FINANCIAL ACCOUNTING

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(1)FINANCIAL ACCOUNTING. FORMATION 2 EXAMINATION - APRIL 2012 NOTES:. You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5. (If you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.) Note: Students have optional use of the Extended Trial Balance, which if used, must be included in the answer booklet. PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE, STATEMENT OF COMPREHENSIVE INCOME BY FUNCTION AND STATEMENT OF FINANCIAL POSITION ARE PROVIDED.. TIME ALLOWED:. 3.5 hours, plus 10 minutes to read the paper.. INSTRUCTIONS:. During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page.. You are reminded to pay particular attention to your communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of your answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted.. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2..

(2) THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND. FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2012. Time allowed: 3.5 hours plus 10 minutes to read the paper.. Answer Question 1 and three of the remaining four questions.. Note: Students have optional use of the Extended Trial Balance, which if used, must be included in the answer booklet.. 1. (a). Discuss the main advantages and disadvantages of operating as a limited company.. (b). The following trial balance was extracted from the books of Dilura Ltd. as at 31st December 2011:. Accountancy Advertising Bad Debt Provision Bank Buildings Buildings Accumulated Depreciation at 31.12.2010 Equipment Equipment Accumulated Depreciation at 31.12.2010 Insurance Intangible Assets Land Light & Heat Long Term Loan Opening Inventory Other Reserves Prepayment Proceeds from Sales of Vehicles Purchases Rates Rent Repairs & Maintenance Retained Earnings Revaluation Surplus Revenue Revenue Return/Purchases Returns Share Capital – 300,000 shares at €2 each Telephone Trade Receivable/Trade Payable Travelling Expenses Truck Expenses VAT Vehicles Vehicles Accumulated Depreciation at 31.12.2010 Wages & Salaries. Debit € 5,600 33,000. Credit €. 1,000 26,890 1,400,000 900,000 320,000 90,000 39,700 640,000 2,670,000 7,000 140,000 800,000 26,000 8,000 9,000 2,100,000 19,000 18,000 37,450. 28,730 7,600 93,500 15,950 12,900 7,480 265,000. 3,264,970 53,000 3,630,000 12,880 600,000 86,300. 89,000 346,350 8,902,150. Page1. (6 marks). 8,902,150.

(3) The following information, based on your investigations, has also come to your attention: (i). Dilura Ltd. had an inventory count at the year-end which revealed that the year-end inventories at cost amounted to €900,000. Included in this figure is €30,000 of slow moving inventories at cost. The post yearend sales register shows that these were subsequently sold just after the year-end at 80% of cost price.. (ii). Depreciation is to be charged as follows: Buildings Equipment Vehicles. 3% on Cost 10% of Reducing Balance 20% on Cost. (100% to Administration Expenses) (100% to Distribution Costs) (100% to Distribution Costs). Depreciation for the year is charged in full in the year of purchases and up to the date of sale, in the year of sale. (iii). The proceeds on the sale of Vehicles, in the trial balance, relates to the disposal on the 1st March 2011 of some vehicles which were purchased for €15,000 on 1st April 2007.. (iv). The land was revalued to €2,750,000 at the year-end.. (v). A preliminary Corporation Tax payment of €36,000 was made on the 31st August 2011 for the 2011 financial year by credit transfer. This transaction has not been included in the above trial balance.. (vi). The prepayment in the trial balance above is the opening prepayment brought forward in relation to Rent. The Rent figure in the trial balance is the amount which has been paid for during 2011. This amount covers rent for the year-ending 31st March 2012.. (vii). There are closing accruals for Telephone and Advertising amounting to €1,100 and €4,350 respectively which have not yet been included in the above trial balance.. (viii) Bad Debts of €2,500 should be written off and this adjustment has not yet been included in the above trial balance. (ix). Due to the current uncertain times, the Bad Debt Provision should be increased to 4% of Trade Receivables.. (x). Corporation Tax is now correctly calculated at €25,000 being owing at the year-end.. (xi). The Intangible Assets in the trial balance include an amount of €155,000 which relates to a brand that has been successfully developed internally by Dilura Ltd. This amount is based on a valuation performed by consultants who specialise in valuing brands.. (xii). VAT represents a refund due from the Revenue Commissioners at 31st December 2011. The Revenue Commissioners have correctly disallowed €2,360 of the figure as relating to non-allowable travelling expenses.. (xiii) The following expenses are to be allocated in the following proportions:. Accountancy Fees Advertising Insurance Light & Heat Rates Rent Repairs & Maintenance Telephone Travelling Expenses Truck Expenses Wages & Salaries Bad Debts Write Off Bad Debt Provision. Distribution Costs 50% 0% 50% 25% 25% 0% 100% 50% 100% 100% 50% 0% 0% Page 2. Administration Expenses 50% 100% 50% 75% 75% 100% 0% 50% 0% 0% 50% 100% 100%.

