FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2014 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: Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss and Other Comprehensive Income By Function, and Statements of Financial Position. 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 your 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 attempted. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2014 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) Write a briefing note on any TWO of the following: The International Financial Reporting Standards (IFRS) Foundation; The International Accounting Standards Board (IASB); The Monitoring Board; The IFRS Advisory Council; and The IFRS Interpretations Committee. (10 Marks) (b) Mocomba Limited is a company involved in the manufacture of packaging for the food industry. The following is the Trial Balance for Mocomba Limited extracted on 31 December 2013: Debit Credit Accumulated Depreciation - Office Equipment - 1 January 2013 40,000 Accumulated Depreciation - Plant & Equipment - 1 January 2013 88,000 Accumulated Depreciation - Premises - 1 January 2013 345,000 Administrative Expenses 148,600 Allowance for Doubtful Debts 7,000 Bank 403,400 Distribution Costs 214,000 Government Grants 100,000 Inventory at 1January 2013 225,100 Issued Share Capital 160,000 Long-Term Loan 240,000 Office Equipment at Cost at 1January 2013 120,000 Plant & Equipment at Cost at 1 January 2013 440,000 Premises at Cost at 1 January 2013 800,000 Purchases 647,000 Retained Earnings at 1 January 2013 896,000 Revaluation Surplus 20,000 Revenue 1,140,000 Trade Payables 86,100 Trade Receivables 124,000 3,122,100 3,122,100 The following information based on your investigations, has also come to your attention, which unless specified, have not been included in the Trial balance above: (i) Inventory at 31 December 2013 is 243,510. This includes 2,410 for items accidentally destroyed on 3 January 2014 and 1,540 which relates to the cost of damaged inventory which can be reworked at a cost of 200 and which can then be sold for 1,230. Page1
(ii) Depreciation is to be charged as follows: Plant & Equipment Office Equipment 10% Straight Line on Cost 20% Reducing Balance Depreciation for the year is charged in full in the year of sale and none in the year of purchase. (iii) (iv) (v) Plant & Equipment expenditure of 90,000 and an extension to the Premises costing 250,000 were incurred and paid for in late December 2013. The premises was revalued to 400,000 on 1 January 2013. The useful life of the revalued premises after revaluation is 40 years and the residual value of the buildings is expected to be zero. During the year the company received a government grant towards the cost of the extension which is recorded in the trial balance. Mocomba Limited intends to amortise the grant at the same rate with which it depreciates its premises. (vi) Tax is estimated at 30,000 for the 2013 year. A tax payment was made on 31 December 2013 of 33,000. (vii) (viii) A customer whose debt had been written off in 2011 contacted Mocomba Limited in November 2013 and confirmed that it would pay 80% of it s debt as full and final payment in December 2013. The previous amount written off was 4,000. The customer paid 80% of it s original debt on 31 December 2013 by cheque. Mocomba Limited has decided that the Allowance for Doubtful Debts should be set at 6% of receivables. (ix) Rent prepaid during the period was 10,000 and amounts outstanding at the year-end amounted to 2,400 and 760 for Telephone and Light & Heat respectively. (x) Expenses are to be allocated evenly between Distribution Costs and Administrative Expenses. REQUIREMENT: Prepare, in a form suitable for publication, a Statement of Profit or Loss and Other Comprehensive Income and Statement of Financial Position for Mocomba Limited for the financial year-ended 31 December 2013. Note: All workings should be shown. (30 Marks) [Total: 40 Marks] Page 2
2. The secretary of the local Mahey Football Club, of which you are a member, has approached you for help in preparing the club s accounts for the year-ending 31 December 2013. You agree to assist and request information on the opening position of the club. The secretary was able to supply you with the relevant information about the non-current and current assets. However, the second half of the statement of financial position was missing as the page had got wet and the figures were smudged and unreadable. On further inquiry, he was able to confirm that the only amounts owed by the club at 31 December 2012 were to the local restaurant for sandwiches which cost 296, an interest only building loan of 80,000 