Advanced Financial Accounting

Advanced Financial Accounting Sample Paper 3 2017 / 2018 Questions & Suggested Solutions Page 1 of 28 Page 1 of 28

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 www.accountingtechniciansireland.ie) 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, 2017. Page 2 of 28

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 solutions have been prepared to reflect the provisions of FRS 102 Page 3 of 28

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 Conceptual Framework for Financial Reporting provides a frame of reference that outlines generally accepted theoretical principles for financial accounting. (a) Explain briefly the purpose of the Framework. 6 marks (b) A friend who has not studied accountancy has read the Conceptual Framework and is confused by some of the terms and definitions discussed within. Prepare a note setting out your understanding of three of the following four terms: i. Going concern ii. Accruals iii. Asset iv. Liability 6 marks (ii) Define Accounting Policies and outline the circumstances under which an accounting policy should be changed. 4 marks Define Accounting Estimates and give examples of three items which are usually the subject of accounting estimates. 4 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. Page 4 of 28

QUESTION 2 (cont d) BACKGROUND INFORMATION TO PARTS [1] [5] The following information relates to ROCK Ltd: / Receivables at 1 st January 2016... 60,000 Receivables at 31 st December 2016... 80,000 Payables at 1 st January 2016... 75,000 Payables at 31 st December 2016... 85,000 Inventory at 1 st January 2016... 140,000 Inventory at 31 st December 2016... 170,000 Sales on credit for the year ended 31 st December 2016... Cash sales for the year ended 31 st December 2016... 1,800,000 300,000 Purchases (all on credit) for the year ended 31 st December 2016... 1,250,000 Bank overdraft at 31 st December 2016... 60,000 Taxation liability at 31 st December 2016... 70,000 Accrued expenses at 31 st December 2016... 25,000 Prepaid expenses at 31 st December 2016... 30,000 [1] The receivable days outstanding at 31 st December 2016 (to the nearest day) was: - (a) (b) (c) (d) 12 days 14 days 16 days 18 days [2] The payables days outstanding at 31 st December 2016 (to the nearest day) was: - (a) (b) (c) (d) 23 days 24 days 25 days 26 days [3] The current ratio at 31 st December 2016 (assuming no other current assets or liabilities), to two decimal points, was: - (a) 1.65 :1 (b) 1.17 :1 (c) 1.04 :1 (d) 0.16 :1 Page 5 of 28

Question 2 cont d [4] The inventory turnover (to two decimal places) for the year ended 31 st December 2016 was: - (a) (b) (c) (d) 8.06 times 7.87 times 7.35 times 1.18 times [5] The gross profit margin for the year ended 31 st December 2016, to one decimal point was: (a) 32.2 % (b) 38.6 % (c) 41.9 % (d) 44.3 % [6] FRS 102 provides that a complete set of Financial Statements comprises the following: (a) (b) (c) (d) A Statement of Comprehensive Income and a Statement of Financial Position. A Statement of Comprehensive Income, a Statement of Financial Position and A statement of Changes in Equity. A Statement of Comprehensive Income, a Statement of Financial Position, a statement of Changes in Equity and A Statement of Cash Flows. A Statement of Comprehensive Income, A Statement of Financial Position, A statement of Changes in Equity and A Statement of Cash Flows, and notes to the Financial Statements. [7] FRS 102 states that a business should prepare its financial statements on the basis that the business is a going concern: - (a) (b) (c) (d) if it is being liquidated if it has ceased trading if the directors have no realistic alternative but to liquidate the entity or to cease trading only if none of the above situations exist [8] Under the provisions of the Companies Acts there must be shown in a note to the accounts: (a) (b) (c) (d) the average number of people employed during the year the number of people employed on the first day of the year the number of people employed on the last day of the year the number of new employees employed during the year Page 6 of 28

Question 2 cont d [9] Partners drawings are: - (a) (b) (c) (d) charged against the partners in their capital accounts charged against the partners in their current accounts credited to the partners in their capital accounts credited to the partners in their current accounts [10] Payments by a lessee in an operating lease are:- (a) (b) (c) (d) charged in the lessee s Statement of Comprehensive Income on the reducing balance basis credited in the lessee s Statement of Comprehensive Income on the reducing balance basis charged in the lessee s Statement of Comprehensive Income on the straight line basis credited in the lessee s Statement of Comprehensive Income on the straight line basis Page 7 of 28

