Advanced Financial Accounting

Transcription

1 Advanced Financial Accounting Sample Paper / 2018 Questions & Suggested Solutions Page 1 of 26

2 NOTES TO USERS ABOUT SAMPLE PAPERS Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see for a comprehensive list of examinable topics. 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 only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2017 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, Page 2 of 26 AFA Sample Paper 2

3 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 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 is 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. Question 1 begins on Page 2 overleaf. NOTE: This sample paper and solution have been prepared to reflect the provisions of FRS102. Page 3 of 26 AFA Sample Paper 2

4 SECTION A Answer ALL THREE Questions in this Section (The total marks for section A will be 60, made up of a theory question of 20 marks, a multiple choice question of 15 marks and a further question of 25 marks) QUESTION 1 (i) The FRC is responsible for the framework of codes and standards for the accounting profession. What are accounting standards and describe the objective of such standards. 8 marks (ii) Describe the steps involved in the standard setting process and the measures taken to improve transparency within the process. 12 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. Requirement Indicate the right answer to each of the following TEN parts. Total 15 Marks N.B Candidates should answer this question by ticking the appropriate boxes on the special answer sheet which is contained within the answer booklet. [1] In accordance with FRS 102 net realisable value is defined as: (a) (b) (c) (d) the actual or estimated selling price the actual or estimated selling price less all further costs to completion and all costs to be incurred in marketing, selling and distribution the actual or estimated selling price less all costs to be incurred in marketing selling and distribution the actual or estimated selling price less all further costs to be completion Page 4 of 26 AFA Sample Paper 2

5 QUESTION 2 (cont d) BACKGROUND INFORMATION TO PARTS [2] & [3] Brian and Jean are in partnership and their capital account balances are / 56,000 and / 84,000 respectively. The partnership agreement details appropriation of partnership profits as follows: Brian Jean Annual salary / 19,500 / 28,000 Interest on capital Share of residual profit 10 % 40 % 10 % 60 % [2] If the profit for the year, before appropriation, was / 112,000 what would Brian s entitlement be in total: (a) / 25,100 (b) / 30,300 (c) / 45,300 (d) / 20,200 [3] If the profit for the year, before appropriation, was / 112,000 what would Jean s entitlement be in total: (a) / 45,300 (b) / 30,300 (c) / 25,100 (d) / 66,700 [4] In accordance with FRS 102 the clarification after the end of the accounting period of proceeds from assets sold before the end of the accounting period, is an example of: (a) (b) (c) (d) an adjusting event a non-adjusting event a material event an immaterial event [5] The formula for price earnings ratio is: (a) (b) (c) (d) dividend per share / market value per share earnings per share / market value per share market value per share / earnings per share market value per share / dividend per share Page 5 of 26 AFA Sample Paper 2

6 QUESTION 2 (cont d) [6] Company A has inventory days of 23 and receivable days of 38. Ideally payable days should be: (a) greater than 38 but less than 61 (b) greater than 61 (c) less than 61 (d) greater than 23 but less than 61 [7] If a capital grant is recognised as deferred income in the Statement of Financial Position what are the entries to be made each year over the useful life of the associated asset: (a) (b) (c) (d) debit deferred income, credit other operating income credit deferred income, debit other operating income debit deferred income, credit bank credit deferred income, debit bank BACKGROUND INFORMATION TO PARTS [8] & [9] The business premises of ABC Limited went on fire on 30 November 2016 and financial records were destroyed. However the following information is available: / Receivables : opening 45,000 Closing 56,000 Inventory : opening 60,000 Closing 44,000 Sales (credit) 270,000 Irrecoverable Receivables 14,000 Gross margin 20% [8] Using the information available what is the value of purchases: (a) / 112,000 (b) / 209,000 (c) / 121,000 (d) / 200,000 [9] Using the information available what is the value of sales receipts: (a) / 295,000 (b) / 245,000 (c) / 273,000 (d) / 259,000 Page 6 of 26 AFA Sample Paper 2

7 QUESTION 2 (cont d) [10] In preparing a cash flow statement in accordance with FRS 102 a profit on disposal of a non - current asset should be: (a) (b) (c) (d) deducted from operating profit in computing the net cash flow from operating activities added back to operating profit in computing the net cash flow from operating activities deducted from payments to acquire tangible fixed assets to compute capital expenditure added to payments to acquire tangible fixed assets to compute capital expenditure Page 7 of 26 AFA Sample Paper 2

