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Financial Acc May 2016 1st Year Paper

of 34 Fin. Accounting S2016 (FA)

Financial Accounting 1st Year Examination

May 2016 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 2016 and may not be reproduced without permission of Accounting Technicians Ireland. © Accounting Technicians Ireland, 2016.



Accounting Technicians Ireland

First Year Examination: Summer 2016

Paper: FINANCIAL ACCOUNTING

Tuesday 10 May 2016 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: The terminology in use for 2016 exams will be in line with the FRS 102. In some cases this differs slightly from the terminology previously used (IFRS). For the 2016 exams, students who use IFRS terminology will not be penalised, however it is preferred that students use FRS 102 terminology throughout.



SECTION A

Answer ALL THREE QUESTIONS (Compulsory) in this Section

QUESTION 1 (Compulsory) The following trial balance was extracted from the books of B. Buster, a sole trader, on 31 December 2015:

€/£ €/£ Buildings 200,750 Accumulated depreciation on buildings 78,210 Fixtures and fittings 154,410 Accumulated depreciation on fixtures and fittings 12,150 Delivery Vans 74,100 Accumulated depreciation on delivery vans 34,520 Inventory as at 1/1/2015 13,120 Receivables and payables 74,320 41,970 Allowance for receivables 2,150 Bank and cash 7,130 PRSI/NIC liability 3,150 Accruals 780 Sales and purchases 312,400 613,410 Returns 2,170 4,520 Discounts 1,780 2,950 Delivery van fuel 3,250 Power 6,410 Telephone and internet 7,520 Business insurance 14,420 Rates and water charges 5,250 Wages and salaries 87,135 Employers PRSI/NIC 9,160 5% Long term bank loan 135,000 Long term loan interest 3,740 Repairs on delivery vans 1,520 Irrecoverable debts 1,250 Drawings 9,100 Accumulated profits/losses 23,170 Suspense account 225 Capital 22,470 981,805 981,805

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

1. The inventory count as at 31 December 2015 showed the following information. Based on this

information the value of closing inventory to be incorporated into the financial statements must be

calculated.

Product Quantity Cost per unit Sales Price per unit Costs to Sell per unit in Units €/£ €/£ €/£

A 915 2.10 4.75 0.35 B 3,110 0.90 0.85 - C 5,100 1.45 1.50 0.15

2. On 30 June 2015 B. Buster paid €/£2,220 for his personal house insurance out of the business bank

account funds. No part of the house is used in the business.



3. Rates and water charges are €/£350 per month. On 31 December 2015 B. Buster paid an invoice for

rates and water charges for quarter 1, 2016.

4. B. Buster was overcharged for power during 2015. The balance in the suspense account relates to a

refund of these power expenses. The refund was debited to the bank and no other entry was made.

5. On 30 June 2015 delivery van B was sold. Delivery van B had been purchased for €/£31,000 and had

accumulated depreciation of €/£24,455 as at 1 January 2015. €/£11,000 was received and lodged to the

bank for the sale of delivery van B. None of the above entries were recorded in the books and records

of B. Buster.

(See additional information at point six for depreciation policy).

6. Allowance to be made for depreciation as follows:

Buildings 2% straight line

Fixtures and fittings 5% reducing balance

Delivery Vans 15% straight line

The depreciation policy is to charge depreciation on a monthly basis from the month of purchase to the

month of sale/disposal.

7. B. Buster believes that the allowance for receivables is appropriate and does not need to be adjusted.

You are required to prepare: a) The Income Statement for the year ended 31 December 2015.

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

9 Marks Total 20 Marks



QUESTION 2 (Compulsory) You have been provided with Bank Statement and the Bank T Account for S Sam for the month ended 30 April 2016.

Bank T Account €/£ €/£ 07/04 Lodgement 51 3,650 01/04 Balance b/d 4,150 11/04 Lodgement 52 120 04/04 Cheque 1024 1,420 12/04 Standing Order 850 11/04 Cheque 1023 789 18/04 Lodgement 53 490 15/04 Cheque 1025 610 25/04 Lodgement 54 2,130 18/04 Cheque 1026 2,150 29/04 Lodgement 55 1,410 22/04 Standing Order 250 25/04 Cheque 1027 1,312 30/04 Balance c/d 4,856 29/04 Cheque 1028 850 29/04 Cheque 1029 1,975 13,506 13,506 01/05 Balance 4,856

S Sam Bank Statement as at 30 April 2016

Date Details DR CR Balance €/£ €/£ €/£ 01/04 Balance -2,150 01/04 Lodgement 50 150 -2,000 01/04 Cheque 1022 2,150 -4,150 05/04 Cheque 1024 1,240 -5,390 06/04 Quarterly charges 202 -5,592 07/04 Lodgement 51 3,560 -2,032 11/04 Lodgement 52 120 -1,912 12/04 Cheque 1023 789 -2,701 12/04 Credit transfer 103 -2,598 13/04 Standing Order 850 -3,448 14/04 ESB – direct debit 741 -4,189 16/04 Cheque 1025 610 -4,799 18/04 Lodgement 53 940 -3,859 19/04 Cheque 1026 2,750 -6,609 23/04 Standing Order 250 -6,859 25/04 Cheque 1027 312 -7,171 25/04 Lodgement 54 2,130 -5,041 28/04 Annual interest 16 -5,025 29/04 Credit transfer 312 -4,713 (Guidance: if the amount for the same item in the bank account and the bank statement differs you should assume that the bank statement is correct.) You are required to prepare: a) Reconcile the opening balance as per the cash book to the balance as per the bank statement.