and amounts owing to some coaches of 235. The opening assets of the club as at 1 January 2013 are as follows: Building & Pitch (Cost) 180,000 Bar Fixtures & Fittings (Cost - 24,000) 18,000 Bar Inventory 2,400 Bank 4,820 Cash in Hand 1,246 Subscriptions 200 The secretary also provided you with a copy book which was used to record the receipts and payments, the details of which are as follows: Receipts Sponsorship 3,640 Old Clothes/Scrap Iron Sale 11,440 Table Quiz 570 Annual Subscriptions 2,410 Sale of Bar Fixtures & Fittings (1April 2013) 1,450 Bar Sales 44,310 Lotto Sales 6,124 Payments Coaches 1,270 Table Quiz Expenses 125 Bar Purchases 21,610 Printing of Lotto Cards 840 Lotto Prizes 1,100 Insurance 5,600 Bar Wages 5,740 Repainting of Bar 2,120 Light & Heat 2,400 The secretary has also outlined the following to you to help prepare the accounts: (a) The insurance and light & heat is split 50:50 between the bar and the football club. (b) Bar Fixtures & Fittings are to be depreciated at 20% straight line. (c) The old fixtures & fittings cost 5,000 and were purchased on 1 July 2010. (d) The club depreciates non-current assets from date of acquisition to date of sale. (e) At the year-end, there were subscriptions due to the club of 180 and 19 members had prepaid their annual subscriptions of 20 each. (f) There was 990 owing to the bar supplier at the year-end. (g) All receipts except the income from the lotto were lodged to the bank account. (h) All payments made by the club were paid by cheque with the exception of payments in relation to the lotto. (i) The interest on the loan is 5% and 6 months of the loan interest was unpaid at the year-end. (j) The closing bar inventory amounted to 1,900. Page 3
REQUIREMENT: Prepare: (a) A Bar Trading Account for Mahey Football Club for the year-ending 31 December 2013; (5 Marks) (b) An Income & Expenditure Account for Mahey Football Club for the year-ending 31 December 2013; and (6 Marks) (c) A Statement of Financial Position for Mahey Football Club as at 31 December 2013. (9 Marks) [Total: 20 Marks] Page 4
3. (a) The following are defined in IAS 10 Events after the Reporting Period : (i) Events after the reporting period. (2 Marks) (ii) Adjusting events. (1 Mark) (iii) Non-Adjusting events (1 Mark) REQUIREMENT: Describe what is meant by (i) to (iii) above. (b) The management of a company completed draft financial statements for the year-ended 31 December 2013 on 15 January 2014. On the 19 January 2014, the board of directors reviewed the financial statements. The board had no issues with the financial statements and directed the management of the company to allow the financial statements to be issued to relevant and interested parties. The company announced its results on 20 January 2014. The financial statements were made available to shareholders and others on 1 February 2014. The shareholders approved the financial statements at the company s annual meeting on 15 February 2014. The approved financial statements were then filed with the companies registration office on 1 March 2014. REQUIREMENT: Outline and explain which date the financial statements are authorised for issue. (2 Marks) (c) In relation to the information provided in part (b), management of the company decided to declare a dividend on 17 January 2014. REQUIREMENT: Should the company record the dividend in the financial statements for the year-ended 31 December 2013? Justify your answer. (3 Marks) (d) The following issues have arisen in Ding Dong Limited, a pharmaceutical company, whose financial year-end is 31 December: (i) (ii) (iii) (iv) On 20 December 2013, Ding Dong Limited was involved in a court case with a customer who sued the company for delivering products where there was a dispute over the exact ingredients included in the products manufactured by Ding Dong. These products were delivered to the customer in October 2013. The details of the case were heard by 22 December but the judge decided to reserve his judgment until 8 January 2014. On 8 January 2014, the judge ruled in favour of the customer, awarding it damages of 100,000. Ding Dong Limited has an investment worth 1,000,000 in its financial statements at 31 December 2013. Due to the continuing recession, the investment reduced in value to 900,000 by 15 January 2014. On 8 January 2014, one of the accountants left the company suddenly. On further investigation, Ding Dong Limited realised that this employee had been paying himself money from the bank account in relation to false rental invoices. The amount of the overpayment was found to be 86,000. With the help of the police, the accountant was tracked down and repaid all of the money on 18 January 2014. On 10 January 2014, Ding Dong Limited sold some inventory for 80,000. This inventory had been included in the year-end inventory count at cost of 100,000. REQUIREMENT: Prepare a briefing note for management, in which you outline the proper accounting treatment of each of the above issues (i) to (iv), so as to ensure that the financial statements are prepared in accordance with IFRS. (11 Marks) Page 5 [Total: 20 Marks]