8 QUESTION 3 WIRE Ltd., a retailing company, has an authorised share capital of / 2,500,000, comprised of 4,000,000 ordinary shares of 50 cent/pence each and / 500,000 of 5% preference shares of / 1 each. The following trial balance was extracted as at 31 st December 2016 / 000 / 000 Ordinary share capital... 1,500 5% preference share capital Share premium account General reserve Retained profits at 1 January % debenture stock (redeemable in 2020) Freehold premises at cost at 1 st January ,500 Freehold premises accumulated depreciation at 1 st January Plant & machinery at cost at 1 st January Plant & machinery accumulated depreciation at 1 st January Motor vehicles at cost at 1 st January Motor vehicles accumulated depreciation at 1 st January Computer equip at cost Computer equip accumulated depreciation at 1 st January Additions to non-current assets at cost: Plant & machinery Motor vehicles Computer equipment Disposal of motor vehicles (sale proceeds) Inventory at 31 December Receivables & payables Bank VAT Corporation tax Prepayments & accruals Long term investments Short term investments Retained profit for the year (after providing for dividends and... debenture interest but before adjusting for items 1 to 3 below) Deferred government grants at 1 st January ,669 3,669 ADDITIONAL INFORMATION (1) Depreciation is to be provided on non-current assets as follows: Freehold premises... 2% on cost Plant & machinery... 10% on cost Motor vehicles... 20% on cost Computer equipment /3 % on cost A full year s depreciation is provided in the year of purchase and none in the year of disposal. Page 8 of 26 AFA Sample Paper 2

9 QUESTION 3 (Cont d) (2) During the year motor vehicles which cost / 45,000 in 2013 were disposed of for / 24,000. The only entries made (before extracting the above trial balance) were to debit the bank account and credit the disposal of motor vehicles account. (3) The deferred government grants balance included in the above trial balance arises in respect of a grant of / 100,000 received in 2015 to help finance the cost of plant and machinery purchased during that year. In addition a grant of / 18,000 was received on 29 th December 2016 towards the cost of new computers purchased during the year. This grant has not yet been recorded in the company s books. (4) Prepaid expenses valued at / 24,000 were incorrectly included in operating costs. Requirement (a) Prepare, in the form required by FRS 102, the Statement of Financial Position for WIRE Ltd., for the year ended 31 st December 2016 in as far as the information provided permits. N. B. You are NOT required to prepare a Statement of Comprehensive Income or notes to the accounts. You are required to submit workings to show the make-up of the figures in the statement of financial position. (b) Prepare the following notes to the accounts for the year ended 31 December 2016: 17 Marks (i) Non-current assets (ii) Deferred government grants 6 Marks Presentation 2 marks Total 25 Marks Page 9 of 26 AFA Sample Paper 2

10 SECTION B Answer TWO of the THREE questions in this Section QUESTION 4 CARTER Limited is installing a new production plant at a cost of / 1 million, in respect of which government grants have been approved as follows: Capital cost - 40% Training costs - 100% The company depreciates its plant and equipment on the basis of 20% on original cost. The directors are aware that the accounting treatment for grants is dealt with in FRS 102, and they have asked you to advise them on the accounting options available to them and the effect which they would have on the company s financial statements. Requirement You are required to draft a report to the directors which: (a) outlines the accounting treatment of the foregoing grants under FRS 102; (b) recommends (with reasons) the treatment which you believe would be most suitable in the case of CARTER Limited; and (c) indicate the form of accounting policy or other notes which should be included in the annual financial statements of the company. 18 Marks QUESTION 5 Presentation 2 marks Total 20 Marks The following errors were identified by the financial accountant of CUSACK Limited (a VAT registered company) when reviewing the year end draft financial statements: [i] A cheque was written for / 20,000 to MAC GARAGE Limited and was entered into the motor expense account. No other entries were made in the financial records. The cheque was in respect of the balancing payment for the purchase of a new car. A car which has originally cost / 13,000 and which had a net book value of / 6,500 at 1 st January 2016 was traded in as part exchange. Assume no loss or gain was made on the trade-in. [ii] Depreciation on motor vehicles is charged at 25% per annum with a full year s depreciation charged in the year of acquisition and none in the year of disposal. No account was taken of the transactions in note (i) above when calculating the depreciation for the year to December [iii] During the year a new machine was purchased for / 484,000 (which is inclusive of VAT of 21%). CUSACK Limited received a government grant of / 60,000 towards the cost of the new machine. Plant and machinery is depreciated at a rate of 10% per annum including a full year s depreciation in the year of acquisition. No entries were made to record this transaction.

