25%

Net Profit Percentage €970/ €5,800 = 16.72% €510/ €3,990 = 12.78%

Current Ratio €1,240/ €702 = 1.76:1 €900/ €570 = 1.58:1

Trade Receivable Days €460/ €5,800*365 = 29 Days €280/ €3,990*365 = 26 Days

Trade Payable Days €400/ €4,123*365 = 35 Days €320/ €2,863*365 = 41 Days

Return on Capital Employed €1,266/ €4,148 = 30.52% €824/ €3,555 = 23.18%

Earnings per Share €970/ €1,000 = €0.97 €510/ €1,000 = €0.51

Price Earnings Ratio €12.00/ €0.97 = 12.37 €6.20/ €0.51 = 12.16


(8 Marks)

(b) To: Board of Directors – Bohermaw Limited


From: Assistant Financial Accountant
Re: Company’s Position and Performance
Date: August 2017

Gross Profit Percentage


The Gross Profit percentage has increased from 28.25% to 28.91%, an increase of over 2.33% which is a
positive trend for the company. This is also positive for the fact that the company sales increased by over 45%.
An increase of this magnitude presented a challenge for a company and the company has in the main
responded positively to this challenge. The increase resulted from the fact that sales increased faster than
Cost of Sales (44%). However, one should note that purchases increased at a slightly higher rate than sales
and was offset by higher closing inventory.

2016 2015 % Increase


€’000s €’000s
Opening Stock 460 500 - 8.00%
Purchases 4,243 2,903 46.16%
Closing Stock (580) (460) 26.09%

Cost of Sales 4,123 2,863

Net Profit Percentage


The Net Profit % has increased from 12.78% to 16.72% which is an increase of nearly 31%. This is an
extremely good performance. The main reason for the increase is due to the increase in Sales which has
meant that the Gross Profit has increased from €1,127k to €1,677k, an increase of €550k. This increase has
been offset to a degree by the increase in Admin Expenses of €92k which is an increase of just over 73%.
This increase is high so the company need to watch this cost going forward.

Current Ratio
This is less than the average of 2:1. However, the current ratio has increased by over 11.39% which is an
improvement. The reason for the improvement is primarily due to the increase in Current Assets (up 37.78%)
which in turn has been driven by the increase in inventory from €460k to €580k an increase of over 26%,
increase in trade receivables of €180k (over 64% increase) and an increase in cash of €40k or 25%. The
increase in trade receivables is not a great result as the sales increased by over 45% which would indicate
that there may have been a problem collecting debts or else the company, to increase sales, had to sell to
customers who demanded more credit from the company. However, if we were to look at Trade Receivables
Days we will see that they increased by less than 12% so therefore, this level of increase is less than the
increase in Sales. However, the trend is negative and therefore the company collection of Trade Receivables
should be pushed hard to ensure that they are collecting them as efficiently as possible and bring the Trade
Receivables back in line with the previous year. Current Liabilities increased by 23.16%. The main drivers of
Current Liabilities were the increase in the Bank Overdraft of €117k, an increase of over 390%. The increase
in the bank overdraft stems from the purchase of non-current assets as well as a decrease in the long-term
debt and an increase in working capital. Trade Payables increased by €80k or 25% but this increase was
mainly due to the decrease in accruals of €53k.
Page 16
Trade Receivables Days
This has increased from 23 to 26 days, an increase of over 11%. Sales have increased by over 45% but this
is no excuse for the deterioration in Trade Receivables Days. The company need to ensure that the increase
in Sales is not being fuelled by having customers who are demanding longer credit before they would purchase
goods from Boherash Limited. Another possible reason is that the credit department were poor in collecting
debts and given the increase in Administrative Expenses, one would expect that the credit control department
was adequately staffed to cope with the increased workload in collecting debts from having more sales.

Trade Payables Days


This decreased from 41 days to 35 days which is a deterioration of over 14.63%. This is not a good result given
the fact that the company should be aiming for 45 days plus. Obviously with the increase in purchases, some
of the supplier company’s set limits on the amount of stock they would sell before getting paid and therefore,
this meant that the Trade Payables days decreased. If we compare to 2015, the difference between when
money was received in from Trade Receivables and paid out to Trade Payables has decreased from 15 days
to 6 days which has obviously put pressure on the cash flow of the company

Return on Capital Employed


This has increased from 23.18% to 30.52% which is an increase in percentage terms of nearly 32%. Again,
this is a very positive result. The main driver of this increase is the increase above the line in the Profit before
Interest and Tax from €824k to €1,266k, an increase of €442 or 53.64%. Capital Employed also increased
from €3,555k to €4,148k, an increase of €593k or 16.68%. The main increases here were the increase in
Non-Current Assets and Current Assets which we have discussed already.

Earnings per Share


This has increased from 51 cent per share to 97 cent per share, which is an increase of over 90%. This is a
positive trend and is driven by the increase in profit which the company has gained in 2016.

Price Earnings Ratio


This ratio has increased slightly from 12.16 to 12.37, an increase of 1.73%. Basically, what has happened is
that the increase in EPS has been offset by the increase in share price from €6.20 to €12 euro. The current
P/E ratio is at a healthy level and basically investors have become quite interested in the company and the
profits the company were going to make and their interest has driven the price of the shares up significantly.

(10 Marks)

(c) Yes I would recommend the sale of the company for €15 million. Basically, the return for 2016 has been very
good and provided that this was not a one off year, then one would expect the company to continue to perform
well going forward. The cash position is the one which is of most concern in purchasing this company i.e. that
the current ratio is not great but if we increase Trade Payables and squeeze Trade Receivables back to where
they were in 2015, this would increase the cash position by €175k and increase the current ratio to greater
than the norm. The current offer values the company at €15 a share which is at a 25% premium to the current
share price. Overall, I would recommend the sale of the company at €15 million provided no issues are
unveiled in the due diligence process.
(2 Marks)

Total (20 Marks)

Page 17
MARKING SCHEME

Q1
(a) Define and explain the elements of financial statements 10

(b) Workings
Statement of Profit or Loss and Other Comprehensive Income +
Statement of Financial Position 30

Total Marks – Q1 40

Q2
(a) Bar Trading Account 11

(b) Income and Expenditure Account 9

Total Marks – Q2 20

Q3
(a) Events after the reporting period 3

(b) Financial statements not prepared on a going concern basis 3

(c) Information after the reporting period 2

(d) Scenarios 1 – 4 12

Total Marks – Q3 20

Q4
(a) Journal Entries 13

(b) Suspense Account 4

(c) Errors detected by preparing a trial balance 3

Total Marks – Q4 20

Q5
(a) Calculation of Ratios 8

(b) Report on position and performance of company 10

(c) Advice on selling of company 2

Total Marks – Q5 20

Page 18
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2018

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2018

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
(a) What is meant by the following terms? You should provide an example of each to support your answer.

(i) A Prepayment
(ii) An Accrual
(iii) Capital Expenditure
(iv) Equity. (10 Marks)

(b) Ragela Limited is a company involved in the manufacture of heating systems for the construction industry. You
have been appointed as the company’s financial accountant and the following trial balance was extracted
from its books as at 31 December 2017:

Debit Credit
€ €
Accumulated Depreciation - Premises - 1 January 2017 682,000
Admininstrative Expenses 457,200
Trade Receivables / Trade Payables 146,000 188,700
Retained Earnings at 1 January 2017 153,320
Purchases / Revenue 3,645,200 4,875,200
Allowance for Bad & Doubtful Debts 11,200
Long-Term Loan - 5% 240,000
Bank 68,500
Issued Share Capital - €2 shares each 200,000
Premises at Cost at 1 January 2017 1,240,000
Inventory at 1 January 2017 245,720
Current Tax Payable at 1 January 2017 21,200
Accumulated Depreciation - Vehicles - 1 January 2017 104,600
Distribution Costs 298,600
Finance Costs 6,000
Accumulated Depreciation - Equipment - 1 January 2017 347,000
Government Grants 200,000
Equipment at Cost at 1 January 2017 867,000
Vehicles at Cost at 1 January 2017 186,000
7,091,720 7,091,720

Page 1
Your role was previously held by an unqualified person. The following information, based on your investigations, has
also come to your attention:

(i) Inventory was counted and valued at 3 January 2018 at €246,800. On 2 January 2018, inventory was sold
at a sales price of €30,000. Ragela Limited makes a margin on 20% on its sales. The sales transaction is
accounted for in the 2018 financial statements.

(ii) Depreciation is to be charged as follows:

Premises 2% Straight Line on Cost

Equipment 15% Reducing Balance

Vehicles 25% Straight Line on Cost

Depreciation is charged in full in the year of purchase and none in the year of sale.

(iii) New vehicles costing €90,000 were purchased and paid by cheque in May 2017. An existing vehicle was
involved in a car accident on 1 November 2017 and had to be written off. The vehicle was purchased for
€30,000 in June 2014. Ragela Limited claimed €15,000 on an insurance policy which the insurance company
agreed to pay in December 2017. The insurance company paid this amount in January 2018.

(iv) The premises as per the trial balance was revalued to €600,000 on 31 December 2017. A professional valuer
estimates the residual value will be €200,000 and that its remaining useful life is forty years.

(v) In December 2017, Ragela Limited issued 10,000 shares and received €25,000. This had not been accounted
for in the books of the company.