4. When Joe Kyle, a sole trader, whose financial year-end is at 31 December each year, extracted a trial balance on 31 December 2013, he found that the debit balances exceeding the credit balances by 5,038. The difference was recorded in a suspense account. The following differences arose on investigation: 1. Purchase returns of 189 were included in sales returns. 2. In writing up his cheque journal, Joe realised that he skipped two cheques for 125 and 249 relating to subscriptions and telephone costs respectively. 3. A journal in relation to rent prepaid of 500 was debited to suspense and credited to the rent accrual account by mistake. 4. A car worth 4,600 was introduced into his business and the only entries made were a debit to the equipment account as well as accounting for the depreciation. Cars are depreciated at the rate of 12.5% reducing balance, whereas equipment is depreciated at the rate of 10% per annum straight line. Mr. Kyle s depreciation policy is to fully depreciate in year of purchase. 5. A bill for light and heat of 240 was found. It has not been processed in the accounts. Joe s light and heat bill for each month is automatically paid by standing order from his bank account on the last day of every month. 6. Joe accounted for and sold goods on credit amounting to 1,240 on a sale or return basis, with the last date allowed for return of these goods being 1 February 2014. These goods had cost Joe 900. 7. A decrease in the allowance for doubtful debts of 800 was debited to the bad debt recovered account and credited to the suspense account. REQUIREMENT: (a) (b) Prepare journal entries for Mr. Joe Kyle to record and/or correct, as appropriate, relevant transactions from the above information for the financial statements for the year-ending 31 December 2013. (14 Marks) Provide an example and explanation of any three of the following typical errors found in preparing financial statements: (i) (ii) (iii) (iv) Errors of Transposition; Errors of Omission; Errors of Principle; Errors of Commission; (v) Compensating Errors. (6 Marks) [Total: 20 Marks] Page 6
5. Sales Limited is involved in the retail industry and its financial statements are as follows: Sales Limited Statement of Financial Position as at 31 December 2013 2013 2012 000 000 Non-Current Assets Property, Plant & Equipment 1,940 1,285 Total Non-Current Assets 1,940 1,285 Current Assets Inventories 327 371 Trade Receivables 189 203 Cash & Cash Equivalents 44 36 Total Current Assets 560 610 Total Assets 2,500 1,895 Equity & Liabilities Equity Share Capital 800 600 Share Premium 100 60 Retained Earnings 673 413 Revaluation Surplus 130 - Total Equity 1,703 1,073 Non-Current Liabilities Long Term Loan 420 500 Total Non-Current Liabilities 420 500 Current Liabilities Trade Payables 242 212 Bank Overdraft 95 80 Current Tax Payables 40 30 Total Current Liabilities 377 322 Total Equity & Liabilities 2,500 1,895 Sales Limited Statement of Profit or Loss & Other Comprehensive Income for the year-ended 31 December 2013 000 Revenue 7,800 Cost of Sales ( 6,900) Gross Profit 900 Distribution Costs (342) Administration Expenses (168) Finance Costs (30) Profit before Tax 360 Income Tax Expense (80) Profit for the Year 280 Other Comprehensive Income Gains on Property Revaluations 130 Other Comprehensive Income for the year, net of tax 130 Total Comprehensive Income for the year, net of tax 410 Page 7
Notes: (i) Property, Plant & Equipment with a carrying value of 200,000 was sold for 160,000. This asset had originally cost 320,000. (ii) Depreciation of Property, Plant & Equipment during the year amounted to 240,000. (iii) Dividends paid during the year amounted to 20,000 and are reported in the Statement of Changes in Equity. REQUIREMENT: Prepare a Statement of Cash Flows for the year-ended 31 December 2013 for Sales Limited in accordance with IAS 7 Statement of Cash Flows. [Total: 20 Marks] END OF PAPER Page 8
