Financial Accounting - Accounting Technicians Ireland · Answer ALL THREE questions in Section A...

Financial Accounting August 2015 1st Year Paper

of 29 Fin. Acc A2015 (FA)

Financial Accounting 1

st Year Examination

August 2015

Solutions & Marking Scheme & Examiner’s Comments



NOTES TO USERS ABOUT THESE SOLUTIONS

The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide

guidance to students and their teachers regarding possible answers to questions in our examinations.

Although they are published by us, we do not necessarily endorse these solutions or agree with the views

expressed by their authors.

There are often many possible approaches to the solution of questions in professional examinations. It should

not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative

answers will be marked on their own merits.

This publication is intended to serve as an educational aid. For this reason, the published solutions will often be

significantly longer than would be expected of a candidate in an examination. This will be particularly the case

where discursive answers are involved.

This publication is copyright 2015 and may not be reproduced without permission of Accounting Technicians

Ireland.

© Accounting Technicians Ireland, 2015.



Accounting Technicians Ireland

First Year Examination: Autumn 2015

Paper: FINANCIAL ACCOUNTING

Tuesday 11 August 2015

9.30 a.m. to 12.30 p.m.

INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

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

practice of Northern Ireland or the Republic of Ireland.

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

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

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

TWO questions are answered in Section B, then only the first two questions, in the order filed, will be

corrected.

Candidates should allocate their time carefully.

All workings should be shown.

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

Answers should be illustrated with examples, where appropriate.

Candidates may ignore any VAT implications to transactions throughout this paper unless the question

specifically instructs them to do otherwise.

Question 1 begins on Page 2 overleaf.

Note: This paper uses both the language of International Accounting Standards (I.A.S’s) and Financial

Reporting Standards (F.R.S’s) where appropriate (e.g. Receivables/Debtors). Examinees are permitted to

use either terminology when preparing financial statements but the use of the language of the

International Accounting Standards (e.g. Receivables rather than Debtors) is preferred.



SECTION A

Answer ALL THREE QUESTIONS (Compulsory) in this Section

QUESTION 1 (Compulsory)

The following trial balance was extracted from the books of P. Potter, a sole trader, on 30 June 2015:

£/€ £/€

Land 174,500

Delivery vans 64,740

Accumulated depreciation on delivery vans 17,410

Inventory as at 1/7/2014 17,950

Payables and receivables 102,740 142,950

Bank 9,855

VAT liability 2,275

Sales and purchases 275,980 410,850

Purchases returns and sales returns 21,410 9,400

Discounts allowed and received 1,970 2,780

Rent expense 21,950

Carriage outwards 3,120

Power, light and heat 3,140

Telephone, internet and media 5,510

Insurance 14,500

Rates and water charges 7,540

Wages and salaries costs 71,950

Allowance for receivables 1/7/2014 5,480

Irrecoverable debts 5,980

Drawings 9,675

Accumulated profits 52,320

Capital 150,135

Suspense accounts 800

803,455 803,455

The following information, which has not been accounted for above, is also available:

1. The inventory count as at 30 June 2015 showed closing inventory valued at £/€17,190.

2. A review of receivables as at 30 June 2015 showed that a further €/£1,150 to be written off as an

irrecoverable debt. It was decided that the closing allowance for receivables was to be 10% of the

outstanding receivables balance as at 30 June 2015.

3. On 30 June 2015 P. Potter received a cheque for €/£840 in relation to an irrecoverable debt previously

written off

4. A payable of P. Potter has charged interest of £/€745 on a payable balance which has been outstanding

for over 200 days.

5. £/€8,000 of insurance in the trial balance above relates to the year from 1 January 2015 to 31 December

2015.



QUESTION 1 (Cont’d)

6. Allowance to be made for depreciation as follows:

Land Not depreciated

Delivery vans 10% straight line method

7. Upon investigation it was determined that the balance in the suspense account related to cash receipt

from a receivable of €/£400 that was credited to the bank account in error.

You are required to prepare:

a) The Statement of Profit or Loss for the year ended 30 June 2015.

11 Marks

b) The Statement of Financial Position as at that date.

9 Marks

Total 20 Marks




Part A

On 6 April 2015 M. Monk received his bank statements for the month ended 31 March 2015. The bank

statement showed a balance of €/£41,740 (overdraft) as at 31 March while the cash book showed a balance of

€/£52,599 (credit) as at the date. On examination of the cash book and the bank statement the following were

discovered:

1. Bank charges of €/£201 had not been recorded in the cash book

2. M. Monk exceeded his overdraft limit during the month of March. The bank had therefore charged him

a penalty of €/£250. This was not reflected in the cashbook

3. A sum of €/£1,250 had been credited to M. Monks bank account in error by the bank

4. A cheque for €/£1,230 had been returned by the bank as dishonoured. As the cheque had been

dishonoured the bank charged M. Monk €15. This was not reflected in the cashbook

5. Cash receipts of €/£3,740 were posted as cash payments of €/£4,730 in the cash book;

6. On 21st March M. Monk lodged cash of €/£650 to his personal bank account. This was lodged to the

business bank account in error by the bank;

7. Standing orders and direct debits of €/£1,115 had not been posted to the cash book;

8. Receivables had lodged €/£2,170 directly to the bank account. No record had been made of this in the

cash book;

9. Lodgements of €/£5,120, lodged to the bank account on 31 March 2015, had not been credited by the

bank;

10. The following cheques, drawn on the bank account, had not been presented to the bank for payment as

at 31 March 2015:

Cheque Number Date Cheque was Written €/£

No: 4528 11 March 2015 840

No: 4535 28 March 2015 1,740

No: 4537 31 March 2015 3,670

You are required to:

A. Prepare the adjusted cash book for the month of March 2015.

8 Marks

B. Prepare a statement on 31 March 2015 reconciling the adjusted cash book with the bank statement

balance.