(4) REQUIREMENT: Prepare, in a form suitable for publication, a Statement of Comprehensive Income and a Statement of Financial Position for Dilura Ltd. for the financial year-ending 31st December 2011. All workings should be shown and generally, the overall adjustment for a working, should be in the form of a double entry or journal (there is no need for a narrative). (34 marks) [Total: 40 Marks]. Page 3.

(5) 2.. The bank account of Proplanner Ltd. for the month of December 2011 was as follows: Dr. Bank Account of Proplanner Ltd. Date Receipts € Date Payments Cheque No. 01/12/2011 Balance b/d 15,245 02/12/2011 R. Patterson 5784 2,450 05/12/2011 A. Harty 5785 02/12/2011 Cash Lodgement 6,000 08/12/2011 M. McDonnell 5786 05/12/2011 M. Kirby 3,553 10/12/2011 L. Sexton 5787 12/12/2011 T. Brennan Ltd. 2,000 13/12/2011 Rent D.D. 18/12/2011 Mulcahy Printers 30/12/2011 Lodgement 3,540 14/12/2011 Cheque - Cancelled 5788 19/12/2011 Bank Charges D.D. 20/12/2011 Conlon Resources S.O. 22/12/2011 F. Davies 5789 29/12/2011 J. Roche 5790 31/12/2011. Balance c/d. 32,788 01/01/2012. Balance b/d. Cr. € 245 348 745 852 650 25 500 2,990 1,640 24,793 32,788. 24,793. The following is the bank statement for Proplanner Ltd. for the month of December 2011.. Date 01/12/2011 04/12/2011 05/12/2011 06/12/2011 07/12/2011 12/12/2011 13/12/2011 14/12/2011 15/12/2011 16/12/2011 17/12/2011 18/12/2011 19/12/2011 20/12/2011 21/12/2011 23/12/2011 27/12/2011 28/12/2011 31/12/2011. Bank Statement for Proplanner Ltd. for December 2011 Description Payments Lodgment € € Balance Lodgement 2,450 Cheque 5784 245 73490 950 Lodgement 6,000 Cheque 5786 745 Rent D.D. 650 Credit Transfer 3,535 Bank Interest 266 Cheque 5787 825 Bank Charges 25 Electricity Supplier 435 Conlon Resources S.O. 500 Lodgement 2,000 74521 600 Telephone Company 212 Cheque 5623 100 Credit Transfer 7,450 Bank Fees re Dishonoured Cheque 2. Balance € 15,345 17,795 17,550 18,500 24,500 23,755 23,105 26,640 26,374 25,549 25,524 25,089 24,589 26,589 25,989 25,777 25,677 33,127 33,125. The bank has confirmed to Proplanner Ltd. that it made errors in Proplanner’s bank account on the 6th December 2011 and 21st December 2011 amounting to €950 and €600 respectively. REQUIREMENT: (a). Prepare the bank reconciliation statement for Proplanner Ltd. as at 31st December 2011.. (15 Marks). (b). Explain the rationale for preparing a bank reconciliation.. (c). Provide reasons for differences that may occur between the bank account and the bank statement. (3 Marks). (2 Marks). [Total: 20 Marks]. Page 4.

(6) 3. (a). In the context of IAS 2 - Inventories, define what is meant by the terms ‘inventory’ and ‘net realisable value’ and explain how inventories should be measured (6 Marks). (b). In the context of IAS 2 - Inventories, describe what is meant by ‘the allowable costs of purchase’ and use an (3 Marks) example to help explain your answer.. (c). Bacon Timothy (BT) has opened a new luxury retail outlet located in Grafton Street in Dublin. BT’s accountant previously worked abroad and is not familiar with international financial reporting standards and has asked you, the trainee accountant, to give advice on the accounting treatment necessary for the following items: (i). One of BT’s product lines is beauty products, particularly cosmetics such as lipsticks, moisturisers and compact make-up kits. BT sells hundreds of different brands of these products. Each product is quite similar, is purchased at similar prices and has a short lifecycle before a new similar product is introduced. The point of sale and inventory system in BT is not yet fully functioning in this department. The Sales Manager of the cosmetic department is unsure of the cost of each product but is confident of the selling price and has reliably informed you that BT, on average, make a gross margin of 65% on each line.. (ii). BT also sells handbags which are manufactured in its own factory in the United Kingdom(UK). This is because BT wishes to be assured of the quality and craftsmanship which goes into each handbag. The UK factory which has made handbags for the last fifty years is located in BT’s head office. Normally, BT manufactures 100,000 handbags a year in it’s handbag division which uses 15% of the space and overheads of the factory. The division employs ten people and is seen as being an efficient division within the overall company.. REQUIREMENT: In accordance with IAS 2 - Inventories, explain how the items referred to in (i) and (ii) above should be measured. (5 Marks). (d). Ginga Ltd. manufactures shovels. The company has consistently used Last In First Out (LIFO) in valuing inventories but has recently been told by it’s accountant that this method is not acceptable under accounting standards and it has agreed to adopt the Weighted Average Cost (WAC) valuation method. At the 1st March 2012, the company had inventories of 4,000 shovels and has computed its value on each basis as follows: Basis FIFO LIFO WAC. Unit Cost - € 9.00 7.50 8.00. Total Value - € 36,000 30,000 32,000. The following is the amount of shovels which the inventory department has received from the manufacturing department during March 2012: Received from Factory Date 08/03/12 22/03/12. No. of Units 3,800 6,000. Manufacturing Cost per Unit - € 7.00 9.00. The following are the sale dates and quantity of shovels sold in March 2012: Date 10/03/12 17/03/12 29/03/12. No. of Units Sold 5,000 2,000 3,000. (Queston continued on page 6) Page 5.