SUGGESTED SOLUTIONS SOLUTION 1 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2014 (a) Write a briefing note on any TWO (2) of the following; Monitoring Board; International Financial Reporting Standards (IFRS) Foundation; International Accounting Standards Board (IASB); IFRS Advisory; and IFRS Interpretations Committee Monitoring Board At the Trustees' meeting in New Delhi, India, in January 2009, a decision was made to enhance the IFRS's public accountability by establishing a link to a monitoring board of public authorities. The primary purpose of the IFRS Foundation Monitoring Board is to serve as a mechanism for formal interaction between capital markets authorities and the IFRS Foundation. The IFRS Foundation monitoring board helps to ensure the public accountability of the IFRS Foundation by monitoring and reinforcing the public interest oversight function of the IFRS Foundation, as well as to promote the continued development of IFRS as a high-quality set of global accounting standards. The members of the Monitoring Board are currently the Emerging Markets and Technical Committees of the International Organization of Securities Commissions (IOSCO), the European Commission, the Financial Services Agency of Japan (JFSA), and the US Securities and Exchange Commission (SEC). The Basel Committee on Banking Supervision participates in the Monitoring Board as an observer. Through the Monitoring Board, securities regulators that allow or require the use of IFRS in their jurisdictions will be able to more effectively carry out their mandates regarding investor protection, market integrity, and capital formation. The Monitoring Board's main responsibilities are to ensure that the Trustees of the IFRS Foundation continue to discharge their duties as defined by the IFRS Foundation Constitution, as well as approving the appointment or reappointment of Trustees. It is envisaged that the Monitoring Board will meet the Trustees at least once a year, or more often if appropriate. IFRS Foundation The IFRS Foundation is the oversight body of the various boards/committees such as the IASB, IFRS Interpretations Committee etc. It is an independent, not-for-profit private sector organisation working in the public interest. Its principal objectives are: To develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB; To promote the use and rigorous application of those standards; To take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and To promote and facilitate adoption of IFRSs, being the standards and interpretations issued by the IASB, through the convergence of national accounting standards and IFRSs. The governance and oversight of the activities undertaken by the IFRS Foundation and its standard-setting body rests with its twenty trustees, who are also responsible for safeguarding the independence of the IASB, appointments to the various boards and committees and ensuring the financing of the organisation. The Trustees are publicly accountable to the Monitoring Board of public authorities. The Trustees promote the work of the International Accounting Standards Board (IASB) and the rigorous application of IFRSs but are not involved in any technical matters relating to the standards. This responsibility rests solely with the IASB. Trustees are appointed for a renewable term of three years. Each Trustee is expected to have an understanding of, and be sensitive to, international issues relevant to the success of an international organisation responsible for the development of high quality global accounting standards for use in the world's capital markets and by Page 9
other users. Six of the Trustees must be selected from the Asia/Oceania region, six from Europe, six from North America, one from Africa, one from South America and two from the rest of the world. The goal of the IFRS Foundation to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards is achieved through the following: An independent standard-setting board (IASB), overseen by a geographically and professionally diverse body of trustees, publicly accountable to a monitoring board of public capital market authorities, Supported by an external IFRS Advisory Council and an IFRS Interpretations Committee to offer guidance where divergence in practice occurs, A thorough, open, participatory and transparent due process in arriving at financial reporting standards, Engagement with investors, regulators, business leaders and the global accountancy profession at every stage of the process, Collaborative efforts with the worldwide standard-setting community. The IASB (International Accounting Standards Board) The IASB which was set up in April 2001 is the independent standard-setting body of the IFRS Foundation. It replaced the International Accounting Standards Committee (IASC) which had been setting international accounting standards (IASs) since 1973. At the time of its initiation, the IASB adopted in full all existing IASs and decided that all new standards they it developed would be called