11 QUESTION 5 (cont d) Requirement (a) Prepare the journal entries to show how each of the above items should be dealt with in the final accounts for the year ended 31 st December Narratives for the journals are required. 15 marks (b) Compute the adjusted net profit before taxation for the year ended 31 st December 2016 taking into account the adjustments made at (a) above. The net profit before taxation as per the draft accounts was / 350, marks Presentation 2 marks Total 20 Marks QUESTION 6 The Statement of Financial Position, Statement of Changes in Equity and other relevant information of CLINIC Limited, for the year ended 31 December 2016, are as follows: Statement of Changes in Equity as at 31 December 2016 Ord share capital Share premium Retained profits Total equity / '000 / '000 / '000 / '000 As at 1 January Net profit for year end 31 December Share issue Ordinary dividends ( 60) (60) Page 11 of 26 AFA Sample Paper 2

12 QUESTION 6 (cont d) Statement of Financial Position as at 31 December 2016 / '000 / '000 / '000 / '000 ASSETS Non-current assets 1,440 1,320 Current assets Inventory 1,890 Receivables 2,850 Cash & cash equivalents 30 Total assets 1,530 2, ,770 3,690 6,210 5,010 EQUITY and LIABILITIES Capital and reserves / 1 ordinary shares Preference shares Share premium account 30 - Retained earnings Non-current liabilities Bank loans 2,190 1,800 10% debentures 1, ,330 2,700 Current liabilities Bank overdraft 30 - Current installments due on loans % debentures Trade payables 1, Taxation ,040 1,560 Total equity and liabilities 6,210 5,010 Page 12 of 26 AFA Sample Paper 2

13 QUESTION 6(Cont d) Additional information: (1) On 1 July 2016 CLINIC issued / 1 ordinary shares at / 2 per share. (2) During the year CLINIC sold non-current assets with a net book value of / 90,000 for cash. Included in the Statement of Comprehensive Income is a profit on disposal of / 60,000. (3) Included in trade payables at 31 December 2016 is an amount of / 450,000 in respect of noncurrent assets purchased during the year. (4) The Statement of Comprehensive Income includes the following charges: Dec Dec 2015 (i) Depreciation... / 600,000 / 550,000 (ii) Interest... / 540,000 / 270,000 (iii) Tax... / 30,000 / 60,000 Requirement (a) Prepare a statement of cash flows for CLINIC Limited for the year ended 31 December 2016 in accordance with FRS N. B. You are NOT required to prepare notes to the statement of cash flows. 18 Marks Presentation 2 marks Total 20 Marks Page 13 of 26 AFA Sample Paper 2

14 Advanced Financial Accounting Sample Paper 2 Suggested Solutions NOTE: This sample paper and solution have been prepared to reflect the provisions of FRS 102. Examinees would be at liberty to use the language of either (i) I.A.S. s, or (ii) FRS 102 in answering questions relating to non public companies. Page 14 of 26

15 Solution to question 1 (a) What are Accounting Standards and describe the objectives of these standards. Accounting standards are a set of rules that describe how an item in financial accounting is treated and calculated and how accounts should be prepared and presented. The objective of accounting standards is to regulate the accounting profession and to provide guidance to both accounting practitioners and users of financial information about how contentious and difficult areas should be treated. Accounting standards are issued by a national or international body of the accounting profession and are intended to apply to all financial accounts which are intended to give a true and fair view of the financial position and profit/loss of an entity. Standards are detailed working regulations within the framework of government legislation and they cover areas in which the law is silent. A sub committee of the FRC the Codes and Standards Committee are responsible for Irish and UK GAAP. (b) Standard setting process The standard setting process involves eight steps and incorporates an extensive consultation process from stakeholders. The eight steps are as follows; 1. Initial scoping of the issue being considered. 2. A discussion paper providing a detailed overview of the issue, why a standard is necessary, different potential approaches to dealing with the issue, preliminary views of the FRC and an invitation to comment on the issue. 3. Public consultation. 4. Outreach events to encourage input to the standard setting process including lab activities, case studies and investigations. 5. Exposure Draft 6. The final code or standard 7. Post implementation review 8. Regular reviews. Transparency within the process As can be seen from the above discussion the process through which the standard is developed involves a significant amount of public consultation. This improves transparency in the standard setting process. It is not possible for an accounting standard to be issued without taking on board comments from interested parties. This avoids the situation whereby the process becomes a pure academic exercise and ensures that the practical application is considered, understood and provided for. Page 15 of 26 AFA Sample Paper 2