(7) REQUIREMENT: Calculate the correct closing inventory value as at 31st March 2012 using the Weighted Average Cost (WAC) method. (6 Marks) Note: In arriving at the total inventory values, one should make calculations to two (2) decimal places where necessary and deal with each inventory movement in date order. [Total: 20 Marks]. Page 6.

(8) 4.. Matthew and James are in partnership sharing profits and losses in the ratio of 3:1. James receives a salary of €30,000 per annum. They both earn interest on capital at 12% per annum, based on their capital balances at the beginning of the year. Both the salary and interest occur evenly throughout the year. The following is the Statement of Financial Position of the partnership as at 31st December 2010: James & Matthew’s Statement of Financial Position as at 31st December 2010 Non-Current Assets Property, Plant & Equipment Total Non-Current Assets. 400,000. Current Assets Trade Receivables Cash & Cash Equivalents Total Current Assets. 30,000 100,000. 400,000. 130,000. Total Assets. 530,000. Equity & Liabilities Capital Accounts Matthew James. 300,000 150,000. 450,000. Current Accounts Matthew James. 60,000 20,000. 80,000. Total Equity & Liabilities. 530,000. On the 30th April 2011, Matthew decides to retire and agrees to leave the entire amount owing to him as a loan to the partnership bearing interest at 6% per annum which accrues evenly over the year. James and Matthew agree that the goodwill of the business at that date amounts to €150,000 and that it should be brought into the books. John joins James in a new partnership on the 30th April 2011 and introduces capital of €100,000. They agree the following: (i) (ii) (iii) (iv) (v) (vi) (vii). This new partnership is to share profits from 1st April in the ratio James 3: John 2. James’ salary stays the same and John’s salary is €24,000 per annum. James and John took drawings of €12,000 each on the 30th September 2011. They pay interest on drawings of 10% per annum. The new partnership decided to leave the interest on capital at 12% per annum and have agreed that John can earn interest on his capital from the date of the new partnership. The profits, which occurred evenly throughout the year and before any adjustments, amounts to €150,000. The new partnership agrees to eliminate the goodwill from their statement of financial position.. REQUIREMENT: For the year ended 31st December 2011: (a). Prepare the partnership’s appropriation account.. (10 Marks). (b). Prepare the partner’s current accounts.. (10 Marks) [Total: 20 Marks]. Page 7.

(9) 5.. PriceRite Plc is one of the major food retailers in Ireland with a listing on the Irish Stock Exchange. It’s 2011 and 2010 Statements of Comprehensive Income and Statements of Financial Position are shown below: PriceRite Plc Statement of Comprehensive Income for Year Ending 31st December 2011 €'000 90,000 70,000 20,000. 2010 €'000 80,000 63,000 17,000. 4,500 500 4,000. 3,900 500 3,400. 2011 €'000. 2010 €'000. 325,000. 295,000. 3,000 3,200 60,000 66,200. 2,900 3,000 53,000 58,900. Total Assets. 391,200. 353,900. Equity & Liabilities Equity Ordinary Share Capital - €1.00 each Retained Profit Total Equity & Reserves. 20,000 275,500 295,500. 20,000 271,500 291,500. Non-Current Liabilities Long Term Debt Total Non-Current Liabilities. 70,700 70,700. 38,400 38,400. Current Liabilities Trade Payables Bank Overdraft Taxation Accrued Expenses Total Current Liabilities. 15,000 5,000 5,000 25,000. 12,000 7,000 5,000 24,000. Total Equity & Liabilities. 391,200. 353,900. 2011 15.00. 2010 13.00. Sales Cost of Sales Gross Profit Net Profit for the year Dividends Profit Retained. PriceRite Plc Statement of Financial Position as at 31st December. Assets Non-Current Assets Current Assets Inventory Trade Receivables Cash & Cash Equivalents Current Assets. Notes Current Share Price per share. Page 8.