(vi) Tax payments were made in March 2017 and December 2017 amounting to €26,400 and €16,400,
respectively. The income tax expense for the year is estimated at €18,300.

(vii) The grants received on 1 January 2017 are amortised over twenty years. Ragela Limited uses the deferred
income method for accounting for government grants.

(viii) Ragela Limited wrote off a bad debt of €6,200 in December 2017. The Allowance for Bad & Doubtful Debts
should be set at 5%.

(ix) On 1 July 2017, a new long term loan of €100,000 (5% interest per annum) was received by the company.
The above trial balance has not been adjusted in respect of this new loan. Provide for the interest due on the
long term loans.

(x) Expenses are to be allocated evenly between Distribution Costs and Administrative Expenses.

REQUIREMENT:

Prepare, in a form suitable for publication, based on International Financial Reporting Standards, a Statement of
Profit or Loss and Other Comprehensive Income and Statement of Financial Position for Ragela Limited for the
financial year-ended 31 December 2017.

Note: All workings should be shown. (30 Marks)

[Total: 40 Marks]

Page 2
2. The bank account of Firblad Limited for the month of December 2017 was as follows:

Dr. Bank Account of Firblad Limited Cr.


Date Receipts € Date Payments Cheque No. €
01/12/17 Balance b/d 10,263 01/12/17 Bank Charges D.D. 42
05/12/17 J. O'Mahony 2,211 03/12/17 T. Roche 4312 2,213
10/12/17 T. Foley 5,373 05/12/17 J. Ryan 4313 368
14/12/17 Cash Lodgement 534 09/12/17 Energia D.D. 1,028
22/12/17 R. Kissane 6,188 13/12/17 T. Moran 4314 618
29/12/17 Lodgement 4,868 16/12/17 B. Nolan 4315 186
19/12/17 T. McSherry S.O. 102
22/12/17 J. Leydon 4316 678
26/12/17 F. Devon 4317 488
29/12/17 J. Richmond 4318 6,884

31/12/17 Balance c/d 16,830

29,437 29,437

01/01/18 Balance b/d 16,830

The following is the bank statement for Firblad Limited for the month of December 2017.

Bank Statement for Firbald Limited for December 2017

Date Description Payments Lodgment Balance


€ € €
01/12/17 Balance 11,001
02/12/17 Bank Charges 42 10,959
03/12/17 Cheque 4310 324 10,635
04/12/17 Cheque 4312 2,123 8,512
05/12/17 Lodgement 2,211 10,723
07/12/17 Cheque 4311 414 10,309
09/12/17 Cheque 4313 368 9,941
10/12/17 Energia D.D. 1,028 8,913
11/12/17 Credit Transfer 5,373 14,286
15/12/17 Bank Charges 160 14,126
16/12/17 Lodgement 543 14,669
18/12/17 Cheque 4315 186 14,483
20/12/17 T. McSherry S.O. 102 14,381
21/12/17 124578 632 15,013
23/12/17 Lodgement 6,188 21,201
25/12/17 Cheque 4316 678 20,523
26/12/17 Meteor D.D. 425 20,098
28/12/17 Insurance S.O. 652 19,446
29/12/17 Credit Transfer 3,457 22,903

The bank has confirmed to Firblad Limited that it made an error in Firblad’s bank account on the 21 December
2017 amounting to €632 by lodging this amount to Firblad’s bank account even though the lodgement related
to a different customer of the bank’s.

REQUIREMENT:
(a) Prepare a bank reconciliation statement for Firblad Limited as at 31 December 2017. (16 Marks)

(b) Discuss three benefits of preparing bank reconciliation statements. (4 Marks)

[Total: 20 Marks]

Page 3
3.
Part A:
Exchangeit Limited imports goods from various countries abroad and has asked you, a trainee financial
accountant, for advice on how to account for the effects of changes in foreign exchange rates. Exchangeit
Limited’s year-end is 31 December and its reporting or functional currency is the euro (€).

REQUIREMENT:

The financial controller of Exchangeit Limited has asked you to prepare a report which addresses the following:

(a) In accordance with IAS 21 – The Effect of Changes in Foreign Exchange Rates, describe what is meant by
the following:

(i) A foreign currency transaction.

(ii) An exchange difference. (4 Marks)

(b) Outline how the following items denominated in a foreign currency are restated to presentation currency. (The
functional currency is not the currency of a hyperinflationary economy).

(i) Assets and liabilities;

(ii) Income and expenses;

(iii) Any resulting exchange differences. (6 Marks)

Part B:
Exchangeit Limited made a credit sale to a US customer on 1 October 2017 for US$100,000. This transaction
was incorrectly recorded by Exchangeit Limited as a sale of €100,000. Exchangeit Limited received part
payment on 30 November 2017 of US$50,000 and this again was incorrectly recorded as €50,000 in its
records.

The following exchange rates applied during the financial year:

1 October 2017 € 1 = US $ 1.25


30 November 2017 € 1 = US $ 1.20
31 December 2017 € 1 = US $ 1.10

REQUIREMENT:

(a) Prepare journal entries to show how the above transactions should be recorded in the books of Exchangeit
Limited for the year ended 31 December 2017.
(8 Marks)

(b) Calculate the foreign exchange gain or loss at the 31 December 2017 for Exchangeit Limited. (2 Marks)

[Total: 20 Marks]

Page 4
4. Robin, Sienna and Teagan are in partnership sharing profits and losses in the ratio of 2:2:1 respectively. At
the 1 January their capital and current account balances were:

Capital Account Current Account


€ €
Robin 32,000 2,400 Credit
Sienna 40,000 1,100 Debit
Teagan 48,000 1,900 Credit

The partners are entitled to interest on capital at the rate of 5% per annum.

On 1 July, Robin increased her capital by paying a further €6,000 into the partnership bank account, while
Sienna reduced her capital to €26,000 and left the value of her withdrawn capital in the partnership as a loan
bearing interest at 5% per annum.

Partners are allowed to withdraw from current accounts at any time during the financial year but are charged
interest on the amounts involved.

Details of drawings made and interest chargeable in respect of each partner for the financial year ended 31
December are:

Drawings Interest on Drawings


€ €
Robin 6,900 270
Sienna 5,700 220
Teagan 8,100 330

Sienna is paid an annual salary of €18,000. The trading profit (before interest) for the year ended 31 December
was €56,420.

REQUIREMENT:

(a) Prepare the profit and loss appropriation account for the partnership. (10 Marks)

(b) From the above information, post the appropriate entries to each of the partner’s capital and current accounts
and balance each account for each partner as at 31 December.
(10 Marks)

[Total: 20 Marks]

Page 5
5. Glamgra Limited is involved in the manufacture of building products and its financial statements are as follows:

Glamgra Limited Statement of Financial Position as at 31 December 2017

2017 2016
€’000 €’000
Non-Current Assets
Property, Plant & Equipment 7,680 5,910
Total Non-Current Assets 7,680 5,910

Current Assets
Inventories 2,070 1,830
Trade Receivables 1,170 1,020
Cash & Cash Equivalents 75 168
Total Current Assets 3,315 3,018

Total Assets 10,995 8,928

Equity & Liabilities


Equity
Share Capital 360 300
Share Premium 90 75
Retained Earnings 5,697 3,603
Revaluation Surplus 180 120
Total Equity 6,327 4,098

Non-Current Liabilities
Long Term Loan 2,250 2,400
Total Non-Current Liabilities 2,250 2,400

Current Liabilities
Trade Payables 2,208 2,250
Bank Overdraft 60 90
Current Tax Payables 150 90
Total Current Liabilities 2,418 2,430

Total Equity & Liabilities 10,995 8,928

Notes:
(i) Glamgra Limited’s 2017 profit for the year before tax amounted to €2,243,000.

(ii) Glamgra Limited’s income tax expense for 2017 was €63,000.

(iii) The cost of Property, Plant & Equipment (PPE) at 1 January 2017 amounted to €7,290,000. The company’s
depreciation policy is to depreciate all assets at 10% straight line on cost from the date of purchase to the date
of sale. On 1 October 2017, Glamgra Limited sold PPE which had a carrying value of €520,000. This PPE
had originally cost Glamgra Limited €800,000 and the company made a loss of €20,000 on the sale of this
PPE. The additions to PPE for Glamgra Limited occurred on 31 December 2017.

(iv) Glamgra Limited’s finance cost for the year amounted to €48,000. This was paid in full.

(v) Glamgra Limited paid a dividend of €86,000 in 2017.

REQUIREMENT:
Prepare a Statement of Cash Flows for the year-ended 31 December 2017 for Glamgra Limited in accordance with
IAS 7 - Statement of Cash Flows.
[Total: 20 Marks]

END OF PAPER

Page 6
SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2018

SOLUTION 1

(a) Explain what is meant by the following terms and provide an example of each to help support your answer
(i) Prepayment
(ii) Accrual
(iii) Capital Expenditure
(iv) Equity

Prepayments are items of expense that relate to future periods but which have already been paid for and are
shown in expenses of the current period. They must be excluded from this year’s expenses as they relate to a
future period.

Examples of Prepayments could include Rent Prepaid, Phone Credit Prepaid etc.