International Financial Reporting Standards (IFRSs). Its members (currently 16 full-time members) are responsible for the development and publication of IFRSs, including the IFRS for SMEs and for approving Interpretations of IFRSs as developed by the IFRS Interpretations Committee (formerly called the IFRIC). All meetings of the IASB are held in public and webcast. In fulfilling its standard-setting duties the IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as discussion papers and exposure drafts, for public comment is an important component. The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession. The IFRS Advisory Council The IFRS Advisory Council is the formal advisory body to the IASB and the Trustees of the IFRS Foundation. It consists of a wide range of representatives from groups that are affected by and interested in the IASB's work. These include investors, financial analysts and other users of financial statements, as well as preparers, academics, auditors, regulators, professional accounting bodies and standard-setters. Members of the Advisory Council are appointed by the Trustees. The Advisory Council normally meets three times a year for a period of two days, in London. The Chairman of the IASB, the Director of Technical Activities, the Director of Research, the Director of Implementation Activities, and IASB members and staff who are responsible for items on the Advisory Council meeting agenda are normally required to attend the meetings. The IFRS Interpretations Committee The IFRS Interpretations Committee is the interpretative body of the IASB. The Interpretations Committee comprises 14 voting members appointed by the Trustees and drawn from a variety of countries and professional backgrounds. The mandate of the Interpretations Committee is to review on a timely basis widespread accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance (IFRICs) on those issues. Interpretation Committee meetings are open to the public and webcast. In developing interpretations, the Interpretations Committee works closely with similar national committees and follows a transparent, thorough and open due process. (10 Marks) Page 10
(b) Mocomba Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2013 Revenue 1,140,000 0.25 Cost of Sales W2-631,510 Gross Profit 508,490 0.25 Amortisation of Grants W1.v - 2,500 0.25 Bad Debt Recovered W1.vii - 3,200 0.25 Distribution Costs W2 245,800 Administrative Expenses W2 180,400 Other Expenses - Revaluation Loss W3 35,000 455,500 0.50 Profit/(Loss) before Tax 52,990 0.25 Income Tax Expense W1.vi - 30,000 0.25 PROFIT/(LOSS) FOR THE YEAR 22,990 0.25 Other Comprehensive Income Revaluation Loss W3-20,000 0.50 Other Comprehensive Income for the year, net of tax - 20,000 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,990 0.25 Oaksy Limited Statement of Financial Position as at 31st December 2012 Non-Current Assets Property, Plant & Equipment W3 1,102,000 0.25 Total Non-Current Assets 1,102,000 0.25 Current Assets Inventories W1.i 240,590 0.25 Trade Receivables W1.viii 116,560 0.25 Prepayments W1.ix 10,000 0.25 Other Receivables - Income Tax W1.v - 30,000 33,000 3,000 0.25 Cash & Cash Equivalents TB+W1.iii+W1.vi+W1.vii 403,400-33,000 3,200-340,000 33,600 0.25 Total Current Assets 403,750 0.25 TOTAL ASSETS 1,505,750 0.25 Equity & Liabilities Equity Share Capital 160,000 0.25 Retained Earnings W1.ix + W1.viii 896,000 22,990 918,990 0.25 Revaluation Surplus W3 20,000-20,000-0.25 Total Equity 1,078,990 0.25 Non-Current Liabilities Long-term Loan 240,000 0.25 Grants TB + W1.v 100,000-2,500 97,500 0.50 Total Non-Current Liabilities 337,500 Current Liabilities Trade Payables 86,100 0.25 Accruals W4 3,160 0.25 Total Current Liabilities 89,260 0.25 TOTAL EQUITY & LIABILITIES 1,505,750 0.25 MARKS 8.00 Page 11
Working - Journal Entries Working - Closing Inventory Total Inventories at Cost per Inventory Count 243,510 Accidentally Destroyed Inventory 2,410 Damaged Inventories - Cost 1,540 NRV - Selling Price less costs to sell (1,230-200) - 1,030 Inventory Write Down 510 Value of Closing Inventories 240,590 1.i Dr. Inventory + Current Assets SOFP 240,590 2.00 Cr. Closing Inventory - Cost of Sales SOPL & OCI 240,590 Dr. Premises - PPE + Non-Current Assets SOFP 250,000 Dr. Plant & Equipment - PPE + Non-Current Assets SOFP 90,000 1.50 Cr. Bank - Current Assets SOFP 340,000 1.v Dr. Grants - Deferred Income - Non-Current Liabilities SOFP 2,500 1.00 Cr. Amortisation of Grants SOPL & OCI 2,500 Grants Amount 100,000 Amoritised over same period as Revalued Premises i.e. 40 Years 1/40 2,500 1.00 1.vi Dr. Income Tax + Expenses SOPL & OCI 30,000 Dr. Income Tax - Current Assets SOFP 30,000 1.00 