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Advanced Financial Accounting 2

nd Year Examination

May 2017

Solutions, Examiners Comments & Marking Scheme

Advanced Financial Accounting May 2017 2nd

Year Paper

of 25

NOTES TO USERS ABOUT THESE SOLUTIONS

The solutions in this document are published by Accounting Technicians Ireland. They are intended to

provide guidance to students and their teachers regarding possible answers to questions in our

examinations.

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

expressed by their authors.

There are often many possible approaches to the solution of questions in professional examinations. It

should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us.

Alternative answers will be marked on their own merits.

This publication is intended to serve as an educational aid. For this reason, the published solutions will

often be significantly longer than would be expected of a candidate in an examination. This will be

particularly the case where discursive answers are involved.

This publication is copyright 2017 and may not be reproduced without permission of Accounting

Technicians Ireland.

© Accounting Technicians Ireland, 2017.


Year Paper

of 25 Advanced Financial Accounting S2017

Accounting Technicians Ireland

2nd

Year Examination: May 2017

Paper: Advanced Financial Accounting

Monday 8 May 2017

2.30 p.m. to 5.30 p.m.

INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

Candidates must indicate clearly whether they are answering the paper in accordance with the law and

practice of Northern Ireland or the Republic of Ireland.

In this examination paper the €/£ symbol may be understood and used by candidates in Northern Ireland

to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro.

Answer ALL THREE questions in Section A and TWO of the three questions in Section B. If more than

TWO questions are answered in Section B, then only the first two questions, in the order filed, will be

corrected.

Candidates should allocate their time carefully.

All workings should be shown.

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

Answers should be illustrated with examples, where appropriate.

Candidates may ignore any VAT implications to transactions throughout this paper unless the question

specifically instructs them to do otherwise.

Question 1 begins on Page 2 overleaf.


Year Paper


SECTION A

Answer ALL THREE Questions in this Section

QUESTION 1

(a) FRS 102 Section 2 Concepts and Pervasive Principles identifies ten qualitative characteristics of

information in Financial Statements. Explain, in detail, any four of the characteristics listed below:

(i) Understandability

(ii) Relevance

(iii) Materiality

(iv) Reliability

(v) Substance over form

(8 Marks)

(b) As per FRS 102 state the definition of assets and liabilities.

(3 Marks)

(c) Explain the meaning of recognition and measurement in terms of the preparation of financial statements

and discuss their importance.

(6 Marks)

(d) Section 3.2 of FRS 102, states that financial statements should provide a true and fair view of the assets,

liabilities, financial position, financial performance and when required to be presented, the cash flows of

the entity.

Explain how a ‘true and fair’ view is achieved.

(3 Marks)

Total: 20 Marks

QUESTION 2

The following multiple choice question consists of TEN parts, each of which is followed by FOUR possible

answers. There is ONLY ONE right answer in each part.

Each part carries 1½ Marks

Indicate the right answer to each of the following TEN parts.

Candidates should answer this question by ticking the appropriate boxes on the special answer sheet which is

contained within the answer booklet.

1. Katie Gallagher failed to maintain a full set of financial records during December 2016. Katie requires a

margin of 20% on all sales. The following information is provided for December 2016:

€/£

Opening inventory 5,000

Closing inventory 6,500

Opening trade payables 25,000

Closing trade payables 22,000

Payment to trade payables 47,000

What was the value of sales made during December?

(a) €/£53,125

(b) €/£58,750

(c) €/£51,000

(d) €/£62,000


Year Paper


2. Under the terms of Section 17 of FRS 102 which of the following costs should not be treated as

property, plant and equipment?

(a) Cost of installing a new asset

(b) Cost of delivery of a new asset

(c) Cost of opening ceremony for a new property

(d) Site preparation costs for a new property

3. Under the terms of FRS 102 Section 17 Property, Plant and Equipment when should the residual value

and the useful life of an asset be reviewed?

(a) At each period end;

(b) When factors suggest that the residual value or residual value has changed;

(c) At each month end;

(d) When an asset is disposed of;

4. DKK has a long term loan of €/£2,500,000 and issued ordinary share capital of €/£7,000,000.

What is the gearing ratio?