(10) In 2011, the industry averages for the relevant ratios for the food retail sector are as follows:. Current Ratio Acid or Quick Ratio Trade Receivable Days Trade Payable Days Inventory Turnover Days. Food Retail 2.1:1 2.2:1 15 Days 60 Days 20 Days. REQUIREMENT: (a). Using suitable ratio analysis and discussion, assess the liquidity and efficiency of PriceRite Plc from 2010 to 2011. (15 Marks). (b). At a recent accountancy conference you attended, the following argument was made by a presenter: “In the airline industry, the closing year-end balances for inventories and trade receivables are very small and for non-current assets are very large relative to the overall size of their statement of financial position.” REQUIREMENT: Comment on the above claim and explain, with reasons, whether you agree or disagree with this statement. (5 Marks) [Total: 20 Marks]. END OF PAPER. Page 9.

(11) SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND. FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2012. SOLUTION 1 (a) Advantages of operating as a limited company (3 Marks) i) Separate legal identity A limited company has a legal existence separate from management and its members (the shareholders) ii). Members' liability is limited The protection given by limited liability is perhaps the most important advantage of incorporation. The members' only liability is for the amount unpaid on their shares. Since most private companies issue shares as "fully paid", if things go wrong, a members' only loss is the value of the shares and any loans made to the company. Personal assets are not put at risk.. iii). Protection of company name The choice of company names is restricted and, providing a chosen name complies with the rules, no-one else can use it. The only protection for sole traders and partnerships is trademark legislation.. iv). Continuity Once formed, a company has everlasting life unless the directors decide to wind up or liquidate the company. Directors, management and employees act as agent of the company and if they leave, retire, or die, the company still remains in existence. A company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies.. v). New shareholders and investors can be easily introduced The issue, transfer or sale of shares is a relatively straightforward process. vi). Obtain finance The process of lending to a company is also easier than with other business forms as the lending bank may be able to secure its loan against the business by either a floating or fixed charge.. vii). Tax A company is taxed as a separate entity from its owners and the tax rate on companies can be lower than the tax rate for individuals.. i). Disadvantages of operating as a limited company (3 Marks) Cost There are more costs involved with a limited company such as company registration fees, annual filing fees and potentially, depending on the size of the company, audit fees.. ii). Legal and Accounting Requirements To comply with company law and accounting rules, a limited company will require more time from the owners than a sole trader or partnership.. iii). Information can be viewed by others Any information filed for company and accounting requirements can be viewed by the public or competitors which may place the company at a disadvantage.. iv). Dilution of powers Owners can lose control of the company if they do not own or control enough shares to allow them run the company in the way they see fit. This is not an issue for a sole trader.. v). Share issues Share issues are regulated by law making it difficult to reduce the share capital of a company. [Total: 6 Marks]. (b). Page 10.

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(34) Working - Journal Entries !. Working - Closing Inventory Total Inventories at Cost per Inventory Count Damaged Inventories - Cost NRV - Selling Price is 80% of Cost Inventory Write Down Value of Closing Inventories. 30,000 24,000. -. ! 900,000 6,000 894,000. 1.i. Dr. Inventory Cr. Closing Inventory. + Current Assets - Cost of Sales. SOFP SOCI. 1.v. Dr. Corporation Tax Cr. Bank. + Current Assets + Current Liabilities. SOFP SOFP. 1.vi. Balance b/d Bank Payment. ! 894,000 36,000. Rent Account 8,000 Expense - SOCI Balancing Figure 18,000 Balance c/d 26,000. ! 894,000. 1.50. 36,000. 1.00. 21,500 4,500 26,000. 1.00. Payment of !18,000 covers from 01.04.11 - 31.03.12 i.e. 3 months is Prepaid 12 Months 3 Months - Prepayment. 18,000 4,500. + Expenses SOCI Dr. Rent Cr. Opening Prepayment - Current Assets SOFP Being reversal of opening rent prepayment Dr. Rent + Expenses SOCI Cr. Bank - Current Assets SOFP being payment of rent to 31.03.12 which has already been completed in the accounts Dr. Closing Prepayment + Current Assets SOFP Cr. Rent - Expenses SOCI being closing prepayment for the rent paid for the period 01.01.12 - 31.03.12 1.vii. Dr. Telephone Dr. Advertising Cr. Accruals. + Expenses + Expenses + Current Liabilities. 8,000 18,000 4,500. SOCI SOCI SOFP. 1,100 4,350. 1.viii Dr. Bad Debt Write Off Cr. Trade Receivables. + Expenses - Current Assets. SOCI SOFP. 2,500. 1.ix. + Expenses - Current Assets. SOCI SOFP. 2,640. Dr. Bad Debt Provision Cr. Trade Receivables Trade Receivables - Bad Debt Write Off. Balance per TB W1.viii. 18,000 4,500. 5,450 2,500 2,640. 1.00. 1.00 1.00 2.00. 93,500 2,500 91,000 - 3,640 87,360. TB See Above. 1,000 3,640 2,640. 1.x. Dr. Corporation Tax Expense Cr. Corporation Tax. + Expenses - Current Assets. SOCI SOFP. 25,000. 1.xi. Dr. Brand Cr. Intangible Assets. + Expense - Non-Current Assets. SOCI SOFP. 155,000. 1.xii. 1.00. -. - Bad Debt Provision - 4% Revised Trade Receivable Current Bad Debt Provision New Bad Debt Provision Increase in Bad Debt Provision. 8,000. 25,000 155,000. 1.00 1.50. Information only, no double entry required, amount will be treated as a current asset seeing as it is a receivable to the company Dr. Travelling Expenses Cr. Other Receivables - Vat. + Expenses - Current Assets. SOCI SOFP. 2,360. 2,360. CURRENT MARKS. Page 12. 1.00. 13.00.

