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Advanced Financial Accounting

Sample Paper 2 2016/ 2017 Questions & Suggested Solutions

NOTES TO USERS ABOUT SAMPLE PAPERS

Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see www.AccountingTechniciansIreland.ie) for a comprehensive list of examinable topics.

There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits.

This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians Ireland.

© Accounting Technicians Ireland, 2016.

INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

Candidates must indicate clearly whether they are answering the paper in accordance with the law and practice of Northern Ireland or the Republic of Ireland.

In this examination paper the €/£ symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling by candidates in the Republic of Ireland to indicate the Euro.

Answer ALL THREE questions in Section A and TWO of the THREE questions in Section B. If more than TWO questions is answered in Section B, then only the first TWO questions, in the order filed, will be corrected.

Candidates should allocate their time carefully. All

workings should be shown.

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

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

Page 2 overleaf.

NOTE:

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

SECTION A

Answer ALL THREE Questions in this Section (The total marks for section A will be 60, made up of a theory question of 20 marks, a multiple choice question of 15 marks and a further question of 25 marks)

QUESTION 1

(i)

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

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

(ii)

8 marks

Describe the steps involved in the standard setting process and the measures taken to improve transparency within the process.

12 marks

Total 20 marks

QUESTION 2

The following multiple choice question consists of TEN parts, each of which is followed by FOUR possible answers. There is ONLY ONE right answer in each part.

Each part carries 1½ marks.

Requirement

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

Total 15 Marks

N.B.

Candidates should answer this question by ticking the appropriate boxes on the special green answer sheet which is supplied with the examination paper.

[1]

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

(a)

the actual or estimated selling price

(b)

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

incurred in marketing, selling and distribution

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

distribution

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

QUESTION 2 (cont’d)

BACKGROUND INFORMATION TO PARTS [2] & [3]

Brian and Jean are in partnership and their capital account balances are £/€ 56,000 and £/€ 84,000 respectively. The partnership agreement details appropriation of partnership profits as follows:

 

Brian

Jean

Annual salary

£/€19,500

£/€28,000

Interest on capital

10 %

10 %

Share of residual profit

40 %

60 %

[2]

If the profit for the year, before appropriation, was £/€112,000 what would Brian’s entitlement be in total:

(a)

£/25,100

(b)

£/30,300

(c)

£/45,300

(d)

£/20,200

[3]

If the profit for the year, before appropriation, was £/€112,000 what would Jean’s entitlement be in total:

(a)

£/45,300

(b)

£/30,300

(c)

£/25,100

(d)

£/66,700

[4]

In accordance with FRS 102 the clarification after the end of the accounting period of proceeds from assets sold before the end of the accounting period, is an example of:

(a)

an adjusting event

(b)

a non-adjusting event

(c)

a material event

(d)

an immaterial event

[5]

The formula for price earnings ratio is:

(a)

dividend per share / market value per share

(b)

earnings per share / market value per share

(c)

market value per share / earnings per share

(d)

market value per share / dividend per share

QUESTION 2 (cont’d)

[6]

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

(a)

greater than 38 but less than 61

(b)

greater than 61

(c)

less than 61

(d)

greater than 23 but less than 61

[7]

If a capital grant is recognised as deferred income in the Statement of Financial Position what are the entries to be made each year over the useful life of the associated asset:

(a)

debit deferred income, credit other operating income

(b)

credit deferred income, debit other operating income

(c)

debit deferred income, credit bank

(d)

credit deferred income, debit bank

 

BACKGROUND INFORMATION TO PARTS [8] & [9]

 

The business premises of ABC Limited went on fire on 30 November 2010 and financial records were destroyed. However the following information is available:

 

£/

 

Receivables : opening

45,000

Closing

56,000

Inventory :

opening

60,000

 

Closing

44,000

 

Sales (credit)

270,000

Irrecoverable Receivables

14,000

Gross margin

20%

[8]

Using the information available what is the value of purchases:

(a)

£/112,000

(b)

£/209,000

(c)

£/121,000

(d)

£/200,000

[9]

Using the information available what is the value of sales receipts:

(a)

£/295,000

(b)

£/245,000

(c)

£/273,000

(d)

£/259,000

QUESTION 2 (cont’d)

[10]

In preparing a cash flow statement in accordance with FRS 102 a profit on disposal of a non - current asset should be:

(a)

deducted from operating profit in computing the net cash flow from operating activities

(b)

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

(c)

deducted from payments to acquire tangible fixed assets to compute capital expenditure

(d)

added to payments to acquire tangible fixed assets to compute capital expenditure

QUESTION 3

WIRE Ltd., a retailing company, has an authorised share capital of /£2,500,000, comprised of 4,000,000 ordinary shares of 50 cent/pence each and /£500,000 of 5% preference shares of €/£1 each.

