FINANCIAL ACCOUNTING

Transcription

1 FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2013 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: a) Statement of Comprehensive Income By Nature, Statement of Comprehensive Income By Function, and Statement of Financial Position. IAS 1 Presentation of Financial Statements permits the use of these for annual periods commencing prior to, or on, 30 June AND b) Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss and Other Comprehensive Income By Function, and Statement of Financial Position. These incorporate the June 2011 amendments to IAS 1 and are effective for annual periods commencing on, or after, 1 July Candidates may opt to answer questions to which these are relevant using either a) the formats permissible up to 30 June 2012 or b) those that are effective for annual periods commencing on, or after, 1 July 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 the 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(s) attempted. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

2 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2013 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) In accordance with the conceptual framework for financial reporting published by the International Accounting Standards Board (IASB): (i) (ii) Define an asset and a liability; and Explain, with reasons, whether a motor vehicle and a bank loan obtained to purchase a motor vehicle conforms to the definition of an asset and liability respectively. (10 Marks) (b) Oaksy Limited is a company involved in the construction and fitting of kitchens and wardrobes. The following trial balance was extracted from its books as at 31 December 2012: Debit Credit 6% Debentures 160,000 Accumulated Depreciation - Buildings - 1 January ,000 Accumulated Depreciation - Plant & Equipment - 1 January ,000 Retained Earnings at 1 January ,300 Balance on Corporation Tax at 1 January ,500 Bank 38,000 Buildings at Cost 1,500,000 Debenture Interest Paid 5,000 Distribution Expenses 46,500 Inventory at 1 January ,300 Issued Share Capital ( 2 shares) 720,000 Land 300,000 Marketing Costs 86,000 Other Income 40,000 Plant & Equipment at Cost 900,000 Allowance for Doubtful Debts 16,000 Purchases 2,400,000 Rent & Rates 24,000 Revaluation Surplus 60,000 Revenue 3,762,000 Salaries 196,000 Telephone Expenses 17,000 Trade Payables 200,000 Trade Receivables 380,000 6,276,800 6,276,800 Page1

3 The following information, based on your investigations, has also come to your attention: i. Inventory at the 31 December 2012 was 395,000. This included inventory costing 17,000 which was found to be defective. The scrap value of this defective inventory is estimated at 11,000 and will cost Oaksy Limited 1,900 to have it transported to the scrap dealer. ii. Depreciation is to be charged as follows: Buildings Plant & Equipment 4% Straight Line on Cost 15% of Reducing Balance Land is not being depreciated. iii. The land and buildings was revalued in total at 1,300,000, of which land amounted to 200,000, at the 31 December This has not been recorded in the books. iv. Corporation Tax is estimated at 60,000 for the 2012 year. A tax payment was made on the 31 December 2012 of 44,500. These transactions has not been included in the above trial balance. v. Rent relates to a display unit rented and its rental period is yearly starting on the 1 June each year. The yearly amount of 12,000 is paid in full on this date. vi. There are closing accruals for Marketing Costs, Salaries and Telephone Expenses amounting to 2,420, 3,610 and 280 respectively which have not yet been included in the above trial balance. vii. viii. ix. A customer owing 6,000 went into liquidation. The liquidator has assured Oaksy Limited that it will receive 10% of the amount. Oaksy Limited has decided that the Allowance for Doubtful Debts should be set at 5%. A dividend of 10,000 was paid by cheque on 31 December This entry is not included in the above trial balance. Provide for any debenture interest due. x. Relevant Expenses are to be allocated evenly between Distribution Costs and Administrative Expenses. REQUIREMENT: Prepare, in a form suitable for publication, a Statement of Comprehensive Income and Statement of Financial Position for Oaksy Limited for the financial year-ending 31 December Note: It is recommended that all workings are shown. (30 Marks) [Total: 40 Marks] Page 2