(35) Working 2 - Expenses Opening Inventory Purchases Purchase Returns Closing Inventory Accountancy Advertising Brands Insurance Light & Heat Rates Rent Repairs & Maintenance Telephone Travelling Expenses Truck Expenses Wages & Salaries Bad Debt Write Off Bad Debt Provision Depreciation - Buildings Depreciation - Equipment Depreciation - Vehicles Total. Per TB Per TB Per TB W1.i Per TB Per TB + W1.vii W1.xi Per TB Per TB Per TB W1.vi Per TB Per TB + W1.vii Per TB + W1.xii Per TB Per TB W1.viii W1.ix W3 W3 W3 + W3 Note 3. Working 3 - Property, Plant & Equipment. -. Cost Accumulated Depreciation b/d Carrying Value b/d at 1st January 2011 Disposal - Cost Disposal - Accumulated Depreciation Carrying Value Depreciation - Buildings - 3% of Cost Depreciation - Equipment - 10% of Reducing Balance Depreciation - Vehicles - 20% of Cost Carrying Value Revaluation Gain Carrying Value c/d at 31st December 2011. Cost of Sales 800,000 2,100,000 12,880 894,000 1,993,120. Distribution Costs 2,800 19,850 1,750 4,750 37,450 4,350 18,310 12,900 173,175 23,000 50,500 348,835. Land Buildings ! ! 2,670,000 1,400,000 900,000 2,670,000 500,000 2,670,000 500,000 42,000 2,670,000 458,000 80,000 2,750,000 458,000. Per TB Per TB Note 1 Note 1. Note 2. Note 1 - Disposal of Vehicle Cost Accumulated Depreciation - 20% on Cost per annum Depreciation 01.04.07 - 31.12.07 Depreciation 01.01.08 - 31.12.08 Depreciation 01.01.09 - 31.12.09 Depreciation 01.01.10 - 31.12.10 Depreciation 01.01.11 - 28.02.11. Cost of Sales 2.00. Distribution Costs 2.50 Admin. Expenses 2.50. Equipment Vehicles ! ! 320,000 265,000 90,000 89,000 230,000 176,000 15,000 12,500 230,000 173,500 23,000 50,500 207,000 123,000 207,000 123,000. -. Total ! 4,655,000 1,079,000 3,576,000 15,000 12,500 3,573,500 42,000 23,000 50,500 3,458,000 80,000 3,538,000. Working 4 - Bank Overdraft Balance per TB - Asset Balance Corporation Tax Payment Closing Balance Working 5 - Corporation Tax Asset Corporation Tax Bill 2011 Corporation Tax Payment Closing Balance - Asset Working 6 - Accruals Telephone Advertising. 0.75 0.75. 3,000 3,000 3,000 3,000 500 Depreciation this year 12,500 12,500. - Non-Current Assets + Non-Current Assets. SOFP SOFP Amount 250,000 15,000. Deprn. Rate 20% 20%. Disposal Account - Vehicle Cost 15,000 Accumulated Depreciation Disposal Proceeds Profit on Disposal 6,500 21,500. 15,000 12,500 No. Of Mths. 15,000 12,500. Depreciation 12 50,000 2 500 50,500. 12,500 9,000 1.00. 21,500 Note 3 - Depreciation of Vehicles Of the total depreciation on Vehicles in 2011, !50,000 relates to assets in the business at the year-end and !500 relates to the vehicle disposed. Land Revaluation Gain. 0.25 0.25 0.75. 2,500. Disposal Account - Vehicle Vehicles Accumulated Depreciation - Vehicles 01.03.11 Disposal Account - Vehicle. Proceeds from Sale of Vehicle Disposal Account - Vehicle Disposal Account - Vehicle Profit on Disposal of Vehicle. 0.25 0.25 0.25. 15,000. Carrying Value of Vehicle disposed. Note 2 - Disposal of Vehicle Cost (265,000 - Disposal 15,000) Disposal - Depreciate until date of disposal Depreciation for the Year. Administration Expenses 2,800 37,350 155,000 19,850 5,250 14,250 21,500 4,350 173,175 2,500 2,640 42,000 480,665. Per TB. 9,000. + Other Income. SOCI. + Non-Current Assets + Other Comprehensive Income. W1.v. -. W1.x W1.v. -. W1.vii W1.vii. SOFP SOCI. 6,500 80,000. 9,000 6,500 80,000. 26,890 36,000 9,110. 0.50. 25,000 36,000 11,000. 1.00. 1,100 4,350 5,450. 0.50. (9.50 Marks to a Total of 9 Marks). Page 13. CURRENT MARKS. 13.50. TOTAL MARKS. 26.50.