The following trial balance was extracted as at 31 st December 2014

 

000

000

Ordinary share capital 5% preference share capital Share premium account General reserve Retained profits at 1 January 2014 6% debenture stock (redeemable in 2018) Freehold premises at cost at 1 st January 2014 Freehold premises accumulated depreciation at 1 st January 2014 . Plant & machinery at cost at 1 st January 2014 Plant & machinery accumulated depreciation at 1 st January 2014. Motor vehicles at cost at 1 st January 2014 Motor vehicles accumulated depreciation at 1 st January 2014 Computer equip at cost Computer equip accumulated depreciation at 1 st January 2014 Additions to non-current assets at cost:

Plant & machinery Motor vehicles Computer equipment Disposal of motor vehicles (sale proceeds) Inventory at 31 December 2014 Receivables & payables Bank VAT Corporation tax Prepayments & accruals Long term investments Short term investments Retained profit for the year (after providing for dividends and debenture interest but before adjusting for items 1 to 3 below) Deferred government grants at 1 st January 2014

1,500

300

150

230

41

200

2,500

 

400

420

 

240

120

 

70

120

 

45

70

25

30

 

24

50

156

85

66

 

32

98

12

18

60

40

 

146

90

 

3,669

3,669

ADDITIONAL INFORMATION

(1)

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

Freehold premises Plant & machinery Motor vehicles Computer equipment

2% on cost 10% on cost 20% on cost 33 1/3 % on cost

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

QUESTION 3 (Cont’d)

(2)

During the year motor vehicles which cost £/45,000 in 2011 were disposed of for £/24,000. The only entries made (before extracting the above trial balance) were to debit the bank account and credit the disposal of motor vehicles account.

(3)

The deferred government grants balance included in the above trial balance arises in respect of a grant of £/€ 100,000 received in 2013 to help finance the cost of plant and machinery purchased during that year.

In addition a grant of £/18,000 was received on 29 th December 2014 towards the cost of new computers purchased during the year. This grant has not yet been recorded in the company’s books.

(4)

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

Requirement

(a) Prepare, in the form required by FRS 102, the Statement of Financial Position for WIRE Ltd., for the year ended 31 st December 2014 in as far as the information provided permits.

N. B.

You are NOT required to prepare a Statement of Comprehensive Income or notes to the accounts. You are required to submit workings to show the make-up of the figures in the statement of financial position.

 

17 Marks

(b)

Prepare the following notes to the accounts for the year ended 31 December 2014:

(i)

Non-current assets

(ii)

Deferred government grants

 

6 Marks

Presentation 2 marks Total 25 Marks

SECTION B Answer TWO of the THREE questions in this Section

QUESTION

4

CARTER Limited is installing a new production plant at a cost of £/1 million, in respect of which government grants have been approved as follows:

Capital cost

-

40%

Training costs

-

100%

The company depreciates its plant and equipment on the basis of 20% on original cost. The directors are aware that the accounting treatment for grants is dealt with in FRS 102, and they have asked you to advise them on the accounting options available to them and the effect which they would have on the company’s financial statements.

Requirement

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

(a)

outlines the accounting treatment of the foregoing grants under FRS 102;

(b)

recommends (with reasons) the treatment which you believe would be most suitable in the case of CARTER Limited; and

(c)

indicate the form of accounting policy or other notes which should be included in the annual financial statements of the company.

QUESTION 5

18 Marks

Presentation 2 marks Total 20 Marks

The following errors were identified by the financial accountant of CUSACK Limited (a VAT registered company) when reviewing the year end draft financial statements:

[i] A cheque was written for £/20,000 to MAC GARAGE Limited and was entered into the motor expense account. No other entries were made in the financial records. The cheque was in respect of the balancing payment for the purchase of a new car. A car which has originally cost £/13,000 and which had a net book value of £/€6,500 at 1 st January 2014 was traded in as part exchange. Assume no loss or gain was made on the trade-in.

[ii]

Depreciation on motor vehicles is charged at 25% per annum with a full year’s depreciation charged in the year of acquisition and none in the year of disposal. No account was taken of the transactions in note (i) above when calculating the depreciation for the year to December 2014.

