Advanced Financial Accounting · Brian and Jean are in partnership and their capital account...

of 26

Advanced Financial Accounting

Sample Paper 2 2017 / 2018 Questions & Suggested Solutions

of 26 AFA Sample Paper 2

NOTES TO USERS ABOUT SAMPLE PAPERS

Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance

to students and their teachers regarding the style and type of question, and their suggested solutions, in

our examinations. They are not intended to provide an exhaustive list of all possible questions that may

be asked and both students and teachers alike are reminded to consult our published syllabus (see

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.


INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

Candidates must indicate clearly whether they are answering the paper in accordance with the law

and practice of Northern Ireland or the Republic of Ireland.

In this examination paper the €/£ symbol may be understood and used by candidates in Northern

Ireland to indicate the UK pound sterling by candidates in the Republic of Ireland to indicate the

Euro.

Answer ALL THREE questions in Section A and TWO of the THREE questions in Section B. If

more than TWO questions is answered in Section B, then only the first TWO questions, in the

order filed, will be corrected.

Candidates should allocate their time carefully. All

workings should be shown.

All figures should be labelled, as appropriate, e.g. €’s, £’s, units etc. Answers

should be illustrated with examples, where appropriate. Question 1 begins on

Page 2 overleaf.

NOTE: This sample paper and solution have been prepared to reflect the provisions of FRS102.


SECTION A

Answer ALL THREE Questions in this Section

(The total marks for section A will be 60, made up of a theory question of 20 marks, a

multiple choice question of 15 marks and a further question of 25 marks)

QUESTION 1

(i) The FRC is responsible for the framework of codes and standards for the accounting profession.

What are ‘accounting standards’ and describe the objective of such standards.

8 marks

(ii) Describe the steps involved in the standard setting process and the measures taken to improve

transparency within the process.

12 marks

Total 20 marks

QUESTION 2

The following multiple choice question consists of TEN parts, each of which is followed by FOUR

possible answers. There is ONLY ONE right answer in each part.

Each part carries 1½ marks.

Requirement

Indicate the right answer to each of the following TEN parts.

Total 15 Marks

N.B Candidates should answer this question by ticking the appropriate boxes on the special answer sheet

which is contained within the answer booklet.

[1] In accordance with FRS 102 net realisable value is defined as:

(a) the actual or estimated selling price

(b) the actual or estimated selling price less all further costs to completion and all costs to be

incurred in marketing, selling and distribution

(c) the actual or estimated selling price less all costs to be incurred in marketing selling and distribution

(d) the actual or estimated selling price less all further costs to be completion


QUESTION 2 (cont’d)

BACKGROUND INFORMATION TO PARTS [2] & [3]

Brian and Jean are in partnership and their capital account balances are £/€ 56,000 and £/€ 84,000

respectively. The partnership agreement details appropriation of partnership profits as follows:

Brian Jean

Annual salary £/€19,500 £/€28,000 Interest on capital 10 % 10 % Share of residual profit 40 % 60 %

[2] If the profit for the year, before appropriation, was £/€112,000 what would Brian’s entitlement be

in total:

(a) £/€ 25,100 (b) £/€ 30,300 (c) £/€ 45,300 (d) £/€ 20,200

[3] If the profit for the year, before appropriation, was £/€112,000 what would Jean’s entitlement be

in total:

(a) £/€ 45,300 (b) £/€ 30,300 (c) £/€ 25,100 (d) £/€ 66,700

[4] In accordance with FRS 102 the clarification after the end of the accounting period of proceeds

from assets sold before the end of the accounting period, is an example of:

(a) an adjusting event

(b) a non-adjusting event

(c) a material event

(d) an immaterial event

[5] The formula for price earnings ratio is:

(a) dividend per share / market value per share

(b) earnings per share / market value per share

(c) market value per share / earnings per share (d) market value per share / dividend per share



[6] Company A has inventory days of 23 and receivable days of 38. Ideally payable days should be:

(a) greater than 38 but less than 61

(b) greater than 61

(c) less than 61

(d) greater than 23 but less than 61

[7] If a capital grant is recognised as deferred income in the Statement of Financial Position what are

the entries to be made each year over the useful life of the associated asset:

(a) debit deferred income, credit other operating income

(b) credit deferred income, debit other operating income

(c) debit deferred income, credit bank

(d) credit deferred income, debit bank

BACKGROUND INFORMATION TO PARTS [8] & [9]

The business premises of ABC Limited went on fire on 30 November 2016 and financial records

were destroyed. However the following information is available:

£/€ Receivables : opening 45,000

Closing 56,000 Inventory : opening 60,000

Closing 44,000 Sales (credit) 270,000 Irrecoverable Receivables 14,000

Gross margin

20%

[8] Using the information available what is the value of purchases:

(a) £/€ 112,000 (b) £/€ 209,000 (c) £/€ 121,000 (d) £/€ 200,000

[9] Using the information available what is the value of sales receipts:

(a) £/€ 295,000 (b) £/€ 245,000 (c) £/€ 273,000 (d) £/€ 259,000



[10] In preparing a cash flow statement in accordance with FRS 102 a profit on disposal of a non -

current asset should be:

(a) deducted from operating profit in computing the net cash flow from operating activities

(b) added back to operating profit in computing the net cash flow from operating activities

(c) deducted from payments to acquire tangible fixed assets to compute capital expenditure

(d) added to payments to acquire tangible fixed assets to compute capital expenditure


QUESTION 3

WIRE Ltd., a retailing company, has an authorised share capital of €/£2,500,000, comprised of 4,000,000

ordinary shares of 50 cent/pence each and €/£500,000 of 5% preference shares of €/£1 each.

The following trial balance was extracted as at 31st

December 2016

€/£’000 €/£’000

Ordinary share capital.................................................................... 1,500 5% preference share capital ........................................................... 300 Share premium account ................................................................. 150 General reserve .............................................................................. 230 Retained profits at 1 January 2016 ................................................ 41 6% debenture stock (redeemable in 2020).....................................

Freehold premises at cost at 1st

January 2016................................

Freehold premises accumulated depreciation at 1st

January 2016 .

Plant & machinery at cost at 1st

January 2016 ...............................

Plant & machinery accumulated depreciation at 1st

January 2016.

Motor vehicles at cost at 1st

January 2016 .....................................

Motor vehicles accumulated depreciation at 1st

January 2016.......

2,500

420

120

200

400

240

70

Computer equip at cost .................................................................

Computer equip accumulated depreciation at 1st

January 2016 ..... 120

45 Additions to non-current assets at cost:

Plant & machinery .................................................................... 70 Motor vehicles .......................................................................... 25 Computer equipment ................................................................ 30

Disposal of motor vehicles (sale proceeds).................................... 24 Inventory at 31 December 2016..................................................... 50 Receivables & payables ................................................................. 156 85 Bank............................................................................................... 66 VAT ............................................................................................... 32 Corporation tax .............................................................................. 98 Prepayments & accruals ................................................................ 12 18 Long term investments .................................................................. 60 Short term investments .................................................................. 40 Retained profit for the year (after providing for dividends and .... debenture interest but before adjusting for items 1 to 3 below)..... 146 Deferred government grants at 1

st January 2016............................ 90

.................................................................................................

3,669 3,669

ADDITIONAL INFORMATION

(1) Depreciation is to be provided on non-current assets as follows:

Freehold premises ............................. 2% on cost

Plant & machinery............................. 10% on cost Motor vehicles .................................. 20% on cost

Computer equipment ......................... 33 1/3 % on cost

A full year’s depreciation is provided in the year of purchase and none in the year of disposal.


QUESTION 3 (Cont’d)

(2) During the year motor vehicles which cost £/€ 45,000 in 2013 were disposed of for £/€ 24,000.

The only entries made (before extracting the above trial balance) were to debit the bank account

and credit the disposal of motor vehicles account.

(3) The deferred government grants balance included in the above trial balance arises in respect of a

grant of £/€ 100,000 received in 2015 to help finance the cost of plant and machinery purchased

during that year.