3 Marks b) Prepare the corrected Bank T Account for S Sam for the month ended 30 April 2016.

9 Marks c) Prepare the Bank Reconciliation Statement as at 30 April 2016.

4 Marks d) With the aid of examples from the Bank Statement and Bank T account above, outline two reasons as

to why it is important to prepare bank reconciliations regularly. Your answer should be presented in report format.




QUESTION 3 (Compulsory) Answer ANY FOUR of the SIX Parts below

Part A Prepare a note:

Describing the terms internal audit and external audit and Outline two differences between the processes.

5 Marks Part B B. Blake is a sole trader. The trial balance extracted as at 29 February 2016 failed to agree. The credits exceeded the debits by €/£9,210 and the difference was entered in a suspense account. B. Blake undertook an investigation which yielded the following:

1. Purchases returns of €/£6,610 has been credited to the sales returns account as £/€6,450, the corresponding entry was correctly treated;

2. A credit sale of €/£4,100 (excluding VAT) was recorded by debiting sales with £/€2,100 and crediting receivables with €/£4,100. The rate of VAT tax is 15%.

You are required to:

i. Calculate the suspense account balance after adjusting for these errors. 2 Marks

ii. Prepare the journal entry for error 2. 3 Marks

Part C D. Don has a term loan. The following details are available in relation to the term loan for the year ended 31 December 2015:

On 1 January 2015 D. Don owed the bank €/£75,000 by way of a term loan. On 1 May 2015 D. Don borrowed an additional €/£20,000. On 28 December 2015 D. Don repays €/£10,000 of the loan. During the year ended 31 December 2015 the interest rate applicable on D. Don’s loan was 5%.

You are required to:

i. Prepare the Loan T Account for D. Don for the year to 31 December 2015. 2 Marks

ii. In brief outline the difference between capital and revenue expenditure. 3 Marks

Part D Outline your understanding of each of the error types below and state whether the error would leave the trial balance in balance or not.

Error of omission

Error of transposition

Casting (arithmetical) error

Error of principle

Error of original entry

5 Marks



Part E Outline your understanding of the terms relevance and reliability as they relate to financial accounting information. Are these characteristics of accounting information ever in conflict?

5 Marks Part F The following information is available for a sole trader for a financial year:

Inventory at the start of the accounting period was €/£9,750. During the period, the sole trader purchased goods for resale totalling €/£87,200. Purchases returns amounted to €/£1,210 Carriage inwards costs totalled €/£930. The closing inventory at the year-end was at €/£8,740. Discounts received during the year amounted to €/£540.

The mark up of the business during the year is 50%. You are required to: Calculate the gross profit made by the sole trader during the financial year.




SECTION B

Answer any TWO of the three questions in this Section QUESTION 4 Part A With the aid of a relevant example outline your understanding of the prudence concept.

3 Marks Part B Many businesses which sell goods and services on credit use credit limits.

i. Outline two advantages of selling goods on credit; 2 Marks

ii. Outline your understanding of the term credit limit. 2 Marks

Part C The following information is available for sole trader G. Dungan for the year ended 31 December 2015:

€/£ Draft receivables debit balances as at 31 December 2015 632,150 Allowances for receivables as at 1 January 2015 48,500 Draft irrecoverable debts written off during the year 41,210 Irrecoverable debts previously written off recovered during the year 3,520

As at 31 December 2015 G. Dungan reviewed his receivables listing and decided the following (none of these adjustments have been reflected in the draft figures above):

An additional €/£11,790 of debts should be written off as irrecoverable; G. Dungan considers that €/£15,380 of debts should be made the subject of a specific allowance; The general allowance for receivables should be set at 5% of the remaining receivable balances.