[iii]

During the year a new machine was purchased for £/484,000 (which is inclusive of VAT of 21%). CUSACK Limited received a government grant of £/€60,000 towards the cost of the new machine. Plant and machinery is depreciated at a rate of 10% per annum including a full year’s depreciation in the year of acquisition. No entries were made to record this transaction.

QUESTION 5 (cont’d)

Requirement

(a) Prepare the journal entries to show how each of the above items should be dealt with in the final accounts for the year ended 31 st December 2014. Narratives for the journals are required.

15 marks

(b) Compute the adjusted net profit before taxation for the year ended 31 st December 2014 taking into account the adjustments made at (a) above. The net profit before taxation as per the draft accounts was £/350,000.

3 marks

QUESTION 6

Presentation 2 marks Total 20 Marks

The Statement of Financial Position, Statement of Changes in Equity and other relevant information of CLINIC Limited, for the year ended 31 December 2014, are as follows:

Statement of Changes in Equity as at 31 December 2014

 

Ord

share

Share

Retained

Total

capital

premium

profits

equity

£/'000

£/'000

£/'000

£/'000

As at 1 January 2014 Net profit for year end 31 December 2014 Share issue Ordinary dividends

270

-

180

450

 

90

90

30

30

60

 

( 60)

(60)

 

300

30

210

540

QUESTION 6 (cont’d)

Statement of Financial Position as at 31 December 2014

 

£/'000

£/'000

£/'000

£/'000

ASSETS

Non-current assets

1,440

1,320

Current assets Inventory Receivables Cash & cash equivalents

1,890

1,530

2,850

2,130

30

30

 

4,770

3,690

Total assets

6,210

5,010

EQUITY and LIABILITIES

Capital and reserves £/€1 ordinary shares Preference shares Share premium account Retained earnings

 

300

270

300

300

30

-

210

180

Non-current liabilities Bank loans 10% debentures

2,190

840

1,800

750

1,140

900

Current liabilities Bank overdraft Current installments due on loans 10% debentures Trade payables Taxation

30

3,330

-

2,700

540

540

300

-

1,140

930

30

90

 

2,040

1,560

Total equity and liabilities

6,210

5,010

QUESTION 6(Cont’d)

Additional information:

(1)

On 1 July 2014 CLINIC issued £/1 ordinary shares at £/2 per share.

(2)

During the year CLINIC sold non-current assets with a net book value of £/€90,000 for cash. Included in the Statement of Comprehensive Income is a profit on disposal of £/60,000.

(3)

Included in trade payables at 31 December 2014 is an amount of £/€ 450,000 in respect of non- current assets purchased during the year.

(4)

The Statement of Comprehensive Income includes the following charges for the year:

 

31 Dec 2014

31 Dec 2013

(i)

Depreciation

£/€ 600,000

£/550,000

(ii)

Interest

£/€ 540,000

£/270,000

(iii)

Tax

£/30,000

£/60,000

Requirement

(a) Prepare a statement of cash flows for CLINIC Limited for the year ended 31 December 2014 in accordance with FRS 102.

.

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

18 Marks Presentation 2 marks Total 20 Marks

Advanced Financial Accounting Sample Paper 2 – Suggested Solutions NOTE: This sample paper and solution

Advanced Financial Accounting

Sample Paper 2 Suggested Solutions

NOTE:

This sample paper and solution have been prepared to reflect the provisions of FRS 100

FRS102.

Page 14 of 26

AFA Sample Paper 2

Solution to question 1

(a)

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

Accounting standards are a set of rules that describe how an item in financial accounting is treated and calculated and how accounts should be prepared and presented. The objective of accounting standards is to regulate the accounting profession and to provide guidance to both accounting practitioners and users of financial information about how contentious and difficult areas should be treated.

Accounting standards are issued by a national or international body of the accounting profession and are intended to apply to all financial accounts which are intended to give a true and fair view of the financial position and profit/loss of an entity. Standards are detailed working regulations within the framework of government legislation and they cover areas in which the law is silent. A subcommittee of the FRCthe Codes and Standards Committee are responsible for Irish and UK GAAP.

(b)

Standard setting process

The

standard

setting

process

involves

eight

steps

and

incorporates

an

extensive

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

1. Initial scoping of the issue being considered.

2. A discussion paper providing a detailed overview of the issue, why a standard is necessary, different potential approaches to dealing with the issue, preliminary views of the FRC and an invitation to comment on the issue.