In addition a grant of £/€ 18,000 was received on 29th

December 2016 towards the cost of new

computers purchased during the year. This grant has not yet been recorded in the company’s

books.

(4) Prepaid expenses valued at €/£24,000 were incorrectly included in operating costs.

Requirement

(a) Prepare, in the form required by FRS 102, the Statement of Financial Position for WIRE Ltd., for

the year ended 31st

December 2016 in as far as the information provided permits.

N. B. You are NOT required to prepare a Statement of Comprehensive Income or notes to the accounts.

You are required to submit workings to show the make-up of the figures in the statement of financial position.

17 Marks

(b) Prepare the following notes to the accounts for the year ended 31 December 2016:

(i) Non-current assets

(ii) Deferred government grants

6 Marks

Presentation 2 marks

Total 25 Marks

SECTION B

Answer TWO of the THREE questions in this Section

QUESTION 4

CARTER Limited is installing a new production plant at a cost of £/€ 1 million, in respect of which

government grants have been approved as follows:

Capital cost - 40%

Training costs - 100%

The company depreciates its plant and equipment on the basis of 20% on original cost. The directors are

aware that the accounting treatment for grants is dealt with in FRS 102, and they have asked you to

advise them on the accounting options available to them and the effect which they would have on the

company’s financial statements.

Requirement

You are required to draft a report to the directors which:

(a) outlines the accounting treatment of the foregoing grants under FRS 102;

(b) recommends (with reasons) the treatment which you believe would be most suitable in the case

of CARTER Limited; and

(c) indicate the form of accounting policy or other notes which should be included in the annual

financial statements of the company.

18 Marks


Total 20 Marks

QUESTION 5

The following errors were identified by the financial accountant of CUSACK Limited (a VAT registered

company) when reviewing the year end draft financial statements:

[i] A cheque was written for £/€20,000 to MAC GARAGE Limited and was entered into the motor

expense account. No other entries were made in the financial records. The cheque was in respect of the balancing payment for the purchase of a new car. A car which has originally cost £/€13,000 and

which had a net book value of £/€6,500 at 1st

January 2016 was traded in as part exchange. Assume no loss or gain was made on the trade-in.

[ii] Depreciation on motor vehicles is charged at 25% per annum with a full year’s depreciation charged

in the year of acquisition and none in the year of disposal. No account was taken of the transactions

in note (i) above when calculating the depreciation for the year to December 2016.

[iii] During the year a new machine was purchased for £/€484,000 (which is inclusive of VAT of 21%).

CUSACK Limited received a government grant of £/€60,000 towards the cost of the new machine.

Plant and machinery is depreciated at a rate of 10% per annum including a full year’s depreciation in

the year of acquisition. No entries were made to record this transaction.

of

26 AFA Sample Paper 2


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 31st

December 2016. Narratives for the journals are required.

15 marks

(b) Compute the adjusted net profit before taxation for the year ended 31st

December 2016 taking

into account the adjustments made at (a) above. The net profit before taxation as per the draft

accounts was £/€ 350,000.

3 marks


Total 20 Marks

QUESTION 6

The Statement of Financial Position, Statement of Changes in Equity and other relevant information of

CLINIC Limited, for the year ended 31 December 2016, are as follows:

Statement of Changes in Equity as at 31

December 2016

Ord

share

capital

Share

premium

Retained

profits

Total

equity

£/€'000 £/€'000 £/€'000 £/€'000

As at 1 January 2016 270 - 180 450

Net profit for year end 31 December 2016 90 90

Share issue 30 30 60

Ordinary dividends ( 60) (60)

300 30 210 540

of


Inventory 1,890 Receivables 2,850 Cash & cash equivalents 30


Statement of Financial Position as at 31 December 2016

£/€'000 £/€'000 £/€'000 £/€'000

ASSETS

Non-current assets 1,440 1,320

Current assets

1,530

2,130

30

4,770 3,690

Total assets

EQUITY and LIABILITIES

Capital and reserves

6,210 5,010

£/€1 ordinary shares 300 270 Preference shares 300 300 Share premium account 30 - Retained earnings 210 180

Non-current liabilities

840 750

Bank loans 2,190 1,800 10% debentures 1,140 900

3,330 2,700 Current liabilities

Bank overdraft

30

- Current installments due on loans 540 540 10% debentures 300 - Trade payables 1,140 930 Taxation 30 90

2,040 1,560

Total equity and liabilities

6,210

5,010

of


QUESTION 6(Cont’d)

Additional information:

(1) On 1 July 2016 CLINIC issued £/€ 1 ordinary shares at £/€ 2 per share.