(a) 34.7%

(b) 42.6%

(c) 26.3%

(d) 52.5%

5. Paris Ltd leased a new piece of plant on 1 January 2016. The lease is for a five year period with annual

payments of €/£30,000 in arrears, commencing on 31 December 2016. The fair value of the plant on 1

January was €/£115,000 and the present value of the minimum lease payments on the same date was

€/£113,720. The interest rate implicit in the lease is 10%.

Calculate the finance cost to be charged to the Income Statement for the year ended 31 December 2016:

(a) €/£30,000

(b) €/£15,000

(c) €/£11,500

(d) €/£11,372

6. Section 24 of FRS 102 deals with government grants. Under this section which of the following

statements is correct:

(a) The accruals model only applies to capital grants;

(b) Under the performance model a grant that imposes future performance related conditions on the

entity is recognised in income only when the performance related condition is met;

(c) Under the performance model grants received before the revenue recognition criteria are

satisfied are recognised as an asset;

(d) A grant is recognised in income even if there is no reasonable assurances that conditions on

which it is based will be met;

7. In March 2016 an employee of Blyth Ltd fell and broke her leg. In November she issued legal

proceedings against the company. At year end of 31 December 2016 legal advice obtained by Blyth Ltd

stated that there was a 80% chance they would lose the case and have to pay-out €/£100,000 in

compensation.


Year Paper


Which of the following statements reflects the accounting treatment required in the financial statements

of Blyth Ltd for the year ended 31 December 2016:

(a) No adjustment;

(b) Debit Provision expense €/£100,000 and Credit provision liability €/£100,000;

(c) Only disclose facts about the legal case in the notes to the financial statements;

(d) Debit Provision expense €/£80,000 and Credit provision liability

€/£80,000;

8. Section 32 of FRS 102 deals with events after the reporting period. Which of the following events,

which occurred after year end but before the accounts of Toothbrush Ltd are authorised for issue, is an

adjusting event?

(a) Sale of premises for €/£1,000,000;

(b) Flood in warehouse which caused damage of €/£500,000;

(c) Liquidation of a receivable who owed €/£25,000 at year end;

(d) Receipt of a bank loan of €/£50,000;

9. The following is an extract from the statement of financial position of Bear Ltd as at 31 December 2016:

Current assets €/£

Trade and other receivables 20,000

Inventory 33,000

Bank 12,000

65,000

Current liabilities

Trade and other payables 41,000

Current tax 12,000

53,000

What is the acid test ratio at year-end?

(a) €/£12,000

(b) 0.6: 1

(c) 1:0.6

(d) 1.23:1

10. Which of the following statements best describes overtrading?

(a) Overtrading is where a business sells a large amount of goods on credit to a single customer;

(b) Overtrading is where a business reduces its sales volume due to production restrictions;

(c) Overtrading is where a business expands too fast without the necessary capital base to support

the volume of business activity being undertaken;

(d) Overtrading is where a business is not able to keep up with sales orders due to the demand for

its products;

Total: 15 Marks


Year Paper


QUESTION 3

The following trial balance has been extracted from the books of AMA Ltd. as at 31 December 2016:

€/£ €/£

Inventory at 1/01/2016 45,000

Turnover 1,500,000

Rent received 28,000

Land 330,000

Buildings 950,000

Buildings accumulated depreciation 01/01/2016 418,000

Vehicles 150,000

Vehicles accumulated depreciation 01/01/2016 54,000

Trade receivables and payables 125,000 99,000

General distribution costs 145,000

General administration costs 220,000

Directors fees 78,000

Government grant 20,000

Equipment 100,000

Dividends paid 77,000

Ordinary shares at €/£1 each 220,000

Allowance for receivables 12,000

Bank balance 18,000

Purchases 450,000

Retained earnings at 1/01/2016 196,000

10% Long term loan 110,000

Long term loan interest 5,000

2,675,000 2,675,000

The following information is also available:

1. The government grant relates to the equipment that was purchased on 1 January 2016 for €/£100,000.

The equipment is used in the factory and has a useful life of 5 years with no residual value. Equipment is

depreciated on a straight line basis.

2. AMA Ltd.’s depreciation policy is as follows:

Vehicles 20% p.a. reducing balance method

Buildings 4% p.a. on a straight line basis.

