The Chartered Tax Adviser Examination

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1 Candidate Number You must tick the box below if you have answered this Module. The Chartered Tax Adviser Examination November 2015 AWARENESS MODULE G ACCOUNTING Suggested solutions 1

2 1. Arthur Sole trader Arthur s business and personal affairs are not distinguished. If he incurs a liability in his business dealings and the business cannot pay the liability then the creditor can require payment out of Arthur s non-business assets. 1 Partnership Arthur and his wife could set up as a partnership. Again their business and personal affairs are not separate. Personal assets may again be used to pay business liabilities. 1 (Note In Scotland a partnership is regarded as a separate legal entity) Company Arthur (with or without his wife) could set up a company as a separate legal entity, with the business affairs separate from his personal affairs. As a shareholder he will not usually be required to contribute further to the company s liabilities, i.e. his liability is limited. 1 Limited Liability Partnership (LLP) LLPs have some legal characteristics of a company and some of a partnership. The LLP is a legal entity and the members liability to contribute to the LLP debts is limited to the LLP s assets Bernard 1) Accounting equation: Assets Liabilities = Capital + Profits Drawings (10, ,250) = 11, ,500 1, ) Revised accounting equation (10, , , [w]) = 11, ,890 [w] 1,250 3 Working: Sales 600 Less cost (1/2 of goods purchased) (210) Additional profit So total profit now ( 3, ) 3,890 Remaining Stock (asset) = 210 2

3 3. Claritey Ltd Dr Machinery (fixed asset) 2,500 Cr Bank/ Cash 2,500 Dr Debtors 4,000 Cr Sales 4,000 Dr Purchases 1,600 Cr Bank/ cash 1,600 Dr Bank/ Cash 400 Cr Debtors 400 Dr Electricity account (P&L) 180 Cr Bank/ Cash mark for each correct double entry. 4. Denzel Fixed assets 1 Motor vehicles 10,000 Current assets 1 Stock 5,000 Debtors 5,000 10,000 Creditors: Amounts falling due within one year 1 Bank overdraft (5,000) Trade creditors (2,500) (7,500) Net current assets 2,500 Net assets 12,500 Financed by: 1 Capital 10,000 Profit for the period 5,000 Less: drawings (2,500) Proprietor s funds 12,

4 5. Companies Act 2006 v FRS 102 Companies Act 2006 FRS 102 Group accounts Consolidated financial statements Profit and loss account Income statement / Part of statement of comprehensive income Balance sheet Statement of financial position Debtors Trade receivables Stocks Inventories Net realisable value Estimated selling price less costs to complete and sell 1 mark per correct alternative (Max 5 marks) 6. Fernot Ltd Electricity account 1/11/14 Balance b/f 2,400 1 Bank/ cash 10,000 ) Bank/ Cash 1,500 ) 1 31/10/15 Profit & loss acct 11, /10/15 Balance c/f (accrual) ,700 12,700 If all entries are reversed then lose one mark. 7. Grande Ltd and Hatt Ltd Grand Ltd Hatt Ltd Year ended 30 June 2013 Cost 20,000 20,000 Depreciation: Grande Ltd - 20,000 / 4 (5,000) 1 Hatt Ltd - 20,000 x 40% (8,000) 1 TWDV c/f 15,000 12,000 Year ended 30 June 2014 Depreciation: Grande Ltd (5,000) Hatt Ltd - 12,000 x 40% (4,800) 1 TWDV c/f 10,000 7,200 Year ended 30 June 2015 Disposal (8,000) (8,000) Loss on disposal 2,000 1 Profit on disposal

5 8. Igloo Ltd Research and development expenditure 1) Research or development i) Designing a new product for sale by the company development 1 ii) Screening a number of chemical products research 1 9. Jack 2) Research expenditure is always written off/ expensed as it is incurred, as there is no certainty that research expenditure will provide the business with future revenues against which costs can be matched. 1 Development expenditure should also be written off as incurred, unless it can be clearly related to a technically feasible/ commercially viable project. In that case it will be capitalised in the balance sheet and amortised over the accounting periods expected to benefit from the development expenditure (i.e. its useful life). 3 1) FIFO Max 5 marks There are 250 units remaining ( ). 1 Using FIFO the goods purchased on 4 October were sold first so the remaining stock was all purchased on 15 October. The cost is therefore 10,750 (250 x 43) 1 Note this can be presented in tabular format. 2) Weighted average cost Purchase/ sale Units Cost per unit Total cost in stock Weighted average cost 4 Oct , Oct (300) 40 (12,000) , Oct , , Oct (350) 42 (14,700) Oct remaining stock , Note the full table is not required but is given for completeness. 5

6 10. Lemar Bad debts expense account Debtors 2,600 1 Bank/cash Provision for doubtful debts Profit and loss account (balance) 1, ,600 2,600 Provision for doubtful debtors Balance b/f 7,450 Bad debts expense Balance c/fwd 6,900 7,450 7,450 Balance b/fwd 6,900 6

7 11. Orla and Patrick Appropriation statement Total Profit for the year 100,000 Orla Patrick Salary 20,000 20,000 1 Remaining profit 80,000 40,000 40, ,000 60,000 40,000 Capital account Balance b/f 80,000 Balance c/fwd 80,000 80,000 80,000 Balance b/f 80,000 1* Current account Balance b/f 44,000 Cash/ drawings 27,000 1 Profit appropriation 60,000 1 Balance c/fwd 77, , ,000 Balance b/fwd 77,000 * *one mark for showing the balance on both accounts 7

8 12. Michael 1) (i) Loan of 20,000 Dr Bank/ Cash 20,000 Cr Loan creditor 20,000 1 (ii) Purchase of shares Dr Bank/ Cash 20,000 Cr Share capital 5,000 Cr Share premium 15, ) The alternative type of shares that Neil could acquire is preference shares. 1 Preference shares may be more appropriate as these usually have a fixed entitlement to a dividend. 1 8