4 Marks

C. Explain, in report format, two reasons for preparing bank reconciliation on a regular basis.

4 Marks

D. M. Monk is considering setting up a petty cash book from which to pay small expenses. M. Monk

however is not sure how a petty cashbook operates. Prepare a brief note to M. Monk outlining the

operation of a petty cash book.

4 Marks

Total 20 Marks




Complete any FOUR parts

Part A

E. Eddie does not maintain proper books and records. However he is in a position to provide you with the

following information for the year ended 30 June 2015:

On 1 July 2014, E. Eddie was owed €/£145,300 by his credit customers.

During the year, E. Eddie received a total of €/£621,600 from customers. 80% of this related to credit

customers.

Discounts allowed (all credit customers) totalled €/£7,500

Dishonoured cheques amounted to €/£4,800. Balances not written off as irrecoverable

Irrecoverable debts €/£650

On 30 June 2015, E. Eddie was owed €/£148,720 from his credit customers.


Calculate E. Eddie’s credit sales for the year ended 30 June 2015

5 Marks

Part B A sole trader receives rent for subletting part of its building.

Rent receivable quarterly in advance, is received as follows:

Date of receipt Period covered €/£

1 October 2013 3 months to 31 December 2013 7,500

30 December 2013 3 months to 31 March 2014 7,500

4 April 2014 3 months to 30 June 2014 9,000

1 July 2014 3 months to 30 September 2014 9,000

1 October 2014 3 months to 31 December 2014 9,000


Calculate the rental income that should appear in the Statement of Profit or Loss Account and the accrual or

prepayment that should appear in the Statement of Financial Position for the year ended 31 October 2014.

5 Marks

Part C

The following information relates to the payroll costs for H. Kitty, a sole trader for the month of April 2015.

Opening balance owed to the Revenue Authority €/£9,100

Gross wages and salaries €/£32,170;

Employers PRSI/NIC €/£3,710;

Net wages and salaries €/£21,780;

Payments to the Revenue authority €/£9,100

Note: The difference between gross and net wages and salaries relates only to PAYE taxes and employees

PRSI/NIC.


Prepare PRSI/NIC T Account for the month of April 2015

5 Marks



Part D

A. Annie is a sole trader and provides you with the following information for the month of January:

Units Price

€/£

1 Jan Opening inventory 100 2.10

5 Jan Purchases 700 2.60

9 Jan Sales 600

18 Jan Purchases 500 2.80

27 Jan Sales 50


Calculate the value of the closing inventory at the end of January if A. Annie adopts the First In First Out

(FIFO) method of inventory valuation?

5 Marks

Part E

The following information is available for a sole trader for a financial year:

Inventory at the start of the accounting period was €/£50,000.

During the period, the sole trader purchased goods for resale totalling €/£460,000.

Purchases returns amounted to €/£20,000

Carriage inwards costs totalled €/£2,000.

The closing inventory at the year-end was at €/£52,000.

Discounts received during the year amounted to €/£2,180.

The gross profit margin of the business during the year is 12%.


Calculate the gross profit made by the sole trader during the financial year.

5 Marks

Part F A sole trader has provided the following balances:

Payables’ ledger control account €/£24,200

List of total individual payables €/£24,000

During an investigation the following additional information has come to light:

A credit purchase invoice amounting to €/£200 was not recorded in the listing

The purchase day book was overcast by €/£200

Debit balances totalling €/£200 were not included in the list of the total individual payables’ balances.


Calculate the corrected balance on the payables’ ledger control account and the list of total individual payables’

balances.

5 Marks

Total 20 Marks



SECTION B

Answer any TWO of the three questions in this Section

QUESTION 4

Part A

Outline your understanding of the terms external audit and internal audit as they relate to accounting.

6 Marks

Part B

Outline why ethics are important to accountants in general and specifically to an Accounting Technician.

5 Marks

Part C

Accounting concepts and conventions are of fundamental importance in the preparation of financial statements.

With the aid of relevant examples outline your understanding on any three of the following

concepts/conventions.

i. Accruals

ii. Going Concern

iii. Historical Cost

iv. Materiality

v. Prudence

9 Marks

Total 20 Marks



QUESTION 5

Part A

Outline your understanding, with the use of relevant examples, of capital and revenue expenditure.

4 Marks

Part B

On 1 January 2014 M. Murray’s books and records contained the following balances:

€/£

Delivery vans at cost 101,750

Accumulated depreciation delivery vans 32,410

During the financial year ending 31 December 2014 the following occurred:

On 1 April 2014 delivery van A was traded in against a new delivery van D. Delivery van A had been

purchased on 1 December 2010 for €/£25,000.