4 2. The trial balance of Luna Limited, a company involved in the manufacturing sector, had a balance in a suspense account of 6,571 at its year-end of 31 December The main shareholder and bookkeeper, Mrs. Lunar, has identified the following issues: 1. The balance of 860 on the telephone expense account has been omitted from the trial balance. 2. The total of the purchases day book has been carried forward as 5,126 whereas the correct amount was 5,621. The correct amount has been posted to the relevant trade payable. 3. Capital introduced by Mrs. Lunar of 3,500 had been entered correctly to the bank but had been debited to Sales. 4. Additions to Property, Plant & Equipment purchased and paid for by cheque on the 1 September 2012 had been expensed to the repairs and maintenance account amounting to 12,000. Luna Limited s depreciation policy is to depreciate on a proportionate basis from the date of acquisition and at the rate of 5% per annum. 5. A VAT credit of 1,200 on motor expenses had been incorrectly claimed. 6. An unaccounted for rates bill amounting to 610 had been discovered in the waste basket. 7. Discount received of 463 in October 2012 have been posted to the debit of the discount allowed account. 8. A rent expense of 2,450 paid during the year was recorded by debiting the rates account. Luna Limited is showing a profit of 41,825 before accounting for the above issues. REQUIREMENT: (a) Prepare journal entries for Luna Limited to record and correct relevant transactions from the above information for the financial statements for the year-ending 31 December (15 Marks) (b) Calculate the revised profit or loss for Luna Limited for the year-ending 31 December (5 Marks) [Total: 20 Marks] Page 3

5 3. Mr. Burns, the owner of the accountancy practice in which you work has recently been approached by a client, Marunda Limited with some specific issues in relation to IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. Mr. Burns has asked you to assist in advising this client. The client has briefed your manager with the following details; Marunda Limited has applied for a capital grant from the government in relation to the building of an office extension to its nursing home. In 2012, the government introduced new rules for nursing homes, allowing grant aid to be given to nursing homes which were undertaking capital improvements. The specific terms of the new rules state that, subject to the nursing home fulfilling certain criteria and conditions, a grant of up to 60% of total outlay may be obtained. On 1 September 2012, Marunda Limited signed a preliminary contract with the department in charge of administrating the grant. Marunda Limited were unable to sign the full contract at that time as they had not sufficient people employed in the nursing home which was one of the pre-conditions of receiving the grant. At the time of signing the preliminary contract, Marunda Limited was in the process of hiring ten extra staff, which would allow Marunda Limited to qualify for the government grant. On 8 January 2013, Marunda Limited had finally hired the ten extra staff and therefore, had now met the conditions of receiving the grant. The contract for receiving the grant was signed on 14 January The grant money was received on 28 January The financial statements were not authorised for issue until 20 March The cost of the extension amounted to 96,000 which has been paid for. Marunda Limited wishes to adopt the income approach in accounting for the government grant. Marunda Limited depreciates in full in the year of purchase to the tune of 5% straight line. REQUIREMENT: Mr. Burns has asked you to prepare a report which addresses the following issues: (a) (b) Explain, with supporting reasons, why the above grant should be included in Marunda Limited s financial statements for the year-ended 31 December (8 Marks) Provide the journal entries to account for the above information in accordance with International Financial Reporting Standards. (6 Marks) (c) Outline the closing balance in the financial statements of Marunda Limited for the government grant at 31 December (2 Marks) (d) Outline the accounting treatment necessary in the event of the government grant having to be repaid to the government. (4 Marks) [Total: 20 Marks] Page 4