16 Solution to question 2 (1) B (2) C (see working) (3) D (see working) (4) A (5) C (6) B (7) A (8) D (see working) (9) B (see working) (10) A Workings: (2) 112,000 (19, ,000) 10%(56, ,000) = 50,500 x 40% = 20,200 20, , ,600 = 45,300 (3) 50,500 x 60% = 30, , ,400 = 66,700 (8) Sales 270,000 Gross margin 20% = 54,000 Cost of sales = 270, ,000 = 216, ,000 + closing inventory 44,000 opening inventory 60,000 = purchases 200,000 (9) Opening receivables 45,000 + sales 270,000 = 315, ,000 irrecoverable receivables 14,000 closing receivables 56,000 = sales receipts 245,000 Page 16 of 26 AFA Sample Paper 2

17 Solution to question 3 (a) WIRE Ltd. Statement of Financial Position as at 31 December 2016 Non current assets Property, plant & equipment (Note 1) 2,343 Other financial assets 60 2,403 Current assets Inventories 50 Trade receivables 156 Prepayments (W1) 36 Cash and cash equivalents (W2) Total assets 2,769 Equity and liabilities Capital (W4) 1,800 Reserves 380 Accumulated profits (W3) 64 2,244 Non current liabilities Interest bearing borrowings 200 Current liabilities Trade and other payables (W7) Deferred government grants (Note 2) 92 2,769 Page 17 of 26 AFA Sample Paper 2

18 Solution to question 3(cont d) (b) (1) Property, plant and equipment WIRE LIMITED Notes to the Accounts for the year ended 31 December 2016 Freehold premises Plant & machinery Motor vehicles Computer equip Total Cost at 1st January , ,160 additions disposals (45) (45) at 31st December , ,240 Accumulated depreciation at 1st January charge for year disposals 0 0 (27) 0 (27) at 31st December Net book value at 1st January , ,405 at 31st December , ,343 (2) Deferred Government Grants At 1 st January Received during the year Released to Income during the year (16) At 31 st December Page 18 of 26 AFA Sample Paper 2

19 Solution to question 3(cont d) Workings (1) Prepayments (2) Cash and cash equivalents (3) Accumulated profits Prepayments per trial balance 12 Add prepayments omitted in error Bank balance 66 Short term investment Government grant received Retained profit for year per trial balance 146 Profit on disposal of motor vehicle 6 Depreciation (Note 1) (169) Prepayments 24 Government grants released Retained Profit brought forward 1 Jan Accumulated profits 64 (4) Issued capital Ordinary share capital 1,500 8% preference capital 300 1,800 Page 19 of 26 AFA Sample Paper 2

20 Solution to question 3(cont d) (5) Reserves Share premium 150 General reserves (7) Trade and other payables Trade payables per Trial Balance 85 Corporation tax 98 VAT 32 Accrued expenses (8) Disposal of motor vehicle Cost in Depreciation charge: NBV 18 Proceeds 24 Profit on disposal 6

21 Solution to question 4 To : The Directors From : A. Accountant Date : XX/MM/YY Subject : Accounting treatment of government grants A. Accounting treatment The grants which have been approved for the new production facility fall into two distinct categories: 1. Revenue based grant the grant for training costs 2. Capital based grant the grant for plant The above two grants are treated differently for accounting purposes. FRS 102 provides that: Revenue based grants are to be credited to revenue as other income in the period in which the related revenue expenditure has been incurred. Capital based grants should be credited to revenue over the life of the related non current asset. The amount of the grant should be credited to a deferred grant account, a portion of which is transferred to revenue annually on the same basis as the related asset is depreciated B. Recommendations I recommend that Carter Limited adopt the following accounting treatment; Training grants these grants be credited to revenue as other income. Capital Grants these grants should be credited to a deferred grant account and disclosed separately in the Statement of Financial Position under the heading Government Grants. The grants should be released to the Statement of Comprehensive Income over the life of the related assets using the same rates of depreciation as applied to those assets.. C. Accounting policies The notes to the accounts of CARTER Limited should include the following: (i) Accounting Policy Government Grants Grants receivable on additions to non current assets are credited to the Deferred Government Grant Account and are allocated to the Statement of Comprehensive Income over the estimated useful lives of the assets concerned. Revenue based grants are credited directly to the Statement of Comprehensive Income in the year in which they become due. Page 21 of 26 AFA Sample Paper 2