M. Murray paid for delivery van D in cash. The list price of delivery van D was €/£37,500. M. Murray

wrote a cheque in full payment for delivery van D of €/£32,000.

Delivery vans are depreciated at 15% per annum on the straight line basis from the month of purchase to the

month of sale. Depreciation is calculated to the nearest whole number.


i). Prepare the delivery van at cost account.

3 Marks

ii). Prepare the delivery van accumulated depreciation account for the year ended 31 December 2014.

4 Marks

iii). Prepare the disposal account for delivery van A.

2 Marks

Part C

A sole trader commenced in business. The following assets were purchased for use within the business:

Asset Type Additional Comments

Manufacturing

Equipment

Manufacturing equipment is expected to consume economic benefit at a relatively

high rate in the first years after purchase with consumption of economic benefit

falling in later years.

Building Buildings are expected to reduce in value evenly over its useful life


i. Outline your understanding of the terms straight line depreciation and reducing balance depreciation as

they relate to non-current assets.

4 Marks

ii. Advise the sole trader as to the most appropriate depreciation method to be applied for each of the

assets outlined above. You must justify your decision in each case.

3 Marks

Total 20 Marks



QUESTION 6

The assets and liabilities of Happy Racket Badminton Club as at 1 January 2014 and the 31 December 2014

include the following:

1 Jan 2014 31 Dec 2014

€/£ €/£

Courts and clubhouse 211,710 211,710

Fixtures and fittings – cost 16,510 ?

Fixtures and fittings – accumulated depreciation 8,050 ?

4% long term loan 120,000 ?

Bar inventory 9,630 10,180

Bar payables 7,200 6,970

Insurance prepaid 8,120 7,130

Annual subscriptions in arrears 25,150 27,800

Annual subscriptions in advance 4,610 3,700

Bar wages due 2,275 2,450

Life subscriptions fund 60,000 ?

The bank T account is as follows:

Bank Account

€/£ €/£ Members subscriptions (all annual) 172,450 Balance b/d (1/1/2014) 16,750

Bank interest 95 Advertising for dinner dance 450

Bar receipts 92,160 General repairs & expenses 32,040

Annual captains dinner dance ticket

sales

16,940 Payments to bar payables 44,300

Payments for bar wages 57,050

Fees from non-members 6,720 Loan interest 3,800

Light and heat 7,210

Repayment of loan principle 8,500

Insurance 12,000

Catering for dinner dancer 3,890

General expenses for dinner dance 1,150

Bank charges 250

Balance c/d 100,975

288,365 288,365

Balance b/d (31/12/14) 100,975

Additional Information

The life subscription fund relates to a once off deal that was offered to members in 2006 to help part

finance an extension to the clubhouse. The value of the life membership fund originally was

€/£200,000 and is being credited to the income and expenditure account over 10 years.

Fixtures and fittings are being depreciated at 10% p.a. on the straight line method. During 2014

€/£2,000 of additional fixtures and fittings were purchased. The club’s depreciation policy is to charge

a full year of depreciation in the year of purchase and none in the year of sale. The courts and

clubhouse are not depreciated.


i. Calculate the accumulated fund as at 1 January 2014.

3 Marks

ii. Prepare the Bar Trading account for the year ended 31 December 2014.

5 Marks

iii. Calculate the profit/loss of the dinner dance.

2 Marks

iv. Prepare the Income and Expenditure Account for the year ended 31 December 2014

10 Marks

Total 20 Marks



1st Year Examination: August 2015

Financial Accounting

Suggested Solutions

and

Examiner’s Comments

Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct

and will be marked on their own merits.

Statistical Analysis – By Question

Question No. 1 2 3 4 5 6

Average Mark (%) 62 42 52 27 34 49

Nos. Attempting 196 189 196 150 147 76

Statistical Analysis - Overall

Pass Rate 38%

Average Mark 44%

Range of Marks Nos. of Students

0-39 83

40-49 40

50-59 43

60-69 20

70 and over 12

Total No. Sitting Exam 198

Total Absent 56

Total Approved Absent 6

Total No. Applied for Exam 260

General Comments:

The overall standard of answers was mixed. Most candidates are attempting the required number of

questions. Candidates in the main attempted the correct number of questions and question parts. .

The general presentation of scripts was acceptable. The majority of candidates are now filing question

parts together, though some continue to scatter question parts through-out the examination booklet. The

main areas of weakness around presentation are as follows:

Poor and untidy handwriting

No workings presented for some questions

Workings presented all combined in the rough work section of the paper – despite the answer

book explicitly stating not to do this

Cluttered answers – each new question should be attempted on a new page



Examiner’s Comments on Question One

Solution One

P. Potter

Statement of Profit and loss for the year ended 30 June 2015 [0.5 marks]

Ref to

Workings

€/£ €/£ €/£ Marks

Allocated

Sales 410,850 0.5

Sales returns (21,410) 0.5

Net sales 389,440

Cost of sales

Opening inventory 17,950 0.5

Purchases 275,980 0.5

Purchases returns (9,400) 266,580 0.5

284,530

Less closing inventory (17,190) 0.5

Cost of sales (267,340)