6 4. The manager of the accountancy practice where you currently are employed has provided you with the following information from a meeting they had with a new client, Mr. Ron Harvey in relation to preparing a set of financial statements so as to facilitate the preparation of a tax return. Mr. Harvey set up in business this year by opening a restaurant. 1. The business began trading on 1 April Mr. Harvey set up a business bank account on 1 April 2012 and lodged 5,000 of his own personal money into the account. He also introduced into the business cash of 700 and equipment that he owned from a previous food venture into the premises that he rented out for his restaurant. The equipment is worth 15, On 1 April 2012, Mr. Harvey entered a lease for the premises amounting to 10,000 per annum, payable quarterly in advance. This amount was paid by cheque. 4. The premises were painted by a friend of Mr. Harvey who was paid 1,000 cash from Mr. Harvey s own personal funds. The paint was purchased by Mr. Harvey for 800, which was paid by cheque. Mr. Harvey also purchased tables and chairs and other fittings at a local antique shop for 2,000 which he also paid by cheque. The delivery of the fittings cost 50 and was paid for in cash. 5. On 1 May 2012, Mr. Harvey borrowed 9,000 from his wife to help him pay for inventory for the restaurant. This amount was lodged to the bank account. The terms of the loan between Mr. Harvey and his wife are that his wife is to receive interest of 10% each year on the loan payable by 31 December each year and Mr. Harvey is to repay the loan to his wife in Mr. Harvey paid his wife the interest on 4 January Most of the sales were in cash which Mr. Harvey puts in a safe (which cost him 300 and was paid by cheque) located on the premises and lodges to the bank every few days. The amount lodged is after paying for cash expenses. Cash sales amounted to 1,000 a week except for the five weeks of December where, due to Christmas parties, weekly sales increased by 80% on a normal week s sales. Due to the volume of parties, Mr. Harvey did not get to lodge the last week s takings until January Mr. Harvey also has some corporate clients that are invoiced by Mr. Harvey after hosting their event. Mr. Harvey billed 7,800 to clients in 2012 and had received and lodged 6,200 by year-end. 8. Mr. Harvey presented you with a file where all invoices were held. A summary of this file highlighted the following: a) Inventory purchased amounted to 26,000 of which Mr. Harvey estimates that there was 2,350 on hand at the year-end, b) Amounts owed to suppliers were 3,000 at the year-end, c) Electricity amounted to 260 a month, d) Wages amounted to 20% of cash sales, e) Consumables cost 1,200 in 2012, f) Miscellaneous expenses amounted to 430, g) Insurance was a significant cost amounting to 9,000 on a yearly basis. The relevant amount was billed by the insurance company each month and paid for by cheque. h) All expenses were paid in cash except point 8 g). 9. Mr. Harvey feels it is appropriate to depreciate all assets of his business by 15% straight line each year, regardless of the date purchased. 10. Mr. Harvey withdrew 200 a month in cash to pay expenses for his daughter in college. He also took 200 worth of inventory out of the business to host his wife s birthday party at his home. REQUIREMENT: For the year ended 31 December 2012 for Mr. Harvey: (a) Prepare the income statement; and (10 Marks) (b) Prepare the statement of financial position. (10 Marks) [Total: 20 Marks] Page 5

7 5. Catunda Limited is a company operating in the hotel sector and its financial statements are as follows: Catunda Limited Statement of Comprehensive Income for the year-ended 31December Operating Profit 2,130 Other Income Interest Received 126 Finance Costs - Interest (387) Profit before Tax 1,869 Income Tax (341) Profit for the Year 1,528 Other Comprehensive Income Gains on Property Revaluations 3,240 Total Comprehensive Income for the year, net of tax 4,768 Catunda Limited Statement of Financial Position as at 31 December Non-Current Assets Property, Plant & Equipment 101,650 95,300 Investment Properties 15,000 19,625 Total Non-Current Assets 116, ,925 Current Assets Inventories 6,300 2,600 Trade Receivables 11,460 10,850 Cash & Cash Equivalents 8,600 - Total Current Assets 26,360 13,450 Total Assets 143, ,375 Equity & Liabilities Equity Ordinary Share Capital 48,000 40,000 Ordinary Share Premium 13,000 5,000 Preference Share Capital 2,600 2,600 Retained Earnings 3,573 2,595 Revaluation Surplus 21,540 18,300 Total Equity 88,713 68,495 Non-Current Liabilities Bank Loans 42,311 48,800 Total Non-Current Liabilities 42,311 48,800 Current Liabilities Trade Payables 9,216 7,450 Bank Overdraft - 1,010 Accruals Current Tax Payable 2,160 2,500 Total Current Liabilities 11,986 11,080 Total Equity & Liabilities 143, ,375 (Question 5 continued on following page) Page 6