You are required to: Prepare the following for G. Dungan for the year ended 31 December 2015:

i. The allowance for receivables T account;

5 Marks ii. Irrecoverable debts expense T account;

2 Marks iii. Outline your understanding of why businesses set up specific allowance for receivables;

2 Marks iv. Prepare appropriate extracts from the “Current Asset Section” of the Statement of Financial

Position and the “Expenses Section” from the Income Statement. 4 Marks

Total 20 Marks


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QUESTION 5 The assets and liabilities of Green Lawns Tennis Club as at 1 April 2015 and the 31 March 2016 include the following:

1 April 2015 31 March 2016 €/£ €/£ Courts and clubhouse 324,410 324,410 Fixtures and fittings – cost 21,110 ? Fixtures and fittings – accumulated depreciation 4,150 ? 5% long term loan 175,000 ? Bar inventory 18,410 20,700 Bar payables 13,540 14,740 Insurance prepaid 3,150 2,750 Annual subscriptions in arrears 47,960 51,330 Annual subscriptions in advance 3,750 4,970 Bar wages due 2,875 3,150 Life subscriptions fund 120,000 ?

The bank T account is as follows:

Bank Account €/£ €/£Members subscriptions (all annual) 94,410 Balance b/d (1/4/2015) 32,100 Bank interest 107 Advertising for dinner dance 515 Bar receipts 121,150 General repairs & expenses 29,140 Annual dinner dance ticket sales 17,630 Payments to bar payables 51,760 Fees from non-members 9,450 Payments for bar wages 45,350 Loan interest 7,000 Power & Internet 6,190 Repayment of loan principle (31/3/2016) 10,500 Fixtures and fittings 3,150 Insurance 18,120 Catering for dinner dancer 4,175 General expenses for dinner dance 2,220 Bank charges 360 Balance c/d 32,167 242,747 242,747 Balance b/d (1/4/16) 32,167 Additional Information

The life subscription fund relates to a once off deal that was offered to members in 2013 to help part finance an extension to the clubhouse. The value of the life membership fund originally was €/£150,000 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 the financial year €/£3,150 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.

You are required to: i. Calculate the accumulated fund as at 1 April 2015.

3 Marks ii. Prepare the Bar Trading account for the year ended 31 March 2016.

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 March 2016



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QUESTION 6 Part A The following books of prime entry are available for a sole trader for the month of March 2016. Purchases Day Book Date Analysis Total Net VAT

€/£ €/£ €/£ 03-March Goods for resale 6,050 5,500 550 19-March Goods for resale 4,125 3,750 375

10,175 9,250 925

Purchase Returns Day Book Date Analysis Total Net VAT

€/£ €/£ €/£ 11-March Goods for resale 1,298 1,180 118

1,298 1,180 118

Sales Day Book Date Analysis Total Net VAT

€/£ €/£ €/£ 9-March Sale of goods 1,375 1,250 125

24-March Sale of goods 21,890 19,900 1,990 23,265 21,150 2,115

Sales Returns Day Book Date Analysis Total Net VAT

€/£ €/£ €/£ 28-March Sale of goods 2,365 2,150 215

2,365 2,150 215

Cheque Payments Book Date Analysis Total VAT Payables NCA

€/£ €/£ €/£ €/£ 7-March Payables 15,250 - 15,250

19-March VAT 6,410 6,410 28-March Fixtures & Fittings 5,420 5,420

27,080 6,410 15,250 5,420

Cash Receipts Book Date Analysis Total Receivables

€/£ €/£ 16-March Receivables 18,210 18,210

18,210 18,210

You are required to: Post the books of prime entry above to the relevant T accounts and balance these T accounts. (Guidance: please note that some closing balances may appear unusual as you have not been given opening balances above)

8 Marks


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QUESTION 6 (Cont’d) Part B The following information is available for sole trader C. Connor for the year ended 31 December 2015:

€/£ Opening receivables debit balances 101,740 Opening receivables credit balances 2,320 Sales (90% credit, 10% cash) 1,074,600 Sales returns (90% credit, 10% cash) 21,110 Cash received from customers (92% from credit customers) 995,600 Irrecoverable debts 16,150 Irrecoverable debts previously written off recovered (these funds have been included in cash receipts above)

1,170

Opening allowance for receivables 17,620 Contra entry with balances on payables ledger 4,320 Interest charged on over-due accounts 930 Discount allowed 1,785 Closing receivables credit balances 1,510

Included in the cash received from credit customers above was a cheque for €/£3,125 which was dishonoured. C. Connor does not believe that this debt is irrecoverable. Requirement: With the aid of a receivables control account, calculate the closing receivables figure for C. Connor as at 31 December 2015.

9 Marks Part C Outline any two of the purposes of Control Accounts within the financial accounting process.



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1st Year Examination: May 2016

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 (%) 68% 59% 53% 42% 61% 59%

Nos. Attempting 1190 1127 1179 716 714 817

Statistical Analysis - Overall

Pass Rate 65% Average Mark 56% Range of Marks Nos. of Students 0-39 298 40-49 124 50-59 216 60-69 211 70 and over 347 Total No. Sitting Exam 1196 Total Absent 290 Total Approved Absent 37 Total No. Applied for Exam 1523

General Comments:

GENERAL COMMENTS ON THE PAPER OVERALL: Weak scripts were characterised by two main issues:

1.) Not all questions answered Often but not always this was a result of candidates spending too much time on Q1 or answering all 6 parts of Q3 despite the instructions clearly stating to only answer 4 parts.