Gross Profit 122,100

Discount received 2,780 0.5

Less Expenses

Rent expense 21,950 0.25

Depreciation delivery vans 5 6,474 1

Insurance 4 10,500 1

Rates and water charges 7,540 0.25

Wages and salaries 71,950 0.25

Carriage outwards 3,120 0.5

Discount allowed 1,970 0.5

Interest charged 3 745 0.5

Telephone, internet and media 5,510 0.25

Increase in the allowance for receivables 1 4,679 0.75

Irrecoverable debts 1 7,130 0.75

Irrecoverable debts recovered 2 (840) 0.75

Power, light and heat 3,140 0.25

Total expenses (143,868)

Operating loss (18,988)

Generally this was a well answered question with candidates displaying a good fundamental

knowledge of the primary statements. Most candidates dealt well with the additional write off of

irrecoverable debts and the calculation of the closing allowance. However many are still confused as

to the movement in allowance being recorded in the Statement of Profit and Loss and the closing

allowance being recorded in the Statement of Financial Position.

Most candidates dealt well with depreciation, however the calculation of the insurance prepayment

proved more challenging.

Most candidates recognised that the bank figure was an overdraft but the two required adjustments to

the bank figure proved more challenging.

Many candidates increased payables by the penalty, however the treatment in the statement of profit

and loss was much weaker.

The naming of the primary statements is still an area of weakness. These are very easy marks to earn.



Solution One (Cont’d)

P. Potter

Statement of financial position as at 30 June 2015[0.5 Marks]

Non-current assets Ref to

Workings

€/£ €/£ €/£ Marks

Allocated

Land 174,500 174,500

Deliver Vans 5 64,740 (23,884) 40,856 0.5

215,356

Current assets

Closing inventory 17,190 0.5

Receivables 1 101,590 1

Closing allowance 1 (10,159) 91,431 0.5

Prepayments 4 4,000 0.5

112,621

Total assets 327,977

Equity and Liabilities

Equity

Capital 150,135 0.5

Accumulated profit/loss 52,320 0.5

Losses for 2015 (18,988) 0.5

Accumulated profits 183,467

Drawings (9,675) 0.5

173,792

Current liabilities

Payables 3 143,695 1.5

Bank overdraft 2 8,215 1.5

VAT liability 2,275 0.5

154,185

Total Equity and Liabilities 327,977

Working 1

€/£

Receivables as per TB 102,740

Additional irrecoverable debts written off (1,150)

Restated receivables 101,590

Allowance for irrecoverable debts 10%

Closing allowance 10,159

Opening allowance (5,480)

Increase in the allowance 4,679

€/£

Irrecoverable debts as per TB 5,980

Additional irrecoverable debts 1,150

Restated irrecoverable debts 7,130



Workings 2

€/£

Bank as per TB (9,855)

Irrecoverable debts recovered 840

(9,015)

Suspense account error 800

8,215

Workings 3

€/£

Payables 142,950

Interest charges 745

143,695

Workings 4

€/£

Insurance 1/12015 to 31/12/2015 8,000

Half a year of a prepayments 50%

Prepayment 4,000

€/£

Insurance as per TB 14,500

Prepayment (4,000)

10,500

Workings 5

€/£

Deliver vans 64,740

Depreciation 10%

6,474



Examiner’s Comments on Question Two

Solution 2

Bank Account/Cash Book

Marks

Allocated €/£ €/£

Marks

Allocated

Balance 52,599 0.75

1 Error 5 8,470 Bank charges 201 1

1 Credit transfer 2,170 O/D penalty 250 1

Dishonoured cheque 1,230 1.5

D. Cheque- penalty 15 0.75

Balance 44,770 SO/DD 1,115 1

55,410 55,410

Balance 44,770

Part B

Bank Reconciliation as at 31 March 2015

€/£

Marks

Allocated

Balance per bank (41,740) 0.5

Correction of bank error (1,250) 1

Correction of bank error (650) 1

Add outstanding Lodgement 5,120 0.75

Less O/S Cheques

4528 840

4535 1,740

4537 3,670 (6,250) 0.75

Balance (44,770)

A popular question that was reasonably well answered – most candidates were aware of the correct

approach to the question. Challenges arose in the following areas:

Point 3 was adjusted in the cash book in error

Treatment of the dishonoured cheque – point 4

Correct of error around point 5

Correct of error around point 6



Part C

To: Whom it May Concern

From: An Accounting Technician

Subject: Importance of Preparing Control Accounts

Date: 20/8/2015

I have been asked to prepare a report outlining the importance of regular preparation of bank

reconciliations:

Identification of errors, such errors may have been made either by the bank, the company or

both. For example a business may have omitted to post receipts from receivables.

Items such as bank interest, charges, standing orders, direct debits and dishonoured cheques.

These will be known by the bank but not identified by a business until it receives the bank

statement and prepares the bank reconciliation.

Should you have any further queries please feel free to contact me.

An Accountant Technician

[1.5 marks per reason and 1 mark for report format]

Part D

A petty cash system operates by setting aside a small amount of cash, called a float. This is withdrawn from the

business bank account normally by cashing a petty cash signed cheque in the bank. A responsible member of

staff, who keeps it in a safe locked box, controls cash.

When a small amount of cash is required within the business a petty cash docket is completed setting out details

of the cash requirement and authorised. This docket is placed into the cash box and the cash handed over. Where

a receipt is received in respect of the purchase for which the cash was issued, this is then attached to the original

withdrawal docket. At any one time the total of the remaining cash in the box and the total of all dockets in the

box should equal the exact amount of the original float. At the end of a specific period all dockets are totalled

and a cheque is cashed for this exact amount bringing the total petty cash back to the original starting amount.

