Advanced Financial Accounting 2 nd Year Examination

Transcription

1 Advanced Financial Accounting 2 nd Year Examination May 2017 Solutions, Examiners Comments & Marking Scheme

2 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, Page 2 of 25

3 Accounting Technicians Ireland 2 nd Year Examination: May 2017 Paper: Advanced Financial Accounting Monday 8 May 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. Page 3 of 25

4 SECTION A QUESTION 1 Answer ALL THREE Questions in this Section (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) (ii) (iii) (iv) (v) Understandability Relevance Materiality Reliability Substance over form (b) As per FRS 102 state the definition of assets and liabilities. (8 Marks) (3 Marks) (c) (d) Explain the meaning of recognition and measurement in terms of the preparation of financial statements and discuss their importance. (6 Marks) 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 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 Page 4 of 25

5 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) (b) (c) (d) Cost of installing a new asset Cost of delivery of a new asset Cost of opening ceremony for a new property 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 The lease is for a five year period with annual payments of / 30,000 in arrears, commencing on 31 December 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, Section 24 of FRS 102 deals with government grants. Under this section which of the following statements is correct: (a) (b) (c) (d) The accruals model only applies to capital grants; 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; Under the performance model grants received before the revenue recognition criteria are satisfied are recognised as an asset; 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. Page 5 of 25

6 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 Page 6 of 25

7 QUESTION 3 The following trial balance has been extracted from the books of AMA Ltd. as at 31 December 2016: / / Inventory at 1/01/ ,000 Turnover 1,500,000 Rent received 28,000 Land 330,000 Buildings 950,000 Buildings accumulated depreciation 01/01/ ,000 Vehicles 150,000 Vehicles accumulated depreciation 01/01/ ,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/ ,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 Buildings 20% p.a. reducing balance method 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 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 The corporation tax liability for the year ended 31 December 2016 is estimated to be / 94, Provide for long term loan interest outstanding. Page 7 of 25

8 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 (b) A Statement of Change in Equity for the year ended 31 December (c) A Statement of Financial Position as at 31 December (14 Marks) (3 Marks) (6 Marks) Presentation (2 Marks) Total: 25 Marks Page 8 of 25

9 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) (c) Outline the three criteria that must be met before a provision can be recognised in the financial statements. (3 Marks) 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 (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) Presentation (2 Marks) Total: 20 Marks Page 9 of 25

10 QUESTION 5 (a) Outline the main provisions of the Partnership Act (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 (ii) Prepare the appropriation account for the year ended 31 December (iii) Prepare the current accounts for each partner for the year ended 31 December (3 Marks) (6 Marks) (4 Marks) Presentation (2 Marks) Total: 20 Marks Page 10 of 25

11 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 / 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 ) 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 Dividends 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 No land was purchased or sold during 2016 Page 11 of 25

12 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) Presentation (2 Marks) Total: 20 Marks Page 12 of 25

13 2 nd 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 Average Mark (%) Nos. Attempting General Comments: Statistical Analysis - Overall Pass Rate 69% Average Mark 54% Range of Marks Nos. of Students and over 125 Total No. Sitting Exam 804 Total Absent 99 Total Approved Absent 51 Total No. Applied for Exam 954 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. Page 13 of 25

14 Examiner Comments on Question One 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. 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. Marking Scheme: Up to 2 marks available 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 Marking Scheme: Up to 2 marks available 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. Marking Scheme: Up to 2 marks available 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. Marking Scheme: Up to 2 marks available Total: 8 Marks (any 4 x 2 marks) Page 14 of 25

15 (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. Marking Scheme: Up to 3 marks available 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. Marking Scheme: Up to 3 marks available 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. Marking Scheme: Up to 3 marks available Page 15 of 25

16 Examiner Comments on Question Two This question was generally well answered. The parts that were answered least well were parts 1, 3 and 5. 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, 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, 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) Page 16 of 25

17 Examiner Comments on Question Three 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. 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 Total other comprehensive income 170 Total comprehensive income for year 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/ Equity dividends (88) (88) W9 Revaluation gain Profit for financial year Balance at 31/12/ Page 17 of 25

18 Statement of financial Position of AMA Ltd as at 31/12/2016 Marks Non-current assets / PPE 1,138 W4 Current assets Inventories Trade & other receivables 125 W Total assets 1,314 Equity & liabilities Equity Issued equity share capital 220 Share premium Revaluation reserve 170 Retained earnings Non current liabilities Financial liabilities (long term loan) Deferred income grant Current liabilities Trade & other payables Accruals & provisions Deferred income grant Bank o/d Taxation due Dividends Total equity & liabilities 1,314 Page 18 of 25