8 (Question 5 continued) Catunda Limited Statement of Changes in Equity for the year-ended 31st December 2012 Ordinary Preference Share Share Share Retained Revaluation Total Capital Premium Capital Earnings Surplus Equity '000 '000 '000 '000 '000 '000 At 1st January ,000 5,000 2,600 2,595 18,300 68,495 Issue of Share Capital 8,000 8,000 16,000 Dividends - Preference (200) (200) Dividends - Ordinary (350) (350) Total Comprehensive 1,528 3,240 4,768 Income for the Year At 31st December ,000 13,000 2,600 3,573 21,540 88,713 Notes: i. During the year, Property, Plant & Equipment which had originally cost 540,000 was sold for 240,000. This asset had been purchased in the year-ending 31st December Catunda Limited s depreciation rate is 10% straight line per annum with full depreciation being charged in year of purchase and none in year of sale. ii. Depreciation of Property, Plant & Equipment for the year-ending 31st December 2012 amounted to 1,860,000. REQUIREMENT: Prepare a Statement of Cash Flows for the year-ended 31st December 2012 for Catunda Limited in accordance with IAS 7 Statement of Cash Flows. [Total: 20 Marks] END OF PAPER Page 7

9 SUGGESTED SOLUTIONS SOLUTION 1 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2013 (a) Definition of an Asset and providing an explanation as regards how a motor vehicle meets this definition. (5 Marks) As per the Conceptual Framework, an asset is 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 A motor car is owned and controlled by the company as a result of purchasing it in the past. The company will obviously expect the use of the car to contribute positively to the company in the future for example, a sales representative of a company will have the use of a car to drive around and make sales and receive cash on behalf of the company Definition of a Liability and providing an explanation as regards how a bank loan received for a motor vehicle meets this definition. (5 Marks) As per the Conceptual Framework, a liability is 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. The bank loan received by the company from a bank is the past event. The company has a present obligation through monthly loan repayments to the bank and these repayments represent a cash outflow from the company to the bank. [Total: 10 Marks] Page 9

10 (b) Oaksy Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2012 Revenue 3,762,000 Cost of Sales W2-2,435,200 Gross Profit 1,326,800 Other Income TB -40,000 Distribution Costs W2 276,470 Administrative Expenses W2 229,970 Finance Costs W1.x 9,600 Other Expenses - Revaluation Loss W3 80, ,040 Profit/(Loss) before Tax 770,760 Income Tax Expense W1.iv -60,000 PROFIT/(LOSS) FOR THE YEAR 710,760 Other Comprehensive Income Revaluation Loss W3-60,000 Other Comprehensive Income for the year, net of tax -60,000 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 650,760 Oaksy Limited Statement of Financial Position as at 31st December 2012 Non-Current Assets Property, Plant & Equipment W3 1,682,500 Total Non-Current Assets 1,682,500 Current Assets Inventories W1.i 387,100 Trade Receivables W1.vii 355,870 Prepayments W1.v 5,000 Cash & Cash Equivalents - Total Current Assets 747,970 TOTAL ASSETS 2,430,470 Equity & Liabilities Equity Share Capital 720,000 Retained Earnings W1.ix + W1.viii 526,300-10, ,760 1,227,060 Revaluation Surplus W3 60,000-60,000 - Total Equity 1,947,060 Non-Current Liabilities 6% Debentures 160,000 Total Non-Current Liabilities 160,000 Current Liabilities Trade Payables 200,000 Current Tax Payable TB + W1.iv 4,500 60,000-44,500 20,000 Bank Overdraft TB + W1.iv + W1.ix 38,000 44,500 10,000 92,500 Accruals W4 10,910 Total Current Liabilities 323,410 TOTAL EQUITY & LIABILITIES 2,430,470 (8.5 Marks) Page 10