This is known as the imprest system.

In most businesses there is a requirement for small amounts of cash. For example to purchase supplies for the

canteen where there is no credit facility in the local shop, for the purchase of stamps, newspapers, cleaning and

other supplies and the reimbursement of staff incidental expenses. The system must control the flow of cash and

regular spot checks should be done.

[Total 4 marks]



Examiner’s Comments on Question Three

Solution 3

Part A

Receivables Control Account

Total Marks

Allocated

€/£ €/£ Total

Marks

Allocated

0.5 Balance b/d. 145,300 Cash receipts 497,280 1

1 Dishonoured cheques 4,800 Discounts allowed 7,500 0.5

0.5 Credit Sales 504,050 Irrecoverable debts 650 0.5

Balance c/d 148,720 1

654,150 654,150

Balance b/d 148,720

[5 Marks]

Part B

Financial year: 1 November 2013 to 31 October 2014

Date of receipt Period covered €/£ €/£ Total

Marks

Allocated

1 October 2013 3 months to 31 December 2013 7,500 2 months 5,000 1

30 December 2013 3 months to 31 March 2014 7,500 3 months 7,500 0.5

4 April 2014 3 months to 30 June 2014 9,000 3 months 9,000 0.5

1 July 2014 3 months to 30 September 2014 9,000 3 months 9,000 0.5

1 October 2014 3 months to 31 December 2014 9,000 1 month 3,000 1

33,500

At the year end there is 2 months rent prepaid. This is recorded in the Statement of Financial Position as a

current liability of €/£6,000 (prepaid income). [1.5 marks]

[5 Marks]

A popular question that was well answered in the main

Part A – Generally well answered through few candidates scored full marks. Challenges arose around

the treatment of the dishonoured cheque, discount allowed and the closing balance owed by credit

customers. Some candidates are not preparing the working in T account format, are getting confused

as a result and are loosing marks.

Part B – Answers here were mixed. Candidates struggled to deal with the correct apportionment of

receipts to the financial period and the calculation of the closing Statement of Financial Position

figure.

Part C – Candidates struggled to treat the opening balance correctly and struggled to calculate the

required figures from the information provided in the question.

Part D – Answers were mixed. Some candidates did not identify that the closing inventory figure was

priced using two inventory prices. Some candidates did not show good workings for this question.

Part E – Most candidates calculated the cost of sales correctly and then simply multiplied it by 12%

to derive the gross profit figure in error. Many candidates incorporated discount received into the cost

of sales figure in error.

Part F – Answers here were very mixed. Many candidates seemed to get confused between the

control account and the listing. Workings tended to be poor for this question.



Part C

PRSI/NIC Account

Marks €/£ €/£ Marks

1 Payments to Revenue Auth. 9,100 Balance b/d 9,100 1

Employers PRSI/NIC 3,710 1

0.5 Balance c/d 14,100 PAYE & EE PRSI/NIC 10,390 1.5

23,200 23,200

Balance b/d 14,100

[5 Marks]

Solution 3

Part D

Units Price Inventory

1 Opening inventory 100 2.10 100*2.10

5 Purchases 700 2.60 100*2.10

700*2.60

9 Sales (600) 200*2.60

18 Purchases 500 2.80 200*2.60

500*2.8

27 Sales (50) 150*2.60

500*2.8

31st Closing inventory 650

Value of closing inventory: (150*2.60) + (500*2.8) = €/£1,790

[5 Marks]

Part E €/£ €/£ €/£ Total

Marks

Allocated

Sales 500,000

Cost of sales



Purchases returns (20,000) 440,000 0.5

Carriage inwards 2,000 0.5

492,000


Cost of sales (88%) (440,000)

Gross Profit (12%) 60,000 2

Discount received 2,180

[5 Marks]

[0.5 marks for excluding discounts received from the calculation]

[2 marks above for GP is for an appreciation of the process and the logic.]



Part F €/£ Total

Marks

Awarded

Payables ledger control 24,200

Purchase day book overcast (200) 1.5

24,000

€/£

Payables listing 24,000

Credit invoice not recorded 200 1.5

Debit balances not included in list (200) 1.5

24,000

[0.5 marks for agreeing the listing and the control account]

[5 Marks]



Examiner’s Comments on Question Four

Solution 4

Part A

External Audit

The users of accounting information need assurance as to the accuracy and reliability of financial statements.

The external audit process strives to provide a high level of assurance to users by providing an independent

examination of the company’s books and financial statements.

To fully appreciate the importance of auditing we must examine the relationship that exists between a

company’s shareholders, directors and auditors. The shareholders are the owners of the company. Large

companies may have thousands of shareholders. In many companies there exists a division of ownership and

management/control. The shareholders elect directors to manage and run the company on a day-to-day basis on

their behalf.

The directors run the company and report back to the shareholders on an annual basis. Reporting is carried out

through the financial statements, with respect to the company’s performance in the statement of profit and loss,

position in the statement of financial position and liquidity in the statement of cash flow.