QUESTION 3 CABLE Ltd., is a furniture company with an authorized share capital of / 3,000,000, comprised of 6,000,000 ordinary shares of 50 pence/cent each. The following trial: balance was extracted as at 31 st December 2016 / 000 / 000 Ordinary share capital... 2,200 Share premium account... 180 General reserve... 260 Retained earnings balance at 1 January 2016... 74 8% debenture stock... 250 Leasehold premises at cost... 3,900 Leasehold premises accumulated depreciation at 1 January 2016... 500 Plant and machinery at cost... 820 Plant and machinery accumulated depreciation at 1 January 2016... 320 Motor vehicles at cost... 300 Motor vehicles accumulated depreciation at 1 January 2016... 80 Receivables... 169 Payables... 95 Bank... 120 Sales... 4,500 Sales returns... 79 Opening inventory... 180 Purchases... 2,400 Purchases returns... 160 Administration expenses... 450 Distribution expenses... 340 Bankinterest... 60 Deposit interest received... 35 Debenture interest... 10 Interim ordinary dividend paid... 66... 8,774 8,774 ADDITIONAL INFORMATION (1) Goods purchased on 28 th December 2016 for / 70,000 had not been accounted for or included in the physical stock count at 31 st December 2016. (2) Closing inventory, as per the physical stock count at 31 st December 2016 was / 220,000. (3) Training grants of / 20,000 in respect of training sales staff were due to the company at 31 st December 2016. Page 8 of 28

QUESTION 3(Cont d.) (4) Depreciation is to be charged as follows: Leasehold premises... 2% on cost Plant and machinery... 10% on cost Motor vehicles... 20% on cost Depreciation on leasehold premises and plant and machinery should be included as part of administration expenses and depreciation of motor vehicles should be included as part of distribution expenses. (5) The charge for corporation tax for the year ended 31 st December 2016 is estimated at 50% of the profit before tax. (6) A final dividend of 5 pence/cent per share was paid to the ordinary shareholders on 31 December 2016 however this payment has not yet been recorded in the accounts. (7) Half year debenture interest to be provided for. Requirement (a) Prepare, in accordance with FRS 102, the Statement of Comprehensive Income of CABLE 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 Financial Position or notes to the accounts. You are required to submit workings to show the make-up of the figures in the Statement of Comprehensive Income. 20 Marks (b) Prepare a Statement of Changes in Equity for the year ended 31 December 2016. 3 Marks Presentation: 2 marks Total: 25 Marks Page 9 of 28

SECTION B Answer TWO of the THREE questions in this Section QUESTION 4 Geoff, Henry and Ian are in partnership sharing profits and losses in the ratio 4:2:2. The partners receive a salary of / 5,000, / 6,000 and / 7,000 each and are entitled to interest on the balance on their capital accounts at 5% per annum. Ian is entitled to a guaranteed share of profits, in addition to his salary and interest on capital, of / 6,000 any deficiency to be borne by Geoff and Henry equally. The following is the draft balance sheet of the partnership as at 31 December 2016 (before the profit for the year has been divided between the partners). DRAFT Statement of Financial Position as at 31 st DECEMBER 2016 Cost Accumulated Net Book Depreciation Amount / / / Non-current Assets Premises... 250,000 50,000 200,000 Plant and machinery... 130,000 65,000 65,000 Furniture and fittings... 25,000 5,000 20,000 405,000 120,000 285,000 Current Assets Inventory... 30,000 Trade receivables... 26,000 Bank... 12,000 68,000... 353,000 Partners Capital Accounts Geoff... Henry... 80,000 70,000 Ian... Partners Current Accounts 70,000 220,000 Geoff... 16,000 Henry... (20,000) Ian... 10,000 6,000 Profit for the year (not yet divided between the partners) 88,000 Current liabilities Payables... 26,000 Loan from Simon... 13,000 39,000 Page 10 of 28

QUESTION 4 (Cont d.) Adjustment is required in respect of the following items: (1) Depreciation for the year has not been provided. It should be provided for as follows: Premises... / 5,000 Plant and machinery... / 26,000 Furniture and fittings... / 5,000 (2) Wages and salaries of / 14,000 have not been provided for at the year end. (3) Rent amounting to / 7,000 has been prepaid at the year end. Requirement You are required to prepare: (a) a statement setting out the adjustments required to the profit for the year arising out of items (1) to (3) above; 3 Marks (b) (c) a statement setting out the appropriation of the adjusted profit between the partners; the current accounts of the partners; 3 Marks 4 Marks (d) the revised balance sheet after dealing with parts (a) to (c) above. 8 Marks Presentation: 2 marks Total: 20 Marks Page 11 of 28