Accruals are expenses which have not been included in expenses in this period as they have not been paid for in
this period but which must be included as they have been incurred in this period as per the accruals concept.

Examples of Accruals could include Wages owing at the end of a period, Light & Heat Due etc.

Capital expenditure are funds that a company uses to acquire or upgrade physical assets such as property,
industrial buildings or equipment to allow the company produce products or provide services.

Examples of Capital Expenditure include money spent on property, plant, equipment, vehicles, trucks, fixtures and
fittings, office equipment etc.

Equity is the residual interest in the assets of an entity after deducting all its liabilities
The above form the accounting equation i.e. Assets – Liabilities = Equity

Examples of Equity include ordinary share capital, share premium, retained earnings and revaluation surplus.

(10 Marks)

Page 7
(b)
Ragela Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2017
! ! ! ! ! !
Revenue TB 4,875,200 0.25
Cost of Sales W2 - 3,620,120
Gross Profit 1,255,080 0.25
Amortisation of Government Grants W1.vii 10,000 0.25
Gain on Disposal W1.iii 7,500 0.25
Finance Costs TB + W1.ix 6,000 8,500 14,500 0.25
Distribution Costs W2 381,745 0.25
Administrative Expenses W2 540,345 919,090 0.50
Profit/(Loss) before Tax 335,990
Income Tax Expense TB 18,300 0.25
PROFIT/(LOSS) FOR THE YEAR 317,690
Other Comprehensive Income
Revaluation Gain W3 66,800 0.25
Other Comprehensive Income for the year, net of tax 66,800
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 384,490 0.25

Ragela Limited Statement of Financial Position as at 31st December 2017


! ! ! ! ! !
Property, Plant & Equipment W3 1,144,400 0.25
Total Non-Current Assets 1,144,400
Current Assets
Inventories W1.i 270,800 0.25
Trade Receivables W1.viii 132,810 0.50
Current Tax Asset W1.vi - 21,200 26,400 16,400 - 18,300 3,300 0.25
Other Receivables W1.iii 15,000 0.25
Cash & Cash Equivalents - 0.25
Total Current Assets 421,910
TOTAL ASSETS 1,566,310
Equity & Liabilities
Equity
Share Capital TB + W1.v 200,000 20,000 220,000 0.25
Share Premium W1.v 5,000 0.25
Retained Earnings TB + SOPL 153,320 317,690 471,010 0.25
Revaluation Surplus W3 66,800 0.25
Total Equity 762,810
Non-Current Liabilities
Long-term Loan TB + W1.iii 240,000 100,000 340,000 0.25
Government Grants TB + W1.vii 200,000 - 10,000 190,000 0.25
Total Non-Current Liabilities 530,000
Current Liabilities
Trade Payables TB + W1.iii 188,700 0.25
Accruals W1.ix 8,500 0.25
Bank TB + W1.iii + W1.v 68,500 90,000 - 25,000 42,800 - 100,000 76,300 0.25
Total Current Liabilities + W1.vi + W1.ix 273,500 0.25
TOTAL EQUITY & LIABILITIES 1,566,310
PRESENTATION 1.00
-

TOTAL MARKS 8.00

Page 8
Working - Journal Entries
! ! ! !

1.i Total Inventories at Cost per Inventory Count 246,800


Add Cost of Goods Sold See Below 24,000
Value of Closing Inventories 270,800

Goods Sold 30,000


Margin - 20% 6,000
Inventory at cost 24,000

Dr. Inventory + Current Assets SOFP 270,800 1.00


Cr. Closing Inventory - Cost of Sales SOPL & OCI 270,800
1.iii Dr. Property, Plant & Equipment (PPE) + Non-Current Assets SOFP 90,000
Cr. Bank + Current Liabilities SOFP 90,000
Dr. Disposal Account - Vehicles 30,000
Cr. Property, Plant & Equipment (PPE) + Non-Current Assets SOFP 30,000 2.00
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 22,500
Cr. Disposal Account - Vehicles 22,500
Dr. Insurance - Other Receivables + Current Assets SOFP 15,000
Cr. Disposal Account - Vehicles 15,000
Dr. Disposal Account - Vehicles 7,500
Cr. Gain on Disposal + Other Income SOPL & OCI 7,500
1.iv See Working 3 - Property, Plant & Equipment
1.v Dr. Bank + Current Liabilities SOFP 25,000
Cr. Share Capital - 10,000 shares @ !2 each + Equity SOFP 20,000 1.00
Cr. Share Premium + Equity SOFP 5,000
1.vi Dr. Current Tax Asset + Current Assets SOFP 26,400
Dr. Current Tax Asset + Current Assets SOFP 16,400 1.00
Cr. Bank + Current Liabilities SOFP 42,800
Dr. Income Tax Expense + Expenses SOPL & OCI 18,300 1.00
Cr. Current Tax Asset - Current Assets SOFP 18,300
1.vii Dr. Government Grants - Deferred Income - Non-Current Liabilities SOFP 10,000
Cr. Amortisation of Government Grants + Other Income SOPL & OCI 10,000 1.00
1.viii Dr. Bad Debt Written Off + Expenses SOPL & OCI 6,200
Cr. Trade Receivables - Current Assets SOFP 6,200 1.00
Dr. Allowance for Doubtful Debts + Current Assets SOFP 4,210
Cr. Allowance for Doubtful Debts - Expenses SOPL & OCI 4,210 1.00
Trade Receivables TB 146,000
- Bad Debt Written Off - 6,200
139,800
- Allowance for Bad & Doubtful Debts - 5% - 6,990
Revised Trade Receivable 132,810 1.00
Current Allowance for Bad & Doubtful Debts TB 11,200
New Allowance for Bad & Doubtful Debts See Above 6,990
Decrease in Allowance for Bad & Doubtful Debts 4,210
1.ix Dr. Bank - Current Liabilities SOPL & OCI 100,000
Cr. Long Term Loan + Non-Current Liabilities SOFP 100,000 1.00

Dr. Finance Costs + Expenses SOPL & OCI 8,500


Cr. Accruals + Current Liabilities SOFP 8,500 1.00

Current Long Term Loan TB 240,000


5% interest 5% 12,000

Interest already included in Finance Costs 6,000


Amount to be accrued 6,000 0.50

New Long Term Loan W1.ix 100,000


5% interest for 6 months 5% 2,500

Amount to be accrued 2,500 0.50

Total Amount to be accrued 8,500

CURRENT MARKS 12.00

Page 9
Cost of Distribution Administration
Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 245,720 - - Cost of
Purchases Per TB 3,645,200 - - Sales
Closing Inventory W1.i - 270,800 - - 1.00
Expenses Per TB - 298,600 457,200
Allowance for Bad & Doubtful Debts W1.viii - - 2,105 - 2,105 - 4,210 Distribution
Bad Debt Write Off W1.viii - 3,100 3,100 6,200 Costs
Depreciation - Premises W3 - 12,400 12,400 24,800 2.00
Depreciation - Equipment W3 - 39,000 39,000 78,000
Depreciation - Vehicles W3 - 30,750 30,750 61,500 Admin.
Total 3,620,120 381,745 540,345 Expenses
2.00
Working 3 - Property, Plant & Equipment
Premises Equipment Vehicles Total
! ! ! !
Cost Per TB 1,240,000 867,000 186,000 2,293,000
- Accumulated Depreciation b/d Per TB - 682,000 - 347,000 - 104,600 - 1,133,600
Carrying Value b/d at 1st January 2017 558,000 520,000 81,400 1,159,400 0.50
Addition W1.iii - - 90,000 90,000 0.50
Disposal - Cost W1.iii + Note 2 - - - 30,000 - 30,000 0.50
Disposal - Accumulated Depreciation W1.iii + Note 2 - - 22,500 22,500 0.50
558,000 520,000 163,900 1,241,900
Depreciation - Premises - 2% Straight Line on Cost Note 3 - 24,800 - - - 24,800 0.50
Depreciation - Equipment - 15% Reducing Balance - - 78,000 - - 78,000 0.50
Depreciation - Vehicles - 20% Straight Line on Cost - - - 61,500 - 61,500 0.50
533,200 442,000 102,400 1,077,600
Revaluation Gain Note 1 66,800 - - 66,800 0.50
Carrying Value c/d at 31st December 2017 600,000 442,000 102,400 1,144,400
Note 1 - Revaluation Gain
Dr. Property, Plant & Equipment + Non-Current Assets SOFP 66,800
Cr. Revaluation Surplus + Equity SOFP 66,800 1.00
Note 2 - Disposal of Equipment
Cost 30,000
Accumulated Depreciation - 25% straight line per annum
Depreciation 2014 7,500
Depreciation 2015 7,500
Depreciation 2016 7,500
22,500 - 22,500
Carrying Value of Equipment disposed 7,500
Disposal Account
Cost 30,000 Accumulated Depreciation 22,500
Insurance Claim 15,000
Gain on Disposal 7,500
37,500 37,500