Accounting is not an exact science and there are many areas where judgements and estimates will have been

made. In addition directors have complete access to all information about the company’s performance, and are

being rewarded based on how well the company performs. There is therefore an inbuilt bias for directors to

portray the best financial picture possible in the financial statements and a danger that directors may act in their

own private interests, rather than those of the shareholders. This scenario is referred to as an agency problem.

To help overcome the agency problem shareholders elect an auditor. The auditor upon examining the books and

financial statements of the company forms an opinion and prepares an audit report that must be included in the

financial statements. If the auditors are satisfied that the books and financial statements of the company have

been prepared in line with the relevant statutory requirements and professional standards, the audit report will

state that the financial statements of the company gives a true and fair view of the state of affairs of the company

at the end of the accounting year. The audit report gives shareholders an impression as to the extent to which

they can rely upon the financial statements prepared and presented to them by the directors.

[3 marks]

Internal Audit

Large companies in addition to external auditors tend to have an internal audit department. This is because in

order to run a company effectively and meet their legal responsibilities, directors need assurance in a number of

areas in addition to the accuracy of their published financial statements (external audit). It is becoming more

expected for companies to have internal auditors.

A reasonably popular question – however answers tended to be poor.

Part A – many candidates could only distinguish between external and internal ausit to the extend that

one is performed by persons external to the business and internal audit by employyes of the business

entity. Some candidates seemded to get management accounting and interal audit confused. Most

candidates we not able to explain why these audits are carried out.

Part B – many candidates explain what ethics are but not why they are important and therefore failed

to score high marks for this question type. Some candidates did not relate ethics to an Accounting

Technician.

Part C – The concept of accruals was generally answered well – though some candidates explain an

accrual as opposed to the accruals concept

The concept of going concern, historical cost and materiality were generally well understood.

Some candidates failed to note that prudence should only be applied under conditions of uncertainty.



In contrast to external auditors, internal auditors are employed by and answer to the company’s management.

The role of the internal auditor is somewhat different to that of the external auditor. The functions of the internal

audit department include:

Scrutinising the company’s accounting procedures;

Testing the internal controls the company has in place to ensure that proper accounting procedures are

applied and that the assets of the companies are safeguarded;

To assess whether internal policies are being upheld and to examine ways in which these policies can

be developed and improved;

Testing the efficiency and effectiveness of operations;

Stewardship of the company’s assets.

[3 marks]

Part B

Ethics in accounting is of utmost importance to accounting professionals and those who rely on their services.

Accounting professionals know that people who use their services, especially decision makers using financial

statements, expect them to be highly competent, reliable and objective. Those who work in the field of

accounting must not only be well qualified but must also possess a high degree of professional integrity.

People need to have confidence in the quality of the complex services provided by accountants and accounting

technicians. Because of these high expectations, accountants have adopted a code of ethics, also known as codes

of professional conduct. These ethical codes call for their members to maintain a level of self-discipline that

exceeds the requirements of laws and regulations.

By joining professional organisations like Accounting Technicians Ireland accounting technicians agree to

uphold the high ethical standards of their profession.

[3 marks for general and 2 marks for accounting technical]

Part C

Accruals

Income is recognised in the financial statements as it is earned, not when the cash is received. Expenditure is

recognised as it is incurred, not when it is paid for. When income is incurred over time (e.g. rental/interest

income) or expenditures are time-based (e.g. rent payments), the income and expenditure recognised in the

income statement should relate to the time period, not to the receipts and payments of cash. For example the sale

of a good is recognised in the financial statements when the rights and rewards of ownership have passed from

the seller to the purchaser not when the cash is received.

Going Concern

Financial transactions are usually prepared on the assumption that the business will continue in operational

existence for the foreseeable future. This means that the financial statements are drawn up on the assumption

that there is no intention or necessity to close down the business.

If the financial statements are not prepared on the going concern basis then they must be prepared on what is

known as the break-up basis. The break-up basis reflects the following:

• Some non-current assets may be sold at less than their value on the statement of financial position,

whilst a machine may have a use for specific business, it may be scrap or no use to other

businesses.

• In contrast, property may be sold for a value in excess of that shown in the statement of financial

position based on original cost.

• If the entire inventory is sold at once then it will not be sold for as much money as if it were sold

in the normal way.

• Some receivables may decide not to pay the business if it is known the business is about to go into

liquidation.



In most cases financial statements are prepared on a going concern basis unless there is evidence to the contrary.

Historical Cost

Assets are recorded at historical cost i.e. what they were bought for. Liabilities are valued at the amount initially

received in exchange for the obligation. Thus the figure shown in the financial statements for an item is the

value of the item when the transaction occurred, not its current market value. Historical cost has many

drawbacks, a significant one being that the non-current assets of the business tend to be undervalued and

therefore the statement of financial position does not show the true value of the business.

Historical cost continues to be used however for the following reasons: it is simple and cheap to apply, figures

used are objective and verifiable and the lack of a sound and acceptable alternative. An example of the historical

cost concept is valuing buildings at a cost price of €/£100,000 even though the current market value of the

buildings is €/£250,000.

Materiality

Materiality is a threshold quality that is demanded of all information given in the financial statements. When

immaterial information is given in the financial statements, the resulting clutter can impair the understand ability

of the other information provided.