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(178) SOLUTION 2 Q 2 (a) Step 1: Reconcile the opening balance in the bank account with the opening balance on the bank statements Balance per Bank Account - 01/12/2011 15,245 Add Items not yet Debited 15,245 Balance per Bank Account - 01/12/2011 Less Unpresented Cheques Cheque. December 31 Balance 31 Cheque 5787 - Difference 31 Lodgement. 1.00. 15,345 5623 -. 1.00 1.00. 100 15,245. Adjusted Bank Account ! December 24,793 31 27 31 7,450 31 31 31 31 32,270. Bank Reconciliation Statement Closing Balance per Bank Statement - 31/12/2011. Lodgement (12/12/11) - Difference Bank Interest ESB Eircom Bank Fees re Dishonoured Cheque Closing Balance. !. 18 266 435 212 2 31,337 32,270. 1.00 1.00 1.00 0.50 0.50 1.00. 33,125. 0.50. Less Unpresented Cheques Cheque 5785 Cheque 5789 Cheque 5790. 348 2,990 1,640 -. 4,978. 0.50 0.50 1.50. Add Lodgement not yet Cleared Lodgement - 30/12/2011. 3,540. 3,540. 1.00. 350. 0.50 1.50. 31,337. 1.00. Bank Errors. 74390 - 06/12/2011 74521 - 21/12/2011. -. 950 600 -. Balance as per Adjusted Bank Account. MARKS Q 2 (b) The rationale for preparing a bank reconciliation is to ensure that the bank account balance can be reconciled to the bank statement thereby ensuring that all transactions have been recorded, recorded correctly and that no fraud has taken place.. 15.00. 2.00. Q 2 (c) Timing Differences This happens as it takes the bank 2 to 3 days to draw the cheques/lodgements through the system. Therefore, there is a timing delay between the time the company write a cheque/receive a lodgement and the cheque/lodgement appearing in the bank statements. However, the cheque/lodgement appears immediately in the company's bank account as they enter it in their accounting system. Errors The person entering the data in the company may make errors in their posting of the data to the bank account of the company for example, the wrong cheque amount posted or an amount not entered at all etc.. 3.00. Bank Account not Updated The bank account may not be updated to reflect the current situation i.e. the bank account needs to take into account any unrecorded items that have gone through the bank statement i.e. Direct Debits, Standing Orders, Returned Cheques etc. TOTAL MARKS. Page 15. 20.00.

(179) SOLUTION 3 Q 3 (a). Q 3 (b). Q 3 (c) i. Per IAS 2, Inventories are assets; (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the process of materials or supplies to be consumed in the production process or in the rendering of services. 2.00. Net Realisable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 2.00. Inventories should be measured at the lower of cost and net realisable value. 2.00. The allowable costs of purchase per IAS 2 comprise; the purchase price import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities) transport costs handling and other costs directly attributable to the acquisition of finished goods, materials and services less any trade discounts, rebates and other similar items.. 3.00. In this example, the Retail Method can be used for measuring inventories of the beauty products. This method is suitable for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin. An average percentage for each retail department is often used. The percentage used takes into consideration inventory that has been marked down to below its original selling price.. 3.00. Q 3 (c) ii The handbags could be measured using standard cost particularly if the results approximate cost. Standard costing takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions. Q 3 (d). WAC Units Balance B/F Received from Factory. 01/03/2012 08/03/2012. Sale. 10/03/2012 -. Sale. 17/03/2012 -. Received from Factory. 22/03/2012. Sale. 29/03/2012 -. Cost ! 4,000 3,800 7,800 5,000 2,800 2,000 800 6,000 6,800 3,000 3,800. WAC per Unit ! 8.00 7.00. Total Cost ! 7.51 7.51 7.51 -. 9.00. 8.83 8.83 -. 2.00. 32,000 26,600 58,600 (7.51 = 58,600/7,800) 37,550 21,050 15,020 6,030 54,000 60,030 (8.83 = 60,030/6,800) 26,490 33,540. 0.50 0.50 0.75 0.50 0.50 0.50 0.50 0.50 0.75 0.50 0.50. The closing value of 3,800 shovels using WAC is !33,540. TOTAL MARKS. Page 16. 20.00.