2.) Poor knowledge meaning parts of questions were left blank in particular question 2. 3.) Failed to show workings for questions, particularly question 1. 4.) Concentration on theory parts of questions with little or no attempt at calculations. 5.) Performance in Q2 & Q4 was very disappointing.

Candidates should be reminded of the need to revise the entire syllabus in preparation for their exam and to follow the instructions given by the examiner on the paper.


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Examiner’s Comments on Question One

Solution One B. Buster Statement of Profit and loss for the year ended 31 December 2015 0.25 Marks

Ref to Workings

€/£ €/£ €/£ Total Marks

Allocated Sales 613,410 0.5 Sales returns (2,170) 0.5 Net sales 611,240 Cost of sales Opening inventory 13,120 0.25 Purchases 312,400 0.5 Purchases returns (4,520) 0.5 307,880 321,000 Less closing inventory 1 (11,450) 0.25 Cost of sales (309,550) Gross Profit 301,690 Discount received 2,950 0.5 Less Expenses Depreciation buildings 6 4,015 0.75 Depreciation fixtures and fittings 6 7,113 0.75 Depreciation delivery vans 6 8,790 1 Business insurance 2 12,200 0.5 Rates and water charges 3 4,200 0.5 Delivery van fuel 3,250 0.25 Delivery van repairs 1,520 0.25 Wages and salaries 87,135 0.25 Employers PRSI/NIC Costs 9,160 0.5 Discount allowed 1,780 0.5 Telephone and internet 7,520 0.25 Irrecoverable debts 1,250 0.25 Interest 7 6,750 0.5 Profit on sale of TFA 5 (6,780) 1 Power 4 6,185 0.5 Total expenses (154,088) Operating profit 150,552

Generally this question was well answered. Candidates struggled in the following areas:

Calculation of the closing inventory. Candidates are valuing all inventory items at cost or NRV as opposed to taking inventory items by category.

Failed to adjust business insurance in the Statement of Profit and Loss. Failed to account for the interest accrual. Calculation of the profit on the sale of the TFA. Many failed to even attempt this calculation. Calculation of the depreciation on delivery vans. Also of concern was that a number of candidates who calculated depreciation for the year

but failed to include it in the Statement of Profit and Loss indicating that they were focused solely on the impact on accumulated depreciation.

Treated the accumulated profit/loss reserve as a loss in error. Included allowance for receivables as an expense.


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Solution One (Cont’d) B. Buster Statement of financial position as at 31 December 2015 0.25 Marks

Non-current assets Ref to Workings


Allocated Buildings 200,750 (82,225) 118,525 Fixtures and fittings 154,410 (19,263) 135,147 Delivery vans 5 & 6 43,100 (16,530) 26,570 0.5 280,242 0.5 Current assets Closing inventory 1 11,450 1.5 Receivables 74,320 0.25 Closing allowance (2,150) 72,170 0.25 Prepayments 3 1,050 0.5 Cash and bank 5 3,870 1 88,540 Total assets 368,782 Equity and Liabilities Equity Capital 22,470 0.5 Accumulated profit/loss 23,170 0.5 Profits for 2015 150,552 0.5 Accumulated profits 196,192 Drawings 2 (11,320) 0.75 184,872 Non-current liabilities 135,000 0.5 Current liabilities Payables 41,970 0.5 Accruals 3,790 0.5 PRSI/NIC liability 3,150 0.5 48,910 Total Equity and Liabilities 368,782


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Solution One (Cont’d) Working 1

Product Quantity Lower of cost & NRV per unit

Total

in Units €/£ €/£ A 915 2.10 1,921.5 B 3,110 0.85 2,643.5 C 5,100 1.35 6,885 11,450

Workings 2 €/£ Drawings as per TB 9,100 Drawings of insurance 2,220 Restated drawings 11,320 €/£ Insurance as per TB 14,420 Drawings (2,220) Restated insurance 12,200

Workings 3 Quarter 1 is January to March 2016 = €350*3 = €1,050 of a prepayment €/£ Rates and water charges as per TB 5,250 Prepayment (1,050) Restated rates and water charges 4,200

Workings 4 €/£ Power as per TB 6,410 Refund of charges (225) 6,185

Workings 5 €/£ Delivery Van B purchase price 31,000 Delivery Van B depreciation 6 months 2015 (2,325) Delivery Van B accumulated depreciation 1/1/15 (24,455) NRV 4,220 Sold for 11,000 Profit 6,780

€/£ Bank as per TB (7,130) Delivery van receipts 11,000 Restated bank 3,870


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Solution One (Cont’d) Workings 6 €/£ Buildings 200,750 Depreciation 2% 4,015