A full year’s depreciation is charged in the year of purchase and none in the year of sale. On 31

December 2016 one of the vehicles that cost €/£25,000 in 2014 was sold for €/£11,000. This transaction

was not recorded in the financial statements and the sale proceeds will not be received until February

2017.

Depreciation of vehicles is to be charged to distribution costs and depreciation of buildings is to be

shared equally between cost of sales and administration expenses.

3. The company’s inventory at 31 December 2016 was valued at €/£56,000 and includes an item valued at

€£5,000, its usual cost price. However, this item was received free as part of a promotion campaign.

4. Trade receivables include a debt of €/£5,000, which is to be written off. The allowance for receivables is

to be adjusted to 5% of receivables at year end.

5. In June 2016 an interim dividend of €/£77,000 was paid. A final dividend of 5c/p per share was declared

and authorised in December 2016.

6. The corporation tax liability for the year ended 31 December 2016 is estimated to be €/£94,000.

7. Provide for long term loan interest outstanding.


Year Paper


8. In November 2016 AMA Ltd got the land professionally valued at €/£500,000 and want to incorporate

this valuation into the financial statements

Required:

Prepare the following financial statements for AMA Ltd in accordance with the requirements of FRS 102:

(a) Statement of Comprehensive Income for the year ended 31 December 2016.

(14 Marks)

(b) A Statement of Change in Equity for the year ended 31 December 2016.

(3 Marks)

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

(6 Marks)

Presentation (2 Marks)

Total: 25 Marks


Year Paper


SECTION B

Answer TWO of the THREE questions in this Section

QUESTION 4

(a) Define a provision as stated in Section 21 of FRS 102 Provisions and Contingencies.

(2 Marks)

(b) Outline the three criteria that must be met before a provision can be recognised in the financial

statements.

(3 Marks)

(c) The following information is provided in relation to SMU Ltd., all of the events below occurred during

the financial year ended 31 December 2016:

(i) SMU decided to close down part of their manufacturing plant in Dublin. A detailed plan was drawn

up and all staff concerned were informed in November. SMU Ltd estimates that the cost of the

restructuring will be €/£500,000.

(ii) SMU Ltd had a retail outlet in Belfast. On 1 January 2016 they closed this retail outlet but had two

years remaining on their lease agreement. The terms of the lease agreement do not allow them to

sublet the premises. The annual cost of the operating lease was €/£150,000

(iii) SMU Ltd started legal proceedings in September against StartUp Ltd. StartUp Ltd sold a piece of

plant to SMU Ltd and SMU Ltd is claiming that this plant was defective and has caused an

abnormal amount of faulty products to be manufactured. At year end legal advice that SMU has

received indicates that they have a 70% chance of winning their case and being awarded damages

of €/£55,000.

(iv) In November, when preparing the budget for the forthcoming period, the directors became

concerned about the poor trading conditions for next year and decided to recognise a provision for

€/£650,000 in anticipation of the downturn.

Required:

Explain, with reference to Section 21 Provisions and Contingencies, the accounting treatment of each of the

above scenarios. Prepare any relevant journals to record the transactions in the financial statements for the year

ended 31 December 2016.

(9 Marks)

(d) “As ratio analysis is not a requirement in FRS 102 there is no benefits to companies of preparing and

analysing ratios”

Discuss the above statement.

(4 Marks)


Total: 20 Marks


Year Paper


QUESTION 5

(a) Outline the main provisions of the Partnership Act 1890.

(5 Marks)

(b) Tom, Peter and Martin Kelly are in partnership sharing profit and losses equally. However, Tom is

guaranteed a minimum profit of €/£75,000. The net profit for the year ended 31 December 2016 was

€/£210,000.

The balances in the capital and current accounts of each partner as at 1 January 2016 were as follows:

Capital a/c Current a/c

€/£ €/£

Tom 73,000 (1,800)

Peter 82,500 3,500

Martin 25,000 (9,700)

During the year ended 31 December 2016 the partners made the following drawings:

€/£

Tom 45,000

Peter 36,000

Martin 29,000

The following additional information is also provided:

(i) Interest on capital and current account credit balances is at a rate of 5% per annum.

(ii) Interest is charged on debit current account balances at 6% per annum.