3. Public consultation.

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

5. Exposure Draft

6. The final code or standard

7. Post implementation review

8. Regular reviews.

Transparency within the process

As can be seen from the above discussion the process through which the standard is developed involves a significant amount of public consultation. This improves transparency in the standard setting process. It is not possible for an accounting standard to be issued without taking on board comments from interested parties. This avoids the situation whereby the process becomes a pure academic exercise and ensures that the practical application is considered, understood and provided for.

Solution to question 2

(1)

B

(2)

C

(see working)

(3)

D

(see working)

(4)

A

(5)

C

(6)

B

(7)

A

(8)

D

(see working)

(9)

B

(see working)

(10)

A

Workings:

(2)

112,000 (19,500+ 28,000) 10%(56,000 + 84,000) = 50,500 x 40% = 20,200 20,200 + 19,500 + 5,600 = 45,300

112,000 – (19,500+ 28,000 ) ‐ 10%(56,00 0 + 84,000) = 50,500 x 40% = 20,200
 

(3)

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

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

(8)

Sales

270,000

Gross margin 20% = 54,000 Cost of sales = 270, 000 54,000 = 216,000

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

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

(9)

Opening receivables 45,000 + sales 270,000 = 315,000 315,000 irrecoverable receivables 14,000 closing receivables 56,000 = sales receipts

245,000
245,000

Solution to question 3

(a)

 

WIRE Ltd.

Statement of Financial Position as at 31 December 2014

 

£/€’000

£/€’000

Noncurrent assets

Property, plant & equipment (Note 1)

2,343

Other financial assets

60

2,403

Current assets

Inventories

50

Trade receivables

156

Prepayments (W1)

36

Cash and cash equivalents (W2)

124

 

366

Total assets

2,769

Equity and liabilities

Capital (W4)

1,800

Reserves

380

Accumulated profits (W3)

64

 

2,244

Noncurrent liabilities

Interestbearing borrowings

200

 

200

Current liabilities

Trade and other payables (W7)

233

 

233

Deferred government grants (Note 2)

92

2,769

Solution to question 3(cont’d)

(b)

 

WIRE LIMITED

 
 

Notes to the Accounts for the year ended 31 December 2014

 

(1)

Property, plant and equipment

 

Freehold

Plant &

Motor

Computer

premises

machinery

vehicles

equip

Total

£/€’000

£/€’000

£/€’000

£/€’000

£/€’000

 

Cost at 1st January 2014 additions

2,500

420

120

120

3,160

70

25

30

125

disposals at 31st December

 

(45)

(45)

 

2014

2,500

490

100

150

3,240

Accumulated depreciation at 1st January 2014 charge for year

400

240

70

45

755

50

49

20

50

169

 

450

289

90

95

924

 

disposals

0

0

(27)

0

(27)

at 31st December

2014

450

289

63

95

897

Net book value

at 1st January 2014 at 31st December

2,100

180

50

75

2,405

 

2014

2,050

201

37

55

2,343

(2)

Deferred Government Grants

At 1 st January 2014 Received during the year

 

90

18

 

108

 

Released to Income during the year

(16)

At 31 st December 2014

92

 

Page 18 of 26

AFA Sample Paper 2

 

Solution to question 3(cont’d)

Workings

(1) Prepayments

 

£/€’000

Prepayments per trial balance Add prepayments omitted in error

12

24

 

36

(2) Cash and cash equivalents

 

£/€’000

Bank balance Short term investment

66

40

 

106

Government grant received

18

124

(3) Accumulated profits

£/€’000

Retained profit for year per trial balance Profit on disposal of motor vehicle Depreciation (Note 1) Prepayments Government grants released

146

6

(169)

24

16

 

23

Retained Profit brought forward 1 Jan 2014

41

Accumulated profits

64

(4) Issued capital

 

£/€’000

Ordinary share capital

1,500

8% preference capital

300

1,800

Solution to question 3(cont’d)

(5) Reserves

 

£/€’000

Share premium

150

General reserves

230

380

(7) Trade and other payables

 

£/€’000

Trade payables per Trial Balance

85

Corporation tax

98

VAT

32

Accrued expenses

18

233

(8) Disposal of motor vehicle

 

£/€’000

Cost in 2011

45

Depreciation charge:

2011

2012

2013

NBV

18

Proceeds

24

Profit on disposal

6

Solution to question 4

To

:

The Directors

From

:

A. Accountant

Date

:

XX/MM/YY

Subject

:

Accounting treatment of government grants

A. Accounting treatment

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

1.

Revenue based grant the grant for training costs

2.

Capital based grant the grant for plant

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

based grants are to be credited to revenue as other incomein the period in which the related revenue expenditure has been incurred.