€/£ Delivery van B 31,000 Depreciation 15% Annual 4,650 6 Months 2,325

€/£ Remaining delivery vans 43,100 Depreciation 15% Annual 6,465

Total depreciation €6,465 + €2,325 = €8,790 €/£ Accumulated depreciation delivery vans 34,520 Accumulated on delivery van sold (24,455) Depreciation 6,465 16,530

€/£ Fixtures and fittings 154,410 Accumulated depreciation (12,150) 142,260 Deprecation 5% 7,113

Workings 7 €/£ Loan 135,000 5% Annual interest 6,750 Paid (3,740) Accrual 3,010


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Examiner’s Comments on Question Two

Solution Two Part A

€/£ Total Marks

Allocated Opening balance as per bank balance (2,150) 1

Add outstanding Lodgement 150 1

Less O/S Cheques

1022 (2,150) 1 Balance as per Bank T Account (4,150)

3 Marks

Part B

Corrected Bank T Account

Part B

Corrected Bank T Account Total

Marks Allocated

€/£ €/£ Total Marks

Allocated 1 Error: cheque 1024 180 01/05 Balance b/d 4,856 0.5

0.5 Credit transfer 103 Charges 202 0.5 1 Lodgement 53 450 Error: Lodgement 51 90 1 1 Error: cheque 1027 1,000 Standing order error 1,700 1

0.5 Interest 16 ESB - DD 741 0.5 0.5 Credit transfer 312 Cheque 1026 600 1

Corrected balance 6,128 8,189 8,189 01/05 Corrected balance 6,128

9 Marks

This question was very poorly answered and for many candidates who failed a poor performance in this question was a significant factor. There appears to be evidence of question spotting here by many candidates. Bank reconciliation statements are generally very well answered by candidates. However, this question type has not been asked as a full question in several sittings and it appears that many candidates did not prepare/omitted this section of the syllabus. Some significant areas of concern were as follows:

Many candidates could not make a meaningful effort for this question Part A was very challenging, many candidates appeared not to know how to attempt this part For Part B many candidates prepared the cashbook from scratch as opposed to the corrected

cash book as requested in the examination. Mark were no deducted for this – however this was an example of poor examination strategy as preparing the cashbook from scratch was time consuming.

Part D – some candidates are not preparing their answer in the format requested. Where this question was answered well candidates were generally on their way to passing the exam.


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Part C Bank Reconciliation as at 30 April 2016 0.5 Marks

€/£ Total Marks

Allocated Balance per bank (4,713) 1 Add outstanding Lodgement 55 1,410 1 Less O/S Cheques

1028 850 0.5 1029 1,975 0.5

(2,825) Balance (6,128) 0.5 4 Marks

0.5 Mark for€/£6,128 is for having the bank rec and cashbook account reconcile to the same number. Part D To: Whom it May Concern From: An Accounting Technician Subject: Importance of Preparing Bank Reconciliations Date: May 2016 I have been asked to prepare a report outlining the importance of regular preparation of bank reconciliations. It is important for all businesses to prepare regular bank reconciliations for the following reasons:

Preparation of regular bank reconciliations will help to identify errors, such errors may have been made either by the bank, the sole trader or both. For example, a business may have omitted to post receipts from customers. In the above example there were credit transfers which the business would not be aware of until preparing the bank reconciliation statement.

Preparation of bank reconciliation will also highlight 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. Bank charges of €202 would not have been known to the sole trader until the bank reconciliation was prepared.

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

1 Mark for format, 1 Mark for each reason and 0.5 Mark each example



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Examiner’s Comments on Question Three

Solution Three Part A External Audit An external audit is where an independent accountant, an auditor, examines the books and records of the company with the objective of forming 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.

1.5 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). Internal audits help directors confirm that the internal controls and procedures of entities are adequate and working appropriately. It is becoming more expected for large companies to have internal auditors.

1.5 Marks

Part A This question part was not well answered. Some candidates described management accounting when describing internal audit. The explanation of internal audit in the main was very vague and candidates struggled to score marks with many candidates simply talking around internal audit being an internal function. External audit was better explained. Many candidates did not include the differences between internal and external audit. Part B Not well answered. The suspense account was completed incorrectly by many candidates. Candidates also struggled to provide the correct journal entry. Part C A popular question part that was well answered. Many candidates included interest in the loan T account in error. Part ii was well answered though most candidates failed to realise that the loan was a capital item and the interest a revenue item from part I of the question. Part D Answers were mixed with some candidates having prepared this well. Some explained the error type and then omitted to state whether it left the trial balance in balance or not. Part E Very unpopular question which was in the main poorly answered by those that attempted it. Part F Well answered although a number of candidates made no attempt to calculate the mark up or simply doubled the cost of sales which indicated they did not understand the mark up of 50% instruction. Perhaps more worryingly some students labelled the cost of sales as gross profit which indicated their grasp of the basics of this subject is not what it should be.