11 Working - Journal Entries Working 1 - Closing Inventory Total Inventories at Cost per Inventory Count 395,000 Damaged Inventories - Cost 17,000 NRV - Selling Price less costs to sell (11,000-1,900) -9,100 Inventory Write Down 7,900 Value of Closing Inventories 387,100 1.i Dr. Inventory + Current Assets SOFP 387,100 Cr. Closing Inventory - Cost of Sales SOCI 387,100 1.iv Dr. Income Tax + Expenses SOCI 60,000 Cr. Current Tax Payable + Current Liabilities SOFP 60,000 Dr. Current Tax Payable - Current Liabilities SOFP 44,500 Cr. Bank Overdraft + Current Liabilities SOFP 44,500 1.v Dr. Prepayment + Current Assets SOFP 5,000 Cr. Rent Expense - Expenses SOCI 5,000 Rent - Yearly Amount 12, Prepaid - 5 Months 5/12 5,000 1.vi Dr. Marketing Costs + Expenses SOCI 2,420 Dr. Salaries + Expenses SOCI 3,610 Dr. Telephone Expenses + Expenses SOCI 280 Cr. Accruals + Current Liabilities SOFP 6,310 1.vii Dr. Bad Debt Written Off - ( 6,000 * 90%) + Expenses SOCI 5,400 Cr. Trade Receivables - Current Assets SOFP 5,400 Dr. Allowance for Doubtful Debts + Expenses SOCI 2,730 Cr. Allowance for Doubtful Debts - Current Assets SOFP 2,730 Trade Receivables Balance per TB 380,000 - Bad Debt Write Off -5, ,600 - Allowance for Doubtful Debts - 5% -18,730 Revised Trade Receivable 355,870 Current Bad Debt Provision TB 16,000 New Bad Debt Provision See Above 18,730 Increase in Bad Debt Provision 2,730 1.viii Dr. Retained Earnings - Equity SOFP 4,500 Cr. Opening Inventory - Cost of Sales SOCI 4,500 1.ix Dr. Retained Earnings - Equity SOFP 10,000 Cr. Bank Overdraft + Current Liabilities SOFP 10,000 1.x Dr. Debenture Interest + Expenses SOCI 4,600 Cr. Debenture Interest Due + Current Liabilities SOFP 4,600 Debentures 160,000 Interest for the year at 6% 9,600 Debenture Interest already paid and included in TB 5,000 Balance Due 4,600 (11.5 Marks) Page 11

12 Cost of Distribution Administration Working 2 - Expenses Sales Costs Expenses Opening Inventory Per TB + W1.viii 422, Purchases Per TB 2,400, Closing Inventory W1.i -387, Distribution Expenses Per TB - 46,500 23,250 46,500 Marketing Costs Per TB + W1.vi - 44,210 44,210 88,420 Allowance for Doubtful Debts W1.vii - 1,365 1,365 2,730 Bad Debt Write Off W1.vii - 2,700 2,700 5,400 Rent & Rates Per TB + W1.v - 9,500 9,500 19,000 Salaries Per TB + W1.vi - 99,805 99, ,610 Telephone Expenses Per TB + W1.vi - 8,640 8,640 17,280 Depreciation - Buildings W3-30,000 30,000 60,000 Depreciation - Plant & Equipment W3-33,750 33,750 67,500 Total 2,435, , ,970 Working 3 - Property, Plant & Equipment Plant & Land Buildings Equipment Total Cost Per TB 300,000 1,500, ,000 2,700,000 - Accumulated Depreciation b/d Per TB , , ,000 Carrying Value b/d at 1st January ,000 1,200, ,000 1,950,000 Depreciation - Buildings - 4% Straight Line - -60, ,000 Depreciation - Plant & Equipment - 15% of Reducing Bal ,500-67,500 Carrying Value 300,000 1,140, ,500 1,822,500 Revaluation Loss Note 1-100,000-40, ,000 Carrying Value c/d at 31st December ,000 1,100,000-67,500 1,682,500 Note 1 - Revaluation Loss The treatment of the revaluation loss is as follows: 1 Revaluation Loss is netted against the revaluation surplus brought forward of 60, Any balance i.e. 140,000-60,000 = 80,000 is taken to expenses in the SOCI Working 4 - Accruals Marketing W1.vi 2,420 Salaries W1.vi 3,610 Telephone W1.vi 280 Debenture Interest W1.x 4,600 10,910 Page 12

