NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5. Should you provide answers to all of Questions 2 to 5, only the answers to Questions 2, 3 and 4 will be marked.
Provided are pro-forma:
Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss and Other Comprehensive Income By Function, and Statements of Financial Position.
TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.
INSTRUCTIONS:
During the reading time you may highlight text and write notes on the examination paper, however, you may not commence writing on the answer field until your Supervisor tells you to do so. Please read each Question carefully.
Marks for each question are shown. The pass mark required is 50% in total over the whole paper. You are reminded to pay particular attention to your communication skills and care must be taken regarding the format and literacy of your 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.
FINANCIAL ACCOUNTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2020
1.
(a) A suspense account is an account showing the balance equal to the difference in a trial balance.
Identify and explain five of the main types of errors that can occur when preparing journal entries and suspense accounts.
(10 Marks)
(b) Yerttemic Ltd. is a company involved in the manufacture of clothes for the retail industry. The following trial balance
was extracted from their books as at 31 December 2019:
Debit Credit
€ €
Current Tax Payable 36,000
Accumulated Depreciation - Plant & Equipment - 1 January 2019 245,000
Plant & Equipment at Cost at 1 January 2019 758,000
Intangible Assets 300,000
Distribution Costs 246,800
Long-Term Loan - 4% 400,000
Inventory at 1 January 2019 248,700
Motor Vehicles at Cost at 1 January 2019 352,000
Accumulated Depreciation - Motor Vehicles - 1 January 2019 187,000
Other Payables 4,000
Premises at Cost at 1 January 2019 1,245,000
Finance Costs 9,000
Issued Share Capital - €2 shares each 260,000
Bank 45,200
Purchases / Revenue 1,245,700 2,451,200
Income Tax Expense 42,000
Allowance for Doubtful Debts 16,000
Accumulated Depreciation - Premises - 1 January 2019 642,500
Amortisation of Intangible Assets 30,000
Retained Earnings 425,300
Trade Receivables / Trade Payables 345,700 248,600
Admininstrative Expenses 197,900
4,990,800 4,990,800
The following information, based on your investigations, has also come to your attention:
(i) Yerttemic Ltd. held an inventory count at the year-end which found that the year-end inventories at cost amounted
to €324,200. Included in this figure is slow moving inventory costing €10,300. This slow moving inventory can be
sold immediately for €7,600, provided that additional repair work to the inventory costing €1,600 is incurred.
(ii) Depreciation is to be charged as follows:
Premises 2% Straight Line on Cost
Equipment 10% Straight Line on Cost
Motor Vehicles 20% Reducing Balance
Depreciation for the year is charged in full in the year of purchase and none in the year of sale.
(iii) Equipment costing €120,000 was purchased and paid for by cheque in 2019.
(iv) The premises was revalued at 31 December 2019 by an independent valuer to €550,000.
(v) In 2019 Yerttemic Ltd. issued 30,000 shares and lodged €80,000 to its bank account. No entry has been included in the financial statements for this transaction.
(vi) One of Yerttemic Ltd. customers was unhappy with an order received in December 2019 amounting to €18,000
which they paid in full before delivery of the product. Yerttemic Ltd. accepted that there was an issue with most of the order and agreed to refund 70% of the order amount to the customer in January 2020. Yerttemic Ltd. needs to provide for this amount at the year-end.
(vii) The finance costs relate to the interest incurred on the long term loan. The balance of finance costs in relation to
the long term loan needs to be accrued for the year-ending 31 December 2019.
(viii) Yerttemic Ltd. wrote off a bad debt of €7,500 in December 2019. The Allowance for Doubtful Debts should be set
at 5%.
(ix) Included in Intangible assets capitalised is research costs incurred of €40,000. The rate of amortisation that
Yerttemic Ltd. uses is 10% per annum and is taken to cost of sales.
(x) Expenses are to be allocated evenly between Distribution Costs and Administrative Expenses.
REQUIREMENT:
Prepare, in a form suitable for publication, based on IFRS, a Statement of Profit or Loss and Other Comprehensive Income and a Statement of Financial Position for Yerttemic Limited for the financial year-ended 31 December 2019.
Note: All workings should be shown. (30 Marks)
Page 3
2.