An item’s size is judged in the context both of the financial statements as a whole and of the other information

available to users that would affect their evaluation of the financial statements. An example of a material item is

the value of non-current assets of €/£250,000 in the financial statement of an entity with total assets of

€/£320,000. The non-current assets are material to the financial statements of the entity.

Prudence

In conditions of uncertainty, a cautious approach should be taken, so that gains and assets are not overstated and

losses and liabilities are not understated. This means that:

• Sales and profit should not be included in the income statement until the cash has been received or

that there is reasonable certainty that the cash maybe received.

• In contrast, losses should be recognised in the income statement as soon as they are foreseen and

considered reasonably certain.

An example of prudence can be seen in the allowance for receivables. As at the year end the entity does not

know which receivables will not be able to pay the balances due. If it did these balances would need to be

written off as irrecoverable debts. However based on past experience and knowledge of the economy the entity

knows that in all probability not all receivables will be able to discharge the balances owed. The entity therefore

sets up an allowance for receivables to reflect balances that the entity expects not to receive and this is deducted

from receivables in the statement of financial position. Therefore the figure reported for receivables can be

thought of as the funds the entity expects to receive as opposed to the total balances owed as at the year end.

[3 marks each derived as follows: 2 marks each of the explanation and 1 mark for example.]

9 Marks



Examiner’s Comments on Question Five

Question 5

Part A

Capital Expenditure: this is expenditure on goods that will last for more than one year and are not bought for

resale but to be used by the business to help generate sales. Examples include premises, equipment, delivery

vans etc. That is capital expenditure is expenditure on non-current assets or the repayment of loans.

Revenue (Current) Expenditure: this is expenditure on goods that will be used up within one year and are not

bought for resale. They relate to the day-to-day running of the business and are incurred in the for the purpose of

the trade of the business. Examples include wages, rent, rates, telephone etc.

3 marks for explanation and 1 mark for the examples

4 Marks

Part B

Deliver Vans at Cost Account

Total

Marks

Allocated

Date Details €/£ Date Details €/£ Total

Marks

Allocated

0.5 1/1/14 Balance c/d 101,750 1/4/14 Disposal A 25,000 0.5

0.5 1/4/14 Cheque – additions 32,000

1 1/4/14 Trade-in additions 5,500 31/12/14 Balance 114,250

139,250 139,250

1/1/15 Balance c/d 114,250

[0.5 for balancing the T account]

Deliver Vans Accumulated Depreciation Account

Total

Marks

Allocated

Date Details €/£ Date Details €/£ Total

Marks

Allocated

2 1/4/2014 Disposal 12,501 1/1/14 Balance c/d 32,410 0.5

31/12/14 Balance b/d 36,579 31/12/14 Statement of P&L 16,670 1.5

49,080 49,080

1/1/2015 Balance c/d 36,579

[0.5 for balancing the T account]

Not a popular question and answers were very mixed. Candidates struggled with both the disposal

and the addition in the deliver van at cost account.

Many candidates made a reasonable attempt at calculating the depreciation on the delivery van

disposed of. Very few candidates realised that in order to complete the accumulated depreciation

account they needed to calculate the depreciation figure of the year.

Candidates incorrectly stated that either straight line or reducing balance depreciation was better for

assets that lose value fast. Thus missing the point that it is the depreciation % that determines how

fast the asset depreciates and the method used is matched to the pattern of consumption of the asset.



Deliver Vans A Disposal Account

Date Details €/£ Date Details €/£

1/4/14 Cost 25,000 1/2/10 Accumulated Depreciation 12,501

1/4/14 Trade in 5,500

Statement of P&L 6,999

25,000 25,000

[0.5 marks per correct entry for a total of 2 marks]

Delivery Van A Depreciation Calculation:

[2 marks from above broken down as follows:]

2010 25,000 * 15% * 1/12 = 313 0.75

2011 25,000 * 15% * 1 = 3,750

2012 25,000 * 15% * 1 = 3,750 0.75

2013 25,000 * 15% * 1 = 3,750

2014 25,000 * 15% * 3/12 = 938 0.5

12,501

Depreciation Calculation 2014:

[1.5 marks from above broken down as follows:]

Continuing 76,750 * 15% * 1 = 11,513 0.5

Disposed of MV 25,000 * 15% * 3/12 = 938 0.5

Addition 37,500 * 15% * 9/12 = 4,219 0.5

16,670



Part C

(i)

Depreciation refers to the measure of wearing out and consumption in the useful economic life of a non-current

asset. There are two methods of calculating depreciation: the straight line method and the reducing balance

method.

Straight Line Method

Using this method the amount of depreciation charged every year is the same. It is therefore appropriate for

assets were the consumption of economic benefit is relatively even over the life of the asset for example

buildings.

The formula for the straight line method of depreciation is as follows:

Depreciation Charge per Annum = Cost – Estimated Residual Value

Expected Life of Fixed Asset

Reducing Balance Method

The reducing balance method calculates the per annum depreciation charge by multiplying the net book value

(NBV) of the non-current asset by a fixed percentage rate. The result of using the reducing balance method is

that the depreciation charge is the highest in the first year after purchase and falls in each subsequent year. It is

therefore appropriate for assets were the consumption of economic benefit is relatively high in first years after

purchase and reduces thereafter for example motor vehicles.