CURRENT MARKS 10.00

TOTAL MARKS 22.00

Page 10
Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Accumulated Depreciation - Premises - 1 January 2017 682,000 24,800 706,800
Admininstrative Expenses 457,200 85,250 2,105 540,345
Trade Receivables / Trade Payables 146,000 188,700 6,200 139,800 188,700
Retained Earnings at 1 January 2017 153,320 317,690 471,010
Purchases / Revenue 3,645,200 4,875,200 3,645,200 4,875,200
Allowance for Bad & Doubtful Debts 11,200 4,210 6,990
Long-Term Loan - 5% 240,000 100,000 340,000
Bank 68,500 125,000 132,800 76,300
Issued Share Capital - !2 shares each 200,000 20,000 220,000
Premises at Cost at 1 January 2017 1,240,000 66,800 1,306,800
Inventory at 1 January 2017 245,720 245,720
Current Tax Payable at 1 January 2017 21,200 42,800 18,300 3,300
Accumulated Depreciation - Vehicles - 1 January 2017 104,600 22,500 61,500 143,600

Page 11
Distribution Costs 298,600 85,250 2,105 381,745
Finance Costs 6,000 8,500 14,500
Accumulated Depreciation - Equipment - 1 January 2017 347,000 78,000 425,000
Government Grants 200,000 10,000 190,000
Equipment at Cost at 1 January 2017 867,000 867,000
Vehicles at Cost at 1 January 2017 186,000 90,000 30,000 246,000
Inventory at 31 December 2017 270,800 270,800 270,800 270,800
Insurance Claim - Other Receivables 15,000 15,000
Gain on Disposal 7,500 7,500
Share Premium 5,000 5,000
Income Tax Expense 18,300 18,300
Amortisation of Government Grants 10,000 10,000
Accruals 8,500 8,500
Revaluation Surplus 66,800 66,800
7,091,720 7,091,720 844,410 844,410 5,163,500 5,163,500 2,848,700 2,848,700

- - -
SOLUTION 2
(a)
Step 1: Reconcile the opening balance in the bank account with the opening balance on the bank statements
Balance per Bank Account - 01/12/2017 10,263
Add Items not yet Debited -
10,263 0.50

Balance per Bank Account - 01/12/2017 11,001 -


Less Unpresented Cheques
Cheque 4310 - 324 1.00
Cheque 4311 - 414 1.00
10,263 0.50

Adjusted Bank Account


December ! December !
31 Balance 16,830 15 Bank Charges 160 1.00
31 Cheque 4312 - Difference 90 31 Meteor D.D. 425 1.00
31 Lodgement - Unrecorded 3,457 31 Insurance S.O. 652 1.00
31 Lodgement (14/12/17) - Difference 9 0.50
31 Closing Balance 19,149 1.00

20,386 20,386 0.50

Bank Reconciliation Statement


Closing Balance per Bank Statement - 31/12/2017 22,903 1.00
Less Unpresented Cheques
Cheque 4314 618 1.00
Cheque 4317 488 1.00
Cheque 4318 6,884 - 7,990 2.00
Add Lodgement not yet Cleared
Lodgement - 30/12/2017 4,868 4,868 1.00
Bank Errors
124578 - 21/12/2017 - 632 - 632 1.00
Balance as per Adjusted Bank Account 19,149 1.00

MARKS 16.00

(b)

Any three of the following


Errors can be identified and corrected at an early stage
Reduces the risk of fraud and theft 4.00
Stale cheques can be identified
Ensures that the bank account in the financial statements of the company is correct

TOTAL MARKS 20.00

Page 12
Solution 3

REPORT
To: Financial Controller, Exchangeit Limited
From: Financial Accountant
Re: IAS 21 – Changes in Foreign Exchange Rates
Date: April 2018

PART A
(a) (i) Per paragraph 20 of IAS 21, a foreign currency transaction is a transaction that is denominated or requires
settlement in a foreign currency, including transactions
arising when an entity;

(a) Buys or sells goods or services whose price is denominated in a foreign currency;
(b) Borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency;
or
(c) Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign
currency.
(2 Marks)

(ii) Per paragraph 8 of IAS 21, an exchange difference is the difference resulting from translating a given number
of units of one currency into another currency at different exchange rates.
(2 Marks)

(b) The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary
economy shall be translated into a different presentation currency using the following procedures:

(i) Assets and liabilities for each statement of financial position presented (i.e. including comparatives) shall be
translated at the closing rate at the date of that statement of financial position;
(2 Marks)

(ii) Income and expenses for each statement presenting profit or loss and other comprehensive income (i.e.
including comparatives) shall be translated at exchange rates at the dates of the transactions; and

(2 Marks)

(iii) All resulting exchange differences shall be recognised in other comprehensive income. (2 Marks)

PART B
(a) The accounting treatment for the transactions for the year-ending 31 December 2017 are as follows:

01.10.2017 Dr. Revenue – SOPL & OCI €100,000


Cr. Trade Receivables – SOFP €100,000
Being reversal of incorrect journal

01.10.2017 Dr. Trade Receivables – SOFP €80,000


Cr. Revenue – SOPL & OCI €80,000
Being inclusion of correct journal – exchange rate €1 = US€1.25

30.11.2017 Dr. Trade Receivables – SOFP €50,000


Cr. Bank – SOFP €50,000
Being reversal of incorrect journal

30.11.2017 Dr. Bank – SOFP €41,667


Cr. Trade Receivables – SOFP €41,667
Accounting for receipt at foreign exchange rate of €1 = US€1.20

31.12.2017 Dr. Trade Receivables – SOFP (See Below) €7,122


Cr. Foreign Exchange Gain – SOPL & OCI €7,122

(8 Marks)
Page 13
(b) Calculation of Foreign Exchange Gain at 31.12.2017

Balance per Trade Receivables €38,333


Balance due in US$ (100,000 – 50,000 = 50,000) €45,455
@ 31.12.2017 €1 = US€1.10
Foreign Exchange Gain €7,122
(2 Marks)

I hope that the above responses clarify and answer your queries. If you have any further queries, please do not hesitate
to contact me.

Yours sincerely,

Financial Accountant
[Total: 20 Marks]

Page 14
SOLUTION 4

Net Profit less loan interest Note 1 56,420 (350) 56,070 1.00
Add Interest on Drawings (270+220+330) 820 1.00
56,890
Less Sienna salary (18,000) 1.00
38,890
Less Interest on Capital
Robin Note 2 1,750 1.00
Sienna Note 2 1,650 1.00
Teagan 5% 48,000 2,400 1.00
(5,800)
Residual Profits 33,090 1.00

Residual Profits Split


Robin 2 33,090 * 2 /5 13,236 1.00
Sienna 2 33,090 * 2 /5 13,236 1.00
Teagan 1 33,090 * 1 /5 6,618 1.00
5 33,090

Note 1 - Interest on Loan


Amount of Loan 14,000
Interest on Loan 5%
No. of Months of Interest on Loan 6
Interest on Loan 350

Note 2 - Interest on Capital


Robin 32,000 * 6 \ 12 * 5% 800
38,000 * 6 \ 12 * 5% 950 1,750

Sienna 40,000 * 6\ 12 * 5% 1000


26,000 * 6\ 12 * 5% 650 1,650

SUBTOTAL MARKS 10.00

Partners Current Account


Robin Sienna Teagan Robin Sienna Teagan
! ! ! ! ! !
Balance B/F - 1,100 - Balance B/F 2,400 - 1,900 0.50
Interest on Drawings 270 220 330 Interest on Capital 1,750 1,650 2,400 2.00
Drawings 6,900 5,700 8,100 Salary - 18,000 - 1.50
Balance C/F 10,216 26,216 2,488 Residual Profits 13,236 13,236 6,618 2.00
Loan Interest - 350 - 1.00
17,386 33,236 10,918 17,386 33,236 10,918

Balance B/F 10,216 26,216 2,488

Partners Capital Account


Robin Sienna Teagan Robin Sienna Teagan
! ! ! ! ! !
Capital Withdrawn - 14,000 - Balance b/d 32,000 40,000 48,000 1.50
Balance c/d 38,000 26,000 48,000 Capital Introduced 6,000 - - 1.50
38,000 40,000 48,000 38,000 40,000 48,000
Balance b/d 38,000 26,000 48,000

SUBTOTAL MARKS 10.00

OVERALL MARKS 20.00


Page 15
SOLUTION 5

Glamgra Limited Statement of Cash flows for the year ended 31 December 2017

Cash flows from Operating Activities !'000 !'000


Profit before Taxation 2,243 1.00
Adjustments for
Depreciation 709 1.00
Loss on Sale of PPE 20 0.50
Interest Expense 48 1.00
3,020
Increase in Inventories - 240 1.00
Increase in Trade Receivables - 150 1.00
Decrease in Trade Payables - 42 1.00
Cash Generated from Operations 2,588
Interest Paid - 48 0.50
Income Taxes Paid - 3 1.50
Net Cash from Operating Activities 2,537 1.00

Cash flows from Investing Activities


Payments to acquire Property, Plant & Equipment - 2,939 5.00
Receipts from sale of Property, Plant & Equipment 500 1.00
Net Cash used in Investing Activities - 2,439 1.00

Cash flows from Financing Activities


Proceeds from Issue of Shares 75 1.00
Payments due to dividends - 86 1.00
Payments due to decrease in Long Term Loan - 150 1.00
- 161 0.50

Net Increase in Cash & Cash Equivalents - 63


Cash & Cash Equivalents at beginning of Year Note 1 78
Cash & Cash Equivalents at end of Year Note 1 15 0.50