QUESTION 5 JEWEL Limited, a car rental company, had revenue of / 4,500,000 and made a net profit before taxation of / 350,000 for the year ended 31 st December 2016, as per the draft accounts. During a review of the draft accounts you ascertain the following: (1) A customer who owed the company / 80,000 at 31 st December 2016 has gone into receivership in January 2017 and is unlikely to be able to pay any part of the debt. (2) A government grant of / 50,000 to help meet the cost of wages and salaries to train staff was treated as deferred income at 31 st December 2016. (3) Inventory which cost / 175,000 was found to be damaged and it is estimated that it has a net realisable value of / 125,000. (4) On 6 th January 2017 goods costing / 60,000 were received which had been ordered from a supplier on 20 th December 2016. (5) A customer of the company is suing the company for / 600,000 damages on the basis that a car which the customer rented from the company in December 2016 was mechanically deficient and was the cause of the customer being involved in an accident which resulted in the customer being badly injured. The company s lawyers are unsure as to the company liability. The court case will not take place until after the accounts are approved by the directors. (6) Wages due to casual workers, who were recruited for the busy Christmas period, of / 17,000, were due at 31 st December 2016 and not yet accounted for. 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 2016. You should use your understanding of FRS 102 in dealing with each item. 14 marks (b) Compute the adjusted net profit before taxation for the year ended 31 December 2016 taking into account the adjustments made at [a] above. 4 marks Presentation: 2 marks Total: 20 Marks Page 12 of 28

QUESTION 6 The Statement of Comprehensive Income of OLIVE Ltd., for the year ended 31 st December 2016 and the Statement of Financial Position as at 31 st December 2016 (with comparative figures as at 31 st December 2015) are as follows: Statement of Comprehensive Income for the year ended 31 st December 2016 / 000 / 000 Revenue... 5,100 Less: Cost of goods sold... 3,300 Gross Profit... 1,800 Government grant... 10 Less: Expenses Loss on disposal of Property Plant and Equipment... 10 Depreciation... 120 Other administration expenses... 440 Distribution expenses... 390 (960) Profit from Operations... 850 Debenture interest paid... (60) Deposit interest received... 20 (40) Profit before tax... 810 Taxation On profits for the year... (320) Underprovided in previous years... (80) (400) Total comprehensive income for the year 410 Page 13 of 28

Question 6 cont d Statement of Financial Position as at 31 ST DECEMBER 2016 2015 / 000 / 000 / 000 / 000 Assets Non current assets Property, plant and equipment... 1,880 1,480 Current assets Inventories... 160 304 Receivables... 692 520 Bank... 596 480 1,448 1,304 Total assets 3,328 2,784 Equity and Liabilities Capital and reserves Ordinary share capital... 1,100 1,000 Share premium account 100 Retained profits 970 720 2,170 1,720 Non current liabilities Debenture stock... 350 200 Current liabilities Payables... 448 384 Taxation... 320 480 Deferred income (govt grant)... 40 808 864 Total equity and liabilities 3,328 2,784 NOTES to the accounts: (1) The profit on ordinary activities before taxation has been arrived at after charging: Auditors remuneration... 24 Directors remuneration... 80 Depreciation... 120 Page 14 of 28

(2) Property plant and equipment: During the year ended 31 st December 2016, OLIVE Ltd., sold for / 40,000 an asset which cost it / 120,000 in 2013 and which had been depreciated by / 70,000 at the date of sale. There were no other sales of property plant and equipment during the year. (3) A government grant of / 50,000 relating to plant and equipment purchased during the year was received. (4) Dividends paid during the year amounted to / 160,000. Requirement Prepare a Statement of Cash Flow for OLIVE Ltd., for the year ended 31 st December 2016, in accordance with FRS 102. 18 marks Presentation: 2 marks Total: 20 Marks Page 15 of 28

Accounting Financial Accounting Sample Paper 3 Suggested Solutions NOTE: This sample paper and solutions have been prepared to reflect the provisions of FRS 100 FRS 102 Page 16 of 28