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Differences

External auditors are appointed by shareholders and answer to them. Internal auditors are employed by and answer to the company’s management.

Internal auditors have a deeper focus when compared to external auditors. For example an internal auditor will scrutinise the company’s accounting procedures.

There is a legal requirement for most companies to conduct an annual external audit. Internal audit functions are generally only required by PLCs.

Any other relevant difference will be accepted for full marks

2 Marks

Part B (i)

Suspense Account Total

Marks Allocated

€/£ €/£ Total MarksAllocated

0.5 Suspense account balance 9,210 Error 2 2,000 0.75 0.75 Error 1 160 Adjusted suspense account

balance 7,370

9,370 9,370

2 Marks (ii) Debit Credit Total

Marks Allocated

€/£ €/£ Dr Receivables 4,100 0.5 Cr Sales 2,100 0.5 Cr Suspense 2,000 0.25 Dr Receivables 4,715 0.5 Cr Sales 4,100 0.5 Cr VAT 615 0.5 Being the correction of error. Credit sales incorrectly posted. 0.25

3 Marks


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Part C (i)

Loan Account Total

Marks Allocated


Allocated 0.5 Loan repayment 10,000 1/1/15 Opening Balance 75,000 0.5 0.5 Balance 85,000 1/5/15 Additional Loan 20,000 0.5

95,000 95,000 1/1/16 Balance 85,000 2 Marks

(ii)

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

Part D

Error of omission is where a transaction is completely omitted from the books. The trial balance will remain in balance. Error of transposition this is where there is a debit and a credit entry but they are not the same. The trial balance will not balance. Casting error this is where a numerical error has occurred in the balancing process. The trial balance will not balance. Error of principle is where an item is entered into the wrong class of accounts. The trial balance will remain in balance. Error of original entry is where the original figure used to make the double entry is incorrect. The trial balance will remain in balance.

5 Marks

Part E

Relevance

Information is relevant if it has the ability to influence an economic decision of users and is provided in time to

influence those decisions. To be useful information must be provided within the time period in which is has the

ability to influence the economic decisions of users.

1.5 Marks

Reliable

Financial accounting information is generally taken as reliable if: it can be depended upon to represent a true

and fair view, is free from bias, is free from material error, is complete and under conditions of uncertainty has

been prepared in line with the prudence concept.

1.5 Marks


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Relevance in conflict with Reliability

The information that is the most relevant many not necessarily be the most reliable and vice versa. For example

the historical cost versus current cost account. While the historical cost of a building is the most reliable it may

not be the most relevant if the building was purchased several years ago. However while the current value of

the building may be the most relevant for inclusion in financial statements it may not be the most reliable given

that the current value will, in all probability, come from a valuation of the property which ultimately is based on

the opinion of a property valuer.

The general rule here is that the information that is the most relevant or whichever information is reliable

should be included in the financial statements. Thus unreliable information should never be included.

2 marks

5 Marks

Part F


Allocated Sales 131,895 Cost of sales Opening inventory 9,750 0.5 Purchases 87,200 0.5 Purchases returns (1,210) 85,990 0.5 Carriage inwards 930 0.5 96,670 Less closing inventory (8,740) 0.5 Cost of sales (100%) (87,930) Gross Profit (50% mark up on cost) 43,965 Discount received 540 5 Marks

0.5 Mark for leaving out discount received from the calculation 2 Marks for the process and procedure to calculate gross profit.

Total 20 Marks


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Examiner’s Comments on Question Four

Solution Four

Part A 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 statement of profit and loss 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 statement of profit and loss 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. Prudence should only be used under conditions of uncertainty. Where there is no uncertainty there is no justification to use prudence.

3 Marks (2 for explanation and 1 Mark for example)

Part A Solutions to the prudence theory question were mixed. Part B Selling on credit and credit limit were both reasonably well explained, though some candidates for credit limit stated that it was the amount of time customers before paying in error. Part C (i) The calculation of the allowance for receivables was mixed. Some candidates re-wrote off irrecoverable debts previously written off in error while others were not aware of how to handle the specific allowance. (ii) Specific allowances theory was not well explained with a lot of candidates explaining allowances in general and not distinguishing between a specific and general allowance. There were easy marks for the extracts which were often picked up by the students who attempted it. A significant number of the students that attempted this question did not answer all parts of the question.


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Part B

(i) Advantages of selling goods on credit

The business customer base may increase (increased sales)

It helps improve the business cash flow by increasing sales, if the cash is collected on time from receivables

It helps build a relationship with the customer in the long run.

(Any two of these advantages or other relevant advantages)

2 Marks

(ii) Credit Limit

It is normal practice for businesses to set credit limits for individual customers. A credit limit is the max amount of credit that the business is willing to offer to a customer and credit limits will vary from customer to customer. If a customer uses a credit limit wisely the credit limit can be extended over time, giving the receivable access to interest free credit. It is the function of the credit control department to set credit limits. The major function of credit limits is that they should help to reduce the risk of irrecoverable debts for a business.