Note 1 2017 2016


!'000 !'000
Cash on hand and balances with bank 75 168
Bank Overdraft - 60 - 90
Cash and Cash Equivalents 15 78

TOTAL MARKS 20.00

Page 16
Loss on Sale of PPE !'000
Carrying Value at date of sale 520
Sales Proceeds 500
Loss on Sale of PPE 20

Interest Account
Balance b/d - Expense - SOPL & OCI 48

Interest Paid 48 Balance c/d -


48 48

Income Tax Account


Corporation Tax Paid 3 Balance b/d 90

Balance c/d 150 Expense - SOPL & OCI 63


153 153

Share Capital Account


Balance b/d - S. Capital 300
Balance b/d - S. Premium 75
Balance c/d - S. Capital 360
Balance c/d - S. Premium 90 Proceeds from Issue of S. Capital 75
450 450

Property, Plant & Equipment Account


Balance b/d 5,910 Depreciation 709

Revaluation Gain 60 Disposal - carrying value 520

Purchase of PPE 2,939 Balance c/d 7,680


8,909 8,909

Page 17
MARKING SCHEME

Q1
(a) Define and discuss the qualitative characteristics of financial statements 10

(b) Workings 22
Statement of Profit or Loss and Other Comprehensive Income + 8
Statement of Financial Position

Total Marks – Q1 40

Q2
(a) Bank Reconciliation 16

(b) Advantages of a Bank Reconciliation 4

Total Marks – Q2 20

Q3 IAS 21 – The Effects of Changes in Foreign Exchange Rates

Part A
(a) (i) Foreign Currency Transaction 2

(ii) An Exchange Difference 2

Restatement of Foreign Currency to Presentation Currency


(b) (i) Assets and Liabilities 2

(ii) Income and Expenses 2

(iii) Any Resulting Exchange Differences 2

Part B
(a) Journal Entries 8

(b) Foreign Exchange Gain/(Loss) 2

Total Marks – Q3 20

Q4
(a) Profit and Loss Appropriation Account 10

(b) Current and Capital Accounts 10

Total Marks – Q4 20

Q5 Operating Activities 9.5

Investing Activities 7

Financing Activities 3.5

Cash & Cash Equivalents 0.5

Total Marks – Q5 20

Page 18
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2018

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2018

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

1.
(a) Identify and explain the advantages and limitations of ratio analysis for the purposes of assessing financial
performance.
(10 Marks)

(b) You are the newly apointed financial accountant to Delloyd Limited, a manufacturing company. You have
extracted the following trial balance below, as at 31 December 2017:

Debit Credit
€ €
Accumulated Depreciation - Buildings at 31.12.16 275,220
Accumulated Depreciation - Motor Vehicles at 31.12.16 51,600
Administrative Expenses 293,766
Allowance for Bad and Doubtful Debts 11,160
Bank 312,870
Buildings 974,400
Current Tax Payable 30,000
Distribution Costs 274,692
Income Tax 28,000
Inventory at 31.12.16 141,480
Investment Income 6,250
Investments - 5% 250,000
Long Term Loan 210,000
Motor Vehicles 144,000
Purchases 875,300
Retained Earnings at 31.12.16 1,236,763
Revenue 1,480,200
Share Capital - 120,000 at €0.50 each 60,000
Trade Payables 188,715
Trade Receivables 255,400
3,549,908 3,549,908

The following information, based on your investigations, has also come to light:

(i) Delloyd Limited’s inventory was counted on 31 December 2017 and amounted to €286,400 at cost. On that
date one of the counting team forgot to count one bay of a warehouse. This bay was counted on 2 January
2018 and the inventory counted was valued at €12,600 on that date. However, inventory was sold from that
bay on 1 January 2018 at a selling price of €1,600. Delloyd Limited makes a 20% margin on its sales.

(ii) Investment income has only been received for the first six months of 2017.

(iii) A credit sale of €4,800 was debited to bank and credited to trade payables by mistake.

(iv) Delloyd Limited recovered a bad debt of €3,100 in December 2017. This amount was lodged to its bank
account but has not been recorded in its financial statements. It has also decided to change the rate for the
allowance of bad and doubtful debts to 4%.

Page 1
(v) Delloyd Limited made a tax payment on 23 December 2017 of €46,000.

(vi) Delloyd Limited purchased goods on credit from a UK supplier for £12,000 on 1 November 2017 but incorrectly
recorded this as €12,000 in its accounts on that date. On 10 December 2017, Delloyd Limited paid £8,000
to the UK supplier but again entered the amount incorrectly in its accounts as a payment of €8,000. The
balance owing was unpaid at year-end. The exchange rates were as follows:

01.11.17 €1 = £0.75
10.12.17 €1 = £0.80
31.12.17 €1 = £0.90

(vii) Delloyd Limited purchased and paid for a building amounting to €200,000 on 1 July 2017.

(viii) Delloyd Limited sold a motor vehicle on 1 September 2017 for €6,000 and lodged the money to the bank. It
purchased this motor vehicle on 1 April 2013 for €25,000.

(ix) Depreciation is to be charged as follows:

Buildings 2% Straight Line on Cost


Motor Vehicles 15% Straight Line on Cost

No depreciation is charged in the year of sale and a full year’s depreciation is charged in the year of purchase.
Revaluation losses are split evenly between Administrative Expenses and Dsistribution Costs.

On 31 December 2017, the buildings were revalued by a professional valuer at €850,000.

(x) All of the relevant expenses in the trial balance are to be split evenly between Administrative Expenses and
Distribution Costs.

REQUIREMENT:

Prepare, in a form suitable for publication, based on IFRS, a Statement of Profit or Loss and Other Comprehensive
Income and Statement of Financial Position for Delloyd Limited for the financial year-ending 31 December 2017.

Note: All workings should be shown. (30 Marks)

[Total: 40 Marks]

Page 2
2. The financial controller of Ocalliam Limited has asked you prepare some information in relation to its trade
receivables and trade payables. The company has provided the following information:

(i) The opening balance on its trade receivables and trade payable ledger were as follows:

Trade Receivables: Debit Balance €56,247


Trade Payables: Credit Balance €68,164

(ii) The following were the transactions that occurred for the year-ended 31 December 2017 in relation to its trade
receivables and trade payables:


Credit sales 345,812
Cash sales 10,845
Credit purchases 220,541
Credit sales returns 6,475
Credit purchases returns 20,169
Trade payable accounts settled by contra accounts with trade receivables 15,467
Discount allowed 14,852
Discount received 23,253
Amounts paid by cheque to trade payables 194,652
Amounts received by cheque from trade receivables 362,145
Cheques received from trade payables 1,571
Cheques paid to trade receivables 1,854

REQUIREMENT:
(a) For the year ended 31 December 2017, prepare both a Trade Receivable Control Account and a Trade Payable
Control Account.
(8 Marks)

(b) Prepare journal entries for note (ii) above for the year-ended 31 December 2017 on the basis that none of the
transactions in note (ii) have as yet been accounted for in the records of Ocalliam Limited.

(12 Marks)

[Total: 20 Marks]

Page 3
3. The financial controller of Femphr Ltd. has asked you, a trainee accountant, to research the implications for
the company arising from the implementation of the new international financial reporting standard on Revenue
i.e. IFRS 15 - Revenue from contracts with customers.

The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. This core principle is delivered in a five-step model framework.

REQUIREMENT:
Prepare a report for the financial controller in which you:

(a) (i) Identify and briefly explain each of the five steps for revenue recognition. (5 Marks)

(ii) Explain what is meant by the term ‘performance obligations’ in a contract? (2 Marks)

(iii) Advise how a good or service can be defined as ‘distinct’. (2 Marks)

(b) Femphr Ltd. enters a contract with a customer to supply a licence for a standard software product. The
company will also install the software, provide updates to the software and technical support for a number of
years. Femphr Ltd. sells the licence and technical support separately, the software will continue to operate
without the software updates and the installation of the software will be sub-contracted to a number of approved
installers throughout the country.

REQUIREMENT:
In light of your answer to part (a) above, identify the good/services which are distinct in the above contract.

(4 Marks)

(c) Femphr Ltd. entered into a contract with a customer to sell its product for €200 per unit for the 2017 calendar
year. If the customer was to purchase more than 1,200 units in the year, the price would decrease to €150
per unit. Femphr Ltd. did not believe at the date of the contract being initiated that the customer would purchase
more than 1,200 units from it due to previous trading patterns with this customer. However, on 1 October
2017, Femphr Ltd. formed the view that the customer would meet or exceed the 1,200 units threshold based
on its sales of 1,100 units by that date. The customer had purchased 500 units on that date and informed
management of Femphr Ltd. that it would be placing a further order of 200 units on 1 December 2017. This
customer had purchased 600 units by 30 June 2017.

REQUIREMENT:
Using journal entries, show how Femphr Ltd. accounts for its revenue to the customer in the period from 1 January
2017 to 30 June 2017 and in the period from 1 July 2017 to 31 December 2017.
(7 Marks)

[Total: 20 Marks]

Page 4
4. The trial balance for Mr. Thomas Dornan, a butcher in Cork, for the year ended 31 December 2017 does not
balance. Mr. Dornan had identified the following issues and has approached you for help and guidance in
rectifying them. The issues are:

1. Home insurance of €1,000 was paid and included in the business insurance expense.

2. Purchase returns of €600 have been posted to the revenue returns account.

3. A bad debt recovered of €840 was credited to the bad debt written off account by mistake.

4. Mr. Dornan introduced €2,000 of his own money into the business in December 2017. The journal entry
included in his financial statements was as follows:

Debit Bank €2,000


Credit Revenue €2,000

5. The rate for amortisation of government grants incorrectly used was 20% instead of 10%. The
government grant amount is €20,000 before amortisation commenced. The bookkeeper debited cost
of sales and credited property, plant and equipment with the incorrect amount.