Capital based grants should be credited to revenue over the life of the related noncurrent asset. The amount of the grant should be credited to a deferred grant account, a portion of which is transferred to revenue annually on the same basis as the related asset is depreciated

B. Recommendations

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

grants these grants be credited to revenue as “other income” . Capital Grants these grants should be credited to a deferred grant account and disclosed separately in the Statement of Financial Position under the heading Government Grants’. The grants should be released to the Statement of Comprehensive Income over the life of the related assets using the same rates of depreciation as applied to those assets

C. Accounting policies

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

(i)

Accounting Policy Government Grants

Grants receivable on additions to noncurrent assets are credited to the Deferred Government Grant Account and are allocated to the Statement of Comprehensive Income over the estimated useful lives of the assets concerned. Revenue based grants are credited directly to the Statement of Comprehensive Income in the year in which they become due.

(ii) Note to the Financial Statements

Balance at start of year Received during the year Released to the profit and loss account during the year

Balance at end of year

Solution to question 5

(a)

£/€

XXXX

XXXX

XXXX

XXXXX

DR

CR

(i)

 

DR

Motor vehicles (SOFP)

20000

CR

Motor Expenses (SOCI)

20,000

DR

Motor Vehicles

6,500

CR

Disposal a/c

6,500

DR

Disposal a/c

13,000

CR

Motor Vehicles

13,000

DR

Disposal a/c

6,500

CR

Accumulated Depreciation

6,500

[Being cheque to purchase motor vehicle debited to motor expense in error Trade in of old motor vehicle not recorded.]

(ii)

 

DR

Depreciation (SOCI)

3,375

CR

Accumulated depreciation (SOFP)

3,375

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

(iii)

 

DR

Plant & machinery

400,000

DR

VAT recoverable

84,000

CR

Bank

484,000

[Being purchase of new machine]

 

DR

Depreciation (SOCI)

40,000

CR

Accumulated depreciation (SOFP)

40,000

[Being calculation of depreciation on new machine]

 

DR

Bank

60,000

Cr

Deferred income (SOFP)

60,000

[Being receipt of government grant]

DR

Deferred income (SOFP)

6,000

CR

Grant released (SOCI)

6,000

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

Solution to question 5 (cont’d)

(b)

£/€

Net profit before tax

350,000

(i)

Motor vehicle expense

20,000

(ii)

Motor vehicle depreciation

(3,375)

(iii)

Plant and machinery

(40,000)

(iii)

Grant released

6,000

Revised net profit

332,625

Solution to question 6

[a]

CLINIC Limited

Statement of Cash Flows for the year ended 31 December 2010

 

£/'000

£/'000

Cash flows from operating activities

Net profit before interest (W1)

660

Adjustments for:

Depreciation Profit on disposal (W3)

600

(60)

Changes in working capital Increase in inventory (W2) Increase in receivables (W2) Decrease in payables (W2)

(360)

(720)

(240)

 

(780)

Cash generated from operations

(120)

Interest paid Tax paid (W4)

(540)

(90)

 

(630)

Net cash from operating activities

(750)

Cash flows from investing activities Payment to acquire non-current assets (W5) Receipt from sale of non-current assets (W3)

(360)

150

Cash flows from financing Proceeds from share issue (incl share prem) New bank loans (W6) Issue of new debentures (W7) Dividends paid

60

(210)

390

540

(60)

 

930

Decrease in cash and cash equivalents

(30)

Cash and cash equivalents at start of year Cash and cash equivalents at end of year

 

30

0

Workings

(1) Net profit before interest

 

£/€’000

Net profit for year Add: tax Add : interest

90

30

540

 

660

(2) Changes in working capital

 

£/€’000

Inventory (1,890 1,530) Receivables (2,850 2,130) Trade payables (1,140 450 930)

360 increase

720 increase

240 decrease

(3) Noncurrent asset disposal

 

£/€’000

NBV Profit on sale Sale proceeds

90

60

150

(4) Taxation

 

£/€’000

Opening balance Charge for year Closing balance Amount paid

90

30

(30)

90

(5) Noncurrent asset acquisition

 

£/€’000

Opening balance Less: disposal Depreciation charge

1,320

(90)

(600)

 

630

Closing balance

(1,440)

Purchases Amount owing included in trade payables Amount paid

810

450

360

(6) Bank loans

 

£/€’000

Opening balance (1,800 + 540)

2,340

Closing balance (2,190 + 540)

2,730

New loans

390

(7) Debentures

 

£/€’000

Opening balance

900

Closing balance (1,140 + 300)

(1,440)

New debentures issued

540