19 Working 1: Statement of comprehensive income Revenue Cost of sales Dist costs Adm exp Marks / / / / Per trial balance 1, Opening inventory Purchases Dep of eqp (wk 3) loss on disposal of vehicle 5 W5 Dep of vehicles 16 W6 Dep of buildings (wk 6) Closing inventory (51) W7 Bad debt 5 W8 Reduction in bad debt provision (6) W8 Directors fees , Working 2: Other operating income / Marks Government grant [20/y years] Rent received Working 3 depreciation of equipment 100/5 years 20 Working 4: PPE / Marks Equipment (wk3) [100-20] Vehicles (wk6] [80-16] Building [ ] Land ,138 Working 5: Profit or loss on disposal of vehicle / Marks Cost price 25 Dep to date 2014 [25*20%] (5) [20*20%] (4) 0.5 Carrying value at date of sale 16 Sale proceeds 11 Loss on disposal 5 1 Page 19 of 25

20 Working 6: Depreciation of vehicles / / Marks Cost price [150-25] Dep to date [54-9] (45) 1 80 Charge for year [80*20%] Working 6: Depreciation of buildings Charge for year [950,000*4%] 38 Working 7: closing inventory Per question 56 Marks Item free (5) Working 8 : trade receivables / Marks Per TB 125 Less bad debt (5) Required closing provision 6 1 [120*5%] Opening provision 12 Reduction in allowance Working 9 Equity dividends / Marks Amount paid (TB) Amount proposed [220*5c] 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 Trade receivables (w8) Allowance for receivables (w8) (6) Page 20 of 25

21 Examiner Comments on Question Four 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. Solution 4 (a) (b) Section 21 of FRS 102 defines a provision as a liability of uncertain timing or amount. Marking Scheme: Up to 2 marks available (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. Marking Scheme: Up to 2 marks available (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. Marking Scheme: Up to 2 marks available Page 21 of 25

22 (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) Total: 4 Marks (4 x 1 mark) Presentation Marks (2 marks): Clarity 1 mark Layout 1 mark Examiner Comments on Question Five 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 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) Total: 5 Marks (5 x 1 mark) (b) (i) Capital a/c s Marks Tom Peter Martin Tom Peter Martin Marks O/bal 73,000 82,500 25, Revaluation 20,000 20,000 20, C/bal 93, ,500 45, , ,500 45,000 93, ,500 45,000 Page 22 of 25

23 (ii) Appropriation a/c for the year ended 31 December 2016 / Marks Net profit 210, 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%] Martin [9,700*6%] Salaries Tom (12,000) 0.25 Martin (12,000) 0.25 Interest on drawings Tom [45,000*10%] 4, Peter [36,000*10%] 3, Martin [29,000*10%] 2, ,490 Share of profits Tom 75, Peter 56, Martin 56, ,490 (iii) Current a/c s Marks Tom Peter Martin Tom Peter Martin Marks O/bal 1,800 9,700 O/bal 3, Interest on current Int on capital 3,650 4,125 1, Int on drawings 4,500 3,600 2,900 Int on current a/c Drawings 45,000 36,000 29,000 Salaries 12,000 12, C/bal 39,242 24,945 27,813 Share of 75,000 56,745 56, profits 90,650 64,545 69,995 90,650 64,545 69,995 Presentation Marks (2 marks): Layout 1 mark Structure 1 mark (including Opening & Closing Balance part (b) (iii)) Page 23 of 25

24 Examiner Comments on Question Six 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. Solution 6 Statement of cash-flows of Bennett Ltd for y/e 31/12/2016 Workings Marks / 000 / Cash-flow from operating activities Profit before interest & tax 1,392 As adjusted for Depreciation Profit on sale of plant (288) 0.5 Changes in working capital Decrease in trade receivables Increase in inventories 1 (540) 1 Increase In payables 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 [ ] 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, , ] 1,500 1 Net cash-flows from financing activities Net increase in cash and cash equivalent 1, Cash and cash equivalent at start of period [ ,616] (48) 0.5 Cash and cash equivalent at end of year [2, ] 1, Page 24 of 25

25 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 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 Working 5 Disposal a/c Disposal a/c / 000 / 000 Plant & equipment 300 Bank 588 Profit on disposal (IS) Presentation Marks (2 marks): Layout/Headings 1 mark Presentation 1 mark Page 25 of 25