13 Adjustment Statement of Profit or Loss and Statement of Financial Position Other Comprehensive Income Debit Credit Debit Credit Debit Credit Debit Credit 6% Debentures 160, ,000 Accumulated Depreciation - Buildings 300,000 60,000 60,000 60, ,000 Accumulated Depreciation - Plant & Equipment 450,000 67,500 67,500 67, ,500 Retained Earnings at 1st January ,300 10, ,260 1,231,560 Corporation Tax 4, ,500 60,000 60,000 20,000 Bank 38,000 54,500 92,500 Buildings at Cost 1,500,000 40,000 1,460,000 Debenture Interest Paid 5,000 4,600 9,600 Distribution Expenses 46,500 46,500 Inventory 422,300 4, , , ,100 Issued Share Capital ( 2 shares) 720, ,000 Land 300, , ,000 Marketing 86,000 2,420 88,420 Other Income 40,000 40,000 Plant & Equipment at Cost 900, ,000 Allowance for Doubtful Debts 16,000 2,730 2,730 2,730 18,730 Purchases 2,400,000 2,400,000 Rent & Rates 24,000 5,000 19,000 Revaluation Surplus 60,000 60,000 - Revenue 3,762,000 3,762,000 Salaries 196,000 3, ,610 Telephone 17, ,280 Trade Payables 200, ,000 Trade Receivables 380,000 5, ,600 Prepayment 5,000 5,000 Accruals 10,910 10,910 Bad Debt Written Off 5,400 5,400 Revaluation Loss - Expenses 140,000 60,000 80,000 Revaluation Loss - Other Comprehensive Income 60,000 60,000 6,276,800 6,276, , ,040 4,253,600 4,249,100 3,326,700 3,331,200-4,500 Page 13

14 SOLUTION 2 a) Issue 1 Should Have Happened Actually Happened Dr. Telephone Expense 860 Dr. Suspense 860 Cr. Trade Payable/Bank 860 Cr. Trade Payable/Bank 860 To Correct Dr. Telephone Expense 860 Cr. Suspense 860 Issue 2 Should Have Happened Actually Happened Dr. Purchases 5,621 Dr. Purchases 5,126 Cr. Trade Payable 5,621 Dr. Suspense 495 Cr. Trade Payable 5,621 To Correct Dr. Purchases 495 Cr. Suspense 495 Issue 3 Should Have Happened Actually Happened Dr. Bank 3,500 Dr. Bank 3,500 Cr. Capital 3,500 Dr. Sales 3,500 Cr. Suspense 7,000 To Correct Dr. Suspense 7,000 Cr. Sales 3,500 Cr. Capital 3,500 Issue 4 Should Have Happened Actually Happened Dr. Property, Plant & Equipment (PPE) 12,000 Dr. Repairs & Maintenance Expense 12,000 Cr. Bank 12,000 Cr. Bank 12,000 Dr. Depreciation Expense 200 Cr. Accumulated Depreciation - PPE 200 To Correct Dr. Property, Plant & Equipment (PPE) 12,000 Cr. Repairs & Maintenance Expense 12,000 Dr. Depreciation Expense 200 Cr. Accumulated Depreciation - PPE 200 Issue 5 Should Have Happened Actually Happened Dr. Nothing Dr. Vat Receivable/Bank 1,200 Cr. Cr. Motor Expenses 1,200 To Correct Dr. Motor Expenses 1,200 Cr. Vat Receivable/Bank 1,200 Issue 6 Should Have Happened Actually Happened Dr. Rates Expense 610 Nothing Cr. Trade Payables/Accruals 610 To Correct Dr. Rates Expense 610 Cr. Trade Payables/Accruals 610 Issue 7 Should Have Happened Actually Happened Dr. Trade Payables 463 Dr. Discount Allowed Expense 463 Cr. Discount Received 463 Dr. Trade Payables 463 Cr. Suspense 926 To Correct Dr. Suspense 926 Cr. Discount Allowed Expense 463 Cr. Discount Received 463 Issue 8 Should Have Happened Actually Happened Dr. Rent Expenses 2,450 Dr. Rate Expense 2,450 Cr. Bank 2,450 Cr. Bank 2,450 To Correct Dr. Rent Expenses 2,450 Cr. Rate Expense 2,450 b) Revised Profit Calculation Original Profit 41,825 1 Telephone Expense Purchases Sales 3,500 4 Repairs & Maintenance Expense 12,000 4 Depreciation Expense Motor Expenses - 1,200 6 Rates Expense Discount Allowed Expense Discount Received 463 Revised Profit Calculation 54,886 Page 14