The trade receivables control account for Nelfitger Ltd. for the year ended 31 December 2019 was prepared by anaccounts clerk and is as follows:
Trade Receivables Control Account
Balance b/d 145,300 Balance b/d 200
Credit sales 645,200 Cheques received 586,800
Cash sales 10,300 Cash received 15,900
Trade payables contras 1,400 Discount allowed 10,500
Balance c/d 500 Balance b/d (Balancing Figure) 189,300
802,700 802,700
The accounts clerk was careless in their preparation of their work and in addition to the errors in the control account above, the following errors were identified:
1. A credit sale of €3,800 had been completely omitted from the trade receivable control account.
2. In the individual trade receivable account, a debt previously written off but now recovered of €1,600 had not
been posted to the trade receivables control account. The amount was received on 2 January 2020.
3. Discount allowed had been understated by €600.
4. A cheque received from a customer amounting to €590 has been posted to the trade receivables control
account as €950.
5. A bad debt written off of €600 has not been posted to the trade receivable control account.
6. The trade payables contras included in the trade receivable control account represents the settlement by
contra transfer of amounts owed to trade payables and has not been posted correctly to the trade receivables control account.
7. The cheques and cash received were from trade receivables except for one cash amount of €500 received
for a cash sale.
REQUIREMENT:
(a) Using the information above, present a revised trade receivables control account for the year-ended 31 December
2019.
(15 Marks)
(b) Identify and briefly explain the benefits of using control accounts. (5 Marks)
3.
Esterro Ltd. has asked you, a trainee financial accountant, for advice on how to determine appropriate accounting policies, changes in accounting estimates and errors. Esterro Limited’s year-end is 31 December.REQUIREMENT: PART A
The financial controller of Esterro Ltd. has asked you to prepare a report which addresses the following:
(a) In accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, describe what is
meant by the following:
(i) An accounting policy;
(ii) A change in an accounting estimate; and
(iii) A prior period error. (8 Marks)
(b) In relation to changes in accounting policies:
(i) Explain how a change in accounting policy is made;
(ii) Explain how a change in accounting policy occurs;
(iii) Describe the accounting treatment for a change in accounting policy; and
(iv) Describe the key disclosures that are necessary for a change in accounting policy (9 Marks)
PART B
During 2019, Esterro Ltd. discovered that certain items had been included in inventory at 31 December 2018 at a value
of €2 million but they had in fact been sold during the 2018 financial year.
The original figures reported for the year ended 31 December 2018 and the figures for the current year 2019 are given below: 2019 2018 €’000s €’000s Sales 60,000 57,000 Cost of Sales (42,000) (40,000) Gross Profit 18,000 17,000 Tax (2,000) (2,000) Net Profit 16,000 15,000
The €2m error in opening inventory referred to above has been included in the cost of sales for 2019.
REQUIREMENT:
Restate the Statement of Profit or Loss & Other Comprehensive Income referred to above for Esterro Ltd. for the year
ended 31 December 2019 with comparative figures.
(3 Marks)
Page 5
4. Cara and Daithi are in partnership sharing profits or losses in the ratio 3:2. The financial terms of their partnership
agreement is as follows:
(i) Cara and Daithi take monthly drawings of €1,000 and €1,500 respectively from the partnership;
(ii) Cara earns an annual salary of €24,000 from the partnership;
(iii) Interest on current account balances is 5% per annum based on the opening balance at the start of the year;
(iv) Interest on drawings is 10% per annum. Interest on drawings is calculated as the end of each six months and
based on the closing amount of drawings taken from 1 January to 30 June and from 1 July to 31 December;
(v) Cara is entitled to a guaranteed minimum profit of €30,000 every six months;
(vi) Cara and Daithi’s opening current account credit balances are €16,000 and €10,000 respectively.
Evan was admitted to the partnership on 1 July 2019. The profit sharing ratio for the new partnership was 3:1:1 for Cara, Daithi and Evan respectively. The financial terms of their new partnership agreement is as follows:
(vii) There is no change to the monthly drawings for Cara and Daithi. Evan withdraws €1,000 a month. The interest
rate on drawings and the calculation of interest on drawings remains the same as in the original partnership agreement between Cara and Daithi;
(viii) Interest on current account balances is still 5% per annum based on the opening balance at the start of the
year. In Evan’s case, the interest on capital is based on his opening balance on 1 July 2019;
(ix) Cara continues to have a guaranteed minimum profit of €30,000 every six months and an annual salary of
€24,000;
(x) Evan introduced money into his current account on 1 July 2019 of €8,000.