2 Marks


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Solution Four (Cont’d) Part C

£/€ Total Marks

Allocated Draft receivables debit balances as at 31 December 2015 632,150 0.5 Additional irrecoverable debt (11,790) 1 Restated receivables 620,360

General Allowance workings

£/€ Restated receivables 620,360 Specific allowances (15,380) 0.75 604,980 General Allowance 5% Closing general allowance 30,249 0.5 Specific allowance 15,380 0.75 Total closing allowance 45,629 Opening allowance for receivables (48,500) 0.5 Decrease in allowance for receivables 2,871

(i)

Allowance for receivables T Account

Total Marks

Allocated

Details €/£ Details €/£ Total Marks

Allocated

4.5 Statement of P&L 2,871 Balance b/d 48,500 0.5

Balance c/d 45,629 48,500 48,500 Balance c/d 45,629

0.5 Mark for balancing the account 4.5 Marks for €/£2.871 broken down above

(ii)

Irrecoverable Debt Expenses T Account Total

Marks Allocated


Allocated

0.75 Receivables 41,210 Allowance for rec. 2,871 0.5 0.75 Receivables 11,790

Statement of P&L 50,129 53,000 53,000


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(iii) A specific allowance is set up when a business has a specific concern that a debt owed by a receivable may not be recoverable. The business may have knowledge that the receivable is having financial difficulty, the debt may have been owed for a long period of time or the receivable may be disputing the balance owed. Therefore a key difference between the general allowance and the specific allowance for receivables is that the specific allowance will be tied to a list of specific receivables as opposed to the general population of receivables.

2 Marks Solution Four (Cont’d) (iv) D. Dungan Statement of Profit and Loss for the year ended 31 December 2015 (Extract) Total

Marks allocated

Less Expenses Irrecoverable debts 50,129 1 Irrecoverable debts recovered (3,520) 1 (Irrecoverable debts and movement in the allowance for receivables can be shown separately). D. Dungan Statement of financial position as at 31 December 2015 (Extract)

Current assets Total Marks

allocated Receivables 620,360 1 Allowances for receivables (45,629) 1 574,731

4 Marks Total: 20 Marks


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Examiner’s Comments on Question Five

Solution Five Part i

1/4/2015 1/4/2015 Total Marks

Allocated €/£ €/£ Assets Court and clubhouses 324,410 0.25 Fixtures and fittings 21,110 0.25 Fixtures and fittings (accumulated depreciation) (4,150) 0.25 Bar inventory 18,410 0.25 Subscriptions in arrears 47,960 0.25 Insurance prepaid 3,150 0.25 410,890 Liabilities Bar payables 13,540 0.25 Subscriptions in advance 3,750 0.25 Bar wages due 2,875 0.25 5% long term loan 175,000 0.25 Bank 32,100 0.25 Life subscriptions fund 120,000 0.25 (347,265) Opening Accumulated Fund 63,625 3 Marks

Part ii Green Lawns Tennis Club Bar Trading Account for the year ended 31 March 2016. 0.5 Mark €/£ €/£ Total

Marks Allocated

Sales 121,150 0.5 Cost of sales Opening inventory 18,410 0.5 Purchases 52,960 1.5 71,370 Less closing inventory (20,700) 0.5 Cost of sales (50,670) Gross Profit 70,480 Less expenses Bar wages (45,625) 1.5 Bar profit 24,855 5 Marks

In general, this question was well answered and a significant number of students scored heavily. Where challenges did arise was around the treatment of insurance, the calculation of bar wages and bar purchases and the release of one year of the life subscription. Some students incorrectly calculated the value of accumulated funds at 31 March 2016 rather than the opening accumulated funds at 1 April 2015 as was required.


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Working 1 Marks above broken down as follows:

Bar Payables A/C Total

Marks Allocated


Allocated0.5 Bank 51,760 Balance b/d 13,540 0.5 0.5 Balance c/d 14,740 Bar Trading Account Purchases 52,960

66,500 66,500 Balance b/d 14,740

Solution Five (Cont’d) Working 2 Marks above broken down as follows:

Wages A/C Total

Marks Allocated


Allocated 0.5 Bank 45,350 Balance b/d 2,875 0.5 0.5 Balance c/d 3,150 Bar Trading Account 45,625

48,500 48,500 Balance b/d 3,150 Part iii

Dinner Dance €/£ Total Marks

Allocated Proceeds 17,630 0.5 Advertising (515) 0.5 Catering for dinner dancer (4,175) 0.5 General expenses for dinner dance (2,220) 0.5 10,720 2 Marks


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Part iv Green Lawns Tennis Club Statement of Profit and Loss for the year to 31 March 2016 0.5 Mark €/£ €/£ Total