Dr. Income Tax + Current Assets SOFP 33,000 Cr. Bank - Current Assets SOFP 33,000 1.00 1.vii Dr. Trade Receivables + Current Assets SOFP 3,200 Cr. Bad Debt Recovered - (4,000 * 80%) SOPL & OCI 3,200 1.00 Dr. Bank + Current Assets SOFP 3,200 Cr. Trade Receivables - Current Assets SOFP 3,200 1.00 1.viii Dr. Allowance for Doubtful Debts + Expenses SOPL & OCI 440 Cr. Allowance for Doubtful Debts - Current Assets SOFP 440 2.00 Trade Receivables Balance per TB 124,000 + Bad Debt Recovered W1.vii 3,200 - Bank Receipt re Bad Debt Recovered W1.vii - 3,200 - Allowance for Doubtful Debts - 5% - 7,440 Revised Trade Receivable 116,560 Current Allowance for Doubtful Debts TB 7,000 New Allowance for Doubtful Debts See Above 7,440 Increase in Allowance for Doubtful Debts 440 1.ix Dr. Prepayments + Current Assets SOFP 10,000 Cr. Rent - Expenses SOPL & OCI 10,000 1.00 Dr. Telephone + Expenses SOPL & OCI 2,400 Dr. Light & Heat + Expenses SOPL & OCI 760 Cr. Accruals + Current Liabilities SOFP 3,160 1.00 MARKS 13.50 Page 12
Cost of Distribution Administration Working 2 - Expenses Sales Costs Expenses Opening Inventory Per TB + W1.viii 225,100 - - Cost of Purchases Per TB 647,000 - - Sales Closing Inventory W1.i - 240,590 - - 1.50 Expenses Per TB - 214,000 148,600 362,600 Allowance for Doubtful Debts W1.vii - 220 220 440 Distribution Rent W1.ix - - 5,000-5,000-10,000 Costs Telephone W1.ix - 1,200 1,200 2,400 1.50 Light & Heat W1.ix - 380 380 760 Depreciation - Buildings W3-5,000 5,000 10,000 Admin. Depreciation - Plant & Equipment W3-22,000 22,000 44,000 Expenses Depreciation - Office Equipment W3-8,000 8,000 16,000 1.50 Total 631,510 245,800 180,400 Working 3 - Property, Plant & Equipment Plant & Office Premises Equipment Equipment Total Cost Per TB 800,000 440,000 120,000 1,360,000 - Accumulated Depreciation b/d Per TB - 345,000-88,000-40,000-473,000 Carrying Value b/d at 1st January 2013 455,000 352,000 80,000 887,000 0.50 Revaluation Loss Note 1-55,000 - - - 55,000 0.50 400,000 352,000 80,000 832,000 Additions W1.iii 250,000 90,000-340,000 0.50 650,000 442,000 80,000 1,172,000 Depreciation - Premises Note 2-10,000 - - 10,000 0.50 Depreciation - Plant & Equipment - 10% Straight Line - 44,000-44,000 0.50 Depreciation - Office Equipment - 20% of Reducing Bal. - - - 16,000-16,000 0.50 Carrying Value c/d at 31st December 2013 640,000 398,000 64,000 1,102,000 0.50 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 20,000. 2 Any balance i.e. 55,000-20,000 = 35,000 is taken to expenses in the SOPL & OCI Note 2 - Depreciation of Premises Revalued Amount of Asset - Residual Value 400,000-0 0.50 Remaining Useful Life in Years 40 Depreciation 10,000 Ignore addition of 250,000 for depreciation in 2013 due to accounting policy is use by company Working 4 - Accruals Telephone W1.ix 2,400 Light & Heat W1.ix 760 3,160 MARKS 8.50 TOTAL MARKS 30.00 Page 13
Adjustment Statement of Profit or Loss and Statement of Financial Position Other Comprehensive Income Debit Credit Debit Credit Debit Credit Debit Credit Accumulated Depreciation - Office Equipment - 1st January 2013 40,000 16,000 16,000 16,000 56,000 Accumulated Depreciation - Plant & Equipment - 1st January 2013 88,000 44,000 44,000 44,000 132,000 Accumulated Depreciation - Premises - 1st January 2013 345,000 10,000 10,000 10,000 355,000 Admininstrative Expenses 148,600 1,580 5,000 145,180 Allowance for Doubtful Debts 7,000 440 440 440 7,440 Bank 403,400 3,200 373,000 33,600 Distribution Costs 214,000 1,580 5,000 210,580 Grants 100,000 2,500 97,500 Inventory at 1st January 2013 225,100 225,100 240,590 240,590 Issued Share Capital 160,000 160,000 Long-Term Loan 240,000 240,000 Office Equipment at Cost at 1st January 2013 120,000 120,000 Plant & Equipment at Cost at 1st January 2013 440,000 90,000 530,000 Premises at Cost at 1st January 2013 800,000 250,000 55,000 995,000 Purchases 647,000 647,000 Retained Earnings at 1st January 2013 896,000 22,990 918,990 Revaluation Surplus 20,000 20,000 - Revenue 1,140,000 1,140,000 Trade Payables 86,100 86,100 Trade Receivables 124,000 3,200 3,200 124,000 Revaluation Loss - Expenses 35,000 35,000 Revaluation Loss - Other Comprehensive Income 20,000 20,000 Prepayment 10,000 10,000 Accruals 3,160 3,160 Bad Debt Recovered 3,200 3,200 Amortisation of Grants 2,500 2,500 Income Tax 63,000 30,000 30,000 3,000 3,122,100 3,122,100 550,500 550,500 1,406,290 1,406,290 2,056,190 2,056,190 - - - Page 14