(2) During the year CLINIC sold non-current assets with a net book value of £/€90,000 for cash.

Included in the Statement of Comprehensive Income is a profit on disposal of £/€ 60,000.

(3) Included in trade payables at 31 December 2016 is an amount of £/€ 450,000 in respect of non-

current assets purchased during the year.

(4) The Statement of Comprehensive Income includes the following charges:

........................................................... 31 Dec 2016 31 Dec 2015

(i) Depreciation ...................... £/€ 600,000 £/€ 550,000 (ii) Interest ..................................... £/€ 540,000 £/€ 270,000 (iii) Tax .......................................... £/€ 30,000 £/€ 60,000

Requirement

(a) Prepare a statement of cash flows for CLINIC Limited for the year ended 31 December 2016 in

accordance with FRS 102.

.

N. B. You are NOT required to prepare notes to the statement of cash flows.

18 Marks Presentation 2 marks

Total 20 Marks

of 26

Advanced Financial Accounting

Sample Paper 2 – Suggested Solutions

NOTE: This sample paper and solution have been prepared to reflect the provisions of FRS 102.

Examinees would be at liberty to use the language of either (i) I.A.S.’s, or (ii) FRS 102 in

answering questions relating to non‐public companies.

of


Solution to question 1

(a) What are Accounting Standards and describe the objectives of these standards.

Accounting standards are a set of rules that describe how an item in financial accounting is

treated and calculated and how accounts should be prepared and presented. The objective of

accounting standards is to regulate the accounting profession and to provide guidance to both

accounting practitioners and users of financial information about how contentious and

difficult areas should be treated.

Accounting standards are issued by a national or international body of the accounting

profession and are intended to apply to all financial accounts which are intended to give a true

and fair view of the financial position and profit/loss of an entity. Standards are detailed

working regulations within the framework of government legislation and they cover areas in

which the law is silent. A sub‐committee of the FRC‐ the Codes and Standards Committee are

responsible for Irish and UK GAAP.

(b) Standard setting process

The standard setting process involves eight steps and incorporates an extensive

consultation process from stakeholders. The eight steps are as follows;

1. Initial scoping of the issue being considered.

2. A discussion paper providing a detailed overview of the issue, why a standard is necessary,

different potential approaches to dealing with the issue, preliminary views of the FRC and

an invitation to comment on the issue.

3. Public consultation.

4. Outreach events to encourage input to the standard setting process including lab activities, case

studies and investigations.

5. Exposure Draft

6. The final code or standard

7. Post implementation review

8. Regular reviews.

Transparency within the process

As can be seen from the above discussion the process through which the standard is developed

involves a significant amount of public consultation. This improves transparency in the standard

setting process. It is not possible for an accounting standard to be issued without taking on

board comments from interested parties. This avoids the situation whereby the process becomes

a pure academic exercise and ensures that the practical application is considered, understood

and provided for.

of



(1) B

(2)

C

(see working)

(3)

D

(see working)

(4)

A

(5)

C

(6)

B

(7)

A

(8)

D

(see working)

(9)

B

(see working)

(10)

A

Workings:

(2) 112,000 – (19,500+ 28,000) ‐10%(56,000 + 84,000) = 50,500 x 40% = 20,200

20,200 + 19,500 + 5,600 = 45,300

(3) 50,500 x 60% = 30,300 + 28,000 + 8,400 = 66,700

(8) Sales 270,000

Gross margin 20% = 54,000

Cost of sales = 270, 000 – 54,000 = 216,000

216,000 + closing inventory 44,000 – opening inventory 60,000 = purchases 200,000

(9) Opening receivables 45,000 + sales 270,000 = 315,000

315,000 – irrecoverable receivables 14,000 – closing receivables 56,000 = sales receipts

245,000

of



(a)

WIRE Ltd.