The profit for the year is €120,000 and is incurred evenly over the year.
REQUIREMENT:
(a) Prepare the profit and loss appropriation account for the partnership for the year ended 31 December 2019.
(12 Marks)
(b) Prepare the partners’ current account for the year ended 31 December 2019. (4 Marks)
(c) Identify and briefly explain four key pieces of information found in a typical partnership agreement. (4 Marks)
5
. Joijub Ltd. is involved in the manufacture of building products and its financial statements are as follows:Joijub Limited Statement of Financial Position as at 31 December 2019
2018 2017
€’000 €’000
Non-Current Assets
Property, Plant & Equipment 13,350 11,320
Total Non-Current Assets 13,350 11,320
Current Assets
Inventories 2,240 2,100
Trade Receivables 890 980
Cash & Cash Equivalents 78 80
Total Current Assets 3,208 3,160
Total Assets 16,558 14,480
Equity & Liabilities Equity Share Capital 300 250 Share Premium 120 100 Retained Earnings 10,460 9,240 Revaluation Surplus 300 200 Total Equity 11,180 9,790 Non-Current Liabilities
Long Term Loan 3,500 3,000
Total Non-Current Liabilities 3,500 3,000
Current Liabilities
Trade Payables 1,640 1,560
Bank Overdraft 90 50
Accrual - Finance Cost 18 -
Current Tax Payables 130 80
Total Current Liabilities 1,878 1,690
Total Equity & Liabilities 16,558 14,480
Notes:
(i) Joijub Ltd’s 2019 profit for the year after tax amounted to €1,260,000. The income tax expense for 2019 amounted
to €140,000.
(ii) The cost of Property, Plant & Equipment (PPE) at 1 January 2019 was €16,400,000. The company depreciates
all assets at 8% straight line on cost. There is no depreciation in the year of purchase and a full year’s depreciation
in the year of sale. On 1 May 2019, Joijub Limited sold PPE for €320,000. This PPE had a carrying value of
€250,000 when sold and had originally cost Joijub Ltd. €600,000. Any additions to PPE for Joijub Ltd. occurred on 31 December 2019.
(iii) Joijub Ltd’s finance cost for the year amounted to €36,000. Half of this amount was accrued at the year-end.
(iv) Joijub Ltd. paid a dividend of €40,000 in 2019. Joijub Ltd. proposed a final dividend of €20,000 for 2019 on 10
January 2020.
REQUIREMENT:
Prepare a Statement of Cash Flows for the year-ended 31 December 2019 for Joijub Ltd. in accordance with IAS 7- Statement of Cash Flows.
[Total: 20 Marks] END OF PAPER
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2020
SOLUTION 1
(a) A suspense account is an account showing the balance equal to the difference in a trial balance. Discuss the five
typical types of errors that can occur with journal entries and suspense accounts
(10 Marks) Five typical errors are as follows;
1. Errors of Transposition
An error of transposition is when two digits in an amount are accidentally recorded the wrong way round
i.e. if a sale was recorded as €8,457 instead of €8,475.
2. Errors of Omission
An error of omission means failing to record a transaction at all or making a debit or credit entry but not the corresponding double entry.
3. Errors of Principle
An error of principle involves making a double entry in the belief that the transaction is being entered in the correct accounts but subsequently finding out that the accounting entry breaks the rules of an accounting principle or concept i.e. including a piece of equipment in repairs and maintenance instead of capitalising it to non-current assets.
4. Errors of Commission
Errors of commission are where the accountant makes a mistake in carrying out their task of recording transactions in the financial statements i.e. putting a telephone expense into the light and heat account or incorrectly totting up an amount.
5. Compensating Errors
Compensating errors are errors which are coincidentally equal and opposite to each other i.e. a debit and a
credit to the bank account in error of €500.