(iii) Property was revalued upwards during the year by €/£60,000.

(iv) Tom and Martin both receive salaries from the partnership of €/£12,000 each.

(v) Interest on drawings is charged at 10% per annum.

Required:

(i) Prepare the capital accounts for each partner for the year ended 31 December 2016.

(3 Marks)

(ii) Prepare the appropriation account for the year ended 31 December 2016.

(6 Marks)

(iii) Prepare the current accounts for each partner for the year ended 31 December 2016.

(4 Marks)


Total: 20 Marks


Year Paper


QUESTION 6 Below is an extract of the statement of comprehensive income of Bennett Ltd. for the year ended 31 December

2016:

€/£’000

Revenue 4,000

Cost of sales (1,604)

Gross profit 2,396

Profit on sale of plant 288

Depreciation of plant & eqp (462)

Other administration expenses (403)

Distribution costs (427)

Operating profit 1,392

Finance cost (396)

Profit before tax 996

Taxation (360)

Profit after tax 636

Other comprehensive income

Revaluation gain on land 1,800

Extract of Statement of Financial Position of Bennett Ltd. as at 31 December

2016 2015

€/£’000 €/£’000

Non-current assets

Land 7,200 5,400

Plant & Equipment 2,340 2,538

9,540 7,938

Current Assets

Inventory 4,020 3,480

Trade & other receivables 2,460 3,120

Bank & cash 2,844 2,568

9,324 9,168

Total Assets 18,864 17,106

Equity & liabilities

Equity 7,200 6,000

Issued equity shares (€/£1 ) 600 300

Revaluation 1,800 0

Retained earnings 2,460 2,100

12,060 8,400

Non-current liabilities

12% loan notes 3,000 3,600

Current liabilities

Trade & other payables 2,340 2,100

Taxation 330 240

Dividends 180 150

Bank overdraft 954 2,616

3,804 5,106

Total equity & liabilities 18,864 17,106

The following additional information was also provided:

1. During 2016 plant and equipment with a net book value of €/£300,000 was sold.

2. On 1 October Bennett Ltd. issued €/£1 ordinary shares at a premium.

3. The loan notes were redeemed on 1 July 2016.

4. No land was purchased or sold during 2016


Year Paper


5. In July Bennett Ltd paid an interim dividend to their shareholders.

Required:

Prepare a statement of cash flows for Bennett Ltd. for the year ended 31 December 2016 in accordance with FRS

102.

(18 Marks)


Total: 20 Marks


Year Paper


2nd

Year Examination: May 2017

Advanced Financial Accounting

Suggested Solutions

and

Examiner’s Comments

Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct

and will be marked on their own merits.

Statistical Analysis – By Question

Question No. 1 2 3 4 5 6

Average Mark (%) 50 63 54 45 51 48

Nos. Attempting 799 804 801 436 654 613

Statistical Analysis - Overall

Pass Rate 69%

Average Mark 54%

Range of Marks Nos. of Students

0-39 154

40-49 94

50-59 259

60-69 172

70 and over 125

Total No. Sitting Exam 804

Total Absent 99

Total Approved Absent 51

Total No. Applied for Exam 954

General Comments:

GENERAL COMMENTS ON THE PAPER AS A WHOLE

Overall strong results from many students this year. While the pass rate was lower than last year, many

students achieved very high marks and were well prepared for all the areas that were examined.

Students should note that everything on the syllabus is potentially examinable and should cover all the

course content to achieve a high grade. Also care needs to be placed on workings in terms of both

showing them clearly and referencing them to your answer – these workings are the fundamental

backbone of your main statements and contain essential marks.


Year Paper


Examiner Comments on Question One

Solution 1

(a)

Understandability

When information is classified, characterised and presented clearly and concisely then it is considered to be more

understandable. Some transactions are complex and cannot be explained easily; though leaving information on

these transactions out of the financial report may aid understandability, they would be misleading. Therefore,

preparing a set of financial statements that are understandable to everyone realistically may not be possible.

Marking Scheme: Up to 2 marks available

Relevance

Relevance in this context is primarily concerned with the decision-making needs of users. Thus, information is

relevant when it influences the economic decisions of users, even if not acted on. Information is relevant if it has

predictive value, confirmatory value or both. It is relevant if it helps a user to evaluate a past, present or future

event/decision in relation to the entity or to confirming or correcting past evaluations which the user may have

made.