Statement of Financial Position as at 31 December 2016

£/€’000 £/€’000

Non‐current assets

Property, plant & equipment (Note 1) 2,343

Other financial assets 60

2,403

Current assets

Inventories 50

Trade receivables 156

Prepayments (W1) 36

Cash and cash equivalents (W2) 124

366

Total assets 2,769

Equity and liabilities

Capital (W4) 1,800

Reserves 380

Accumulated profits (W3) 64

2,244

Non‐current liabilities

Interest‐bearing borrowings 200 200

Current liabilities

Trade and other payables (W7) 233

233

Deferred government grants (Note 2) 92

2,769

of


Solution to question 3(cont’d)

(b)

WIRE LIMITED

Notes to the Accounts for the year ended 31 December 2016

(1) Property, plant and equipment

Freehold

premises Plant &

machinery Motor

vehicles Computer

equip

Total £/€’000 £/€’000 £/€’000 £/€’000 £/€’000

Cost at 1st January 2016 2,500 420 120 120 3,160 additions 70 25 30 125 disposals (45) (45) at 31st December

2016 2,500

490

100

150

3,240

Accumulated depreciation

at 1st January 2016 400

240

70

45

755 charge for year 50 49 20 50 169

450 289 90 95 924 disposals 0 0 (27) 0 (27) at 31st December 2016 450

289

63

95

897

Net book value at 1st January 2016 2,100 180 50 75 2,405 at 31st December

2016 2,050

201

37

55

2,343

(2) Deferred Government Grants

At 1st January 2016

90

Received during the year 18 108

Released to Income during the year

(16)

At 31st December 2016

92


Workings

(1) Prepayments

Prepayments per trial balance

£/€’000

12

Add prepayments omitted in error 24

36

(2) Cash and cash equivalents

£/€’000

Bank balance

66 Short term investment 40

106

Government grant received

18

124

(3) Accumulated profits

£/€’000

Retained profit for year per trial balance

146 Profit on disposal of motor vehicle 6 Depreciation (Note 1) (169) Prepayments 24 Government grants released 16

23

Retained Profit brought forward 1 Jan 2016

41

Accumulated profits

64

(4) Issued capital

£/€’000

Ordinary share capital 1,500

8% preference capital 300

1,800


NBV 18 Proceeds 24

Profit on disposal

6


(5) Reserves

£/€’000

Share premium 150

General reserves 230

380

(7) Trade and other payables

£/€’000

Trade payables per Trial Balance 85

Corporation tax 98

VAT 32

Accrued expenses 18

233

(8) Disposal of motor vehicle

£/€’000

Cost in 2013 45

Depreciation charge:

2013

2014

2015



To : The Directors

From : A. Accountant

Date : XX/MM/YY

Subject : Accounting treatment of government grants

A. Accounting treatment

The grants which have been approved for the new production facility fall into two distinct

categories:

1. Revenue based grant – the grant for training costs

2. Capital based grant – the grant for plant

The above two grants are treated differently for accounting purposes. FRS 102 provides that: Revenue

based grants are to be credited to revenue as “other income” in the period in which the

related revenue expenditure has been incurred. Capital based grants should be credited to revenue over the life of the related non‐current asset. The amount of the grant should be credited to a deferred grant account, a portion of which is transferred to

revenue annually on the same basis as the related asset is depreciated

B. Recommendations

I recommend that Carter Limited adopt the following accounting treatment; Training

grants – these grants be credited to revenue as “other income” .

Capital Grants – these grants should be credited to a deferred grant account and disclosed separately in the Statement of Financial Position under the heading ‘Government Grants’. The

grants should be released to the Statement of Comprehensive Income over the life of the related

assets using the same rates of depreciation as applied to those assets..