Solution to question 1 (i) (a) (b) Definitions The FRC developed the Conceptual Framework to provide guidance for the application of generally accepted accounting principles to financial transactions. The principles of the framework form the basis for the development of new accounting standards and the assessment and revision where necessary of existing ones. The Framework is not an accounting standard however new standards issued following the publication of the Framework must be in line with the principles of the Framework. Going forward the incidents of conflict between the Framework and accounting standards will reduce thus leading to increased harmonisation in financial accounting regulations. However as the Framework is not an accounting standard it cannot override the principles of an existing accounting standard, where a conflict exists the principles as laid out in the standard must be complied with. The framework also provides very important definitions which were not previously defined, including the definitions of such frequently used terms such as asset and liability. This eliminates the need to provide such definitions in each standard thereby decreasing the time it takes to develop and publish new standards. Overall, the Framework promotes a more consistent regulatory environment which should help not only standard setting bodies but also preparers of financial statements and users of such financial information. Going concern Financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Foreseeable future is considered to be twelve months from the date the financial statements are signed. In the event that management decide that it is no longer appropriate to prepare the financial statements on a going concern basis this must be disclosed. Accruals Financial statements, with the exception of the cash flow statement, are prepared on the accruals basis of accounting where transactions are recognised in the period in which they occur (are earned or accrued) irrespective of when the cash flow arising from these transactions occurs. Asset 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. Future economic benefits represent the potential to contribute to the cash flow of the entity. Examples of assets include premises, equipment, receivables. Page 17 of 28

Liability A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity. Examples of liabilities include payables, finance lease obligations, accruals. (ii) Accounting Policies FRS 102 defines Accounting Policies as the specific principles, bases, conventions, rules and practices applied by an entity in preparing financial statements. An entity should change an accounting policy only if the change: is required by a Standard or an Interpretation, or results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance or cash flows. Accounting Estimates Accounting estimates involve judgements on the uncertainties inherent in business activities which cannot be measured with precision but only estimated. Examples of items may which require accounting estimates are: Provision for bad and doubtful debts Inventory obsolescence Useful life of depreciable assets Page 18 of 28

Solution to question 2 (1) C (80,000 *365 / 1,800,0000) (2) C (85,000 * 365 / 1,250,000) (3) B (170,000 +80,000+30,000)/(85,000+60,000+70,000+25,000) (4) B (140,000 + 1,250,000 170,000) / ((140,000 + 170,000) /2) (5) C (2,100,000 (140,000 + 1250,000 170,000) = 880,000 *100/210,000 (6) D (7) D (8) A (9) B (10) C Page 19 of 28

Solution to question 3 Cable Ltd. Statement of Comprehensive Income for the year ended 31 December 2016 / 000 Sales Revenue (W.1) 4,421 Cost of sales (W.2) 2,200 Gross profit 2,221 Other Income 20 Distribution costs (W.3) (400) Administrative expenses (W.4) (610) 1,231 Interest received 35 Interest paid (W.5) (80) Profit before tax 1,186 Tax expense (593) Profit on ordinary activities after tax 593 CABLE Limited Statement of Changes in Equity for the year ended 31 December 2016 Share Capita Share Premiu Retained earnings Genera l Total / '000 / '000 / '000 / '000 / '000 As at 1 January 2016 2,200 180 74 260 2,714 Profit for the year 593 593 Ordinary dividends (w.6) (286) (286) 2,200 180 381 260 3,021 Page 20 of 28

Solution to question 3(cont d) Workings (1) Sales revenue / 000 / 000 Sales per T/B 4,500 Less: sales returns 79 4,421 (2) Cost of sales Opening inventory 180 Purchases 2,400 Less : purchases returns (160) 2,240 Add : goods purchased on 28/12 70 2,310 2,490 Less : Closing Inventory Per physical count (220) Add : not accounted for (70) (290) 2,200 (3) Distribution expenses Per T/B Depreciation : Motor Veh. 60 400 (4) Administrative expenses Per T/B 450 Add : Depreciation : Premises 78 Plant and Mach. 82 (5) Interest paid 610 Bank overdraft interest 60 Debenture interest Paid 10 Due 10 20 80 Solution to question 3(cont d) Page 21 of 28 AFA Sample Paper 3

(6) Dividend / 000 Interim dividend per trial balance 66 Final dividend paid 220 Total dividend 286 (7) Other Income Training Grant receivable 20 Page 22 of 28 AFA Sample Paper 3

Solution to question 4 (a) Statement of adjusted profit for the year ended 31 December 2016 / / Net profit as per draft accounts 88,000 (1) Depreciation: Leasehold Premises 5,000 Plant and Machinery 26,000 Furniture & Fittings 5,000 (36,000) (2) Wages owing (14,000) (3) Rent prepaid 7,000 Adjusted net profit 45,000 (b) Appropriation account for the year ended 31 December 2016 Net profit 45,000 Less: Partner s salaries Geoff 5,000 Henry 6,000 Ian 7,000 (18,000) Interest on capital Geoff 4,000 Henry 3,500 Ian 3,500 (11,000) Appropriated as follows: Geoff 8,000 Less: to meet guarantee (1,000) Henry 4,000 Less: to meet guarantee (1,000) Ian 4,000 Add: to meet guarantee 2,000 16,000 7,000 3,000 6,000 16,000 Page 23 of 28 AFA Sample Paper 3