Materiality

Information is material, and therefore has relevance to the financial statements, if its omission or misstatement,

individually or collectively, could influence the economic decisions of users about the reporting entity.

Information can be material in terms of its size in relation to the financial statements as a whole or an item could

be material by its nature given the surrounding circumstances


Reliability

Information in the financial statements must be reliable. Information is reliable when it faithfully represents the

economic transactions of an entity in terms of its financial position, performance and financial adaptability.

Financial statements portray a true and fair view when the financial information that is provided, is free from

material error and is neutral.


Substance over form

This means that when accounting for transactions and other events and conditions the substance of the

transaction, other event and conditions needs to be considered, not just their legal form. This characteristic is to

stop dubious company accountants creating transactions with their conditions set out in legal documents that do

not portray the true economic consequence of the transaction, for example, by treating a prearranged yearly

commitment to pay cash as an expense each year instead of as a long- term liability with a yearly expense. This

type of activity would reduce a company’s reported liabilities and hence it’s gearing ratio (an important ratio for

investors and financiers). The substance over form characteristic of information enhances the reliability of

financial statements.


Total: 8 Marks (any 4 x 2 marks)

This question was generally answered well.

Parts (a), (b), and (d) were well answered with many students able to quote part (b) the definition of

assets and liabilities from FRS 102 word for word.

Part (c) was the least well answered section in this question.


Year Paper


(b)

Definition of an asset:

A resource controlled by the entity as a result of past events and from which future economic benefits are

expected to flow to the entity.

Marking Scheme: Up to 1.5 marks available

Definition of a 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. Marking Scheme: Up to 1.5 marks available

Total: 3 Marks (2 x 1.5 marks)

(c)

Recognition

Recognition is the process of including in the reporting statements an item that meets the definition of an asset, a

liability, equity, income or an expense and it is:

• Probable that an economic benefit associated with the item will flow to or from the entity; and

• The item has a cost or value that can be measured reliably.

Items must be recognised if they meet these criteria; other narrative disclosures such as accounting policy

information or explanatory notes are not substitutes.


Measurement

Measurement is defined in FRS 102: 2.33 as ‘the process of determining the monetary amounts at which an entity

measures assets, liabilities, income and expenses in its financial statements’. It is about selecting the most

appropriate basis of measurement. The two most common forms of measurement base are historical cost and fair

value.

It is important that transactions are recognised and measured correctly in the financial statements in order for the

financial statements to give a true and fair view. If they are not recognised and measured correctly this could lead

to liabilities being understated and assets overstated. This would then impact on the prudence concept.


Total: 6 Marks (2 x 3 marks)

(d)

True and Fair View

It is assumed that fair presentation is achieved when financial statements within the scope of FRS 102 are

prepared in accordance with FRS 102. Further, an entity whose financial statements comply with FRS must make

an explicit and unreserved statement of such compliance in the notes. In order to state that an entity is compliant,

the entity must be compliant with all the requirements of the FRS.

However, in some instances additional disclosures may be necessary, to achieve a true and fair view when the

specific requirements of FRS 102 are insufficient to enable users to understand the effect of a particular

transaction, other event or condition or the entity’s financial position and financial performance.



Year Paper


Examiner Comments on Question Two

Solution 2

1 Answer A

Trade payable a/c

€/£ €/£

Bank 47,000 O/bal 25,000

Closing balance 22,000 Purchases 44,000

Cost of sale working:

€/£

Opening inventory 5,000

Purchases 44,000

Closing inventory (6,500)

42,500

Sales [42,500/80*100] €/£53,125

2. Answer C

3. Answer B

4. Answer C

5. Answer D

Date Description Capital Finance cost

01 Jan 2016 PV of min lease payments 113,724

Finance cost [113,720 *10%] 11,372 6. Answer B

7. Answer B

8. Answer C

9 Answer B

10 Answer C

Marking Scheme: 1.5 marks per part

Total: 15 Marks (10 x 1.5 marks)

This question was generally well answered. The parts that were answered least well were parts 1, 3 and

5.