15 SOLUTION 3 REPORT To: Owner of Accountancy Practice From: Assistant Financial Accountant Re: IAS 20 Accounting for Government Grants & Disclosure of Government Assistance Date: April 2013 (a) Paragraph 7 of IAS 20 states that government grants shall not be recognised until there is reasonable assurance that: i) The entity will comply with the conditions attaching to them; and ii) The grants will be received. Based on the information provided by Marunda Limited, they met the conditions of receiving the grant on the 8th January 2013 and the grant was signed off on the 13th January Therefore, at this date, part i) of the conditions had been satisfied. Part ii) of paragraph 7 was satisfied by the fact that the grants were received by Marunda Limited on the 28th January Therefore, both conditions of paragraph 7 have been met by 28th January The question arises as regards whether the grant can be recognised in the 2012 or 2013 year for financial statement purposes. IAS 10: Events after the Reporting Period state in paragraph 3 that events after the reporting period are those events, favourable or unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. Events that provide evidence of conditions that existed at the end of the reporting period are called adjusting events after the reporting period and paragraph 8 of IAS 10 states that an entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period. Given that Marunda Limited had signed a preliminary contract in September 2012 in relation to the grant, the events that occurred in January 2013 are adjusting events after the reporting period and therefore, Marunda Limited is entitled to include the government grant in their 2012 financial statements. (8 Marks) (b) The journal entries to account for the transactions are as follows: Dr. Property, Plant & Equipment Non-Current Assets SOFP 96,000 Cr. Bank Current Assets SOFP 96,000 Dr. Other Receivables Current Assets SOFP 57,600 Cr. Government Grants Deferred Income Equity 57,600 Dr. Depreciation Expense SOCI 4,800 Cr. Accumulated Depreciation PPE Non-Current Assets SOFP 4,800 Dr. Government Grants Deferred Income Equity 2,880 Cr. Other Income SOCI 2,880 (6 Marks) (c) The closing balance for the government grant for the year-ended 31st December 2012 is as follows: Grant Received 57,600 Less Amortisation of Grant - 2,880 Closing Balance 54,720 (2 Marks) (d) Per paragraph 32 of IAS 20, a government grant that becomes repayable shall be accounted for as a change in accounting estimate as per IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Since the grant was originally received in relation to a new asset, the repayment of a grant 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. (4 Marks) If you have any further queries, please do not hesitate to contact me. Yours sincerely, Financial Accountant [Total: 20 Marks] Page 15

16 SOLUTION 4 (10 Marks) Page 16

17 Mr. Ron Harvey Statement of Financial Position as at 31st December 2012 Non-Current Assets PPE 14,705 (15,000 equipmt + 2,000 fittings safe 1.00 Total Non-Current Assets 14,705 - Dep (15,000+2, )*.15) Current Assets Inventory 2, Trade Receivables 1,600 (7,800-6,200) 0.50 Bank 4,830 See Calculation Below 2.00 Cash 1,800 (1,000*180% - Not Lodged to bank at year-end) 1.00 Prepayment 2,500 (10,000*25% - Rent) 0.50 Total Current Assets 13,080 Total Assets 27, Equity & Liabilities Capital & Reserves (5,000 bank cash + 15,000 equipment Capital 21, ,000 paid painter) 1.00 Drawings - 2,000 (- 200*9 daughter wife's party) 1.00 Retained Earnings - 4, Total Capital & Reserves 15,185 Non-Current Liabilities Loan 9, Total Non-Current Liabilities 9,000 Current Liabilities Trade Payable 3,000 (3,000 of purchases unpaid at year-end) 0.50 Accruals 600 (Interest on Loan due at year-end 0.50 Total Current Liabilities 3,600 Total Equity & Liabilities 27,785 - Calculation of Closing Bank Balance Dr. Cr. Details Cash Bank Details Cash Bank Capital Introduced 700 5,000 Rent 10,000 Borrowings from Wife 9,000 Paint 800 Cash Sales 43,000 Fittings 2,000 Credit Sales 6,200 Delivery Charges 50 Safe 300 Inventory (26,000-3,000) 23,000 Electricity 2,340 Wages 8,600 Consumables 1,200 Miscellaneous 430 Insurance 6,750 Drawings 1,800 Bank Lodgment 4,480 Bank Lodgment 4,480 Balance c/d 1,800 4,830 43,700 24,680 43,700 24,680 SUBTOTAL MARKS OVERALL MARKS (10 Marks) [TOTAL: 20 MARKS] Page 17