The formula for the reducing balance method of depreciation is as follows:

Depreciation Charge per Annum = NBV of non-current asset * Depreciation % Rate

[4 Marks]

(ii)

Whether the straight line or reducing balance method of depreciation is chosen depends upon how the asset is

expected to consume economic benefit. The method used should approximate how the asset is expected to

consume economic benefit. Where assets are expected to consume economic benefit evenly over the life of the

asset the straight line method is normally considered appropriate. Thus using the straight line method for the

building would appear appropriate.

Using the reducing balance method means that the depreciation charged is the highest in the first year after

purchase and falls in each subsequent year. Thus using the reducing balance method for manufacturing

equipment would appear appropriate.

1 mark for stating SL/RB – 2 marks for justification

[3 Marks]

[20 Marks]



Examiner’s Comments on Question Six

Solution 6

Part i

1/1/2014 1/1/2014 Total

Marks

Allocated

€/£ €/£

Assets

Court and clubhouses 211,710 0.25

Fixtures and fittings 16,510 0.25 Fixtures and fittings (accumulated depreciation) (8,050) 0.25 Bar inventory 9,630 0.25 Subscriptions in arrears 25,150 0.25

Insurance prepaid 8,120 0.25

263,070

Liabilities

Bar payables 7,200 0.25 Subscriptions in advance 4,610 0.25 Bar wages due 2,275 0.25 4% long term loan 120,000 0.25 Bank 16,750 0.25

Life subscriptions fund 60,000 0.25 (210,835)

Opening Accumulated Fund 52,235

[3 marks]

ii

Happy Racket Badminton Club [0.5 for title]

Bar Trading Account for the year ended 31 December 2014.

€/£ €/£ Total

Marks

Allocated

Sales 92,160 0.5

Cost of sales



53,700


Cost of sales (43,520)

Gross Profit 48,640

Less expenses

Bar wages (57,225) 1.5

Bar loss (8,585)

Not a very popular question.

Part i – this was reasonably well answered. Some candidates failed to include the bank figure,

subscriptions in arrears and advance confused some candidates and some candidates prepared the

accumulated fund as at 31 December 2014 in error.

Part ii – answers here were mixed. The calculation of purchases and the bar wages figure caused the

most problems. Some candidates prepared the Trading account in T account format. No marks were

deducted for this. However those that prepared the trading account in T account format seemed to get

confused as to whether an item was a debit or credit and scored poorly as a result.

Part iii – this in general was very well answered.

Part iv – the calculation of subscriptions while improved remains a challenge for others as does, the

release of one year of the annual subscription, insurance calculation, loan interest calculation and

depreciation of fixtures and fittings.



Working 1

Marks above broken down as follows:

Bar Payables A/C

Total

Marks

Allocated

€/£ €/£ Total

Marks

Allocated

0.5 Bank 44,300 Balance b/d 7,200 0.5

0.5 Balance c/d 6,970 Bar Trading Account Purchases 44,070

51,270 51,270

Balance b/d 6,970

Working 2


Wages A/C

Total

Marks

Allocated

€/£ €/£ Total

Marks

Allocated

0.5 Bank 57,050 Balance b/d 2,275 0.5

0.5 Balance c/d 2,450 Bar Trading Account 57,225

59,500 59,500

Balance b/d 2,450

Part iii

Dinner Dance €/£ Total

Marks

Allocated

Proceeds 16,940 0.5

Advertising (450) 0.5

Catering for dinner dancer (3,890) 0.5

General expenses for dinner dance (1,150) 0.5 11,450

Part iv

Happy Racket Badminton Club

Income and expenditure account for the year to 31 December 2014

€/£ €/£ Total

Marks

Allocated

Income

Subscriptions 176,010 2.5

Release of one year life subscriptions 20,000 1

Interest received 95 0.5

Proceeds of dinner dance 11,450 0.5

Fees from non-members 6,720 0.5

214,275

Expenditure

Light and heat 7,210 0.25

Bank charges 250 0.25

Insurance 12,990 1.5

Loss on bar 8,585 0.5

Loan interest 4,800 1

General repairs and maintenance 32,040 0.5

Depreciation fixtures and fittings 1,851 0.5

(67,726)

Excess of income over expenses 146,549

[0.5 for leaving out repayment of the loan principle]



Workings


Subscriptions Account

Total

Marks

Allocated

Details €/£ Details €/£ Total

Marks

Allocated

0.5 Opening subs in arrears 25,150 Opening subs in advance 4,610 0.5

I/E value for subs 176,010 Cash received for subs 172,450 0.5 0.5 Closing subs in advance 3,700 Closing subs in arrears 27,800 0.5

204,860 204,860

Opening subs in arrears 27,800 Opening subs in advance 3,700

Insurance Account

Total

Marks

Allocated

Details €/£ Details €/£ Total

Marks

Allocated

0.5 Opening balance 8,120 Income and Exp A/C 12,990 0.5 Bank 12,000 Closing balance 7,130 0.5

20,120 20,120

Opening balance 7,130

Loan Interest Working

€/£

Loan principle 120,000

Interest at 4% 4%

4,800

Loan interest paid 3,800

Loan interest to be accrued 1,000

€/£

Fixtures and fittings 16,510

Additions 2,000

18,510

Depreciation 10%

1,851

Financial Accounting - Accounting Technicians Ireland · Answer ALL THREE questions in Section A...

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