Year Paper


Examiner Comments on Question Three

Solution 3

Solution 3

Statement of comprehensive income of AMA Ltd for year ended 31/12/2016

€/£ €/£ Marks

Revenue 1,500 Working 1

Cost of sales (483) W1

Gross Profit 1,017

Distribution costs 166 W1

Administration expenses 316 (482) W1

Other operating income 32 W2

Operating profit 567

Finance cost (11) W10

Profit before tax 556

Taxation (94) 0.5

Profit for financial year 462

Other comprehensive income

Gain on revaluation of land 170 1

Total other comprehensive income 170

Total comprehensive income for year 632 0.5

Statement of change in Equity for AMA Ltd for year ended 31 December 2016

Retained

earnings

Issued

share

capital

Share

Premium

Revaluation

reserve

Total Marks

Balance as at 1/01/2016 196 220 416 0.5

Equity dividends (88) (88) W9

Revaluation gain 170 170 0.5

Profit for financial year 462 462 0.5

Balance at 31/12/2016 570 220 0 170 960 0.5

Many students scored very highly on this question but there were some common issues emerging:

- Poor workings/hard to read/unable to follow led to some students missing marks

- Very few students got ‘Deferred Income’ correct

- Many students got the ‘Closing Inventory’ figure incorrect

- Several students were able to work out ‘Bad Debts’ and the reduction in the ‘Provision for Bad

Debts’ but then did not know where to put them in the financial statements.


Year Paper


Statement of financial Position of AMA Ltd as at 31/12/2016

Marks

Non-current assets €/£

PPE 1,138 W4

Current assets

Inventories 51 0.25

Trade & other receivables 125 W11

176

Total assets 1,314

Equity & liabilities

Equity

Issued equity share capital 220

Share premium

Revaluation reserve 170

Retained earnings 570

960 0.5

Non—current liabilities

Financial liabilities (long term loan) 110 0.25

Deferred income grant 12 0.5

122

Current liabilities

Trade & other payables 99 0.25

Accruals & provisions 6 0.25

Deferred income –grant 4 0.5

Bank o/d 18 0.25

Taxation due 94 0.25

Dividends 11 0.25

232

Total equity & liabilities 1,314


Year Paper


Working 1: Statement of comprehensive income

Revenue Cost of sales Dist costs Adm exp Marks

€/£ €/£ €/£ €/£

Per trial balance 1,500 145 220 0.5

Opening inventory 45 0.25

Purchases 450 0.25

Dep of eqp (wk 3) 20 0.5

loss on disposal of vehicle 5 W5

Dep of vehicles 16 W6

Dep of buildings (wk 6) 19 19 0.5

Closing inventory (51) W7

Bad debt 5 W8

Reduction in bad debt provision (6) W8

Directors fees 78 0.5

1,500 483 166 316

Working 2: Other operating income

€/£ Marks

Government grant [20/y years] 4 0.5

Rent received 28 0.5

32

Working 3 depreciation of equipment

100/5 years 20

Working 4: PPE

€/£ Marks

Equipment (wk3) [100 -20] 80 0.5

Vehicles (wk6] [80-16] 64 0.5

Building [950-418-

38]

494 0.5

Land 500 0.5

1,138

Working 5: Profit or loss on disposal of vehicle

€/£ Marks

Cost price 25

Dep to date

2014 [25*20%] (5) 0.5

2015 [20*20%] (4) 0.5

Carrying value at date of sale 16

Sale proceeds 11

Loss on disposal 5 1


Year Paper


Working 6: Depreciation of vehicles

€/£ €/£ Marks

Cost price [150-25] 125 0.5

Dep to date [54-9] (45) 1

80

Charge for year [80*20%] 16 0.5

Working 6: Depreciation of buildings

Charge for year [950,000*4%] 38

Working 7: closing inventory

Per question 56 Marks

Item free (5)

51 1.5

Working 8 : trade receivables

€/£ Marks

Per TB 125

Less bad debt (5) 0.5

120

Required closing provision

[120*5%]

6 1

Opening provision 12

Reduction in allowance 6 0.5

Working 9 Equity dividends

€/£ Marks

Amount paid (TB) 77 0.5

Amount proposed

[220*5c]

11 0.5

88

Working 10 Long term loan interest

Charge for year [110*10%] 11 1 Mark

Amount paid (TB) 5

Amount due 6 [accruals]

Working 11: Trade and other receivables

€/£ Marks

Sale of vehicles 11 0.25

Trade receivables (w8) 120 0.25

Allowance for receivables (w8) (6) 0.25

125


Year Paper


Examiner Comments on Question Four

Solution 4

(a) Section 21 of FRS 102 defines a provision as a ‘liability of uncertain timing or amount’.