[Total: 10 Marks]
Page 7
SUGGESTED SOLUTIONS
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Page 9
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SOLUTION 3
REPORT
To: Financial Controller, Esterro Limited
From:Financial Accountant
Re: IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Date: August 2020 PART A
(a)
(i) Accounting policies are the significant principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting the financial statements. An entity determines its accounting policies by applying the International Accounting Standards Board's (IASB) Standards and Interpretations.In the absence of a Standard or Interpretation covering a specific transaction, other event or condition, management uses its judgement to develop an accounting policy which results in information that is relevant and reliable, considering in the following order.
• Standards or Interpretations dealing with similar and related issues;
• The Framework definitions and recognition criteria; and
• Other national GAAPs based on a similar conceptual framework (providing the treatment does not conflict
with extant Standards, Interpretations or the Framework).
(3 Marks)
(ii) A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or the amount of
the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not correction of errors.
(3 Marks)
(iii) Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior
periods arising from a failure to use, or misuse of reliable information that:
(a) was available when the financial statements for those periods were authorised for issue; and
(b) could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements. They may arise from:
(a) mathematical mistakes
(b) mistakes in applying accounting policies
(c) oversights
(d) misinterpretation of facts
(e) fraud. (2 Marks)
(b)
(i) A change in accounting policy is made only if:
(a) it is required by a Standard or Interpretation; or
(b) results in the financial statements providing reliable and more relevant information about the effects of
transactions, other events or conditions on the entity's financial position, financial performance or cash flows. (2 Marks)
(ii) A change in accounting policy occurs if there has been a change in:
• recognition e.g. an expense is now recognised rather than an asset
• presentation e.g. depreciation is now included in cost of sales rather than administrative expenses
• measurement basis e.g. stating assets at replacement cost rather than historical cost
(iii) The accounting treatment for a change in accounting policy is as follows;
Where the initial application of a standard/interpretation does not prescribe specific transitional provisions, an entity applies the change retrospectively by
(a) restating comparative amounts for each prior period presented as if the accounting policy had always been
applied;
(b) adjusting the opening balance of each affected component of equity for the earliest prior period presented;
(c) including the adjustment to opening equity as the second line of the statement of changes in equity; and
(d) disclosing the nature of the change and the amount of the adjustment to current and prior periods for each
line item in each period affected
Where it is impracticable to determine the period-specific effects, the entity applies the new accounting policy from the earliest period for which retrospective application is practicable (and discloses that fact).
(2 Marks)
(iv) The key disclosures in respect of a change in accounting policy are as follows;
(a) the nature of the change in accounting policy
(b) the reasons for the change
(c) the amount of the adjustment for the current and each prior period presented for each line item affected
(d) the amount of the adjustment to periods before those presented.
(3 Marks)
PART B (a)
Statement of Profit or Loss
2019 2018 €’000 €’000 Sales 60,000 57,000 Cost of Sales 2019 (42,000 – 2,000) 40,000 (1 Mark) 2018 (40,000 + 2,000) 42,000 (1 Mark) Gross Profit 20,000 15,000 Tax 2,000 2,000
Net Profit 18,000 13,000 (1 Mark)
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MARKING SCHEME Q1
(a) Discuss the five typical types of errors that can occur with journal entries and suspense accounts 10
(b) Workings 22
Statement of Profit or Loss and Other Comprehensive Income + 8
Statement of Financial Position
Total Marks – Q1 40
Q2
(a) Control Account 15
(b) Benefits of a control account 5
Total Marks – Q2 20
Q3 IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Part A (a)
(i) Definition of an Accounting Policy 3
(ii) Definition of a Change in an Accounting Estimate 3
(iii) Definition of a Prior Period Error 2
(b)
(i) How a change in Accounting Policy is made 2
(ii) How a change in Accounting Policy occurs 2
(iii) Accounting treatment for a change in Accounting Policy 2
(iv) Key disclosure in respect of a change in Accounting Policy 3
Part B
(a) Scenario 1 3
Total Marks – Q3 20
Q4
(a) Profit and Loss Appropriation Account 12
(b) Partnership Current Account 4
(c) Items found in a typical partnership agreement 4
Total Marks – Q4 20
Q5
(a) Operating Activities 9
Investing Activities 6.5
Financing Activities 3.5
Cash & Cash Equivalents 1