(180) SOLUTION 4 Q 4 (a) The annual profit before adjustment is !150,000 which occurs evenly throughout the year; The old partnership ceased on the 30th April 2011 i.e. 4/12th of the year. Therefore, the new partnership is in existence for 8/12th of the 2011 year. Consequently, the split of the profit before any adjustment is as follows: Annual Profit - !150,000 Old Partnership - 4/12ths of !150,000 New Partnership - 8/12ths of !150,000. 150,000. 50,000. New Partnership 8/12ths. Old Partnership !. 100,000 New Partnership !. 50,000. 100,000. 1.00. !30,000 x 4/12ths and !30,000 x 8/12ths !24,000 x 8/12ths. (10,000). (20,000) (16,000). 0.50 0.50. !300,000 * 12% * 4/12ths !150,000 * 12% * 4/12ths and !150,000 * 12% * 8/12ths !100,000 * 12% * 8/12ths. (12,000) (6,000). (12,000) (8,000). 0.50 1.00 0.50. (20,040). 2.00. Now, begin to work out the appropriation of profits Net Profit before Adjustment Less Salaries - James - John Less Interest on Capital - Matthew - James - John. Old Partnership 4/12ths. Less Interest on Loan. Note 1. Add Interest on Drawings - James - John Residual Profits. !12,000 * 10% * 3/12ths !12,000 * 10% * 3/12ths. 22,000. 300 300 24,560. 0.50 0.50 1.00. 3:1 1:3 in 1st Partnership and 3:2 in 2nd Partnership 2:3. 16,500 5,500 22,000. 14,736 9,824 24,560. 0.50 1.00 0.50. TOTAL MARKS. 10.00. Residual Profits Split - Matthew - James - John. Note 1 - Interest on Loan from Matthew Opening Capital Account Balance Opening Current Account Balance Goodwill !150,000 split 3:1 Profit after Adjustments Interest on Capital Loan Amount Interest on loan. Q 4 (b) Balance B/D Interest on Drawings Drawings Goodwill Eliminated Loan to Partnership Balance C/D Balance B/D. 300,000 60,000 112,500 16,500 12,000 501,000. 6% per annum by 8/12ths. Matthew ! 221,040. James ! 300 12,000 90,000 -. 221,040. 23,436 125,736. -. -. 20,040. Partners Current Account John Matthew ! ! Balance B/D 60,000 300 Interest on Capital 12,000 12,000 Salary 60,000 Goodwill Created 112,500 Residual Profits 16,500 Interest on Loan 20,040 Balance C/D 72,300 221,040 38,476 Balance B/D. Page 17. -. James ! 20,000 18,000 30,000 37,500 20,236 125,736 23,436. John ! 8,000 16,000 9,824 38,476 72,300. 0.50 2.00 1.00 2.00 2.00 1.00 1.50. -. TOTAL MARKS. 10.00. OVERALL MARKS. 20.00.