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SOLUTION 3 REPORT To: Financial Controller Belle Limited From: Assistant Financial Accountant Re: IAS 10 Events after the Reporting Period Date: April 2014 (a) (i) (ii) (iii) Paragraph 3 of IAS 10 states that events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue Adjusting events are those events that provide evidence of conditions that existed at the end of the reporting period Non-adjusting events are those events that are indicative of conditions that arose after the reporting period (4 Marks) (b) (c) (d) (i) (ii) (iii) (iv) The financial statements are authorised for issue on 19th January 2014 which is the date of management authorisation for issue of the financial statements to relevant and interested parties (2 Marks) Per paragraph 12 of IAS 10, if an entity declares dividends to holders of equity instruments after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. If dividends are declared after the reporting period but before the financial statements are authorised for issue, the dividends are not recognised as a liability at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed in the notes in accordance with IAS 1 Presentation of Financial Statements (3 Marks) Per paragraph 9 (a) of IAS 10, this is an adjusting event. The event took place during the reporting period and the settlement after the reporting period of the court case confirms that Belle Limited had a present obligation at the end of the reporting period. The entity adjusts any previously recognised provision related to this court case in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or recognises a new provision. Per paragraph 11 of IAS 10, this is a non-adjusting event. The decline in fair value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that have arisen subsequently. Similarly, the entity does not update the amounts disclosed for the investments as at the end of the reporting period, although it may need to give additional disclosure Per paragraph 9 (e) of IAS 10, this is an adjusting event. The discovery of fraud that shows that the financial statements are incorrect has to be adjusted in the financial statements for the relevant reporting period i.e. yearended 31st December 2013. At the year-end, rental expenses are overstated and the bank balance is understated and these need to be corrected to accurately reflect the correct balances at the year-end. Per paragraph 9 (b ii) of IAS 10, this is an adjusting event. The sale of inventories after the reporting period can give evidence about the net realisable value of the inventory at the end of the reporting period. The inventory s net realisable value in early January 2014 is 80,000 whereas the cost of the inventories at the 31st December 2013 was 100,000. Using IAS 2 Inventories rule that inventory is to be valued at the lower of cost and net realisable value, the inventory at the year-end should be included at 80,000 in the financial statements and therefore, the financial statements have to be adjusted to reflect this change. (11 Marks) If you have any further queries, please do not hesitate to contact me. Yours sincerely, Financial Accountant [Total: 20 Marks] Page 18
SOLUTION 4 (a) Issue 1 Should Have Happened Actually Happened Dr. Trade Payable 189 Dr. Trade Payable 189 Cr. Purchases Returns 189 Dr. Sales Returns 189 Cr. Suspense 378 To Correct Dr. Suspense 378 Cr. Sales Returns 189 Cr. Purchases Returns 189 Issue 2 Should Have Happened Actually Happened Dr. Subscriptions 125 Nothing Dr. Telephone 249 Cr. Bank 374 To Correct Dr. Subscriptions 125 Dr. Telephone 249 Cr. Bank 374 Issue 3 Should Have Happened Actually Happened Dr. Rent Prepaid 500 Dr. Suspense 500 Cr. Rent Expense 500 Cr. Rent Accrual 500 To Correct Dr. Rent Prepaid 500 Dr. Rent Accrual 500 Cr. Suspense 500 Cr. Rent Expense 500 Issue 4 Should Have Happened Actually Happened Dr. Car - PPE 4,600 Dr. Equipment - PPE 4,600 Cr. Capital/Equity 4,600 Cr. Suspense 4,600 Dr. Depreciation Expense 575 Dr. Depreciation Expense 460 Cr. Accumulated Depreciation - Car - PPE 575 Cr. Accumulated Depreciation - Equipment - PPE 460 To Correct Dr. Car - PPE 4,600 Dr. Suspense 4,600 Cr. Capital/Equity 4,600 Cr. Equipment - PPE 4,600 Dr. Depreciation Expense 115 Dr. Accumulated Depreciation - Equipment - PPE 460 Cr. Accumulated Depreciation - Car - PPE 575 Issue 5 Should Have Happened Actually Happened Dr. Light & Heat Expense 240 Dr. Suspense 240 Dr. Trade Payables 240 Cr. Bank 240 Cr. Trade Payables 240 Cr. Bank 240 To Correct Dr. Light & Heat Expense 240 Cr. Suspense 240 Issue 6 Should Have Happened Actually Happened Nothing as shouldn't be accounted for as a sale under IAS 18 - Revenue Dr. Trade Receivables 1,240 Cr. Sales 1,240 Dr. Closing Inventory - Cost of Sales 900 Cr. Closing Inventory - Current Assets 900 To Correct Dr. Sales 1,240 Cr. Trade Receivables 1,240 Dr. Closing Inventory - Current Assets 900 Cr. Closing Inventory - Cost of Sales 900 Issue 7 Should Have Happened Actually Happened Dr. Allowance for Doubtful Debts - Expenses 800 Dr. Bad Debt Recovered 800 Cr. Allowance for Doubtful Debts - Current Liability 800 Cr. Suspense 800 To Correct Dr. Suspense 800 Cr. Bad Debt Recovered 800 Dr. Allowance for Doubtful Debts - Expenses 800 Cr. Allowance for Doubtful Debts - Current Liability 800 Page 19 (14 marks)