6. Deposit interest received and banked of €800 was included in finance costs.

7. Repairs and maintenance unpaid of €3,000 were capitalised to property, plant and equipment. The
depreciation rate used for property, plant and equipment is 10% and a full year’s depreciation occurs in
the year of purchase.

Prior to the discovery of the above, Mr. Dornan’s gross profit for the year was calculated at €65,600 and the
net profit for the year at €26,400.

REQUIREMENT:

(a) Prepare journal entries for Mr. Thomas Dornan to record and correct relevant transactions from the above
information for the financial statements for the year-ending 31 December 2017.
(12 Marks)

(b) Calculate the revised gross and revised net profit figures after adjusting for items 1 to 7, as appropriate.

(8 Marks)

[Total: 20 Marks]

Page 5
5. Franfie Limited is involved in the service industry and its financial statements are as follows:

Franfie Limited Statement of Financial Position as at 31 December 2017

2017 2016
€’000 €’000
Non-Current Assets
Property, Plant and Equipment 2,850 2,050
Total Non-Current Assets 2,850 2,050

Current Assets
Inventories 580 600
Trade Receivables 420 300
Cash and Cash Equivalents 30 50
Total Current Assets 1,030 950

Total Assets 3,880 3,000

Equity & Liabilities


Equity
Share Capital 1,100 900
Share Premium 200 100
Retained Earnings 980 610
Revaluation Surplus 300 100
Total Equity 2,580 1,710

Non-Current Liabilities
Long-Term Loan 950 800
Total Non-Current Liabilities 950 800

Current Liabilities
Trade Payables 290 320
Bank Overdraft 20 120
Current Tax Payables 40 50
Total Current Liabilities 350 490

Total Equity and Liabilities 3,880 3,000

Franfie Limited Statement of Profit or Loss & Other Comprehensive Income for the year-ended 31
December 2017
€’000
Revenue 11,700
Cost of Sales (10,400)
Gross Profit 1,300
Distribution Costs (520)
Administration Expenses (250)
Finance Costs (50)
Profit before Tax 480
Income Tax Expense (60)
Profit for the Year 420

Other Comprehensive Income


Gains on Property Revaluations 200
Other Comprehensive Income for the year, net of tax 200

Total Comprehensive Income for the year, net of tax 620

Page 6
Notes:
(i) Property, Plant & Equipment with a carrying value of €280,000 was sold during 2017 for €290,000. This
asset had originally cost €450,000.

(ii) Depreciation of Property, Plant & Equipment during 2017 amounted to €400,000.

(iii) Dividends paid during 2017 amounted to €50,000 and are reported in the Statement of Changes in Equity.

REQUIREMENT:
Prepare a Statement of Cash Flows for the year-ended 31 December 2017 for Franfie Limited in accordance with
IAS 7 - Statement of Cash Flows.
[Total: 20 Marks]

END OF PAPER

Page 7
SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2018

SOLUTION 1

(a) Discuss the advantages and limitations of ratios (10 Marks)

Advantages of Ratios (5 Marks)

Comparison
Financial ratios provide a standardised method with which to compare companies and industries. Ratios can put
all companies on a relatively equal playing field in the eyes of analysts; companies are judged on their performance
rather than their size, sales volume or market share.

Industry Analysis
Ratios can reveal trends in particular industries, creating benchmarks against which the performance of all industry
players can be measured thus providing valuable information to users, shareholders, trade payables, banks.

Stock Valuation
Ratios help investors and analysts to evaluate the strengths and weaknesses of individual companies or industries
and allow them to highlight companies to invest in or to avoid investing in.

Planning and Performance


Ratios can provide guidance to entrepreneurs when creating business plans or preparing presentations for lenders
and investors. Ratios can also serve as an impetus for strategic change within an organisation, providing
management with relevant guidance and feedback as ratio valuations shift in response to organisational changes.
Ratios help to ensure managers perform by revealing financial weaknesses and opportunities.

Simplicity
It highlights important information in simple formats. A user can judge a company by just looking at a small amount
of numbers instead of reading the whole financial statements.

Limitations of Ratios (5 Marks)

Financial Statements
Ratios are based off of financial statements, so if the financial statements are incorrect in any way it will affect the
quality of the analysis

Historical Information
Ratios are based on historical findings and don’t take into consideration current market conditions. Therefore, they
may not be all that helpful for predicting the future

Quantitative Tool
Ratios are a quantitative tool, thus ignoring qualitative factors when completing the ratios. For example, a large
current ratio might not equal a good liquidly position if current assets include large inventories of obsolete items

Ratios account for one variable


Ratios only account for 1 variable. Therefore, they cannot always show the correct picture since multiple variables
need to be kept in mind when interpreting them

Seasonal factors affect financial data


Ratios can be biased for seasonal businesses. For example, a snow shovel company may maintain high inventory
for the winter season, but will have significantly less for rest of the year

Total (10 Marks)

Page 8
(b) Delloyd Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2017
! ! ! ! ! ! ! !
Revenue TB + W1.iii 1,480,200 4,800 1,485,000 0.25
Cost of Sales Total W2 720,500 0.25
Gross Profit 764,500 0.25
Investment Income W1.ii 6,250 6,250 12,500 0.25
Bad Debt Recovered W1.v 3,100 0.25
Foreign Exchange Gain W1.vi 1,556 0.25
Loss on Disposal of PPE W1.ii 4,000 0.25
Distribution Costs W2 307,831 0.25
Administrative Expenses W2 326,905 638,736 0.25
Profit/(Loss) before Tax 142,920 0.25
Income Tax Per TB 28,000 0.25
PROFIT/(LOSS) FOR THE YEAR 114,920 0.25
Other Comprehensive Income for the year, net of tax - 0.25
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 114,920 0.25

Delloyd Limited Statement of Financial Position as at 31st December 2017


! ! ! ! ! ! ! !
Non-Current Assets
Property, Plant & Equipment W3 914,550 0.25
Investments - 5% TB 250,000 0.25
Total Non-Current Assets 1,164,550
Current Assets
Inventories W1.i 300,280 0.25
Trade Receivables W1.viii 249,792 0.50
Other Receivables W1.ii 6,250 0.25
Current Tax Asset TB + W1.v - 30,000 46,000 16,000 0.50
Cash & Cash Equivalents TB + W1.iii + W1.iv 312,870 - 4,800 3,100 - 46,000 - 2,000 - 200,000 6,000 69,170 0.50
Total Current Assets + W1.v + W1.vi + W1.viii + W1.ix 641,492
TOTAL ASSETS 1,806,042
Equity & Liabilities
Equity
Share Capital TB 60,000 0.25
Retained Earnings TB + SOPL 1,236,763 114,920 1,351,683 0.50
Total Equity 1,411,683
Non-Current Liabilities
Long-term Loan TB 210,000 0.25
Total Non-Current Liabilities 210,000
Current Liabilities
Trade Payables TB + W1.iii + W1.vi 184,359 0.50
Total Current Liabilities 184,359
TOTAL EQUITY & LIABILITIES 1,806,042