(b)

(i) A business has a present obligation (legal or constructive) as a result of a past event (the

obligating event)

(ii) It is probable that a transfer of economic benefits will be required to settle the obligation

(iii) A reliable estimate can be made of the amount of the obligation

Marking Scheme: 1 mark per point

Total: 3 Marks (3 x 1 mark)

(c)

(i) A provision must be created in the 2016 financial statements as SMU Ltd have met both criteria

in relation to a restructuring provision. These are:

(i) There is a formal plan

(ii) Staff effected have been informed

Marking Scheme: 0.5 mark per point

A provision must be created with the following journal entry:

Dr Provision expense €/£500,000

Cr Provision liability €/£500,000

Marking Scheme: 0.5 mark per entry

Total: 2.5 Marks

(ii)

This is identified under FRS 102 as an onerous contract. This is where the cost of fulfilling the contract

outweighs the benefits. A provision must be created in the 2016 financial statements for the full net cost

of fulfilling the contract. The journal required is as follows:

Dr Provision expense (150,000*2 years) €/£300,000

Cr Provision liability €/£300,000

Marking Scheme: Up to 1.5 marks available for text. 0.5 mark per journal entry

Total: 2.5 Marks

(iii)

This is a contingent asset. A contingent asset is never recognised in the financial statements but must be

disclosed if probable. As the chance of SMU Ltd of winning their case is 70% full disclosure must be

made in the notes to the 2016 financial statements.


(iv) To be a liability there must be a present obligation based on a past event. A provision is a liability

therefore to be a provision there must be a present obligation based on a past event. At year end the

further operating loss has not occurred yet therefore there is no obligating event. No transaction is either

recognised or disclosed in relation to the future potential losses in the 2016 financial statements.


This was the least popular question on the paper but was nevertheless a short question with a lot of easy

marks. There were some excellent concise answers, however some people ignored part (d) on ‘Ratios’

completely.


Year Paper


(d) FRS 102 does not require entities to undertake ratio analysis, however the information provided from

ratio analysis provides valuable information to users of financial statements.

Potential lenders would analyse the current gearing of an entity

Suppliers and other payables would be interested in the current cash flow position of an entity as this

would influence the length of the credit period given and credit terms offered.

Managers would analyse the profit margins and try and understand any movement from period to period.

Ratio analysis provides relevant information for decision making purposes.

Marking Scheme: 1 mark per relevant point (any 4 relevant points accepted)


Presentation Marks (2 marks):

Clarity 1 mark

Layout 1 mark

Examiner Comments on Question Five

Solution 5

(a)

All profits and losses must be shared equally

All partners have the right to take part in the business

No interest is paid on the capital advanced by each partner

No remuneration is paid to the partners for acting within the business

All partners have the right to prevent the entry of another partner

All partners have the right to examine the books of the partnership

differences of opinion shall be settled by the majority of the partners but the nature of the business

cannot be changed without the consent of all partners

All partners have the right to receive interest at 5% p.a. on loans and advances made to the partnership in

excess of their capital subscriptions

Marking Scheme: 1 mark per relevant point (any 5 relevant points accepted)


(b) (i)

Capital a/c’s

Marks Tom Peter Martin Tom Peter Martin Marks

O/bal 73,000 82,500 25,000 0.75

Revaluation 20,000 20,000 20,000 1.5

C/bal 93,000 102,500 45,000 0.75

93,000 102,500 45,000 93,000 102,500 45,000

This question was the most popular optional question with many scoring very high marks. Some

recurring issues with this question included:

- Not indicating if items in the Appropriation account should be added or subtracted