Partners Current Accounts Geoff Henry Ian Geoff Henry Ian Balance b/d 20,000 Bal b/d 16,000 10,000 Salaries 5,000 6,000 7,000 Interest on capital 4,000 3,500 3,500 Share of profits 7,000 3,000 6,000 Balance c/d 32,000 26,500 Balance c/d 7,500 32,000 20,000 26,500 32,000 20,000 26,500 Balance b/d 7,500 Balance b/d 32,000 26,500 Solution to Q4 continued overleaf Page 24 of 28 AFA Sample Paper 3

(d) Statement of Financial Position as at 31 December 2016 Cost Accumulated NBV Depreciation / / / Non-current assets Leasehold Premises 250,000 55,000 195,000 Plant and machinery 130,000 91,000 39,000 Furniture & Fittings 25,000 10,000 15,000 405,000 156,000 249,000 Current Assets Inventory 30,000 Receivables 26,000 Prepaid rent 7,000 Bank 12,000 75,000 324,000 Partners capital accounts Geoff 80,000 Henry Ian 70,000 70,000 220,000 Partners current accounts Geoff 32,000 Henry Ian (7,500) 26,500 51,000 Current liabilities Payables 26,000 Loan from Simon Accrued wages and salaries 13,000 14,000 53,000 324,000 Page 25 of 28 AFA Sample Paper 3

Solution to question 5 (a) Journal Dr. Cr. / / (1) Irrecoverable Receivable a/c (SOCI) 80,000 Receivable(SOFP) 80,000 Being write off of an irrecoverable receivable (2) Deferred Income (SOFP) 50,000 Other Income (SOCI) 50,000 Being correction of mis posting; Revenue grant posted in error to Deferred Grants (3) Inventory (SOCI) 50,000 Inventory ( SOFP ) 50,000 Being reduction of inventory from cost to NRV (4) No adjustment ; a non adjusting event as per FRS 102 (5) Contingent liability, a possible but uncertain obligation, no provision required as per FRS102. Show as a note to the accounts. (6) Wages expense (SOCI) 17,000 Accrued expense (SOFP) 17,000 (Accounting for wages accrued due at year end not provided for) (b) Adjusted net profit before tax / / Profit before taxation per draft accounts 350,000 Adjustments : (1) Irrecoverable Receivable (80,000) (2) Training grant 50,000 (3) Inventory write off (50,000) (6) Wages expense (17,000) (97,000) Adjusted net profit 253,000 Page 26 of 28 AFA Sample Paper 3

Solution to question 6 OLIVE Ltd., Statement of Cash Flow for the year ended 31 st December 2016 Cash flow from operating activities: / 000 / 000 Profit on ordinary activities before interest 850 Adjustment for: Government grant... (10) Depreciation... 120 Loss on disposal of property plant and equipment... 10 120 970 Operating profit from working capital changes: Decrease in inventories... 144 Increase in receivables... (172) 36 Increase in payables... 64 Cash generated from operations... 1,006 Interest paid... (60) Income tax paid (w.1)... (560) Net cash flow from operating activities... 386 Cash flow from investing activities: Purchases of property plant and equipment (w.2)... (570) Proceeds of sale of property, plant and equipment... 40 Interest received... 20 Net cash used in investing activities... (510) (124) Cash flow from financing activities: Proceeds from issue of shares (100+100)... 200 Government grant received... 50 Proceeds from long term borrowing... 150 Dividends paid... (160) 240 Net increase in cash and cash equivalents... 116 Cash and cash equivalents at beginning of year... 480 Cash and cash equivalents at end of year... 596 Page 27 of 28 AFA Sample Paper 3

Solution to question 6 (Cont d.) WORKINGS (1) Income tax paid / 000 Due at 1 st January 2016... 480 Charge for year... 400 880 Due at 31 st December 2016... 320 Income tax paid... 560 (2) Purchase of property plant and equipment / 000 Net book amount at 1 st January 2016... 1,480 Less: net book amount of sale During year ( / 120,000 / 70,000)... (50) 1430 Depreciation charge for year... (120) 1310 Net book amount at 31 st December 2016... 1880 Purchases during year 570 Page 28 of 28 AFA Sample Paper 3