PRESENTATION 1.00

TOTAL MARKS 8.50

Page 9
Working - Journal Entries
!'000 !'000
1.i Total Inventories at Cost per Inventory Count 286,400
Plus Inventory not counted until 02.01.18 12,600
Plus Goods Sold at Cost before count on 02.01.18 See Below 1,280
Value of Closing Inventories 300,280
Selling price of Inventory sold 1,600
Profit Margin 20%
Cost 1,280
Dr. Inventory + Current Assets SOFP 300,280 1.00
Cr. Closing Inventory - Cost of Sales SOPL & OCI 300,280
1.ii Dr. Other Receivables + Current Assets SOFP 6,250 1.00
Cr. Investment Income + Income SOPL & OCI 6,250
Investments 250,000
Interest rate on Investments 5%
Interest on Investments 12,500
Amount received already Per TB 6,250
Amount to be accounted for 6,250
1.iii Reverse original incorrect entry
Dr. Trade Payables - Current Liabilities SOFP 4,800 0.50
Cr. Bank - Current Assets SOFP 4,800
Enter Correct Entry
Dr. Trade Receivables + Current Assets SOFP 4,800 0.50
Cr. Revenue + Income SOPL & OCI 4,800
1.iv Dr. Trade Receivables + Current Assets SOFP 3,100 0.50
Cr. Bad Debt Recovered + Income SOPL & OCI 3,100
Dr. Bank + Current Assets SOFP 3,100 0.50
Cr. Trade Receivables - Current Assets SOFP 3,100
Dr. Trade Receivables + Current Assets SOFP 752
Cr. Allowance for Bad & Doubtful Debts - Expenses SOPL & OCI 752 0.50
Trade Receivables Balance per TB 255,400
Credit Sale W1.iii 4,800
Bad Debt Recovered W1.iv 3,100
- Bad Debt Recovered received W1.iv - 3,100
260,200
- Allowance for Bad Debts - 4% 10,408
Revised Trade Receivable 249,792 0.50
Current Allowance for Bad & Doubtful Debts TB 11,160
New Allowance for Bad & Doubtful Debts See Above 10,408
Decrease in Allowance for Bad & Doubtful Debts - 752 0.50
W1.v Dr. Current Tax Asset + Current Assets SOFP 46,000
Cr. Bank - Current Assets SOFP 46,000
1.vi What Happened - 01.11.17
Dr. Purchases + Cost of Sales SOPL & OCI 12,000
Cr. Trade Payables + Current Liabilities SOFP 12,000 0.50
What Should Have Happened - 01.11.17
Dr. Purchases + Cost of Sales SOPL & OCI 16,000
Cr. Trade Payables + Current Liabilities SOFP 16,000 0.50
To Correct - 01.11.17
Dr. Purchases + Cost of Sales SOPL & OCI 4,000
Cr. Trade Payables + Current Liabilities SOFP 4,000 0.50
What Happened - Payment - 10.12.17
Dr. Trade Payables - Current Liabilities SOFP 8,000
Cr. Bank - Current Assets SOFP 8,000 0.50
What Should Have Happened - Payment - 10.12.17
Dr. Trade Payables - Current Liabilities SOFP 10,000
Cr. Bank - Current Assets SOFP 10,000 0.50
To Correct - 10.12.17
Dr. Trade Payables - Current Liabilities SOFP 2,000
Cr. Bank - Current Assets SOFP 2,000 0.50
Closing Balance of Trade Payable - 31.12.17 Sterling Euro
Purchase 12,000 16,000
- Payment - 8,000 - 10,000
Closing Balance - 31.12.17 4,000 6,000
Exchange Rate 0.90
Converted Into Euro 4,444 6,000
Exchange Difference - Gain - 1,556
Dr. Trade Payables - Current Liabilities SOFP 1,556
Cr. Foreign Exchange Gain + Income SOPL & OCI 1,556 1.00

Trade Payables TB 188,715


Incorrect Entry W1.iii - 4,800
Error in Entry W1.vi 4,000
Payment W1.vi - 2,000
Exchange Loss W1.vi - 1,556
Revised Trade Payables 184,359 0.50
1.viii Dr. Buildings + Non-Current Assets SOFP 200,000 0.50
Cr. Bank - Current Assets SOFP 200,000
1.ix Dr. Bank + Current Assets SOFP 6,000
Cr. Disposal Account 6,000
Dr. Disposal Account 25,000
Cr. Motor Vehicles - Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 25,000
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 15,000
Cr. Disposal Account 15,000
Dr. Loss on Disposal of PPE + Expenses SOPL & OCI 4,000 1.00
Cr. Disposal Account 4,000

CURRENT MARKS 11.50

Page 10
Cost of Distribution Administration
Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 141,480 - - Cost of
Purchases Per TB 875,300 - - Sales
Closing Inventory W1.i - 300,280 - - 2.00
Expenses Per TB - 274,692 293,766 Distribution
Purchases W1.vi 4,000 Costs
Allowance for Bad & Doubtful Debts Decrease W1.iv - - 376 - 376 - 752 2.00
Revaluation Loss W3 - 12,846 12,846 25,692
Depreciation - Premises W3 - 11,744 11,744 23,488 Admin
Depreciation - Motor Vehicles W3 - 8,925 8,925 17,850 2.00
Total 720,500 307,831 326,905
Working 3 - Property, Plant & Equipment Motor
Buildings Vehicles Total
! ! !
Cost 974,400 144,000 1,118,400
- Accumulated Depreciation b/d - 275,220 - 51,600 - 326,820
Carrying Value b/d at 1 January 2017 699,180 92,400 791,580 0.50
Disposal W1.ii - - 25,000 - 25,000 0.50
Disposal - Accumulated Depreciation W1.ii - 15,000 15,000 0.50
Carrying Value 699,180 82,400 781,580
Addition - Premises W1.iii 200,000 - 200,000 0.50
899,180 82,400 981,580
Depreciation - Buildings - 2% Straight Line on Cost - 23,488 - - 23,488 0.50
Depreciation - Motor Vehicles - 15% Straight Line on Cost - - 17,850 - 17,850 0.50
875,692 64,550 940,242
Revaluation Loss - 25,692 - - 25,692 0.50
Carrying Value c/d at 31 December 2017 850,000 64,550 914,550 0.50
Dr. Administrative Expenses - P/L - SOPL & OCI 12,846
Dr. Distribution Costs - P/L - SOPL & OCI 12,846
Cr. Buildings - PPE - Non-Current Assets - SOFP 25,692

CURRENT MARKS 10.00

TOTAL MARKS 21.50

Page 11
Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Accumulated Depreciation - Buildings at 31.12.16 275,220 23,488 298,708
Accumulated Depreciation - Motor Vehicles at 31.12.16 51,600 17,850 69,450
Administrative Expenses 293,766 33,515 376 326,905
Allowance for Bad and Doubtful Debts 11,160 752 10,408
Bank 312,870 9,100 252,800 69,170
Buildings 974,400 200,000 25,692 1,148,708
Current Tax Payable 30,000 46,000 16,000
Distribution Costs 274,692 33,515 376 307,831
Income Tax 28,000 28,000
Inventory at 31.12.16 141,480 141,480
Investment Income 6,250 6,250 12,500
Investments - 5% 250,000 250,000

Page 12
Long Term Loan 210,000 210,000
Motor Vehicles 144,000 15,000 25,000 134,000
Purchases 875,300 4,000 879,300
Retained Earnings at 31.12.16 1,236,763 114,920 1,351,683
Revenue 1,480,200 4,800 1,485,000
Share Capital - 120,000 at !0.50 each 60,000 60,000
Trade Payables 188,715 8,356 4,000 184,359
Trade Receivables 255,400 7,900 3,100 260,200
Inventory at 31.12.17 300,280 300,280 300,280 300,280
Other Receivables 6,250 6,250
Bad Debt Recovered 3,100 3,100
Foreign Exchange Gain 1,556 1,556
Loss on Disposal of PPE 4,000 4,000
3,549,908 3,549,908 668,668 668,668 1,802,436 1,802,436 2,184,608 2,184,608
SOLUTION 2
a) Dr. Trade Payables Control Account Cr.
! !
Balance B/d Balance B/d 68,164 0.50
Purchase Returns 20,169 Purchases 220,541 1.00
Contras 15,467 Cheques Received from Trade Payables 1,571 1.00
Discount Received 23,253 0.50
Cheques Paid to Trade Payables 194,652 0.50
Balance C/d 36,735 Balance C/d - 0.50
290,276 - 290,276
Balance B/d - Balance B/d 36,735
Dr. Trade Receivables Control Account Cr.
! !
Balance B/d 56,247 Balance B/d 0.50
Sales 345,812 Sales Returns 6,475 1.00
Cheques Paid to Trade Receivables 1,854 Contras 15,467 1.00
Discount Allowed 14,852 0.50
Cheques Received from Trade Receivables 362,145 0.50
Balance C/d Balance C/d 4,974 0.50
403,913 403,913
Balance B/d 4,974 Balance B/d -

SUBTOTAL MARKS 8.00

b) Trade Payables Journal Entries


Dr. Purchases - Cost of Sales - P/L - SOPL & OCI 220,541 0.50
Cr. Trade Payables - Current Liabilities - SOFP 220,541 0.50
Dr. Trade Payables - Current Liabilities - SOFP 20,169 0.50
Cr. Purchases Returns - Cost of Sales - P/L - SOPL & OCI 20,169 0.50
Dr. Trade Payables - Current Liabilities - SOFP 15,467 0.50
Cr. Trade Receivables - Current Assets - SOFP 15,467 0.50
Dr. Trade Payables - Current Liabilities - SOFP 23,253 0.50
Cr. Discount Received - P/L - SOPL & OCI 23,253 0.50
Dr. Trade Payables - Current Liabilities - SOFP 194,652 0.50
Cr. Cash & Cash Equivalents - Current Assets - SOFP 194,652 0.50
Dr. Cash & Cash Equivalents - Current Assets - SOFP 1,571 0.50
Cr. Trade Payables - Current Liabilities - SOFP 1,571 0.50
Trade Receivables Journal Entries
Dr. Trade Receivables - Current Assets - SOFP 345,812 0.50
Cr. Revenue - Income - SOPL & OCI 345,812 0.50
Dr. Bank - Current Assets - SOFP 10,845 0.50
Cr. Revenue - Income - SOPL & OCI 10,845 0.50
Dr. Revenue Returns - Income - SOPL & OCI 6,475 0.50
Cr. Trade Receivables - Current Assets - SOFP 6,475 0.50
Dr. Discount Allowed - P/L - SOPL & OCI 14,852 0.50
Cr. Trade Receivables - Current Assets - SOFP 14,852 0.50
Dr. Bank - Current Assets - SOFP 362,145 0.50
Cr. Trade Receivables - Current Assets - SOFP 362,145 0.50
Dr. Trade Receivables - Current Assets - SOFP 4,974 0.50
Cr. Bank - Current Assets - SOFP 4,974 0.50

SUBTOTAL MARKS 12.00

OVERALL MARKS 20.00

Page 13
Solution 3

REPORT
To: Financial Controller – Femyhr Limited
From:Future Financial Accountant
Re: IFRS 15 – Revenue from contracts with customers
Date: April 2018

(a)
(i) An entity recognises revenue in accordance with that core principle by applying the following five steps.