Marks Allocated

Income Subscriptions 96,560 2.5 Release of one year life subscriptions 15,000 1 Profit on bar 24,855 0.5 Interest received 107 0.5 Proceeds of dinner dance 10,720 0.5 Fees from non-members 9,450 0.5 156,692 Expenditure Power and internet 6,190 0.25 Bank charges 360 0.25 Insurance 18,520 1.5 Loan interest 8,750 1 General repairs and maintenance 29,140 0.5 Depreciation fixtures and fittings 2,426 0.5 (65,386) Excess of income over expenses 91,306

10 Marks Total: 20 Marks

0.25 Mark if no accrual for loan interest is calculated.


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Solution Five (Cont’d) Workings Marks above broken down as follows:

Total Marks

Allocated


Allocated

0.5 Opening subs in arrears 47,960 Opening subs in advance 3,750 0.5 I/E value for subs 96,560 Cash received for subs 94,410 0.5

0.5 Closing subs in advance 4,970 Closing subs in arrears 51,330 0.5 149,490 149,490 Opening subs in arrears 51,330 Opening subs in advance 4,970

Insurance Account Total

Marks Allocated


Allocated 0.5 Opening balance 3,150 Income and Exp A/C 18,520 0.5 Bank 18,120 Closing balance 2,750 0.5

21,270 21,270 Opening balance 2,750

Loan Interest Working €/£ Loan principle 175,000 Interest at 4% 5% 8,750 Loan interest paid 7,000 Loan interest to be accrued 1,750 Depreciation on fixtures and fittings €/£ Fixtures and fittings 21,110 Depreciation 10% 2,111

€/£ Fixtures and fittings additions 3,150 Depreciation 10% Annual 315


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Examiner’s Comments on Question Six

Solution 6

Part A Payables A/C

€/£ €/£ Purchases returns 1,298 Purchases book 10,175 Cheque payments 15,250 Balance c/d 6,373

16,548 16,548

Balance b/d 6,373

1.5 Marks (0.5 per entry)

Receivables A/C €/£ €/£ Sales book 23,265 Sales returns book 2,365 Cash receipts book 18,210 Balance c/d 2,690 23,265 23,265 Balance b/d 2,690


VAT €/£ €/£

Purchases book 925 Purchases returns 118 Sales returns 215 Sales book 2,115 Cheque payments 6,410 Balance c/d 5,317

7,550 7,550

Balance b/d 5,317 2.5 Marks (0.5 per entry)

Fixtures and Fittings Account €/£ €/£

Cheque payments 5,420

0.25 Mark (0.25 per entry)

Bank €/£ €/£

Cash receipts book 18,210 Cheque payments 27,080 Balance b/d 8,870

27,080 27,080

Balance c/d 8,870 0.5 Mark (0.25 per entry)

This question was also particularly well answered by those who attempted it. Some candidates were not familiar with how to treat the VAT element when posting to the T Accounts. The control account part of the question was again generally well answered.


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Sales Returns Account €/£ €/£

Receivables 2,150

0.25 Mark (0.25 per entry)

Purchases Returns Account €/£ €/£

Payables 1,180


Sales Account €/£ €/£

Sales book 21,150


Purchases Account €/£ €/£

Purchases book 9,250

8 Marks

0.25 Mark (0.25 per entry) 0.75 Mark to be awarded based on balancing T accounts & general presentation. Not every T account

needs to be balance. But students must have shown with at least one T account that they know how to balance the

Part B

Receivables Control Account Total Marks

Allocated €/£ €/£ Total

Marks Allocated

0.5 Balance b/d. 101,740 Balance b/d 2,320 0.5 1 Credit Sales 967,140 Sales returns 18,999 1 1 Irrecoverable debts, recovered 1,170 Cash receipts 915,952 1

0.5 Interest charged 930 Irrecoverable debts 16,150 0.5 0.5 Dishonoured cheques 3,125 Contra 4,320 0.5

Discounts allowed 1,785 0.5 1 Balance c/d 1,510 Balance c/d 116,089 1,075,615 1,075,615 Balance b/d 116,089 Balance b/d 1,510 9 Marks

0.5 Marks for leaving out opening allowance for receivables


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Part C Any two of the following purposes of control accounts

The function on control accounts is to keep the nominal ledger free of details and yet have the receivables and payables balances for the Trial Balance.

They are a means of proving the accuracy of the ledger accounts of receivables and payables. Control accounts help to locate errors and mistakes within the nominal ledger system

Control accounts can help calculate missing figures in the case where an business had not maintained complete records.

Control accounts tend to act as an internal check as the individual who prepares the control account is not normally the person who posts entries to the personal ledgers.

Any two for full marks or any other valid reason 3 Marks

Total: 20 Marks

fa solutions examiners comments s2016 done · financial acc may 2016 1st year paper page 3 of 34...

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