- Leaving out the ‘revaluation’ in the Capital account


Year Paper


(ii) Appropriation a/c for the year ended 31 December 2016

€/£ Marks

Net profit 210,000 0.25

Interest on capital a/c’s

Tom [73,000*5% (3,650) 0.25

Peter [82,500*5%] (4,125) 0.25

Martin [25,000*5%] (1,250) 0.25

Interest on current a/c’s

Peter [3,500*5%] (175) 0.5

Interest on current a/c’s

Tom [1,800*6%] 108 0.5

Martin [9,700*6%] 582 0.5

Salaries

Tom (12,000) 0.25

Martin (12,000) 0.25

Interest on drawings

Tom [45,000*10%] 4,500 0.5

Peter [36,000*10%] 3,600 0.5

Martin [29,000*10%] 2,900 0.5

188,490

Share of profits

Tom 75,000 0.5

Peter 56,745 0.5

Martin 56,745 0.5

176,490

(iii)

Current a/c’s

Marks Tom Peter Martin Tom Peter Martin Marks

O/bal 1,800 9,700 O/bal 3,500

0.5 Interest on

current

108 582 Int on capital 3,650 4,125 1,250 0.75

0.75 Int on

drawings

4,500 3,600 2,900 Int on current

a/c

175 0.25

0.75 Drawings 45,000 36,000 29,000 Salaries 12,000 12,000 0.25

C/bal 39,242 24,945 27,813 Share of

profits

75,000 56,745 56,745 0.75

90,650 64,545 69,995 90,650 64,545 69,995


Layout 1 mark

Structure 1 mark (including Opening & Closing Balance part (b) (iii))


Year Paper


Examiner Comments on Question Six

Solution 6

Statement of cash-flows of Bennett Ltd for y/e 31/12/2016

Workings Marks

€/£’000 €/£’000 0.5

Cash-flow from operating activities

Profit before interest & tax 1,392

As adjusted for

Depreciation 462 0.5

Profit on sale of plant (288) 0.5

Changes in working capital

Decrease in trade receivables 1 660 1

Increase in inventories 1 (540) 1

Increase In payables 1 240 1

Operating cashflow before interest & tax 1,926

Interest paid (396) 0.5

Income tax paid 2 (270) 2

.

Net cash-flow from operating activities after interest & tax 1,260

Cash-flows from investing activities

Sale of plant & equipment [300 + 288] 588 1.5

Purchase of plant & Equipment 3 (564) 2.5

.

Net cash-flows used in investment activity 24

Cash-flows from financing activities

Dividend 4 (246) 4

Repayment of loan [3,600 – 3,000] (600) 0.5

Issue of shares [ 7,200 + 600 – 6,000 – 300] 1,500 1

. 654

Net cash-flows from financing activities

.

Net increase in cash and cash equivalent 1,938 0.5

Cash and cash equivalent at start of period [ 2568- 2,616] (48) 0.5

Cash and cash equivalent at end of year [2,844 – 954] 1,890 0.5

Many students scored full marks on this question but for others there were some fundamental issues

such as:

- Not knowing what to add back and what to subtract

- Using PBT instead of PBIT

- Poor presentation

Cash-flow statements are a fundamental skill for the financial accountant and it was disappointing to see

several students unsure of their structure and format – and hence struggling.


Year Paper


Working 1: Changes in working capital

€/£’000 €/£’000

Inventory [4,020- 3,480] 540 Increase

Trade receivables [3,120 – 2,460] 660 Decrease

Trade payables [2,340 - 2,100] 240 Increase

Working 2: Taxation

Taxation a/c

€/£’000 €/£’000

O/balance 240

***Tax paid 270 Income statement 360

C/balance 330

600 600

Working 3 : Plant & Equipment

Plant & Equipment a/c

€/£’000 €/£’000

O/balance 2,538 Depreciation 462

***Additions 564 Disposal 300

C/balance 2,340

3,102 3,102

Working 4 Dividend

Retained Earnings

€/£’000 €/£’000

***dividend 276 O/balance 2,100

C/balance 2,460 Income statement 636

2,736 2,736

Dividend a/c

€/£’000 €/£’000

***Dividend paid 246 O/balance 150

C/balance 180 Retained earnings 276

426 426

Working 5 Disposal a/c

Disposal a/c

€/£’000 €/£’000

Plant & equipment 300 Bank 588

Profit on disposal (IS) 288

588 588


Layout/Headings 1 mark

Presentation 1 mark

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