Identify the Identify the Determine the Allocate the Recognise


contract with a performance transaction transfer price revenue when
customer obligations in price to the each
Step 1 the contract Step 3 performance performance
Step 2 obligations obligation is
Step 4 satisfied
Step 5

( (5 Marks)

(ii) a customer
A performance obligation and the
is where goods
there or services
is a contract are distinct
to transfer goods orand can be
services to aaccounted for the goods
customer and
s
or services are distinct and can be accounted for separately.
(2 Marks)

(iii) A good or service is distinct if;

(a) b
The customer can benefit from the good or service on its own or together with other resources that are readily
available to the customer; and
(b) The entity’s promise to transfer the good or service to the customer is separately identifiable from other
promises in the contract.
t (2 Marks)

(b) Given the above information, the customer can benefit from each of the goods or services either on their own or
altogether. The promises to transfer goods or services are separately identifiable. Consequently there are a number
of distinct good or services identified i.e. software licence, installation service, software updates and technical
support.
(4 Marks)

(c) Period 01.01.17 – 30.06.17


As Femphr Limited does not believe that the customer will hit the target, it should account for the sales using a sales
price per unit of €200 i.e. sales of 600 units x €200 per unit = €120,000 as follows:

Dr. Trade Receivables €120,000


Cr. Revenue €120,000.

Period 01.07.17s – 30.12.17 The promises to transfer goods or services


On the basis thata Femphr Limited believes thatConsequently there
the customer will areitsatarget
reach number of distinct
its accounts for good or
its transactions with
s
the customer as follows:

Order of 500 units x €150 = €75,000

Dr. Trade Receivables €75,000


Cr. Revenue €75,000.

Order of 200 units x €150 = €30,000

Dr. Trade Receivables €30,000


Cr. Revenue €30,000.
Page 14
Recalculating the sales value of the original 600 units sold in the first six months at €150 per unit instead of €200
per unit i.e. €50 selling price per unit of a difference i.e. 600 units x €50 per unit difference = €12,000 as follows:

Dr. Revenue €12,000


Cr. Trade Receivables €12,000.

(7 Marks)

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

Financial Accountant

[Total: 20 Marks]

Page 15
Solution 4

a) Issue 1 ! ! ! !
Should Have Happened Actually Happened
Dr. Drawings 1,000 Dr. Insurance 964
Cr. Bank 1,000 Dr. Bank 964
To Correct
Dr. Drawings 1,000 1.00
Cr. Insurance 1,000 1.00
Issue 2
Should Have Happened Actually Happened
Dr. Trade Payables 600 Dr. Trade Payables 600
Cr. Purchase Returns 600 Dr. Sales Returns 600
Cr. Suspense 1,200
To Correct
Dr. Suspense 1,200 0.50
Cr. Sales Returns 600 0.50
Cr. Purchase Returns 600 0.50
Issue 3
Should Have Happened Actually Happened
Dr. Trade Receivables 840 Dr. Trade Receivables 840
Cr. Bad Debt Recovered 840 Cr. Bad Debt Written Off 840
To Correct
Dr. Bad Debt Written Off 840 1.00
Cr. Bad Debt Recovered 840 1.00
Issue 4
Should Have Happened Actually Happened
Dr. Bank 2,000 Dr. Bank 2,000
Cr. Capital Introduced 2,000 Cr. Revenue 2,000
To Correct
Dr. Revenue 2,000 0.50
Cr. Capital Introduced 2,000 0.50
Issue 5
Should Have Happened Actually Happened
Dr. Government Grant 2,000 Cost of Sales 4,000
Cr. Amortisation of Govt. Grant - P/L 2,000 Property, Plant & Equipment 4,000
To Correct
Dr. Government Grant 2,000 0.50
Dr. Property, Plant & Equipment 4,000 0.50
Cr. Cost of Sales 4,000 0.50
Cr. Amortisation of Govt. Grant - P/L 2,000 0.50
Issue 6
Should Have Happened Actually Happened
Dr. Bank 800 Dr. Finance Costs 800
Cr. Investment Income 800 Dr. Bank 800
Cr. Suspense 1,600
To Correct
Dr. Suspense 1,600 0.50
Cr. Investment Income 800 0.50
Cr. Finance Costs 800 0.50
Issue 7
Should Have Happened Actually Happened
Dr. Repairs & Maintenance 3,000 Dr. Property, Plant & Equipment 3,000
Cr. Trade Payables/Accruals 3,000 Cr. Trade Payables/Accruals 3,000
Dr. Depreciation Expense 300
Cr. Property, Plant & Equipment 300
To Correct
Dr. Repairs & Maintenance 3,000 0.50
Dr. Property, Plant & Equipment 300 0.50
Cr. Depreciation Expense 300 0.50
Cr. Property, Plant & Equipment 3,000 0.50
TOTAL MARKS 12.00
b)
Original Gross Profit 65,600 Original Net Profit 26,400 0.50
2 Revenue Returns 600 Adjustment to Gross Profit 3,200 1.00
2 Purchases Returns 600 1 Insurance 1,000 1.00
4 Revenue - 2,000 3 Bad Debt Written Off - 840 1.00
5 Cost of Sales 4,000 3 Bad Debt Recovered 840 1.00
5 Amortisation of Government Grant 2,000 0.50
6 Investment Income 800 0.50
6 Finance Costs 800 0.50
7 Repairs & Maintenance - 3,000 0.50
7 Depreciation Expense 300 0.50

Adjusted Gross Profit 68,800 Adjusted Net Profit 31,500 1.00

Net Adjustment to Gross Profit 3,200

SUBTOTAL MARKS 8.00

OVERALL MARKS 20.00

Page 16
Solution 5

Franfie Limited Statement of Cash flows for the year ended 31 December 2017

Cash flows from Operating Activities !'000 !'000


Profit before Taxation 480 1.00
Adjustments for
Depreciation 400 1.00
Profit on Sale of PPE - 10 1.00
Interest Expense 50 1.00
920
Increase in Trade Receivables - 120 1.00
Decrease in Inventory 20 1.00
Decrease in Trade Payables - 30 1.00
Cash Generated from Operations 790
Interest Paid - 50 0.50
Income Taxes Paid - 70 1.50
Net Cash from Operating Activities 670 1.00

Cash flows from Investing Activities


Payments to acquire Property, Plant & Equipment - 1,280 3.00
Receipts from sale of Property, Plant & Equipment 290 1.00
Net Cash used in Investing Activities - 990 1.00

Cash flows from Financing Activities


Proceeds from Issue of Shares 300 1.00
Receipts from Increase in Long Term Loans 150 1.00
Dividends Paid - 50 1.00
400 1.00

Net Increase in Cash & Cash Equivalents 80


Cash & Cash Equivalents at beginning of Year Note 1 - 70
Cash & Cash Equivalents at end of Year Note 1 10 1.00

Note 1 2017 2016


!'000 !'000
Cash on hand and balances with bank 30 50
Bank Overdraft - 20 - 120
Cash and Cash Equivalents 10 - 70

TOTAL MARKS 20.00

Page 17
Profit on Sale of PPE !'000
Cost 450
- Accumulated Depreciation - 170
Carrying Value at date of sale 280
Sales Proceeds 290
Profit on Sale of PPE - 10

Interest Account
Balance b/d - Expense - SOPL & OCI 50

Interest Paid 50 Balance c/d -


50 50

Income Tax Account


Corporation Tax Paid 70 Balance b/d 50

Balance c/d 40 Expense - SOPL & OCI 60


110 110

Share Capital Account


Balance b/d - S. Capital 900
Balance b/d - S. Premium 100
Balance c/d - S. Capital 1,100
Balance c/d - S. Premium 200 Proceeds from Issue of S. Capital 300
1,300 1,300

Property, Plant & Equipment Account


Balance b/d 2,050 Depreciation 400

Revaluation Surplus 200 Disposal - carrying value 280

Purchase of PPE 1,280 Balance c/d 2,850


3,530 3,530

Page 18
MARKING SCHEME

Q1
(a) Discuss the advantages and limitations of ratios 10

(b) Workings 21.5


Statement of Profit or Loss and Other Comprehensive Income + 8.5
Statement of Financial Position

Total Marks – Q1 40

Q2
(a) Trade Receivables and Trade Payables Control Accounts 8

(b) Journal Entries 12

Total Marks – Q2 20

Q3 IFRS 15 Revenue from Contracts with Customers

(a)
(i) 5 steps 5

(ii) Performance Obligations 2

(iii) Good/Service Distinct 2

(b) Identify Goods/Services as Distinct in a Contract 4

(c) Journal Entries re Accounting for Revenue to Customer 7

Total Marks – Q3 20

Q4
(a) Journal Entries 12

(b) Amendments to Gross and Net Profit 8

Total Marks – Q4 20

Q5 Operating Activities
10
Investing Activities
5
Financing Activities
4
Cash & Cash Equivalents
1

Total Marks – Q5 20

Page 19