C. Accounting policies

The notes to the accounts of CARTER Limited should include the following:

(i)

Accounting Policy – Government Grants

Grants receivable on additions to non‐current assets are credited to the Deferred Government Grant

Account and are allocated to the Statement of Comprehensive Income over the estimated useful lives of

the assets concerned. Revenue based grants are credited directly to the Statement of Comprehensive

Income in the year in which they become due.


(i) DR Motor vehicles (SOFP) 20000 CR Motor Expenses (SOCI) 20,000 DR Motor Vehicles 6,500 CR Disposal a/c 6,500 DR Disposal a/c 13,000 CR Motor Vehicles 13,000 DR Disposal a/c 6,500 CR Accumulated Depreciation 6,500

(ii) Note to the Financial Statements

£/€

Balance at start of year XXXX

Received during the year XXXX

Released to the profit and loss account during the year XXXX

Balance at end of year XXXXX


(a) DR CR

[Being cheque to purchase motor vehicle debited to motor expense in error

Trade in of old motor vehicle not recorded.]

(ii)

DR Depreciation (SOCI) 3,375

CR Accumulated depreciation (SOFP) 3,375

[Being calculation of depreciation charge on additions (6,625 – 3,250)]

(iii)

DR Plant & machinery 400,000

DR VAT recoverable 84,000

CR Bank 484,000

[Being purchase of new machine]

DR Depreciation (SOCI) 40,000

CR Accumulated depreciation (SOFP) 40,000

[Being calculation of depreciation on new machine]

DR Bank 60,000

Cr Deferred income (SOFP) 60,000


[Being receipt of government grant]

DR Deferred income (SOFP) 6,000

CR Grant released (SOCI) 6,000

[Being release of proportion of grant to Statement of Comprehensive Income]

Solution to question 5 (cont’d)

(b)

£/€

Net profit before tax

350,000

(i) Motor vehicle expense

20,000

(ii) Motor vehicle depreciation

(3,375)

(iii) Plant and machinery

(40,000)

(iii) Grant released

6,000

Revised net profit

332,625


Increase in inventory (W2) (360) Increase in receivables (W2) (720) Decrease in payables (W2) (240)


[a]

CLINIC Limited

Statement of Cash Flows for the year ended 31 December 2016

£/€ '000 £/€ '000

Cash flows from operating activities

Net profit before interest (W1) 660

Adjustments for:

Depreciation 600

Profit on disposal (W3) (60)

Changes in working capital

(780)

Cash generated from operations (120)

Interest paid (540)

Tax paid (W4) (90)

(630)

Net cash from operating activities

Cash flows from investing activities

(750)

Payment to acquire non-current assets (W5) (360) Receipt from sale of non-current assets (W3) 150

(210)

Cash flows from financing

Proceeds from share issue (incl share prem)

60 New bank loans (W6) 390 Issue of new debentures (W7) 540 Dividends paid (60)

930

Decrease in cash and cash equivalents (30)

Cash and cash equivalents at start of year

30 Cash and cash equivalents at end of year 0


Workings

(1) Net profit before interest

£/€’000

Net profit for year 90 Add: tax 30 Add : interest 540

660

(2) Changes in working capital

£/€’000

Inventory (1,890 – 1,530) 360 increase

Receivables (2,850 – 2,130) 720 increase

Trade payables (1,140 – 450 – 930) 240 decrease

(3) Non‐current asset disposal

£/€’000

NBV 90 Profit on sale 60 Sale proceeds 150

(4) Taxation

£/€’000

Opening balance 90

Charge for year 30

Closing balance (30)

Amount paid 90

(5) Non‐current asset acquisition

£/€’000

Opening balance 1,320

Less: disposal (90)

Depreciation charge (600)

630

Closing balance (1,440)

Purchases 810

Amount owing included in trade payables 450

Amount paid 360


(6) Bank loans

£/€’000

Opening balance (1,800 + 540) 2,340

Closing balance (2,190 + 540) 2,730

New loans 390

(7) Debentures

£/€’000

Opening balance 900

Closing balance (1,140 + 300) (1,440)

New debentures issued 540

Advanced Financial Accounting · Brian and Jean are in partnership and their capital account...

Documents

Transcript of Advanced Financial Accounting · Brian and Jean are in partnership and their capital account...