18 SOLUTION 5 Catunda Limited Statement of Cash flows for the year ended 31st December 2012 Cash flows from Operating Activities '000 '000 Profit before Taxation 1,869 Adjustments for Interest Received Depreciation 1,860 Loss on Sale of PPE 138 Interest Expense 387 4,128 Increase in Trade Receivables Increase in Inventory - 3,700 Increase in Trade Payables 1,766 Increase in Accruals 490 Cash Generated from Operations 2,074 Interest Paid Interest Received 126 Income Taxes Paid Net Cash from Operating Activities 1,132 Cash flows from Investing Activities Payments to acquire Property, Plant & Equipment - 5,348 Receipts from sale of Property, Plant & Equipment 240 Receipts from sale of Investment Properties 4,625 Net Cassh used in Investing Activities Cash flows from Financing Activities Proceeds from Issue of Shares 16,000 Payments from Decrease in Bank Loans - 6,489 Dividends Paid ,961 Net Increase in Cash & Cash Equivalents 9,610 Cash & Cash Equivalents at beginning of Year Note 1-1,010 Cash & Cash Equivalents at end of Year Note 1 8,600 Note '000 '000 Cash on hand and balances with bank 8,600 - Bank Overdraft - - 1,010 Cash and Cash Equivalents 8,600-1,010 [TOTAL : 20 MARKS] Page 18

19 SOLUTION 5 Workings Loss on Sale of PPE '000 Cost Accumulated Depreciation Carrying Value at date of sale 378 Sales Proceeds 240 Loss on Sale of PPE 138 Interest Account Balance b/d - Expense - SOCI 387 Interest Paid 387 Balance c/d Income Tax Account Corporation Tax Paid 681 Balance b/d 2,500 Balance c/d 2,160 Expense - SOCI 341 2,841 2,841 Share Capital Account Balance b/d - S. Capital 40,000 Balance b/d - S. Premium 5,000 Balance c/d - S. Capital 48,000 Balance c/d - S. Premium 13,000 Proceeds from Issue of S. Capital 16,000 61,000 61,000 Property, Plant & Equipment Account Balance b/d 95,300 Depreciation 1,860 Revaluation Surplus 3,240 Disposal - carrying value 378 Purchase of PPE 5,348 Balance c/d 101, , ,888 Page 19

20 MARKING SCHEME Q1 (a) Definition of Asset 2 Explanation why Motor Vehicle meets definition of asset 3 Definition of Liability Explanation why bank loan on purchase of motor vehicle meets definition of liability 3 Q1 (b) Workings 21.5 Statement of Profit or Loss and Other Comprehensive Income Statement of Financial Position Total: 40 Marks Q2 (a) Journal Entries 8 x 2 marks each up to a maximum of 15 marks 15 Q2 (b) Reconciling Net Profit 5 Total: 20 Marks Q3 (a) Conditions to recognise grants 2 x 1 mark each 2 Using information provided in question to prove conditions 2 IAS 10 events after reporting period 1 Adjusting event 1 Using information provided in question to prove adjusting event 2 Q3 (b) Journal Entries 4 x 1.5 marks each 6 Q3 (c) Closing Balance 2 Q3 (d) Repayment accounting treatment 4 Total: 20 Marks Q4 (a) Statement of Profit or Loss 10 Q4 (b) Statement of Financial Position 10 Total: 20 Marks Q5 Operating Activities 11.5 Investing Activities 4 Financing Activities 3.5 Cash & Cash Equivalents 1 Total: 20 Marks Page 20