(b) An Error of Transposition is when two digits are accidentally recorded the wrong way round. For example, revenue is recorded in the revenue account as 1,284 but it has been incorrectly recorded in the trade receivables account as 1,248. The error is the transposition of the 4 and the 8 and the consequence is that the total debits will not be equal to the total credits. An Error of Omission means falling to record a transaction at all, or making a debit or credit entry but not the corresponding double entry. For example, if a supplier provides an invoice but the invoice gets lost, then the invoice will not be recorded in the accounting system at all. An Error of Principle involves making a double entry in the belief that the transaction is being entered in the correct accounts but subsequently finding out that the accounting entry breaks the rules of an accounting principle or concept. For example, capitalising repairs by mistake. An Error of Commission is where the bookkeeper makes a mistake in carrying out their task of recording transactions in the financial statements. For example, putting an amount for a rates invoice into the rent expense or incorrectly adding up totals and posting the incorrect total. Compensating Errors are errors which are, coincidentally, equal and opposite of one another. For example, the bank account having a debit and a credit of 500 and neither amount being posted. The trial balance will balance but still be incorrect. (6 marks) [Total: 20 Marks] Page 20
SOLUTION 5 (a) Moat Limited Statement of Cash flows for the year ended 31st December 2013 Cash flows from Operating Activities '000 '000 Profit before Taxation 360 1.00 Adjustments for Depreciation 240 1.00 Loss on Sale of PPE 40 1.00 Interest Expense 30 1.00 670 Decrease in Trade Receivables 14 1.00 Decrease in Inventory 44 1.00 Increase in Trade Payables 30 1.00 Cash Generated from Operations 758 Interest Paid - 30 0.50 Income Taxes Paid - 70 1.50 Net Cash from Operating Activities 658 1.00 Cash flows from Investing Activities Payments to acquire Property, Plant & Equipment - 965 3.00 Receipts from sale of Property, Plant & Equipment 160 1.00 Net Cash used in Investing Activities - 805 1.00 Cash flows from Financing Activities Proceeds from Issue of Shares 240 1.00 Payments from Decrease in Long Term Loans - 80 1.00 Dividends Paid - 20 1.00 140 1.00 Net Increase in Cash & Cash Equivalents - 7 Cash & Cash Equivalents at beginning of Year Note 1-44 Cash & Cash Equivalents at end of Year Note 1-51 1.00 Note 1 2013 2012 '000 '000 Cash on hand and balances with bank 44 36 Bank Overdraft - 95-80 Cash and Cash Equivalents - 51-44 TOTAL MARKS 20.00 Page 21
Q5 Workings Loss on Sale of PPE '000 Cost 320 - Accumulated Depreciation - 120 Carrying Value at date of sale 200 Sales Proceeds 160 Loss on Sale of PPE 40 Interest Account '000 '000 Balance b/d - Expense - SOPL & OCI 30 Interest Paid 30 Balance c/d - 30 30 Income Tax Account '000 '000 Corporation Tax Paid 70 Balance b/d 30 Balance c/d 40 Expense - SOPL & OCI 80 110 110 Share Capital Account '000 '000 Balance b/d - S. Capital 600 Balance b/d - S. Premium 60 Balance c/d - S. Capital 800 Balance c/d - S. Premium 100 Proceeds from Issue of S. Capital 240 900 900 Property, Plant & Equipment Account '000 '000 Balance b/d 1,285 Depreciation 240 Revaluation Surplus 130 Disposal - carrying value 200 Purchase of PPE 965 Balance c/d 1,940 2,380 2,380 Page 22
MARKING SCHEME SOLUTION 1 (a) Briefing note on any 2 2 x 5 marks each 10 (b) Workings 22 Statement of Profit or Loss and Other Comprehensive Income + 8 Statement of Financial Position Total Marks 40 SOLUTION 2 (a) Bar Trading Account 5 (b) Income & Expenditure Account 6 (c) Statement of Financial Position 9 Total Marks 20 SOLUTION 3 (a) Events after the reporting period 2 Adjusting event 1 Non-adjusting event 1 (b) Financial statements authorised for use 2 (c) Accounting treatment for dividends after reporting period 3 (d) Accounting treatment of issues as per IAS 10 3 issues x 3 marks each + 1 issue x 2 marks 11 Total Marks 20 SOLUTION 4 (a) Journal Entries 7 x 2 marks each 14 (b) Explanation and example of 3 of errors 6 Total Marks 20 SOLUTION 5 Operating Activities 9.5 Investing Activities 3.5 Financing Activities 3.5 Cash & Cash Equivalents 1 Total Marks 20 Page 23