(181) SOLUTION 5 (a). PriceRite plc. Current Ratio Acid/Quick Ratio Trade Receivable Days Trade Payable Days Inventory Turnover Days. 2011 66,200/25,000 = 2.65:1 (66,200-3,000)/25,000 = 2.53:1 3,200/90,000*365 = 13 Days 15,000/70,000*365 = 78 Days 3,000/70,000*365 = 16 Days. 2010 58,900/24,000 = 2.45:1 (58,900–2,900)/24,000 = 2.33:1 3,000/80,000*365 = 14 Days 12,000/63,000*365 = 70 Days 2,900/63,000*365 = 17 Days. Calculation of, Commentary on & Presentation of Results (15 Marks) Current Ratio This ratio has increased from 2.45:1 to 2.65:1 this year which is an improvement of over 8% year on year percentage wise. The ratio is also greater than the norm for company’s in their industries which is a positive. The main reason for the increase is the fact that current assets increased by over 12% driven mainly by the increase in cash and cash equivalents which increased by 13.21% year on year. Current liabilities increased by 4.17% year on year driven by the increase in trade payables of 25% and offset by the decrease in taxation of 28.57% year on year. Obviously, the retailer has slowed paying their trade payables and increased their cash flow as a result as well as retaining their profits within the company. The retailer has also expanded significantly during the year as their property plant and equipment has increased by €30 million which has been funded by long-term debt which increased by €32.3 million. This is good financial management as the company has funded long-term assets by long-term debt and preserved their current ratio as a result. This company has no bank overdraft and are in a very good position financially. Acid or Quick Ratio This ratio has increased from 2.33:1 to 2.55:1 this year which is an improvement of over 9.44% year on year percentage wise and again is higher than the industry average of 2.2:1. As mentioned in the analysis of the current ratio, the main driver of the increase in the ratio has been the increase in cash and cash equivalents with lower increases in overall current liabilities. Trade Receivable Days This has decreased marginally from 14 to 13 days, a decrease of over 7% year on year which again is a positive result. This result is slightly lower than the industry average. The main reason for the decrease in the ratio is that trade receivables increased by 6.67% whereas revenue increased by 12.5% year on year. It is heartening to see the ratio improving but further improvement should be achievable as the retailer is operating in a cash business thereby ensuring that trade receivables should be low and therefore, the company should continue to focus on reducing this ratio. Trade Payable Days This increased from 70 days to 78 days which is an increase of over 11.43% year on year. This again is a good result as it means that the company have delayed paying their suppliers longer ensuring that the cash flow has improved from day to day trading. Given that the retailer has such strong purchasing power allows it to delay paying as its suppliers are quite dependent on the retailer for their sales. The industry average is 60 days so PriceRite plc. is more aggressive in delaying payment to its suppliers and the stock market will be happy with this. The main reason for the increase is due to the increase in the cost of sales (11.11% increase) due to the increase in the business whereas the trade payables increased by 25% year on year but albeit from a low base of €12 million. Inventory Turnover Days There is no opening stock for 2010 or purchases given so in calculating this ratio, the closing inventory and cost of sales is taken. The ratio decreased slightly from 17 days to 16 days which is a 5.88% year on year as the retailer turned over its products quicker which is a positive. The retailer is also doing better than the industry average of 20 days and is to be commended for the efficiency of its internal operations. This overall proper management of the company has ensured that the market has taken notice by increasing the share price by over 15% year on year. The main reason for the decrease in the inventory turnover ratio is due to the increase in cost of sales of 11.11% year on year whereas the inventory in the business has increased by only 3.45% year on year. Therefore, the company is playing close attention to its inventory control. (b). I agree with the comment as in the airline business, most of their non-current assets are aeroplanes which are very costly and are the main asset of an airline company. Airlines generally would have very little trade receivables as most of their customers are passengers who have paid up front. They also would have very limited inventory on hand at the year-end as it would only be set amounts of fuel on the planes and items like meals or drinks for flights. (5 Marks) [Total: 20 Marks] Page 18.

(182) Marking Scheme Q1 a). 6 Points x 1 Mark each. Q1 b). Workings As shown in detailed solution Total Marks – Q1. 6. 34 40. Q2 a). Reconciling Opening Balance Reconciling and Adjusting Bank Account Reconciling Bank Statement. 3 5 7. Q2 b). Overall Comment. 2. Q2 c). 3 Reasons x 1 mark each Total Marks – Q2. 3 20. Q3 a). Inventory Measurement of Inventory Net Realisable Value. 2 2 2. Q3 b). Allowable Costs of Purchase. 3. Q3 c). Retail Method Standard Cost. 3 2. Q3 d). Opening Balance Receipt of Inventory Updating the WAC for receipt Sales of Inventory Updating inventory quantity and value after sale Sales of Inventory Updating inventory quantity and value after sale Receipt of Inventory Updating the WAC for receipt Sales of Inventory Closing Balance of inventory quantity and value Total Marks – Q3. Q4 a). Calculation of Profit Salaries Interest on Capital Interest on Loan Interest on Drawings Residual Profits Split of Residual Profits. Q4 b). Opening Balances Interest on Drawings Interest on Capital Drawings Salaries Goodwill Created Goodwill Eliminated Loan to Partnership Interest on Loan Residual Profits Closing Balances Total Marks – Q4. 0.5 0.5 0.75 0.5 0.5 0.5 0.5 0.5 0.75 0.5 0.5 20 1 1 2 2 1 1 2 0.5 1 1 0.5 0.5 1 1 1 1 1 1.5 20. Page 19.

(183) Q5 a). Calculation of Ratios 20 * 0.4 marks each Commentary on Ratios 10 x 0.5 marks each Presentation of Results and Commentary. 8 5 1. Q5 b). Riteprice plc. discussion Dough plc. discussion. 2 1. Q5 c). Airline discussion. 3. Total Marks – Q5. 20. Page 21.

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