22 (ii) Note to the Financial Statements Balance at start of year Received during the year Released to the profit and loss account during the year Balance at end of year / XXXX XXXX XXXX XXXXX Solution to question 5 (a) DR CR (i) DR Motor vehicles (SOFP) CR Motor Expenses (SOCI) 20,000 DR Motor Vehicles 6,500 CR Disposal a/c 6,500 DR Disposal a/c 13,000 CR Motor Vehicles 13,000 DR Disposal a/c 6,500 CR Accumulated Depreciation 6,500 (ii) (iii) [Being cheque to purchase motor vehicle debited to motor expense in error Trade in of old motor vehicle not recorded.] DR Depreciation (SOCI) 3,375 CR Accumulated depreciation (SOFP) 3,375 [Being calculation of depreciation charge on additions (6,625 3,250)] DR Plant & machinery 400,000 DR VAT recoverable 84,000 CR Bank 484,000 [Being purchase of new machine] DR Depreciation (SOCI) 40,000 CR Accumulated depreciation (SOFP) 40,000 [Being calculation of depreciation on new machine] DR Bank 60,000 Cr Deferred income (SOFP) 60,000 Page 22 of 26 AFA Sample Paper 2

23 [Being receipt of government grant] DR Deferred income (SOFP) 6,000 CR Grant released (SOCI) 6,000 [Being release of proportion of grant to Statement of Comprehensive Income] Solution to question 5 (cont d) (b) / Net profit before tax 350,000 (i) Motor vehicle expense 20,000 (ii) Motor vehicle depreciation (3,375) (iii) Plant and machinery (40,000) (iii) Grant released 6,000 Revised net profit 332,625 Page 23 of 26 AFA Sample Paper 2

24 Solution to question 6 [a] CLINIC Limited Cash flows from operating activities Statement of Cash Flows for the year ended 31 December 2016 / '000 / '000 Net profit before interest (W1) 660 Adjustments for: Depreciation 600 Profit on disposal (W3) (60) Changes in working capital Increase in inventory (W2) (360) Increase in receivables (W2) (720) Decrease in payables (W2) (240) (780) Cash generated from operations (120) Interest paid (540) Tax paid (W4) (90) Net cash from operating activities Cash flows from investing activities Payment to acquire non-current assets (W5) (360) Receipt from sale of non-current assets (W3) 150 Cash flows from financing Proceeds from share issue (incl share prem) 60 New bank loans (W6) 390 Issue of new debentures (W7) 540 Dividends paid (60) (630) (750) (210) 930 Decrease in cash and cash equivalents (30) Cash and cash equivalents at start of year 30 Cash and cash equivalents at end of year 0 Page 24 of 26 AFA Sample Paper 2

25 Workings (1) Net profit before interest Net profit for year 90 Add: tax 30 Add : interest (2) Changes in working capital Inventory (1,890 1,530) Receivables (2,850 2,130) Trade payables (1, ) 360 increase 720 increase 240 decrease (3) Non current asset disposal NBV 90 Profit on sale Sale proceeds (4) Taxation Opening balance 90 Charge for year 30 Closing balance (30) Amount paid 90 (5) Non current asset acquisition Opening balance 1,320 Less: disposal (90) Depreciation charge (600) 630 Closing balance (1,440) Purchases 810 Amount owing included in trade payables 450 Amount paid 360 Page 25 of 26 AFA Sample Paper 2

26 (6) Bank loans Opening balance (1, ) 2,340 Closing balance (2, ) 2,730 New loans 390 (7) Debentures Opening balance 900 Closing balance (1, ) (1,440) New debentures issued 540 Page 26 of 26 AFA Sample Paper 2